Felix Salmon

ETFs and gold speculation

Felix Salmon
Oct 8, 2009 00:11 UTC

Izabella Kaminska has an interesting take on the record-high gold price, via Bedlam Asset Management: essentially, it’s rising because the big gold ETFs, like GLD, are so incredibly easy to buy and to speculate with. Gold is now something that individuals can easily trade in and out of daily — goldbugs are no longer just hold-it-until-you-die inflation hawks and eschatologically-inclined survivalists.

The implication, according to Bedlam, is that the whole swathes of ETF-linked commodities risk being dumped en masse, if and when the current wave of momentum fizzles out:

One or more of the smaller exotics will expire. Little notice will initially be taken. After a couple more, especially if in different sectors, there will be a rush to dump them all. The good and the bad will be forced sellers alike to meet redemptions. This will lead to an avalanche of physical gold, live hogs and cocoa being heavily sold into often thin markets, causing sharp price declines.

Remember: insofar as gold is being held by speculators, it isn’t safe. And GLD alone has more than $30 billion invested in it, much of that on margin. Where would gold be if even a fraction of that sum got sold at once? I don’t like to think.


Hmmmmm ..There is a run for the doors on GLD the supply of gold can jump VERY FAST.

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Stock-market charts of the day

Felix Salmon
Oct 7, 2009 23:55 UTC

Dshort and Clusterstock both have eye-catching stock-market charts today:

four-bears-large.gif f.gif

These present two very different views of the recent rally. The first shows it to be a strong bounce off a deep low, which brings us back to a point which is perfectly normal for a recession. The second shows the bounce to be smaller, and largely a function of the weak dollar.

My feeling is that looking backwards at charts of where we’ve come is never a useful way of working out where we’re going. But the first chart does a good job of explaining why we’re all breathing so much easier now than we were in March, and the second chart does a good job of keeping us sober. And raises the question: if the euro weakens against the dollar, could that precipitate a broad-based stock-market fall?


Since the S&P 500 has earnings overwhelmingly in US Dollars and, I would presume, stockholders who are overwhelmingly US-based, why would the strength of the Euro matter?

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Airline revenue datapoint of the day

Felix Salmon
Oct 7, 2009 23:36 UTC

Joe Brancatelli finds a wonderful inverse relationship when it comes to ancillary airline fees:

Here’s an indisputable fact: During the second quarter of the year, the nation’s largest airlines collected $669.5 million worth of baggage fees from the nation’s hapless passengers. That’s an attention-grabbing 275 percent increase from the second quarter of 2008.

But here’s an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free.

Brancatelli makes a compelling case that for every dollar you gain in extra baggage revenue, you lose vastly more in revenue overall:

American Airlines, for example, generated an industry-leading $118.4 million in bag fees during the second quarter, a 219 percent year-over-year jump, says the BTS. Yet its total revenue in the second quarter dropped 20.9 percent to $4.88 billion from $6.17 billion in 2008′s second quarter.

That’s a drop of more than ten times the increase in bag fees. Even if bag-revenue margins are super-fat and seat-revenue margins are super-thin, this kind of thing can’t possibly be a good way of making money — especially not when it alienates your passengers at the same time. And even the airline execs know it:

“Baggage fees are the kind of shortsighted things that are killing us,” the top U.S. executive of a European airline told me recently. “The accountants we have are great at tracking the ‘ancillary’ revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It’s a scandal.”

You wanna blame the accountants? Feel free. But it’s the senior management which is really responsible. Do they really think that raising baggage fees is cost-free?


If your looking for ways to avoid airline baggage fees, click on the link below for some easy ways to fight back.
http://www.leaptocheap.com/2010/06/avoid ing-expensive-airline-luggage-fees/

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The defenestration of Bill Winters

Felix Salmon
Oct 7, 2009 23:26 UTC

Why did Jamie Dimon fire Bill Winters as head of JP Morgan’s investment bank? According to Bloomberg, it’s because he felt Winters shouldn’t be CEO of the bank as a whole. And so, by the inexorable up-or-out logic of Wall Street, Winters was out.

Winters is one of the best risk managers on the street, and saved JP Morgan countless billions of dollars when he refused to let his group join the structured-product gold rush. But there’s much more to being a CEO than risk management, especially today, when you need to be able to charm not only institutional investors but also Washington regulators.

In a way it’s sad that no role could be found for Winters at JP Morgan — but he’s had a long and hugely successful run at the bank, and he’s surely happier dreaming of being CEO elsewhere than being stuck in JP Morgan without any hope of achieving the top job. This is how succession planning should work. For an example of how it shouldn’t work, of course, you just need to look at Bank of America.

If Winters had worked for Ken Lewis, not only would he never have been in line for the CEO job, but he would also have been fired years ago for being altogether too competent. Lewis didn’t like promoting potential rivals; Dimon, by contrast, loves surrounding himself by the smartest and best-qualified professionals he can find.


Nice try to change the facts, though.

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Krugman on the end of trade

Felix Salmon
Oct 7, 2009 22:01 UTC

Paul Krugman gave a pleasingly wonkish talk at the World Business Forum today: the attendees with their Speaker Workbooks will have found it difficult to fill out the Paul Krugman Summary Sheet on page 95, complete with blanks where they are meant to write in their Action Plans and associated Due Date. Instead, he gave a smart and detailed disquisition on the past, present, and future state of international trade.

First, though, Krugman gave a quick overview of the crisis, and there was essentially nothing there I took any issue with. He was rude about financial innovation, saying that most of it is about regulatory evasion and arbitrage; he also worries that due to the fast action of the Fed,” we stepped back from the edge of the abyss too soon, quickly enough that there wasn’t a thoroughgoing appreciation of the need for reform”.

Bernanke “has averted disaster” by putting the Fed into the lending business, he said:

Around the turn of the year, it looked as though it might be the apocalypse, but apocalypse now has turned into apocalypse put on hold, and the risk of a second Great Depression seems to have evaporated.

He also had a good line about economic forecasters, who have us returning to full employment in about five years just because all forecasts tend to bake in a return to “normal” in five years. Krugman’s more pessimistic than that, however: “We almost certainly have a long, long haul before we’re fully recovered,” he said. A good part of the reason for that is what has happened to international trade — it “has fallen through the floor in a way that it literally never has before, including in the Great Depression”. And building it back up is going to be very hard indeed.

Krugman noted that economies like Spain and the US, with overleveraged housing bubbles and financial problems, have actually outperformed relatively sober manufacturing exporters like Germany and Japan:

World trade acted as a transmission mechanism. The vector of disease spread even to those economies with relatively healthy financial systems and little speculative excess.

The reason, said Krugman, was the big spike in trade intensity (essentially the trade-to-production ratio) between 1990 and 2007, much of which can be put down to containerization and the rise in IT logistics, which allow products to be have touched dozens of different countries before reaching the final consumer. This is a good thing: “goods are a lot cheaper and our purchasing power is much greater because of this globalization,” he said. But it has also, now, come to an end.

World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.

So the growth in world trade is going to stop, or at least slow down dramatically, even without any kind of spike in protectionism. And in fact Krugman was sanguine on that front: he sees no such spike happening, and says that once international trade rules are put into place, they tend to be pretty strongly observed. “It’s very hard to have the cascading protectionism that you had in the 1930s,” he said. “When I was in the government and someone said ‘that’s GATT illegal’, that was pretty much the end of the discussion.”

But the trade-related gains in global living standards that we’ve seen since the shipping container was invented might not be easily replicable going forwards. Krugman wasn’t specific on what he thought that meant for global GDP growth going forwards, but the clear indication was that we might be moving to a much more zero-sum world than we’ve been used to. It’s a powerful and sobering conclusion, and one which, wonderfully, said absolutely nothing about Greatness or Leadership or Success.


Quite a bit of that spike in trade can be put to IT advances and containerization.

But there is quite a bit more currency manipulation at the heart of it that is the 800 pound gorilla in the room of which few wish to speak.

Recall the 40% devaluation of the yuan in the mid 1990′s as China embarked on an aggressive policy of mercantilism.

They achieved most favored nation status the old fashioned way, most likely association with the Clinton – China political donations scandal which involved Mr. Gore. Not to be outdone, Mr. W Bush put the icing on the cake in his own term.

Keeping in mind that during all this, China has accumulated an enormous amount of dollars by maintaining an artificially low peg on the dollar, which as we all know is contrary to free trade 101.

And so the free markets were more than happy to export jobs and capital to China, and import cheap goods and fat profits for Wall Street, and create a trade bubble that was a tremendous boost for the credit bubble.

Paul Krugman knows this.

Be happy about the lack of securitization

Felix Salmon
Oct 7, 2009 15:43 UTC

Paul Krugman has a good response to Jenny Anderson’s piece today on the woeful state of the securitization markets: isn’t that a good thing?

Here’s my question: why does it have to be a return to shadow banking? The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets. Yet the assumption at the Fed seems to be that this isn’t an option — that the only way to go is back to the securitized debt market of the years just before the crisis.

Why? Are we still convinced that securitization is a far superior system to conventional banking, and if so why?

Another way to look at this is to ask what’s happening at the big institutional investors who drove the securitization market. If they’re insisting on underwriting loans all of a sudden, and actually wanting to understand who they’re lending to, that’s a good thing too. Here’s James Kwak:

The boom in securitization was based on investors’ willingness to believe what investment banks and credit rating agencies said about these securities. Buying a mortgage-backed security is making a loan. Ordinarily you don’t loan money to someone without proving to yourself that he is going to pay you back (or that the interest rate you are getting will compensate you for the risk that he won’t pay you back). The securitization bubble happened because investors were willing to outsource that decision to other people — banks and credit rating agencies — who had different incentives from them.

What’s more, it turned out during the crisis that a lot of the investors in the securitization market were banks — specifically, they were European banks and SIVs who, in a feat of regulatory arbitrage, managed to discover that it didn’t matter how much credit you were exposed to, just so long as it carried a triple-A rating. I think we can all agree that insofar as banks are lending, they should be lending directly to borrowers, rather than outsourcing what’s meant to be their core competency to investment banks in the modeling-and-repackaging business.

The stubborn refusal of the securitization market to participate in the current credit boom is one of the few chinks of light I’m seeing these days. It shows there’s still some common sense in the world; long may it stay that way.


Yes, David. I overreached with “never”. I also neglected to finish before posting my comment. I’ll try again.

My skepticism is driven by the view that the securitization market (or at least large parts of it) ceased to function properly some time early this decade. The grand idea, as I take it, was that securitization was supposed to bring liquidity to various classes of illiquid assets like mortgages et al by the following mechanisms: (a) aggregating (and in many cases tranching or otherwise reorganizing) risks, (b) centralizing the analysis those risks at credit rating agencies, and (c) transferring those reorganized risks and rewards to those better suited (than originators) to bear them.

I think what we came to terms with in 2008 was that there had been problems in that chain of logic all along. By aggregating and tranching risks, originators discovered new-found demand for what would have previously been considered imprudent loans. By centralizing risk analysis in the hands of the ratings agencies, investors grew complacent in their own due diligence. And the hope that securitized products would end up on the balance sheets most tolerant of the risks turned out to be spectacularly flawed. The demand was ravenous for the seventy-some-odd percent of the securitized structures granted AAA ratings. Whether this demand was due to investor appetites for low risk or merely for the appearance of low risk (and for the lower capital charges that come with that appearance) remains to be demonstrated.

Ben Stein’s antagonist is not a gangster

Felix Salmon
Oct 7, 2009 14:14 UTC

Remember the desperate lawsuit launched by Adaptive Marketing, Ben Stein’s sleazy paymasters, trying to uncover the identity of a critical blogger? The good news is that it’s been dropped:

Plaintiff Adaptive Marketing LLC (“Adaptive”) gives notice that this action appears to have become moot and, accordingly, it is hereby withdrawing this action as to all parties without costs to any party. The clerk may mark this matter “withdrawn.”

The better news is that Adaptive seem to be disappearing down a crazy rabbit hole:

Adaptive believes that it has discovered the name and address of the person in question, thereby mooting this action… The name and address discovered by Adaptive are as follows:

Franklin Seegers
1266 Morse Street, N.E.
Apt. #306
Washington, D.C. 20002

Franklin Seegers, as a minute’s Googling will reveal, is an inmate of Butner Federal Correctional Complex in North Carolina, having been given a 40-year sentence in 2006 for his role in a violent drug gang known as Murder Inc. I don’t know who “flâneur de fraude” is, but I’m quite sure that it’s not Seegers. Still, I hope that Adaptive spend lots of time and money trying to serve a lawsuit on Seegers claiming defamation. This could be very funny indeed.


Hey Felix,

I think “Front Row Washington” has my identity on a “don’t post this guy’s opinions” list. If you have any contact with their editorial decision makers, tell them censorship is really cool if you’re 1939 Germany.

Or,, just tell them to kiss my ass!

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John Thain comes clean

Felix Salmon
Oct 7, 2009 13:30 UTC

Financial News has a quote from John Thain, at “a speech this month”:

“To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. Creating things that you don’t understand is really not a good idea no matter who owns it.”

This is the same man, of course, who, during his tenure as CEO of Merrill Lynch, would repeatedly take a large writedown, raise capital, and say that his marks were conservative and that there would be no further writedowns or capital-raisings. And then of course he’d be back with more a couple of weeks later. Certainly Thain tried his darndest as CEO to give the impression that he knew exactly what his CDO holdings were worth, and that Merrill understood them very well. So I guess he’s now saying that he was lying?

Still, I’d like a bit more color on the “correct model” that Thain is talking about. Which computer does he have in mind? And how much faith does he have in the results? It’s hilarious to me that even after everything he’s been through, Thain thinks that if only we had more computing power, we might not have been in this mess. More likely, we’d be in an even bigger mess.

Update: The Q&A session at Wharton from which the quote was taken can be found in PDF form here. (Thanks, Cardiff!)

Update 2: John Carney points out that in January 2008, Thain seemed a bit less sure of himself when it came to how much all those CDOs were worth. But that call, on January 17, came in between a statement on January 15 saying that he was “certain that Merrill is well-capitalized”, and a statement on January 18 that he was “very confident that we have the capital base now that we need”. (Of course, any further writedowns in the CDO book would directly hit Merrill’s capital base, so statements that Merrill’s capital was safe were tantamount to statements that there wouldn’t be any further CDO writedowns.)

Later on in the year, Thain continued in this vein:

“…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” (March 8 )

“We have more capital than we need, so we can say to the market that we don’t need more injections. (March 16)

“We have plenty of capital going forward, and we don’t need to come back into the equity market… No more capital raising; I’m sure we have enough capital.” (April 4)

“We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market.” (April 8 )

“We are well-capitalized. We’re comfortable with our capital position.” (June 11)

“We are in a very comfortable spot in terms of our capital.” (July 17)

How could he be so sure, if no one had a clue what Merrill’s enormous CDO book was really worth?

Given the size of Merrill’s CDO exposure, and the degree of uncertainty which Thain now claims was endemic to that exposure, it seems incredible that Thain could have been so certain about the amount of capital that Merrill needed. Of course, in retrospect all his claims about needing no more capital were wrong: the losses would never end, even after Merrill was taken over by Bank of America. As he now admits, the CDO book was so opaque that Thain had no grounds for being so cocky.


It certainly boggled Thain’s brain!

As for OSMR, the word is not just shame, but sham!

As for not having a clue, KenG, Thain was head of the mortgage desk from 1985 to 1999 at Goldman Sachs, and president and co-chief operating officer there from 1999 to 2004, and CEO of the New York Stock Exchange from January 2004 to December 2007, where he laid off THOUSANDS of people, THOUSANDS. Including a lot of people who might have had a clue….

So when we look at all the bad debt due to defaulted mortgages, let’s also thank Thain, who was responsible for the free-for-all environment that ‘valued’ these things as worth something, a notional number on paper only, and which we then tried to ‘prop up’ with REAL dollars, not notional ones, from the hardworking American tax payers.

The guy lies like a rug, AND is incompetent too.


Felix Salmon
Oct 6, 2009 22:36 UTC

Commonfund releases its 2009 higher education price index. The cost of running a university is +2.3% this year. — Commonfund (PDF)

Ralph Lauren picks a copyright fight with the wrong gang — BoingBoing

Can we call this the last word on the subject? Kid Dynamite on Taibbi — Kid Dynamite

The radical incoherence at Brandeis continues. How embarrassing. — Justice

Rewriting God: “This quotation is a favorite of liberals but should not appear in a conservative Bible.” — Conservapedia

The astonishingly short life of a bagel — Serious Eats

Tim Phillips says nice things about me. We anti-anti-counterfeiting types have to stick together! — Research Live

I hate to say it, but Tina really does get it. — Daily Beast

In 2004, Gourmet commissioned David Foster Wallace to write 7600 words on lobsters. Now they’re both dead. — Gourmet

WTF is a “premium reading experience”? — Poynter


That DFW jibe is incredibly poor taste Felix.

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