Felix Salmon

One quote jumped out at me from the Reuters Dubai round-up this morning:

“We have seen a classic risk aversion reaction in the markets over the past 24 hours. The dollar has slumped, the yen is stronger,” a Societe Generale note said.

Needless to say, this isn’t exactly a classic risk-aversion reaction: when the markets are really scared, they tend to flee to the safety of the dollar, rather than to the Japanese yen. So my feeling is that this — along with the relatively modest stock-market reaction in New York this morning — counts as a sign that Dubai really isn’t all that bad: it shows that markets are trading the news, rather than panicking.

On the other hand, it’s clearly not good news that a severe-if-not-life-threatening shock such as this one sends the dollar down rather than up. The immense fiscal cost of the financial crisis has hurt the dollar’s standing as the global reserve currency, and if I were at Treasury right now I’d be very concerned about this reaction. Not that there’s much Treasury can do about it.

The Dubai World default is big news — big enough that it’s even made it into Gawker. Your one-stop shop for bloggy coverage this Thanksgiving is Alphaville, which features for instance this wonderful chart of the debt structure which is now being crawled over by lawyers around the world.

Personally, I’m quite happy about this default, since it sets another very useful precedent of a state-owned company defaulting on its debt. Historically investors in state-owned companies have perceived an implicit sovereign guarantee — there’s even a German word for it, Anstaltslast. The result is a huge and unhelpful moral-hazard trade.

So it’s great that the government of Dubai has made it clear that Dubai World’s lenders aren’t going to be automatically bailed out by the sovereign, despite the fact that the government has hundreds of billions of dollars in its sovereign wealth fund*. Would that Treasury will follow suit when it comes to the creditors of state-owned companies like AIG.

*Update: As my commenters have pointed out, it’s Abu Dhabi which has hundreds of billions of dollars in its sovereign wealth fund, not Dubai. Some of those dollars might well yet be used fora Dubai bailout, but it won’t be on terms Dubai likes.

Why You Should Support The Lynch Amendment: Don’t let banks own more than 20% of derivatives exchanges! — Rortybomb

A very sad day for the financial blogosphere: the invaluable John Jansen is giving up his blog to move to the sell side — Across the Curve

Hedge fund prospectus says its “Directors will not receive, open, or deal directly with mail addressed to the Fund” — Risk Without Reward

Don’t forget! $50 feeds 8 tomorrow — Robin Hood

The real connection between Arnold Schwarzenegger and Sarah Palin — Sorensen

Debunking the paradox of choice — FT

Pareene unloads on Lou Dobbs. Totally deserved — Gawker

The behavioral economics of Thanksgiving — Bloggingheads

Claims of Thanksgiving Excess Fueled by Feast of Fuzzy Data — WSJ

Greatest Fox News pie chart ever — Fox

John Carney is right: a very large number of Americans is always going to be financially illiterate, and there’s nothing we can do about it. Indeed, if we try too hard to do something about improving financial literacy, there’s a good chance we’ll only end up creating a new cohort of overconfident financial illiterates who think they understand things when they don’t.

This is why we need a Consumer Financial Protection Agency: to make sure that people buying financial products don’t end up buying something that’s going to end up exploding in their face. As Elizabeth Warren so frequently says, we do it for toasters, we should be able to do it for mortgages and toasters and annuities. There’s a decent case to be made that we can and should give a decent financial education to people starting up small businesses. But there’s not much empirical evidence that it works for people more generally.

(Via Konczal)

This chart (via Paul) I think is too meek: of course the current emerging-markets boom is debt-financed. And boy does it look bubblicious, what with the Bovespa having doubled in the past 12 months and rapidly approaching its all-time high. I’m a believer in the long-term future of Brazil, and even count a Brazilian ETF among my few investments. But at this point any investment in emerging markets looks very much like a speculative momentum play: don’t invest anything you can’t afford to lose.

Keith Bradsher’s NYT story on Australian credit-card fees kicks off with an eye-opening anecdote:

When Steve Franklin bought four plane tickets on Qantas last June, he faced an unexpected expense: a surcharge of 7.70 Australian dollars on each of the 136.70 dollar ($126) tickets — just for using his Visa credit card…

Now, as Congress debates how to rein in credit and debit card companies in the United States, Australia’s experience is being pointed to as an example of just how tricky that can be: for one thing, if regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing.

It’s not until the very end of the 1,400-word article that Bradsher sees fit to inform us that “no one is suggesting outright surcharges for paying with a credit card in the United States” — and he never mentions that airline surcharges are a very special case, because of those holdback charges.

That said, if you start introducing legislation which decreases the amount of money that credit card companies get from hidden charges, it’s almost certain that you will increase the amount of transparent charges that credit-card companies will start imposing. And when people start seeing new charges, they use their cards less:

The main consumer federation in Australia, Choice, says that while regulations here have had a few unintended consequences, they have created incentives for retailers and consumers alike to rely more on debit cards, which have much lower processing costs, instead of credit cards.

That’s already happening in the US, and the trend will accelerate if new legislation gets introduced, and it’s a good trend to see accelerate — especially now that banks are being banned from imposing unasked-for overdraft fees on debit-card purchases. (Mike Konczal has a good post up today on the way that hidden fees can force invidious choices.)

Interchange fees on both debit cards and credit cards are rising, and in general it’s a bad thing when banks start making billions of dollars from hidden fees that very few people ever see. Much better to cap those fees and force the banks’ income sources out into the open where consumers can make their own decisions about whether and how they want to pay them. One consequence is likely to be that total credit-card indebtedness will fall. And we should all be happy about that.

File under “about time too”: HIV-positive immigrants will be able to apply for a green card as of January 4. But I don’t like this part of Anna Gorman’s article:

Mark Krikorian, executive director for the Center for Immigration Studies, said the decision to remove HIV as a bar was based on politics, not science. “It was clearly a politically motivated move,” Krikorian said, adding that the decision could have real consequences — more HIV cases and more costs. “It is extra healthcare spending that we wouldn’t have otherwise.”

An analysis by the Centers for Disease Control and Prevention showed that in the first year, an estimated 4,275 people infected with HIV could come into the U.S. at a cost of about $25,000 each.

The Center for Immigration Studies, the article never points out, is an anti-immigration and pro-deportation pressure group which can be counted on to oppose any kind of increase in the number of green cards being given out for any reason. And the CDC report starts off by saying this:

The incremental impacts of the rule should be a comparison between the arrival of an HIV-infected immigrant and the arrival of an HIV-negative immigrant. Presumably, HIV-related healthcare expenditures will be different, but there are a variety of health expenditures that the HIV-infected immigrant may not incur that other immigrants may incur (e.g., certain types of cancer, diabetes, heart disease). It is not clear that, over the course of a lifetime, on net an HIV- infected immigrant would consume more health care resources than other immigrants. Furthermore, HIV treatment yields benefits that offset the expenditures, including increased life expectancy and productivity.

In other words, although HIV-related costs will obviously be higher, other costs will be lower, and there’s no indication that an HIV-positive immigrant will cost more overall.

And even if you concentrate only on HIV-related costs, it turns out that “about $25,000″ comes from this:

The primary estimate of the present value of lifetime medical costs for persons identified as HIV-infected in Year One is $94 million in the first year.

What we’re talking about here, then, is the present value of lifetime medical costs, no matter who pays for them; in most cases the cost will be paid mainly by the immigrant, and be paid into the US medical community. And $94 million divided by 4,275 is less than $22,000, not “about $25,000″. And remember that this number is nowhere compared to the present value of lifetime medical costs for someone who is HIV-negative. What’s more, the $94 million uses a very low 3% discount rate; if you increase the discount rate, the present value of future costs comes down sharply.

The important thing to concentrate on here is that the US is finally putting to an end a period of official discrimination which dates back to the days when people thought that HIV could be transferred by people sharing towels. Here’s the CDC report again:

In 2004, the Joint United Nations Programme on HIV/AIDS (UNAIDS) and the International Organization for Migration (IOM) issued the ‘‘UNAIDS/ IOM Statement on HIV/AIDS-related travel restrictions’’ which provides guidance to governments regarding addressing the public health, economic, and human rights concerns involved in HIV-related travel restrictions. This document concludes that HIV-related travel restrictions have no public health justification.

There are a dozen countries that deny entry if a person has HIV. These countries are: Armenia, Brunei, Iraq, Libya, Moldova, Oman, Qatar, the Russian Federation, Saudi Arabia, South Korea, Sudan, and the United States.

This proposed rule will remove the United States from the list of countries that continue to have entry restrictions for HIV-infected individuals.

I’m sure that Mark Krikorian would love for the US to remain on that list of shame, but most sane people will be very happy that we’re finally leaving it. There’s no excuse for any state action which serves to perpetuate the stigma associated with HIV-positive status.

(Via Drum)

Even capital controls, it seems, are powerless in the face of the global carry trade:

Brazil’s real is the “most overvalued” currency as a “wall of money” coming into Latin America’s biggest economy may overwhelm government efforts to curb its rally, said Goldman Sachs…

“After some initial success with capital controls, real appreciation appears to be on the rise again,” Stolper wrote in a note to clients.

The real has gained 34 percent this year, making it the second-best performer in the world after the Seychelles rupee…

A quickening economic recovery and the nation’s link to growing demand for commodities from emerging markets such as China have led to “unprecedented amounts” of overseas capital flowing into the country, Stolper wrote. Inflows reached $17.6 billion in October, compared with $6 billion to $8 billion in previous months, he wrote.

Yes, Brazil has a lot of commodities, but I can assure you that it’s not exporting $17.6 billion of commodities every month. This is hot money, plain and simple, the tool of speculators who fund themselves at near-zero rates in dollars and invest in an appreciating currency paying an interest rate of 8.75% and rising. The influx does no good for Brazil whatsoever (exporters hate overvalued currencies) while feeding huge dividends to hedge funds and others with little long-term stake in Brazil’s future.

The Brazilian central bank is saying that the current capital controls are “adequate”, and that it’s not targeting exchange rates. But it’s surely well aware that this is the kind of story which tends to end in tears. And that there’s not much it can do to stop the carry trade, without endangering the economy in other ways. Brazil’s technocrats have no desire to wall the country off from international trade and capital flows. Suffering this kind of problem is a natural, if unpleasant, consequence of their decision to open the country up.

Anybody who thinks that banks always act in their own best interest when a mortgage goes into default (I’m looking at you, Indiviglio) should read the wonderful judgment of Jeffrey Spinner, of Suffolk County Supreme Court, in the case of . Indymac Bank F.S.B. v Yano-Horoski. Apologies for quoting at some length, but it’s worth it:

At the conference held on September 22, 2009, Karen Dickinson, Regional Manager of Loss Mitigation for IndyMac Mortgage Services, division of OneWest Bank F.S.B. (“IndyMac”) appeared on behalf of Plaintiff. IndyMac purports to be the servicer of the loan for the benefit of Deutsche Bank who, it is claimed, is the owner and holder of the note and mortgage (though the record holder is IndyMac Bank F.S.B., an entity which no longer is in existence). At that conference, it was celeritously made clear to the Court that Plaintiff had no good faith intention whatsoever of resolving this matter in any manner other than a complete and forcible devolution of title from Defendant. Although IndyMac had prepared a two page document entitled “Mediation Yano-Horoski” which contained what purported to be a financial analysis, Ms. Dickinson’s affirmative statements made it abundantly clear that no form of mediation, resolution or settlement would be acceptable to Plaintiff… Although Ms. Dickinson insisted that Ms. Yano-Horoski had been offered a “Forbearance Agreement” in the recent past upon which she quickly defaulted, it was only after substantial prodding by the Court that Ms. Dickinson conceded, with great reluctance, that it had not been sent to Defendant until after its stated first payment due date and hence, Defendant could not have consummated it under any circumstances… Plaintiff flatly rejected an offer by Plaintiff’s daughter to purchase the house for its fair market value (a so-called “short sale”) with third party financing. Plaintiff refused to consider a loan modification utilizing any more than 25% of the income of Plaintiff’s husband and daughter (both of whom reside in the premises with her), the excuse being that “We can’t control what non-obligors do with their money” (the logical follow up to this statement is how does the bank control what the obligor does with her money?)… The Plaintiff also summarily rejected an offer by both Plaintiff’s husband and daughter to voluntarily obligate themselves for payment upon the full indebtedness, thus committing their individual incomes expressly to the purpose of a loan modification… Even a final and desperate offer of a deed in lieu of foreclosure was met with bland equivocation…

In the matter before the Court, the pendulum of credibility swings heavily in favor of Defendant. When the conduct of Plaintiff in this proceeding is viewed in its entirety, it compels the Court to invoke the ancient and venerable principle of “Falsus in uno, falsus in omni” … Regrettably, the Court has been unable to find even so much as a scintilla of good faith on the part of Plaintiff. Plaintiff comes before this Court with unclean hands yet has the insufferable temerity to demand equitable relief against Defendant…

The affirmative conduct exhibited by Plaintiff at least since since February 24, 2009 (and perhaps earlier) has been and is inequitable, unconscionable, vexatious and opprobrious. The Court is constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity, greatly egregious and so completely devoid of good faith that equity cannot be permitted to intervene on its behalf. Indeed, Plaintiff’s actions toward Defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned so as to deter it from imposing further mortifying abuse against Defendant.

Spinner then voided the entire debt, leaving Yano-Horoski in full possession of 100% of the equity in her home, and the bank with nothing whatsoever.

Most of us have had unpleasant run-ins with our bank, but the experience of Yano-Horoski was clearly much worse than most, and it’s great that IndyMac and its representatives have been so publicly slapped down. The bank couldn’t even explain to the court how it arrived at its monstrous total for the amount owed ($527,437.73), or even what the outstanding principal amount was (somewhere between $283,992.48 and $290,687.85). And on top of all that, the plaintiff (IndyMac Bank F.S.B.) doesn’t even legally exist.

In an ideal world, Judge Spinner would be able to bar Karen Dickinson from ever being involved in another mortgage renegotiation, but unfortunately that’s not possible. But if you’re unfortunate enough to be dealing with her, it might be worth trying to take your case to Suffolk County Supreme Court, instead of attempting what seems sure to be a fruitless attempt to come to terms. The judge there clearly has no sympathy for Ms Dickinson whatsoever.

(HT: Mitev, via TBI)

Charles Diez Gets 120 Days for Shooting Cyclist in the Head — Streetsblog

Sponsor a 9/11 cobblestone! — 9/11 Memorial

Ben Davis on the “sense of coagulating ignorance surrounding the art world” — Artnet

Lacayo kills his blog. Silly, why not just reduce the frequency? — Time

The Muppets: Bohemian Rhapsody — YouTube

The next time someone argues that transit is overly subsidized and roads “pay for themselves,” show them this — Streetsblog

FDIC fund falls into red — Reuters

Wondering what Google will look like after News Corp pulls out? — Gawker

Cartoonist, who calls herself an “information radical,” documents how she made $55,000 giving away her work — WSJ

Classic book review — Amazon

A safety improvement for cars can be dangerous for cyclists — Streetsblog

Anthony d’Offay was behind winning $4-mil bid for Bruce Nauman neon “Violins, Violence, Silence” — Lindsay Pollock

Brownstein on healthcare has been declared “mandatory reading” by Obama — Atlantic, Politico

Is it plausible that the grandfather of cool, corporate Helvetica was a kind of ironic, high-lowbrow Cubist straddle? — Crooked Timber

After putting up a slightly hurried blog entry yesterday, I’ve spent a large part of this afternoon doing a deep dive into the sale of the license to run Chicago’s parking meters: many thank to the Parking Ticket Geek and Daniel Strauss of Gapers Block for prompting me to revisit the issue.

If you really want to get up to speed on all this, there are two main sources worth reading. The first is a long investigation by Ben Joravsky and Mick Dumke of the Chicago Reader, especially part two, which was published in May of this year. The second is a 46-page report by the Chicago Inspector General, David Hoffman, also looking at whether the city got a decent deal; it dates from June. Both of them are well-written and comprehensive examinations of the deal, which are invaluable when it comes to understanding it.

Daniel asks me a few questions, via email:

Where did the city go wrong? And why isn’t there a broader consensus on what should’ve been done? (Changing things is difficult in Chicago politics but hindsight is fairly easy to come to a consensus on.)

Boiled down, what the city of Chicago did was to rush a bill selling the parking-meter concession through the city legislature without allowing lawmakers to give it a detailed reading. The city claimed it got a good deal, basing that claim on a single valuation from its own advisor. But after the fact, a number of analysts, including the Inspector General, have concluded that actually the deal wasn’t very good at all.

The one claim in the IG’s report that I find the most compelling is that the term of the deal — 75 years — is far too long. Here’s their chart:

This is the IG’s best attempt to reverse-engineer the amount paid for the concession: in order to get to the final sum of $1.16 billion, they had to assume an 11% discount rate. (Which, yes, is pretty high.) When your discount rate is that high, there’s little point in selling off a 75-year concession: you can cut the life in half and still get 93% of the value.

It’s worth pointing out at this point that another critic of the deal, Scott Waguespack, uses a valuation methodology where the discount rate is 3% and the inflation rate is also 3% — in other words, the value of a real dollar in 75 years’ time is the same as the value of that dollar today. That’s just ludicrous.

But what isn’t ludicrous is that nobody has a clue what the parking-meter industry is going to look like in the 2080s: will there even be cars parking at meters then? If someone bought a franchise in 1934 in just about any industry — even if it was heavily regulated by the government — they’d have no ability to foresee what kind of revenues that franchise might be bringing in today. As far as the purchaser is concerned, the second half of the deal basically has option value: there’s a possibility that it might be hugely lucrative, but there’s also a possibility that it’ll beworth nothing. Looking at the price, it doesn’t seem that the buyers paid anything at all for the option, so it was silly of Chicago to just give it away.

But weirdly, the length of the deal is not one of the main points that the critics bring up. Instead, the point that they return to over and over again is that Chicago would make much more money, over time, if it kept all the parking-meter revenue for itself, rather than giving it to a private-sector contractor.

That’s true. But is it relevant? I’m a believer in what the IG report calls “the impossibility argument” — that even if Chicago did manage to raise meter rates on its own, pushback from constituents would surely force it to roll back those hikes sooner rather than later. As the Parking Geek himself says,

From every report I’ve read and every city hall insider I’ve spoken to, all 50 alderman, a full year after the deal was signed, are still receiving holy hell for the rate increases from their constituents.

The only way of baking in these price hikes was for the city government to tie its own hands — which is exactly what it did. And more broadly, it’s possible that the only way it could tie its hands in this manner was precisely by pushing the bill through in a rushed and bullying manner. (It’s not the first time that’s happened in Chicago, and it won’t be the last: it’s called politics.) Maybe doing the deal in this way was the only way a deal could be done at all.

But that still leaves the question of whether Chicago should have done this deal. I’ve already said that the tenor of the deal is too long: a 30-year concession would have made much more sense. But what is the value of the deal to the purchaser? Was Chicago ripped off? Let’s say I’m auctioning off a vintage Rolls Royce which I have no use for because I can’t drive and I think it’s ugly. Even if I sell it for $100, the cash will be worth more to me than the car. But I’d be stupid to do that, because there are people who would pay a lot more, and the market value of the car is many times greater.

So was Chicago stupid in this case? Did it leave money on the table in its negotiations to sell the parking-meter concession?

My feeling, after reading the IG report, is that Chicago got a good price for the concession, if not a very good price. There’s no doubt that the price would have been much higher had the auction taken place at the height of the credit bubble, when money was almost free, rather than at the height of the credit crunch, when persuading anybody to part with over a billion dollars for anything at all was quite an impressive achievement. What’s more, the critics of the deal generally ignore the tail risk involved: there were lots of things which might go wrong for any purchaser, and as a result the reasonable market price was lower than the revenue projections might suggest.

Indeed, after the parking meters were handed over to Chicago Parking Meters, lots of things did go wrong. And that brings me to the second part of Daniel’s question, where he asks about yesterday’s story, which came out of the Chicago News Cooperative, and which prompted my blog entry:

How does this reflect on the CNC? Many Chicagoans are curious/excited/nervous about the venture but it’s run by the same Tribune people that arguably ran it into the ground. Is this story prophetic of what the venture will be like in your opinion?

The simple answer to the last question is no: it would be ridiculous and invidious to judge an ambitious new news organization by its first story, and I wish the CNC all the best.

That said, after reading a great deal of material from this summer on the subject of the parking-meter deal, I’m even less impressed by the CNC story, whose conclusion was clearly foregone. The new news in the story is about the actual revenues that the private-sector parking meters have generated — and it turns out that those revenues were significantly lower than expected. Yet the CNC story largely skates over that fact, to paint a picture of a company “piling up the profits”, in the words of its headline. To the extent that the CNC story looks at the mechanics of the deal itself, it adds nothing to the Chicago Reader’s investigation, which of course it doesn’t mention.

Going forwards, I’m hopeful that the CNC will produce good work. But I stand by my original verdict that this particular story is flawed. I neither hope nor expect that someone in Chicago is going to write a long, contrarian article explaining why the deal was magnificently good after all. But it’s worth at least examining both sides of the argument.

Many thanks to Brad Miller, one of the co-sponsors of the Miller-Moore amendment, who has been doing the rounds of the blogs trying to explain what it does and doesn’t do. He left a comment on my blog on Sunday, and another on Yves Smith’s today; I then spent a good chunk of this morning on the phone to him, nailing down the thinking behind the amendment.

Conceptually, what’s happening here is that the FDIC is getting resolution authority not just for the community banks and thrifts which it’s been overseeing up until now, but also for systemically-important financial institutions like Goldman Sachs or AIG. It’s important for the FDIC to have a certain degree of freedom to maneuver — but a lot of these firms, especially when things start falling apart at the very end, find themselves pledging substantially all of their assets in a desperate search for liquidity at any price. “What precipitated the final collapse of AIG was a collateral call,” says Miller. “It complicates life for the FDIC to walk in to a firm which has all of its assets pledged as collateral.”

When a firm like AIG fails, its list of creditors on the date of failure can look very, very different to its list of creditors a few weeks earlier — because all of its assets have been pledged to last-minute emergency funders. Unsecured creditors who took solace in the large number of assets on the firm’s books can wind up with little or nothing as a result; and the people who get paid out in full are people who were most aggressive in seizing collateral in the final days and weeks.

The Miller-Moore amendment seeks to make it more dangerous for those last-minute secured creditors to jump the queue and get first dibs on a failing firm’s assets. In doing so, it gives the FDIC the ability to seize some of those assets itself, to minimize the hit to taxpayers. As Yves Smith says,

Creditors ARE risk capital, if they made bad decisions, they should take their lumps before innocent bystanders like taxpayers. That is a perfectly sensible idea.

But neither Yves nor Andrew Ross Sorkin nor just about anybody else seems to be able to get a grip on what exactly the Miller-Moore amendment does, despite the fact that it’s all of 160 words long. Here’s Smith:

One can argue that the bill is too liberal. It allows loans to secured creditors to be cut only by 20%. What if the collateral is worth only 50% of its face value? Even a 20% reduction would be too low.

This isn’t true — in fact secured debt is only secured to the value of the collateral. That’s perfectly standard, and it’s in the original bill, and therefore doesn’t need to be amended by Miller-Moore.

Meanwhile, Andrew Ross Sorkin today recapitulates the Barclays fallacy — indeed, he approvingly quotes the Barclays research saying that the amendment could turn secured loans into “an unsecured loan at 80 percent of the original amount”. But that’s not what the amendment states.

My reading of the amendment was that a 100% secured loan will get converted into a loan which is a combination of 80% secured and 20% unsecured, with the unsecured debt being treated as being pari passu with all the bank’s other unsecured debt.

But Brad Miller, in his comment on my blog, said that

Secured creditors would lose nothing until shareholders and unsecured creditors had lost everything.

Is the 20% of the formerly-secured debt which is now unsecured pari passu with old unsecured debt? Or is it actually senior? (Either way, the Barclays/Sorkin reading is massively off-base.) Miller says that in practice the old senior creditors will remain senior, since the FDIC won’t impose the haircut unless and until unsecured bondholders are being wiped out. “The way the bill as amended now works, that 20% is treated as unsecured but as a practical matter it would still be senior to wholly unsecured debt,” he says.

He adds, in his comment:

The haircut provision wouldn’t apply when a systemically significant financial firm teeters over into insolvency, it will only apply in spectacular, catastrophic collapses. Think of the Hindenberg.

It wouldn’t take a lot of underwriting to see something like that coming. The most likely candidates for the haircut would be existing creditors who demanded more and more collateral as the firm collapsed, jumping queue and exacerbating the liquidity crisis at the collapsing firm.

Also, the haircut would be discretionary. The FDIC could allow secured creditors who had taken collateral when the firm was solvent their full security interest, and just impose the haircut on creditors who had grabbed collateral from a firm that should already have been in receivorship.

What Miller’s talking about, here, is a system whereby haircuts are imposed on secured creditors on a case-by-case basis at the discretion of the FDIC. Some secured creditors (he cites as an example “existing creditors who demanded more and more collateral as the firm collapsed, jumping queue and exacerbating the liquidity crisis at the collapsing firm”) get given haircuts; others (such as “secured creditors who had taken collateral when the firm was solvent”) get no haircut at all.

There’s an echo, here, of the silly attempt by the likes of Maxine Waters to carve out an exception for vulture funds, saying that they’re worse than other creditors and therefore should have fewer rights. But the difference in this case is that we’re not talking about tradeable, fungible secured bonds: instead we’re talking about bilateral contracts between a failing bank and a group of creditors scrambling to secure as much collateral as they can.

Clearly the FDIC, if it were so inclined, could allow all repo transactions to remain unscathed — thereby addressing at least part of the objection of my colleague Agnes Crane. The key question is whether the markets would believe that the FDIC would keep repos untouched — and that’s a question which would probably have to be handled by the head of the FDIC at the time. Since the FDIC has every interest in preventing runs on banks, my guess is that the FDIC would make it clear that it would not seek to impose haircuts on repos.

But at the same time Miller does want to reduce banks’ reliance on the repo market. “What we are talking about is short-term secured debt,” he says. “We don’t want systemically significant firms to be relying on that kind of financing.” And in that sense Agnes is right to be worried about the effects of this amendment on the repo market: it probably would become smaller and less liquid.

Is that a bad thing? I’m not sure that it is. A large and liquid repo market means a large and liquid market in Treasury securities — making those Treasuries even more of a safe haven in times of crisis. One of the big problems in crises is the flight-to-quality trade, where people sell any kind of risk assets that they own, and buy instead the safest and most liquid securities they can find, invariably Treasuries. The flight to quality is inherently destabilizing, and sends the correlations on all risk assets soaring unhelpfully towards 1. If the Treasury market were slightly less liquid and attractive, that might be no bad thing: we want anybody with a large sum of money to be OK with taking a small amount of risk, rather than panicking and looking for something entirely risk-free.

What’s more, a move from secured lending and repo-market funding to good old-fashioned interbank lending is something to be encouraged, since it forces people lending money to banks to actually do some underwriting first. The Federal Home Loan Banks opposed the Miller-Moore amendment, since they blithely advance billions of dollars in secured financing to banks around the country. That’s not a smart use of taxpayer funds, and it’s a great idea to force them to do some very basic underwriting first.

More generally, my feeling about the Miller-Moore amendment, and the other pieces of legislation being discussed in Sorkin’s column today, is that it’s all well and good to worry a little about unintended consequences, as he does at length. But against that it’s also imperative to bear in mind that the unintended consequences of the lack of decent regulatory oversight are much, much worse. Virtually anything would be an improvement on what we’ve got right now — and that key fact is heavily obscured in the column. The Miller-Moore amendment makes the world a better place — even (perhaps especially) if it does end up damaging the repo market. So let’s be a bit more constructive about it.

Noam Scheiber has the fascinating behind-the-scenes story of how the derivatives-regulation sausage is being made — and how Wall Street, amazingly, seems to be losing the lobbying war, at least for the time being. In a nutshell, the banks sought to get around proposed new derivatives regulations by creating an “end-user exemption” loophole which they could then drive their trucks full o’money straight through. But the CFTC’s Gary Gensler saw through the ruse and persuaded Barney Frank to tighten up the language and minimize the size of the loophole. And since the banking lobby was pretending to care only about its end-user clients, it had few if any grounds on which to object to the new bill.

Writes Scheiber:

Gensler’s own role can’t be overstated. A former Goldman Sachs partner who served as Treasury under secretary in the late 1990s, Gensler’s nomination to the CFTC aroused suspicion among congressional liberals when the Obama transition team announced it last December. But Gensler spent several months persuading regulatory hawks that he was one of them, and his actions as chairman underscore it. “The reason I think the left and these consumer groups are in good position is that they have Gensler at the CFTC,” says the bank lobbyist. “He’s turned a rinky dink commission into the most powerful agency in the federal government when it comes to derivatives.”

This is not the first time that the head of the CFTC has tried to rein in the power of the banks. But it is the first time that Congress has listened — and that’s worrying the likes of Andrew Ross Sorkin, whose column today is headlined “Beware the Result of Outrage”.

I’ll have more to say on Sorkin’s column in general, and the Miller-Moore amendment in particular, later today. But suffice to say that Scheiber I think shows quite compellingly that there’s significant upside to outrage too.

Remembering collateral costs in synthetic ETFs — Index Universe

Daily Intel commenter says the only cure for Goldman’s PR troubles is PUPPIES FOR EVERYONE — NYM

Man puts $25k downpayment on a “Warhol” dated 1996 (he died in 1987) featuring “Matthew Baldwin” (who doesn’t exist) — SLT

Guy invites 700 FB “friends” to meet up; 60 RSVPs as “maybes” & 15 “attending.” One actually showed up — NYT

Newtongate: the final nail in the coffin of Renaissance and Enlightenment ‘thinking’ — Carbon Fixated

Sinoscience chartporn — Kedrosky

AOL’s New Image: Animated Edition — Paid Content

Just another day in the sleaze of the art world — AFC

Dick Fuld made $541 million in cash from bonuses and stock sales, never mind the stock he owned at the end — NYT

Flags by color proportion — Shahee Ilyas

Where can you find a coveted bottle of 1997 Champagne Salon? In first class on Japan Air Lines — USAT

Empty LA

File under “events which don’t happen every day”: Gawker describing a newspaper article as being “real journalism” (their emphasis) and “what news alarmists say will be missing if and when we lose newspapers”.

But the fact is that the article in question, an investigation into Chicago parking-meter revenues by Dan Mihalopoulos, is contentious, one-sided, and flawed.

A bit of background: in February, a company named Chicago Parking Meters LLC paid the city $1.15 billion for the right to parking fee revenues for the next 75 years. And now? Well, the headline seems unambiguous: “Company Piles Up Profits From City’s Parking Meter Deal”. But in fact the article only gives numbers for revenues and operating profits. There’s no indication of Chicago Parking Meters’s cost of funds, or whether, after paying the interest on its debt, it’s managing to make any profit at all.

The theme of the article is that selling the rights to parking fee revenues was a mistake:

“Had we done this ourselves, it could have made a lot more money,” said Alderman Scott Waguespack…

The economist Roger Skurski calculated the current value of the deal. Mr. Skurski said his conservative estimate was that “the city could have earned about $670 million more by keeping the asset.”

But this ignores the whole point of doing the deal in the first place: that the city was politically incapable of raising the parking-meter rate itself. This was clear as far back as December, when I wrote that “this parking-meter initiative is the municipal equivalent of a CEO hiring McKinsey to come in and recommend job cuts: it’s a way of doing what needs to be done while somehow managing to blame someone else”. When the deal went through, Chicago parking meters were charging just 25 cents per hour: all the proof you’d ever need that the city, on its own, was incapable of charging a market-clearing price for on-street parking.

Mihalopoulos also ignores the question of whether higher parking-meter rates might benefit the city of Chicago in other ways, by reducing the congestion from cars circling downtown streets at a crawl, desperately seeking a Spot.

And he also buries the news that in fact Chicago Parking Meters is making less money than it had expected:

According to the meter deal’s income statement for May 2009, revenues for the month were about 20 percent below projections. At the same time, expenses were far over budget, mostly for “supplemental staffing.”…

Because the company is not writing tickets, it seems many Chicagoans are getting away with parking for free. A company audit of a section of the North Side found 41 percent of occupied spaces filled by motorists who were not paying, according to the company records.

What’s more, at the end of the story we find this:

Before entering into the parking meter deal, the city hired a consultant whose confidential report suggested the lease could generate $650 million to $1.2 billion for the city.

The report was not disclosed to the public until after the check from the winning parking meter bidder cleared. Officials say revealing a consultant’s valuation analysis before a deal closes would hurt the city’s chances of getting the best possible deal.

This datapoint comes well over 1,000 words after Mihalopoulos tells us about the $1.15 billion deal value. If you don’t remember that number from the beginning of the article, the tone of the writing makes it seem as though the city was somehow hiding a report which showed it got a bad price. Instead, the report reveals that the city got a price at the very top of the expected range.

So far, Chicago Parking Meters has made rather less money than it had hoped out of this deal. Maybe its revenues will recover, as Mihalopoulos seems to think they will; on the other hand, maybe they won’t. The risk all belongs to the company, rather than the city. The city just gets to spend a whopping great big check, and also bring the price of on-street parking up to where it should have been for years. A good deal, not a bad one.