Felix Salmon

The new standardized mortgage estimate

Felix Salmon
Dec 31, 2009 16:50 UTC

James Hagerty is cautiously optimistic about the new, standardized good faith estimate form which has been mandated by the Department of Housing and Urban Development. If you get one of these forms from three or four different lenders, and they all fill out this table, then being able to choose the best mortgage for you is going to be much easier than it has been until now.


It might have been nice to include “adjusted origination charges” along with “total estimated settlement charges” on this form, because a conscientious consumer should shop around in any case for things like title insurance. Still, bundling everything into one figure at least gives lenders an incentive not to rip off their borrowers too much on those fees.

Is this going to make a big difference in practice? Are homebuyers going to spend as much time comparing different mortgages as they do comparing different televisions? Or are all those numbers always going to be so confusing that many people will end up just doing what they’ve historically done, which is trust a mortgage broker?

My hope is that a few big lenders are going to take a leaf out of Progressive’s book, and encourage homebuyers to shop around, making it as easy as possible to compare different offers. But one thing’s for sure: if your mortgage broker doesn’t show you different options in this kind of ultra-clear standardized format, find a different mortgage broker.


US Housing crisis will grow larger in 2010 as strategic foreclosures increase from the 25% of the total they are today. Why stay in a mortgage when your neighborhood is renting at 1/3 the cost of your monthly mortgage? See a wild California foreclosure story at http://storyburn.com

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The economic statistic of the decade

Felix Salmon
Dec 31, 2009 15:01 UTC

Mike Mandel has four nominees for his “Economic Statistic of the Decade” award, including home prices (obvs), Chinese growth, and global trade. But the most startling one, for me, is US household borrowing:


I like the time frame that Mike has chosen here, since it shows not only the huge increase in borrowing during the credit boom and the stomach-churning plunge thereafter, but also, for much of the 1990s, what “normal” should look like.

Mike notes that the data for this chart includes domestic hedge funds, so it shouldn’t be taken entirely at face value. But it’s the best visual representation I’ve seen of the credit boom and bust.


from Robert Pozen on How to restore confidence in loan securitisation http://www.ft.com/cms/s/0/f45e6dbc-e8af- 11de-9c1f-00144feab49a.html – “In 2006, before the financial crisis, banks accounted for less than 25 per cent of all credit extended in the US; most loans were originated by non-bank lenders such as auto finance companies, credit card issuers and insurance companies. These non-bank lenders depend heavily on loan securitisation… In 2006, the US volume of loan securitisation was $100bn per month; in 2009, this volume is averaging less than $5bn per month.”

there’s your (‘wile e. coyote’ over the edge) collapse; it’s not that banks aren’t lending so much as median income is falling… http://online.wsj.com/public/resources/i mages/P1-AL265_COMPAR_20080420183003.gif

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Felix Salmon
Dec 31, 2009 05:52 UTC

Vanity Fair says it handles a combined five snail mail letters or faxes a month — WWD

“Let’s say we move from 0% to 3% short-term expected inflation” – how exactly is the Fed meant to do that? — MR

Luke Mullins with a 2-years-in-the-making, 13,000-word labor of love about an incredible kid named Joey Graziano — HuffPo

The 20 Top Philosophers of All Time: Happy to see Hume at #4, and Frege’s in the top 10! — Leiter Reports

How much does a Kiwi honorary knighthood cost? Ask Julian Robertson — Stuff

I can’t tell you how much it sickens me that this fugly Tom Otterness playground toy sold for $1.2 million — NYT

What is worth giving up our right to not be seen naked by strangers? The ability to see celebrities naked. Duh — NYMag

Larry Summers’ visitor log, Sept. 16-30, 2009 — Google

NM Rothschild profit +82%, but parent group profits down 48% — FT

Looks like Time Warner is losing those Fox stations — LAT

Worst decade ever, politics edition — Atlantic Wire

Richard Diebenkorn “Ocean Park” show at OCMA postponed for second time; no new date set — LAT

How Feinberg set executive pay

Felix Salmon
Dec 30, 2009 23:56 UTC

Steve Brill has a very interesting 8,500-word story in this weekend’s NYT magazine, all about Kenneth Feinberg and the process he went through to determine the pay packages of companies the US government had bailed out.

The funniest part of the story is the bit where Feinberg reflexively tries to pay AIG executives in stock — which was trading at more than $40 a share at the time — only for both AIG and Treasury to tell him that really wasn’t fair, because AIG stock is, yes, fundamentally worthless. They were right on that point: Feinberg actually would have been foolish to pay AIG executives in common stock, because that stock only has any long-term value at all in the event that AIG takes enormous risks and they pay off. And that is not something we want AIG’s leadership to be doing, so I’m sad that Feinberg agreed to stock-based compensation at AIG “in appropriate cases”.

But Brill, who is a multi-millionaire in his own right, is not always a reliable guide to what constitutes fair pay. He’s got a friend who works at AIG Financial Products, and who he lets “make the case” for that company’s crazy retention-bonus plan. He quotes another friend talking sympathetically about how “really hard” these people are working, and a lawyer saying that “if people in these industries see that Congress can jerk them around whenever they want, they’re going to stop going into these businesses, just the way people have stopped becoming doctors”. He’s happy talking about how half a million bucks a year “is considered piddling” on Wall Street, and how a low six-figure salary doesn’t mean anything to people who are already millionaires. And he talks a lot about the risk that people will quit, or not work hard, if they aren’t paid lots of money — without giving a single example of that actually happening.

He also covers at length and with a perfectly straight face about the bizarre creature invented by Feinberg and called “salarized stock”:

For base cash salaries, Feinberg suggested a sum that, on Wall Street, is considered piddling — typically no more than $500,000 a year. He also said there would be no cash bonuses. But he tempered that with a compromise: The firms could provide additional annual salary compensation if paid in company stock — stock that the executive would receive every payday but could not sell immediately.

This last provision came to be called “salarized stock.” It sounds like jargon only an M.B.A. could love, but it became a key element of the negotiations and a clever way for Feinberg and the bailed-out companies to work around a law passed in the early weeks of the Obama administration. Back in February, Senator Christopher Dodd, the Connecticut Democrat who is the chairman of the Senate Banking Committee, inserted what is now called the Dodd amendment into the President’s economic stimulus bill. A provision in that amendment limited any bonus compensation to 50 percent of the executive’s salary…

Because Feinberg’s salarized stock would be dispensed every payday, it could therefore be considered salary under the Dodd amendment.

How clever of Feinberg to “work around” a clear law like that! Of course “salarized stock” is simply a guaranteed bonus, payable in stock; since it vests over a period of years, it’s neither here nor there whether it’s paid annually or whether it’s paid monthly. But because Feinberg didn’t like the optics of guaranteed bonuses — and because Dodd had clearly made guaranteed bonuses illegal — he created this Frankenstein monster instead, waving his magic terminological wand and turning a bonus into salary, to the delight of Brill, who as a lawyer loves this kind of sophistry.

To be fair to Brill, he does show quite clearly that Feinberg ended up paying lots of money to senior executives in practice, while trying as hard as possible to make it look as though he was being very harsh. That’s probably what the government wanted all along: the main thing it was worried about was headlines. Feinberg’s job wasn’t to rein in pay, it was to rein in outrage about pay.

Brill’s also excellent at uncovering the silly game that Feinberg played with the banks: he invited them to submit their own proposals as the basis for negotiation, with the predictable result that the banks spent millions of dollars on compensation consultants paid to conclude that senior executives were all above average, and had to be paid as much as $21 million a year, in the case of BofA. Feinberg could then announce multi-million-dollar pay packages as a low percentage of what the banks originally asked for, and seem tough in so doing.

But what Brill never really addresses is the question in the headline of his piece: how much are these bankers actually worth? And he also never addresses the question of the degree to which seven- and eight-figure salaries caused the crisis in the first place, or whether we actually want greedy people in these positions who won’t do their jobs unless they’re paid a hundred grand a week.

In Brill’s world, the only downside to an enormous salary is the optics of the thing: how it looks to the rest of us. “Business common sense,” he writes, “dictates that because the government owned them, these were the last companies the government should want to undercut with unilateral pay disarmament”. Does he give a single example of a company underperforming because it can’t pay well enough? Of course not: it’s just obvious to Brill that banks which pay modest salaries (like, say, most credit unions) will do worse than banks which pay enormous bonuses (like, say, Lehman Brothers or Bear Stearns). Well, it’s not obvious to me. Just like it’s not obvious to me that people have stopped becoming doctors.

Update: Thanks to reader Anthony Bongiorni for picking up on this:

Feinberg consulted regularly with Deputy Treasury Secretary Neal Wolin and others at Treasury, Wolin says, though he met with Geithner only three times. “We pushed back with him on some issues,” Wolin recalls, referring to Treasury’s desire to make sure that the companies would be able keep talented employees — and eventually repay the government.

It seems it was Wolin, at Treasury, who was pressuring Feinberg to pay more, rather than less. Wolin, in turn, entered Treasury straight from a senior executive position at The Hartford, which took $3.4 billion in federal bailout money, and surely wanted to be able to continue to pay its executives lots of money in future. Maybe they should send their friend Neal a thank-you note for helping to keep salaries high at bailout recipients.


This isn’t really about pay restrictions. It’s about corruption.

Put this together with the post above linking to MR. The point of the MR post is that we are inflating the real return of money that the big banks can borrow (from us), while depressing the return that ordinary savers can earn, in order to pump up bank earnings, so that we can help them “earn their way out of insolvency.” Geithner is in charge of hiding this set of facts.

And then they take those gross earnings, stolen from Main Street, and pay 80% that amount out to their traders and top 5% execs. And Feinberg is helping hide this set of facts.

What does it all mean? That we’re trying to recapitalize a kleptocracy. We’re all Nigeria now.

I hope the New Obama Democrats get 5% of all that action. Because they won’t get another dollar from me.

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Deaths foretold

Felix Salmon
Dec 30, 2009 22:21 UTC

Ryan Avent worries about the incentives built into the 2010 repeal of the estate tax:

This is a much happier state of affairs than is likely to prevail a year from now, when families are struggling to hurry grandpa off this mortal coil by the time the ball drops in Times Square.

I’m looking forward to a covert market in death certificates at the end of 2010: doctors willing to formally decree an individual dead, which event would be swiftly followed by a small cremation ceremony with immediate family only. And then a mysterious resident in the guest house on St Bart’s, whom nobody ever talks about.

Bureaucratic fantasy of the day

Felix Salmon
Dec 30, 2009 21:47 UTC

Emanuel Derman wins the day with this:

I had a fantasy in which the Fed and the TSA (Transportation Security Administration) switched roles.

If a bank failed at 9 a.m. one morning and shut its doors, the TSA would announce that all banks henceforth begin their business day at 10 a.m.

And, if a terrorist managed to get on board a plane between Stockholm and Washington, the Fed would increase the number of flights between the cities.

The ethics of walking away, cont.

Felix Salmon
Dec 30, 2009 20:26 UTC

Yesterday, I asked Megan McArdle how much of one’s life’s savings should be given to the bank before they take one’s house. She answers, gratifyingly, that in the particular case I was writing about, “obviously he should have walked away immediately.” Good, we’re in agreement on that. If you’re going to lose your house, best just to lose your house, rather than to lose your house and your savings.

But then, puzzlingly, Megan asks “what Felix thinks this has to do with people who decide to default on their mortgages so that they’ll have more money to spend on cruises and new furniture”.

Um, everything? If you have savings, you can spend that money on cruises or new furniture or anything else you like. If Tom Vellucci had walked away immediately, as Megan says he should have done, then he would have thousands of dollars in the bank. And good libertarian that she is, I’m sure she wouldn’t mind him then spending that money on a cruise, if that’s where he thought his money would be best spent. Once he’s saved his money, it’s up to Tom Vellucci, and no one else, where he spends it. Or is Megan saying that he should walk away from his mortgage obligations only if he doesn’t spend his savings on furniture or cruises?


Well said wcw. The ability to walk away from a mortgage afforded to homeowners by state creditor and federal bankruptcy laws is just one of the risks that mortgage lenders failed to recognize when issuing such poor loans.

Personally, I know one thing: if I had a $500,000 mortgage on a house worth $250,000, I would walk away so quick my neighbors would never know I declared bankruptcy in the first place (thereby preventing their decision to declare bankruptcy themselves because someone else did it). It’s really a rather easy decision: let’s see here, college fund for my children or Citigroup? Tough decision. While I would like nothing more than to contribute to the Citigroup bankers’ bonuses, I am pretty sure one thing I would not even consider would be how my declaring bankruptcy might induce others considering bankruptcy to follow in my footsteps. In fact, such a decision could not get much easier for me, and in fact I would be proud of my decision to do what is financially in my best interest. I might even spend a couple thousand of the quarter of a million dollars I just saved my family on a nice little cruise.

Infusing moral arguments when it comes to the world of one’s financial is misplaced. Infusing ethical arguments into the world of finance is simply not appropriate. With every financial transaction, it’s a zero sum game: someone wins and someone loses. Is it morally wrong to sell a stock you believe to be overvalued because the buyer may lose money on the trade? The problem is one could easily distort the nature of such a transaction and make a claim that I am taking (i.e., stealing) money from someone else, despite it being a perfectly legal transaction guided by a valid contractual arrangement.

The irony is that this homeowners walking away from their mortgages proves the futility of the the entire premise behind libertarianism. In the absence of restrictions preventing otherwise, humans will always act out of their own self-interest, often to the detriment of society as a whole, as is the case purportedly here when one declares bankruptcy to avoid paying a mortgage one can afford.

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Poem of the day

Felix Salmon
Dec 30, 2009 20:00 UTC

Martin Dickson wins the day with his fabulous tale of bankster excess, in rhyming couplets no less. Go read the whole thing, but here’s a taster:

Exuberant beyond all reason
(For this or any other season)
Fired up by dreams of starter castles,
Sardinian yachts and vineyard parcels,
They built themselves a strange device –
A ticking bomb, to be precise.

The trouble was they did not know,
It was a bomb ’twas ticking so.
They thought it merely marked the beat
That called them to stay on their feet
And dance away – to really bop –
To music that would never stop.

Now, if only someone would make a YouTube video of this, complete with music and visuals.

(HT: Daniel Lippman)

What use short selling?

Felix Salmon
Dec 30, 2009 18:35 UTC

I’m noticing a theme chez John Hempton: a few weeks ago he was writing about the dangers of shorting frauds, and now he’s writing about the dangers of shorting an industry in terminal decline. At least he’s not doing this kind of thing at book length: David Einhorn spent 380 pages detailing the dangers of shorting Allied Capital.

The general idea here is that no matter how perspicacious and intelligent a short seller is, he can still be entirely correct and lose lots of money. As Hempton writes today:

If you understood the implications of digital photography in 1991 you were – at least on that item – the smartest guy in almost any room. And it did not help you make (much) money.

Well, yes. And, good. Hempton’s talking about an episode where Warren Buffett was talking to Bill Gates in 1991, and Gates said that Kodak was toast. Neither Buffett nor Gates thought that, even if Kodak was toast, they should go out and short the stock. But because Hempton’s a short seller, that was the first idea that sprang to mind.

Bill Gates, of course, had much better things to do in 1991 than short Kodak: he was using his intelligence and perspicacity to build Microsoft into a global giant which has fundamentally changed the lives of billions of people. Short sellers, by contrast, are what Adair Turner would call socially useless.

Let’s say I’m an intelligent and perspicacious short-seller who correctly believes that Kodak shares are going to fall. Kodak has shares in the first place, remember, because it needed to raise equity capital to build a global company capable of changing the world in fundamental ways. A large number of long-term investors then bought those shares, becoming part-owners of a then-successful real-world company. I then approach one of those large, long-term investors, and ask them to lend me their shares for a short while. I’ll pay them a modest interest rate for the privilege, and they’ll end up with just as many shares as they started with, so they agree.

The next thing I do is to immediately sell those shares on the open market, to someone else who believes in the future of Kodak. I then sit back and wait, as Kodak shares fall in price. Eventually, I buy them back cheap, return them to the original long-term investor, and pocket my profits.

Now I don’t think that this exercise is particularly harmful on a societal level, and at the margin it can help to make markets more liquid and efficient. But I can’t help but think of the opportunity cost of having all these intelligent and perspicacious people playing around on stock markets, rather than going out and putting that intelligence and perspicacity to more socially-beneficial use.

It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world. Old-fashioned lending is important, and I’d say that stock markets in general also count as a positive financial innovation, since they make it vastly easier for companies to raise equity capital. But in my ideal world, people working for real companies like Kodak would make more money, in general, than people working for more parasitical financial-services companies. The fact that it’s the other way around worries me. While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.


‘social productivity’- another well intentioned, scientifically dubious journalistic slap at financial markets by a man who should know better. You either allow free markets to allocate resources or you leave it to grand Soviets and government ministries. To say that short sellers are wasting their talent by playing a part in the aggregated resource allocation mechanism of society is to say we should all start queuing for the bread line.

Socially unproductive work is a reality of a world of human self-interest. Even in your populist dream world where bankers till the fields and traders run charity bake sales for the poor, smart people would still spend plenty of time ‘gaming’ systems and markets for their own advantage. Whether that takes the form of short-selling, learning how to card count in blackjack, practicing the SATs, or figuring out how to legally shield the most of their income from the taxman.

Mindless drivel.

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