Felix Salmon

Bair’s chutzpah

Felix Salmon
Nov 14, 2009 16:07 UTC

Many thanks to Paul Solman for putting my question to Sheila Bair. Her answer is quite astonishing in its chutzpah:

Solman: Felix Salmon, who blogs for Reuters and does a lot of very interesting reporting, wanted us to ask this: was the Washington Mutual intervention a mistake, given the knock-on effects it seems to have had on the broader community. And more generally, is there anything you would do differently, in hindsight, about Washington Mutual or any other of things that you did?

Bair: I think actually that’s a bit of a myth. WaMu was a liquidity failure. It could not meet its obligations, it didn’t have enough cash on hand to meet the funding obligations it had contractually committed to. That is a basis for closing an institution. And the other option would have been to pump government money in there too, and we’ve tried to resist a lot of these bailouts. So I don’t think that was the right solution. So we really didn’t have any other option.

It was a below-the-fold story. It didn’t even really get that much press play. It was completely smooth. Shareholders and creditors, yes, took significant losses, but everybody else was pretty much protected: the general creditors, even the uninsured depositors were protected. The employees: almost all were kept. So actually I don’t think the WaMu failure had a disruptive impact at all.

Now at about the same time, Congress voted down TARP, and there was a very severe market reaction to that. Those all happened about the same time, and I think that maybe sometimes people get that confused. But the WaMu failure itself was barely a ripple in what was going on with the financial system at that time.

Solman: Felix Salmon’s question is in general, in hindsight, is there anything you would now have done differently?

Bair: Yes, certainly there is. I think we would have tried to tried to dissuade Treasury from making the TARP capital investments…

Just, wow. I don’t necessarily expect Bair to get into the nitty-gritty of the difference between senior unsecured debt and tier-2 capital in a national TV interview. But the fact is that she did have the option of paying off WaMu’s senior unsecured bondholders, and she dismisses that option a little bit too blithely in saying that she doesn’t like “bailouts”. WaMu would still have been a major failure, complete with creditor losses, if she had done that.

And I think she’s simply wrong when she says that hitting WaMu’s bondholders as she did had no disruptive impact. Maybe this is a matter of opinion, since it’s hard to prove a direct causal relationship, but Bair, here, wiped out the senior debt of an enormous commercial bank — the kind of debt which is exactly what Libor measures. It seems to me pretty improbable that she could do that without a pretty significant knock-on effect on interbank markets and on the level of trust between banks. And as we saw at the end of 2008, when that trust disappears, all manner of extremely gruesome consequences result.

Certainly the failure of the TARP legislation to pass the first time round didn’t help things, partly because the markets were hoping that it would rapidly shore up that fast-eroding trust. But the need to shore up trust wouldn’t have been as urgent as it was were it not for WaMu. (And Lehman, of course, but that was out of Bair’s bailiwick.)

Finally, Bair, when asked if there was anything she would do differently in hindsight, essentially says no, there isn’t: the only thing she points to is a decision that Treasury made, not that she made. Rather than taking the opportunity to revisit her own decisions, she quickly turns on Treasury. That’s something she’s done many times in the past. When it comes to admitting to human fallibility, she’s still batting zero.


Thank you Felix! Great insight and initiative to forward your query to PBS for Mr Solman’s interview with Ms Bair.

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The too-big-to-fail debate continues

Felix Salmon
Nov 13, 2009 21:16 UTC

Economics of Contempt defends too-big-to-fail banks:

The point of creating CDOs was to generate a mezzanine tranche, which investors, who had a seemingly insatiable thirst for yield, would gobble up. Goldman (and other dealers) couldn’t place the super-senior tranches, so they held the super-seniors on their books and hedged all that risk by buying CDS protection from AIG (and the monolines)…

As you can imagine, all the risks that a major dealer bank has to manage on a daily basis—the constantly changing level of their exposures, how those exposures all interact, etc.—gets extraordinarily, mind-bogglingly complicated. The major banks all made huge investments to develop the technological capacity to manage those risks, and it’s pretty clear they didn’t invest enough in their risk management systems. There are only two banks that I’ve seen that clearly did make the necessary investments in risk management (Goldman and JPMorgan, not surprisingly). So there are undoubtedly economies of scale there.

There are two problems with this. Firstly, the two banks which made the necessary investments in risk management were not the two biggest banks. Neither Goldman nor JP Morgan is small, of course — but Citigroup and Bank of America, both of which had woefully insufficient risk-management systems, were bigger still, and saw none of those “economies of scale”. There’s no indication that bigger banks are better at risk management than smaller banks; in fact, bigger banks tend to have more places in which they can hide nuclear waste from senior management and the board.

EoC also implies that bigger banks are more likely to be able to mark their assets to market; again, that’s not really true, as a glance at Citigroup will tell you. The key variable here isn’t size, it’s the quantity of illiquid assets that a bank is holding. (Loans, which are the bread and butter of commercial banks if not of Goldman Sachs, are by their nature illiquid.)

And then there’s EoC’s point about Goldman holding illiquid CDOs on its balance sheet and then hedging the associated risks in the CDS market. Is that something Goldman can do because it’s big, or is it a mistake which Goldman made and which it’s unlikely to repeat? Let’s ask Goldman CEO Lloyd Blankfein, who recently gave an interview to Peter Lee of Euromoney (behind a firewall, unfortunately):

We think there should be a much, much higher return for holding illiquid assets. Right now, our asset quality is a lot higher, we’re carrying more liquidity and the bar just got higher for carrying anything else. But for the right profit opportunity, we would put more illiquid assets on our balance sheet.

Super-senior CDOs are never going to provide that kind of profit opportunity. Goldman’s shenanigans in the CDO market were an aberration, and were not something societally useful which sprang from being large. In any event, there’s really nothing in EoC’s argument which couldn’t apply to banks with only $100 billion in assets, say, as opposed to $1 trillion. As James Kwak notes, economies of scale top out long before bank size does; beyond that, it’s all moral hazard.


I think you’re missing his point. You’re actually agreeing with EoC. He isn’t saying that the biggest banks MADE the biggest investment in risk management systems, he’s saying they NEEDED to, and the ones that did have done best.

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Two safe havens

Felix Salmon
Nov 13, 2009 17:21 UTC

I got two smart responses to my assertion that there’s no safe haven for investors these days. Jared Woodard at Condor Options responded with 1,500 words on how investors in an S&P index fund can buy put options to protect their downside: “any hedging at all is better than none,” he writes. Meanwhile, maynardGkeynes left a much shorter comment:

TIPS are both easy and obvious.

Of the two, I prefer the TIPS. Why gamble in the stock market at all, if you don’t need to? Jared’s options strategy is akin to buying insurance that your bet won’t pay off, without stopping to wonder why you’re making the bet in the first place. The main advantage to the options strategy is that if things really blow up, and there’s a major stock-market crash on the order of 60% or so, you could actually end up making a profit. But I think an investor who was invested in TIPS during such a chaotic time would be perfectly happy with her choice.

There are two small problems with the TIPS strategy. One is that the tax implications of investing in TIPS can be extremely complicated, and taxpayers might want to consider the cost in accountancy fees before going down that road. The second is that it doesn’t scale: the whole point of financial markets is that they turn savings into investments, and we actually want people with savings to be willing to take a little bit of downside risk.

In that sense, Jared’s strategy of buying long-dated puts and selling them six months before expiry is better. It brings with it most of the upside associated with stock-market investments, it helps move money into equities (which, over the long term, is something society prefers to having it create bubbles in the debt market), and it helps the investor sleep at night with regards to black-swan events. What’s more, it involves a little bit of work: that’s a good thing, since investing shouldn’t be brainlessly easy. On the other hand, it also involves a significant transfer of funds from the Main Street investor to Wall Street, which always makes money on options trading.

Still, both strategies are worth considering for people with investments. In general, I’d recommend the TIPS approach to people who are likely to be able to make money the best way, by earning it: in that case TIPS are a safe place to put your hard-earned cash. (Especially if you are very unlikely to move abroad, and aren’t worried about a falling dollar except insofar as it feeds through into inflation.) On the other hand, people who are looking to earn money through capital rather than labor will probably not be happy with the modest return on TIPS and might be happier with Jared’s approach.


“The difference is the more than amount of risk you have gotten rid of, at the market rate.”

If you’re trying to note the presence of a negative volatility risk premium paid by option buyers, you are correct (and with such nice dramatic flourishes!). Academics have noted and analyzed the phenomenon extensively, and many traders exploit it in practice.

That phenomenon does not exclude the fact that it is rational for many investors to pay the vol premium to reduce the risk in their portfolios over a relevant time frame. The vol risk premium is not prohibitively large, it keeps getting smaller, and prior to the financial crisis there were discussions in some circles about whether it would continue to persist at all. For the practical purposes of average investors with their own goals and time horizons, your concerns are misplaced.

The “second order” risks you allude to are obviously not relevant in the case of a risk-defined hedged stock position. Nobody is advocating being naked short convexity here; quite the opposite.

Awarding online journalism

Felix Salmon
Nov 13, 2009 15:35 UTC

I got a phone call this morning from one of the judges of the Loeb awards. A Loeb is one of the high-prestige gongs that important business and financial journalists love to award to each other, and it’s a fundamentally conservative animal: the NYT and WSJ always get lots of nominations and awards, and the winners are generally the kind of long-form investigative pieces which, say, the Pulitzer jury loves as well.

So what happens when the Loeb jury tries to drag itself into the 21st Century and honor online journalism? My guess is that it’s going to be in baby steps: the first winners are going to be newspaper brand extensions like Dealbook or Alphaville, and maybe one of those labor-intensive interactive data dumps that the NYT’s digital team is so good at. (Up until now, the Online award has gone to big Flash-based projects on newspaper websites, which isn’t at all what online journalism is really about.)

But if the Loeb jury wants to go further and start honoring new and disruptive forms of online journalism, they’re going to face enormous difficulties. First there’s the difficulty in defining what even counts as journalism in the first place. If the awards need to go to professional journalists at accredited media organizations, that automatically excludes 90% of the internet, including highly-respected blogs — Calculated Risk, say, or Mark Thoma, or Nouriel Roubini. And insofar as a few great bloggers get picked up by larger media outlets (Mike Konczal, Baseline Scenario), that’s precisely because those media outlets recognized them as being extremely good online journalism before they were picked up. It’s silly to restrict your awards to people who feel like they can or should accept an offer of being hosted on a major media outlet’s website.

What’s more, the biggest and most successful game-changers online have been startups: Huffington Post, Talking Points Memo, Politico, and the like. In the business space, TechCrunch, The Business Insider, and many others are setting the pace for what can be done with imagination, hard work, and a lean, aggressive attitude. Yet at the same time it’s almost inconceivable that the Loebs would honor Henry Blodget for his work, given his $2 million fine for securities fraud.

And if they wouldn’t honor Blodget, they’d never dream of honoring a site like Zero Hedge, which has shown what’s possible when you throw out the entire journalistic rulebook and indeed attempt to disintermediate journalists altogether. Zero Hedge is undoubtedly an important game-changer, and is also rather influential, but it doesn’t really belong in a journalism awards ceremony — as I’m sure its founders would agree.

It’s harder than that, though: the problems with drawing the line are dwarfed by two bigger problems. First is the problem of nominations, which are normally, for the Loebs, handled by managers deep within the media bureaucracy. Executives at media organizations nominate their own stories, which are then handed out to the judges; who’s going to nominate blogs? If bloggers are asked to come up with a $100 entry fee themselves, only the most self-aggrandizing will do so, and that’s going to skew the results enormously.

Bigger still is the problem of judging. Blogs are a conversation, and a lot of the value they add lies in their comments sections and in the interplay between each other. The unit of quality for a blog is the blog itself, a living thing, rather than any individual blog entry or even series of entries. The only way to judge blogs is to read them and interact with them in real time. That just doesn’t work in the context of a Loeb jury, which consists of important and busy journalists receiving packages of printed-out entries and then sitting in their armchair reading them in sequence. It’s hard enough to get them to watch all of the broadcast entries; it’s simply impossible to ask them to start regularly reading a list of blog nominees.

So although the sentiment is admirable, I think the Loeb jury should think long and hard before trying to extend its own brand into the online space. If it wants to expand, maybe it should do so in print, by giving awards to punchier, more aggressive business sections — not just the FT, which rarely gets Loebs, but even places like the New York Post. A couple of awards for art direction, in magazines and newspapers, would fit into the ceremony much more easily, and would be a welcome sign that the Loebs award journalism which isn’t just Important but is also accessible and popular and easy to read. Blogs don’t need the Loebs to give them recognition, and any attempt to go down that road risks embarrassing all concerned.


To that lengthy screed, let me add two other points. The first is that if Loeb is actually trying “to encourage reporting on these subjects that would both inform and protect the private investor and the general public,” then it really needs to pay attention to the blogosphere. A huge (and rapidly increasing) number of Americans go online to get their news, and that’s probably more true of finance than of other categories of reporting. If Tim Geithner is serving cookies to bloggers and trying to woo them, then for Loeb to ignore them would be to seal the irrelevance of its broader mission.

The other is that we’re not talking about blogs, but bloggers. And many bloggers do, in fact, crave and deserve the recognition that a major award provides. It’s a brutal media environment. Job security is scarce. Independent bloggers often have day jobs, even if they’d rather blog full-time; bloggers working for major media organizations are no more secure than most other reporters, and subject to some pressures (page view counts, for example) that they are not.

But media outlets treasure prestigious awards, and have traditionally been willing to make large investments in order to obtain them – and handsomely rewarded those journalists who win them. A Loeb is business journalism’s closest equivalent to job security – not necessarily at any given media organization, but even if a Loeb-winner loses his job, he has a decided leg up on getting another. I know journalists who would kill for a Loeb, a Polk, a Pulitzer. And I know bloggers who would, too. It’s more than respect, or recognition from the dinosaurs of the print world. It’s about proving that blogs offer journalistic value far beyond their economic pay-off – and that, surprisingly, isn’t always the way they’re viewed by old-line news organizations. Where awards go, resources follow. So this has more than symbolic importance.

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Felix Salmon
Nov 13, 2009 04:40 UTC

Craig Brown channels Gladwell — VF

James Meek meets President Obama in Arlington — NYDN

Thanksgiving feast, circa 1881 — NYT

A gorgeous power-of-ten visualization — Utah

Lou Dobbs, in verse — Newsweek

One advantage of citizenship over a green card: authorities can’t threaten you with deportation to get a plea bargain — WSJ

Those Apple-to-buy-Nintendo rumblings are back! — Deal

ISDA’s attempt to fire back at Dodd is a damp squib. Expect no substantive opposition from this front — ISDA

How Providence, R.I. got rid of a freeway and gained valuable real estate — NYT


With respect to Providence, the story states that they are spending $610m to move the highway. As a result, it will create “valuable” parcels worth $60m.

It is any wonder why Rhode Island is nearly bankrupt?

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Will small banks replicate big banks?

Felix Salmon
Nov 12, 2009 22:26 UTC

Mark Gimein says that we shouldn’t worry too much about the problem of too-big-to-fail, because the alternative to one big bank failing is lots of small banks failing:

What we’ve seen in virtually every crisis is that bank failures and other economic catastrophes are highly correlated, in large part because financial players do not lock themselves up in rooms and gaze at crystal balls. They watch what everyone else is doing and then they do the same thing… The problem of the giant institution that’s an outlier and needs to be bailed out when everyone else is doing fine is one that exists only in theory. What happens in practice is that many banks, large and small, make the same mistakes and fail at the same time. In other words, it tends to be not single banks that need to be bailed out, but big swaths of the whole industry. Breaking up the biggest banks won’t change that.

This misses two key points. The first is that big banks are too interconnected to fail in a way that small banks never are. And the second is that big banks have balance sheets which are so enormous that they can hide all manner of nuclear waste there (as well as in purpose-built off-balance-sheet vehicles) in a way that small banks could never comprehend. Yes, there have been a lot of small bank failures over the course of this crisis. But none of them were a result of those small banks keeping on their own balance sheets a huge quantity of unfunded super-senior tranches of synthetic collateralized debt obligations. You need to be big to be that stupid.

When small banks fail, it’s generally because they make long-dated real-estate loans at high valuations or low interest rates or both. Big banks, by contrast, can fail ways that small banks can never dream of. And when they fail, the consequences for the payments system generally can be disastrous. So yes, breaking up big banks does significantly reduce tail risk in the financial system. No matter what Goldman Sachs says (and they’ve been feeding me the Gimein line for a while now).


Small banks has no meaning. When I was a kid growing up in the Dakotas we had a small bank. The safe rolled around on wheels. It was profoundly unconnected. The banks that make up the top 50 % of the banking system, which my small Dakota bank was not one, are going to be as interconnected as a snarled fishing line whether there are 2 of them or 200 of them.

One can say the top-50% banks would not be equally interconnected if small, but it would be almost impossible that they would not be as interconnected. It the global economy that interconnects them, not their number.

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Strange bedfellows: Jon Stewart and Patrick Byrne

Felix Salmon
Nov 12, 2009 22:13 UTC

Remember the Jon Stewart interview of Jim Cramer where Stewart pulled out a secret weapon to unleash upon his unsuspecting guest?

Stewart repeatedly said Cramer wasn’t his target, but aired clip after clip of the CNBC pundit.

“Roll 210!” announced Stewart, like a prosecutor. “Roll 212!”

Most were from a 2006 interview not meant for TV in which Cramer spoke openly about the duplicity of the market.

No one’s entirely sure where Stewart gets his video clips. But the source for these ones has now outed himself, and it’s none other than crazy short-selling conspiracy theorist Patrick Byrne.

“I supplied a certain video of Jim Cramer to a certain comedy show, that was used in revealing and exposing Jim Cramer,” said Byrne to the WSJ’s Julia Angwin in an interview.

Which is all well and good when it’s used to take down a blowhard like Cramer. But let’s hope that Stewart and his researchers are using Byrne only as a useful source of video. It wouldn’t be good if they were talking to him about the markets more generally.

(Via Weiss)


Interesting…James Chanos used to(?) work for Deutsche Bankhttp://en.wikipedia.org/wiki/James_C hanosBut this isn’t a real Sith Lord is it? This is a billionaire scapegoat?

The Goldman Sachs Foundation’s torrid 2008

Felix Salmon
Nov 12, 2009 21:27 UTC

Goldman Sachs has provided Reuters with a copy of the Goldman Sachs Foundation’s 2008 tax return. Why the NYT didn’t just put it online I have no idea, but in any case here it is, all 297 pages of it.

The bottom line is that the Goldman Sachs Foundation did very badly in 2008. Here’s the way it’s all summed up:


The fund started the year with $269 million in assets, and ended with $161 million. The amount it made in charitable disbursements was $22 million (that’s the last number on line 25 of the first page), which means that the charitable disbursements aside, the fund managed to drop by $85 million. That’s 32% of the amount it started the year with, and almost four times the amount of money it actually gave to charity.

The big losses are a capital loss of $15 million on the sale of assets, and a whopping $75 million unrealized loss on investments. And then, just for good measure, we find out on page 68 of the PDF that the foundation paid Goldman Sachs Asset Management $3,864,540 for “investment management”. Gee, thanks for the service, guys.

If the Goldman Sachs Foundation put all its money in cash, earning 0%, and wrote checks over the course of the year totalling $100 million, it would have done better than this. Instead, it managed to give away less than a quarter of that, to recipients like the Foundation for Teaching Economics ($333,333) and $2,550,000 to the Institute of International Education “to support the expansion and enhancement of the Goldman Sachs Global Leaders Program in building a strong platform for the Program’s 10th anniversary activities in 2010.”

The Goldman Sachs Foundation also spent $230,000 on various Davos-related donations, in the form of gifts to the Schwab Foundation for Social Entrepreneurship and the World Economic Forum itself.

Maybe that’s what Lloyd Blankfein had in mind when he talked about doing God’s work.


I have a solution to the national deficit. There are about 75000 entities, foundations, tax free in our nation. It is time for a flat tax of 10% on assets in 2010 and a tax on any income for 2 years of 15% no matter what or who the foundation is. We would solve the massive ddeficit problem if the hidden wealth of our country was tapped instead of the guy making 30000 dollars a year. What do you all think?

Happy 10th birthday, Financial Modernization Bill!

Felix Salmon
Nov 12, 2009 20:13 UTC

Ten years ago today:

SEC. SUMMERS: Let me welcome you all here today for the signing of this historic legislation. With this bill, the American financial system takes a major step forward towards the 21st century, one that will benefit American consumers, business, and the national economy for many years to come…

It goes on in that vein for over 4,000 words. But the limit of how much I could stomach was much lower than that. Tim Dickinson has some of the most damning quotes; unfortunately I haven’t been able to find a photograph of Alan Greenspan, Larry Summers, and others drinking champagne and eating a large cake upon which was written “Glass-Steagall, R.I.P., 1933-1999″. Maybe that’s just as well.


You HAD to remind us!

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