Opinion

Felix Salmon

Counterparties

Felix Salmon
Nov 20, 2009 22:41 UTC

Bad stock art

Vivendi, GE agree to interim payment on NBCU stake — Reuters

I’m now “the dark prince of the financial blogosphere”! — NYM

They Might Be Giants: “Meet the Elements”: Make your kid love chemistry! — YouTube

Signs the world is coming to an end: John Baldessari’s Catalog Raisonne launch party took place at the Fendi store — HuffPo

Sarah Palin angers her base — Rumproast

Ken Lewis’ replacement could be… Ken Lewis — Alacra

The secret behind Mona Lisa’s enigmatic smile — Telegraph

How ingrained is corruption in Albany? Even Joe Bruno’s personal secretary was stealing from Joe Bruno! — NYT

A huge infographic on the front page of the The Daily Herald in Everett, WA — Visual editors

The Paradou deathwatch begins, and I hope its owner loses a fortune — Gawker

Easterly hangs out with TESFA, a successful locally-owned tourism initiative in Ethiopia — Aid Watch

College students arrested for not paying tip — Philly

Vice magazine has audited Ebitda — FT

COMMENT

No, Bob, it was my bad. Fixed.

Posted by Felix Salmon | Report as abusive

How to fund the MTA

Felix Salmon
Nov 20, 2009 22:22 UTC

Alex Pareene has a wonderful rant about New York’s MTA, which picks up on this astonishing line from the Daily News:

In addition to the 2010 budget, the MTA released a four-year fiscal plan. It envisions 7.5% fare and toll hikes in 2011 and 2013 as the agency tries to establish a pattern of regular inflation-based increases.

‘Cos obviously consumer prices generally are going to rise by 15.5% between now and 2013.

Pareene also has a very good point about the fungibility of city revenues:

Fares are simply taxes—incredibly regressive taxes, just like the sales taxes that New York City residents suffer to fund our own transit while suburban New Yorkers bitch about the prospect of being charged to clog our streets with their cars, and Jersey dicks bemoan the tolls they have to pay to enter the city where they make all of their money while contributing nothing back.

This is one reason why Charles Komanoff’s plan for reducing MTA tolls while implementing a congestion charge makes so much sense — and it’s a reason which has yet to fully penetrate the consciousness of most New Yorkers. There’s no particular reason why the MTA’s revenues should cover the MTA’s costs, especially when the MTA benefits the city in so many other ways, such as reducing congestion and increasing possible population density and therefore total taxes. Yet somehow everybody seems to blindly accept that the MTA should cover most of its costs through selling MetroCards. Sad.

COMMENT

Pareene laments “suburban New Yorkers.” I’m not sure if the reader understands, though, that many outerborugh drivers–Queens, Staten Island, Brooklyn–use cars to commute to Manhattan. Just to clarify, those aligned against the tolls are not just non-NYC residents.

Posted by Bill | Report as abusive

Where to get 50x leverage on stock indices

Felix Salmon
Nov 20, 2009 21:43 UTC

Last Friday, Jason Kelly put up a very funny blog entry about his launch of a pair of fictional 100x levered ETFs, with the ticker symbols SOAR and SINK:

Kelly Capital will reset and relaunch the funds at the beginning of each trading day. The company is in talks with the Security and Exchange Commission (SEC) about the possibility of relaunching the funds after lunch should they go bust in the morning session, but the SEC is balking. SEC spokesperson Ben Meriwether remarked, “We recognize the right of investors to employ as much leverage needed to find fortune or ruin in a day, we just aren’t sure of the need to extend that right twice per day.”

By Wednesday, Kelly was depressed enough about the email traffic he got in response that he posted an update:

A full 65% of people expressed an interest in owning products that would “go bankrupt within the course of most trading days.” A stunning 5% thought they already owned them. Only 30% of respondents got the humor.

John Carney picked up the datapoint in a blog entry headlined “Is It Possible To Invent An Investment Product Too Stupid To Find Buyers?” — something I then tweeted.

What none of us appreciated, however, is that products much like these already exist. As Amy Nauiokas Sean Park rightly notes, in the spread betting market, which is huge in the UK and elsewhere, 50-1 leverage is common. IG Index, for instance, gives an example of how a £10-a-point bet on the FTSE can generate a gain of £560 — or a loss of £480 — in one day.

Spread bets don’t exist in ETF form, but they’re essentially the same thing, just much more highly leveraged than any fund. They’re hugely popular in the UK — which just goes to prove that yes, if you offer an insanely leveraged way of betting on intraday moves in stock indices, there’s no shortage of people who will flock to your door. Even in boring old England.

COMMENT

Eh, how is that example of spread-betting telling you what the leverage is? That depends on how much margin you’re required to put up, and is probably more like 10-20x.

Posted by nivedita | Report as abusive

The Miller-Moore amendment’s not that bad!

Felix Salmon
Nov 20, 2009 19:53 UTC

John Jansen reprints some BarCap research on the Miller-Moore amendment, and now I think I understand why so many finance types are so scared by it: they’ve misread it!

Here’s BarCap:

Proposed by Reps. Miller (D) and Moore (D), it would effectively replace existing repo and secured funding with unsecured borrowing subject to a margin, or haircut, of up to 20%. Specifically, in the case that a large systemically important institution is put into receivership by the FDIC and there are not enough assets to cover the cost of unwinding it to the government, all secured claims would be automatically converted into unsecured loans with a haircut of up to 20%…

No secured lender will want to be left in a trade with a bank in receivership where the regulators have converted the transaction into an unsecured loan at 80% of the original amount.

But that’s not what the amendment is proposing. Here it is:

An allowed claim under a legally enforceable or perfected security interest (that became a legally enforceable or perfected security interest after the date of the enactment of this clause), other than a legally enforceable or perfected security interest of the Federal Government, in any of the assets of the covered financial company in receivership may be treated as an unsecured claim in the amount of up to 20 percent as necessary to satisfy any amounts owed to the United States or to the Fund. Any balance of such claim that is treated as an unsecured claim under this subparagraph shall be paid as a general liability of the covered financial company.

Let’s say you have a secured claim of $1 million on a bank which has been taken over by the FDIC, and let’s say that unsecured creditors of that bank end up being paid only 70 cents on the dollar.

If the BarCap reading were right, the FDIC would first impose a 20% haircut on the $1 million, turning it into $800,000, and then convert it into an unsecured loan — which, at 70 cents on the dollar, would be worth just $560,000. The net effective haircut would be a whopping 44%. But of course this makes no conceptual sense at all, because unsecured creditors would end up being treated better, under this scheme, than secured creditors.

The way I read it, however, the Miller-Moore amendment allows up to 20% of the secured debt to be converted into unsecured debt; the rest of it is untouched. So you retain $800,000 of secured debt, worth $800,000, and now the remaining $200,000 is unsecured debt, worth $140,000. All in all your $1 million claim is worth $940,000 — a net effective haircut of just 6%.

No one likes losing 6% of their money, of course, but that’s a hell of a lot better than losing 44% of your money. And maybe if the sell side begins to understand how Miller-Moore really works, they might be less averse to it.

(HT: Alloway)

COMMENT

It’s not even that bad. Secured creditors would lose nothing until shareholders and unsecured creditors had lost everything. So 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.

I liked your calling the amendment a “spectaculary good idea” more than “not that bad,” but I’ll take it.

Posted by brad miller | Report as abusive

The SEC surrenders to the oil industry

Felix Salmon
Nov 20, 2009 16:44 UTC

What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations? I think we all know the answer to that one. But unbelievably, after such shenanigans contributed enormously to the greatest financial meltdown in living memory, the SEC is now set to allow more or less exactly the same thing in the oil industry.

Otto points to a stunning report by oil consultant Alan von Altendorf which spells it all out. Up until now, oil companies needed to actually prove they had reserves before they reported proven oil reserves. Now, however, the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).

Von Altendorf goes into great detail about how such numbers are useless and meaningless, and how the “proven reserve” rules should probably be tightened, rather than loosened, given the number of enormous write-downs in proven reserves which have taken place across the oil industry in recent years.

So what’s the SEC thinking here? Frankly, it’s not thinking at all: this is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution.

COMMENT

Are you implying that you actually believed any of the reported reserve numbers in the first place?

“…the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).”

Hasn’t OPEC done this since, uh, always?

Hitting secured creditors

Felix Salmon
Nov 20, 2009 15:34 UTC

Ira Stoll notes that the Miller-Moore amendment has passed. He calls it the “Bair-Miller-Moore Haircut”, and he doesn’t like it; I, on the other hand, think it’s a spectacularly good idea. This is the meat of it:

Payments to Fully Secured Creditors: Notwithstanding any other provision of law, in any receivership of a covered financial company in which amounts realized from the resolution are insufficient to satisfy completely any amounts owed to the United States or to the Fund, as determined in the receiver’s sole discretion, an allowed claim under a legally enforceable or perfected security interest (that became a legally enforceable or perfected security interest after the date of the enactment of this clause), other than a legally enforceable or perfected security interest of the Federal Government, in any of the assets of the covered financial company in receivership may be treated as an unsecured claim in the amount of up to 20 percent as necessary to satisfy any amounts owed to the United States or to the Fund. Any balance of such claim that is treated as an unsecured claim under this subparagraph shall be paid as a general liability of the covered financial company.

In English, this means that if you’re a secured creditor of a bank which has failed and which the federal government has to pay money to rescue, you are only guaranteed to receive 80% of your money back. Beyond that, you’re treated as an unsecured creditor.

This achieves three important goals.

Firstly, it means that lenders to dodgy banks will actually have to start doing underwriting, rather than simply relying on their security interest. That keeps everybody honest, and will give the system a heads-up when banks start getting into trouble.

Secondly, it means that wholesale lenders no longer have the ability to jump the queue when it comes to seniority. Banks should repay their depositors first, and then their senior unsecured creditors, and then their subordinated creditors, and then their preferred shareholders; whatever’s left over goes to common shareholders. But increasingly the pecking order has been upended by allowing banks to issue secured debt, which in practice ends up being senior even to depositors. In some countries, banks aren’t allowed to issue secured debt at all; this amendment doesn’t go that far, but at least it makes the debt a little bit riskier for the lender.

Thirdly, it means that banks will be forced to look at the big picture when it comes to their assets, rather than simply using them as collateral for cheap and dangerous short-term funding. Writes Stoll:

The provision make it harder and more expensive for banks to raise capital, and therefore, harder to get credit flowing again into the economy.

This is not entirely true. The provision makes it harder and more expensive for banks to raise secured capital — but as we’ve seen, there are lots of other funding sources available to banks. The more unpledged assets that a bank has, the easier it is for that bank to raise both unsecured debt and various forms of equity.

Conceptually, this is entirely what we want. If I have an asset worth $1 million, I can either borrow $900,000 against that asset and pay interest on the loan, or else I can sell off equity stakes in that asset for $1 million. I’m not sure why the former is a better idea than the latter, when we’re trying to deleverage the banks and move to a more equity-based (and less debt-based) world.

Does the Miller-Moore amendment make banks more liable to liquidity runs? Yes, but on the understanding that (a) they only become more vulnerable insofar as they’re reliant on the short-term repo markets, which is something we want to discourage; and (b) they have access to the Fed’s discount window anyway, so it’s not as though all secured funding sources can disappear overnight.

Why does Stoll love secured creditors so much? He says that “the rights of secured creditors took a beating in the Chrysler bankruptcy” — but that’s not true. They still had the right to provide DIP financing themselves (the role played by the government) or even to push Chrysler into liquidation. They sensibly didn’t exercise those rights, because doing so would have cost them an enormous amount of money compared to what they ended up getting. But the rights themselves were untouched.

The Miller-Moore amendment, by contrast, really does hit secured creditors. That’s a very good idea. Next up, let’s allow bankruptcy judges to modify mortgages, too.

Update: One more thought on this subject. Most secured funding for banks comes from the repo market, where banks borrow against securities they own. But what are banks doing holding so many securities in the first place? Shouldn’t their assets mainly be loans, which can’t be repoed?

COMMENT

It’s not even that bad. Secured creditors would lose nothing until shareholders and unsecured creditors had lost everything. So 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.

I liked your calling the amendment a “spectaculary good idea” more than “not that bad,” but I’ll take it.

Posted by brad miller | Report as abusive

Counterparties

Felix Salmon
Nov 20, 2009 03:56 UTC

A classic 2002 Calvin Trillin piece on wine tasting — TNY

How TV works — YT

HFT “is happening because it’s just more cost effective to employ one programmer over dozens of expensive traders” — FT

Elizabeth Warren earns a six-figure salary from COP on top of what Harvard pays her — Bloomberg

Gotta love those ombudspeople. 800 words on whether it’s “Rahm” or “Mr Emanuel” — NPR

BusinessWeek staffer: Bloomberg “seems to be getting rid of voice” with columnist axings — NYT

Annals of famous Belgians: Hilarious Herman Van Rompuy profile — BBC

ACORN conspiracy theory datapoint of the day — TPM

I want a dedicated RSS feed for Heather Horn’s “Screed” columns — Atlantic Wire

Texas Accidentally Bans Straight Marriage — Newser

The Daily Mail news headline randomizer — Qwghlm

Cats for Gold

The semiotics of death penalty attire — WaPo

Simon Johnson’s testimony on TARP — Baseline Scenario

‘Too Big to Fail’ now $13.50, below cost — Amazon

Not generally a fan of listicles, but I like these Weird Error Messages — ZDnet

Jonathan Ford and Peter Thal Larsen on how to shrink the banks — Prospect

COMMENT

ACORN stole my lunch money!

Posted by kthomas | Report as abusive

Disclosing journalists’ pasts

Felix Salmon
Nov 19, 2009 20:00 UTC

Dear Henry,

I’m not annoyed by you! How could I be, when you call me the “king of financial bloggers” no fewer than four times in one piece? I think you’ve created a powerful, innovative, and disruptive franchise in The Business Insider, which employs some very smart people and publishes some great journalism — even if sometimes it’s neither checked nor correct. I’m entirely happy that you’re out there hiring people even as most publications are doing the opposite, and I wish you and your investors the very best of fortune.

My blog entry yesterday was not about you qua entrepeneur; I just thought that if you were going to get into the business of publishing earnings estimates for technology companies — exactly the business you were banned from by the SEC — then it might be worth mentioning the ban as you did so.

In fact, the blog entry wasn’t really about you at all, as you might have surmised from the picture at the top and the lead paragraph, which were all about Michael Whitney. Maybe you could answer my questions where Bloomberg’s Judith Czelusniak didn’t: do you think it was OK for Bloomberg to hire Whitney and not disclose his past? If not, would it have been OK for Bloomberg to hire Whitney if they had disclosed his past?

I suspect that the differences between us are not particularly great, and that we believe that while such episodes aren’t necessarily disqualifying when it comes to hiring journalists, they should definitely be treated transparently. At the margin, the necessity of disclosing such things might well lead media organizations to pick an experienced out-of-work journalist instead: that clearly doesn’t apply in your case, where you’re the hirer rather than the prospective employee.

You say that you’ve disclosed everything in great detail in the past — this is true, and in fact I linked to one such disclosure. I feel that the disclosure should be a permanent thing, easily available to new readers, especially when you start revisiting ground extremely similar to that which you trod as a securities analyst. It’s not a major difference.

I think we’d have a much more substantive disagreement if you defended Bloomberg’s failure to disclose Whitney’s past, or Thom Calandra’s failure to disclose his own past when selling his new newsletter; I look forward to reading your views on them. But as it is, I think you might be overreacting to my piece slightly.

Best,

Felix Salmon, KFB

COMMENT

If Bernie madoff started publishing a split strike newsletter people would be pissed…why aren’t they pissed about blodget?!?! Because people are dumb and have no memory.

Posted by Al Coholic | Report as abusive

The unbearable pain of 0.01%

Felix Salmon
Nov 19, 2009 19:08 UTC

Bill Gross isn’t earning much interest on his cash: in fact, he’s only earning 0.01%. Tell us, Bill, what’s an appropriate metaphor to explain how it feels to earn such a low interest rate?

My point is to recognize, and to hope that you recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s Maginot line in WWII – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!

I’m not sure this is entirely fair. Think of the camraderie in those muddy foxholes! Think of all those meaningful religious conversions! Frankly, earning 0.01% interest on your money-market funds is much worse than that!

Or, you know, it could be a sign of how incredibly short memories are. A year ago — even six months ago — people thought that losing 30% or 40% or 50% of your money constituted something extremely painful. Now, it seems, making a small amount of money is analogous to fighting in the bloodiest war of all time.

Kid Dynamite today translates Gross’s column into Sensible, explaining that opportunities paying say 5% annualized become a lot more attractive when rates are at zero than they are when you can get 5% just by investing in Treasury bills. Hence assets yielding anything at all — even stocks — have become pretty popular of late, accounting for the impressive price rise since March. Still, he concludes, “this can only end one way… badly”. People aren’t asking that yields compensate for risk any more, they’re just asking that they pay more than nothing. Which is probably not the smartest manner of allocating capital ever invented.

As for Gross, his best advice is to buy utility stocks:

Pricewise, they’re only halfway between their 2007 peaks and 2008 lows – 25% off the top, 25% from the bottom.

Is that the new Goldilocks Scenario, I wonder?

Update: The quote above — which mangles history in unspeakable ways, as many commenters noted — has been changed on the Pimco website, which now talks about “the American doughboys near France’s future Maginot line in WWI”.

COMMENT

“If I have accumulated $1 million for that purpose, at the 5% I came to expect as a minimum rate for safe fixed-income investments – far from what anyone would have ever said was the product of an “asset bubble,” I can generate $50,000 per year for as long as I live without depleting principal. Maybe I will have $70,000 total income combined with Social Security, which could be a reasonably comfortable retirement income.”@Urban Legend:If you think it is reasonable to get a 5% return on top of inflation without taking risk, I have some oceanfront property in Nevada to sell you. That may have been possible in the past, but we are in a new world now.Investing is not about loaning your funds out to a government, completely abdicating responsibility for finding meaningful uses for the capital and then expecting a substantial return above inflation. Our governments are nearly bankrupt.If you lend to a nearly bankrupt and profligate entity, you deserve to lose a lot of money. You are like a bartender serving a drunk who is drinking himself to death. You are not innocent. You are part of the problem, and your investments are making the world worse. You don’t deserve a good return for that.How to invest? If you really want risk fee, go for TIPs, but don’t expect much beyond inflation. Better yet, learn basics of business and investing and carefully loan out to local small businesses. Or be a landlord, watching your profit and dividends every month. Or invest in important and useful companies via the stockmarket. Or invest in making your house energy efficient. Or invest in your childrens’ and grandchildrens’ educations. Or donate it for research to invest in everyone’s future.Whine about the Fed if you want. Your treasury buys make all these games possible.

Posted by Dan | Report as abusive
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