Felix Salmon


Felix Salmon
Dec 11, 2009 23:30 UTC

How Gordon Ramsay “neglected to take into account how little alcohol New Yorkers would order at lunch” and almost went bankrupt despite his TV income — Bloomberg

A hugely detailed report on how electric cars can become dominant in the US — PRTM

I love it when Jon Stewart rips in to Glenn Beck — The Daily Show

Accrued Interest adjudicates the question of whether debt is good or bad — AI

Don’t trust scientific-looking numbers you read in the press. Especially if they’re about wine. Or spinach — Legg Mason (PDF)


Svendthrift, the RSS feed for my blog is still http://blogs.reuters.com/felix-salmon/fe ed/

Fernholz vs Taibbi

Felix Salmon
Dec 11, 2009 22:39 UTC

Tim Fernholz‘s intemperate attack on Matt Taibbi and his latest article is getting a lot of attention in the Twittersphere. It turns out that a lot of journalists don’t like Taibbi, and love it when he gets taken down a peg.

But Fernholz’s attack is weaker than it looks at first glance; a lot of it is simply a matter of slant and opinion. For instance:

“In the end, Frank not only agreed to exempt some 8,000 of the nation’s 8,200 banks from oversight by the castrated-in-advance agency, leaving most consumers unprotected.” The CFPA, while somewhat compromised, remains a strong agency that will protect consumers. In particular, all the banks in the country will be subject to the CFPA’s rules, and they will be able to inspect any bank they identify as problematic. You can also ask Elizabeth Warren, who came up with the idea, what she thinks of Frank’s proposal. Oh, I did.

Actually, Tim, the CFPA is not “a strong agency that will protect consumers”. In fact, it doesn’t even exist. And I clicked through; you didn’t ask Elizabeth Warren what she thinks of exempting 8,000 banks from CFPA oversight. And in any case there’s no doubt that if and when the CFPA does finally become reality, it will be smaller and weaker than when it was first proposed, especially now that it can’t mandate that banks offer plain-vanilla products. As Taibbi writes:

Frank’s last-minute reversal — made in consultation with Geithner — was such a transparent giveaway to the banks that even an economics writer for Reuters, hardly a far-left source, called it “the beginning of the end of meaningful regulatory reform.”

Um, thanks for making me sound respectable?

In any case, I feel that Fernholz is a bit like Heidi Moore: he’s missed the point of Taibbi’s polemical style. Taibbi is not interested in an writing an even-handed examination of Obama’s economic policies: he’s interested in writing an enjoyable screed which jumps off the page and which describes Alan Greenspan as “a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters”. This stuff isn’t meant to be taken nearly as literally as Fernholz is taking it — but in any case, Fernholz’s game of gotcha comes up with precious little of real substance. Viz:

Michael Froman. His connection to Obama is through their time together on the Harvard Law Review, not through Rubin. He did indeed once work for Rubin, and was a member of Obama’s transition advisory board; he was not on the transition staff. His portfolio is international economic policy, he does not participate in domestic financial policymaking except in that strategic role; of late his main focus has been managing economic negotiations with China.

But here’s how Taibbi actually describes Froman:

Leading the search for the president’s new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama’s biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin…

Joining Summers, Furman and Farrell at the NEC is Froman, who by then had been formally appointed to a unique position: He is not only Obama’s international finance adviser at the National Economic Council, he simultaneously serves as deputy national security adviser at the National Security Council. The twin posts give Froman a direct line to the president, putting him in a position to coordinate Obama’s international economic policy during a crisis.

Taibbi is quite explicit that Froman and Obama met at Harvard Law, and indeed claims that Froman introduced Obama to Rubin, not that Rubin introduced Obama to Froman. Taibbi says that Froman “went to work for” the Obama transition team; I think that’s probably true, even if Froman wasn’t on the formal transition staff. Taibbi also says that Froman’s role is that of international finance adviser; he never says that it’s domestic financial policymaking.

In other words, it’s worth cross-checking everything that Fernholz says against what Taibbi actually writes, because often Taibbi simply doesn’t say what Fernholz implies that he says.

All the schadenfreude over Fernholz’s attack on Taibbi is particularly weird since they seem to actually agree with each other. Here’s how Fernholz concludes:

Is it disconcerting that employees of the financial industry make a ton of money? Yes. Is it the revolving door between Washington and Wall Street problematic? Yes. Does the Administration take it too easy on the banks? Absolutely. Are White House advisers too centrist for progressive tastes? Sure. But when you try and tell that story with a lot of lies and innuendo, and misunderstand the basic policies that these people are producing, you don’t hurt them. Now anyone who criticizes the Administration will just be lumped in with Taibbi’s meandering conspiracy…

Doing the work is hard. But if you want to make a dent, you have to do it.

This is quite astonishing. Fernholz is basically saying that Taibbi is right, and that not only is he right but that he will now and henceforth utterly overshadow anyone else who’s criticizing the Obama administration from the left. At the same time, however, despite Taibbi’s astonishing ability to encapsulate and personify the entire group of people who criticize the administration, he’s not even going to manage to “make a dent”, because he’s not going about his job in an evenhanded J-school manner.

Personally, I love it that Taibbi exists, and I’m impressed that his 6,500-word screed (into which a great deal of work clearly went) in fact has very little in the way of factual errors, let alone “lies”. Yes, Taibbi is polemical and one-sided, and he exaggerates his thesis, and he’s entertaining; I daresay he’s learned a lot from watching Fox News. And no, I would never want to live in a world where everybody wrote like that. But Taibbi is one of a kind, and we can enjoy him and learn from him as such. He might not end up changing policy in Washington. But he’s doing a much better job of making the policy debate relevant to Rolling Stone‘s readership than anything Tim Fernholz has ever done.


Thanks for the unique perspective on this subject…

Annie Leibovitz is now $30 million in debt

Felix Salmon
Dec 11, 2009 21:24 UTC

Allen Salkin has some new facts in the continuing saga of Annie Leibovitz and Art Capital Group: the amount that Leibovitz owes Art Capital has now ballooned to $30 million (the original loan, taken out in September 2008, was for $24 million); and the maturity date on the loan has now been extended only to “next summer”:

A mortgage filed with New York City in October notes, partially in capital letters, the urgency and complexity of the agreements between Ms. Leibovitz and Art Capital: “TIME IS OF THE ESSENCE with respect to each and every covenant, agreement, and obligation of mortgagors under this mortgage, the secured loan agreement and any and all of the other loan documents.”

Leibovitz does seem to be making good-faith efforts to make as much money as she can: she’s reportedly sold two “Master Sets” of 157 prints at $2.5 million apiece (she’s using Lawrence Schiller to broker those deals, which worries Marion Maneker), and she’s talking to Benedikt Taschen about a book deal. But it seems unlikely that she’s going to be able to raise $30 million in less than a year — and it seems even less likely that she’s going to be able to refinance into the bond market.

Salkin reports:

As she tries to increase her earnings, Ms. Leibovitz is also seeking to restructure her debt. She has met with the Pullman Group, the company that issued bonds based on the catalogs of Mr. Bowie, James Brown, the Isley Brothers and others, according to the source who consulted with Ms. Leibovitz but is bound by confidentiality. But Ms. Leibovitz would have to demonstrate that her future earnings would arrive in a dependable and clearly accountable fashion before any bonds could be sold, the source said.

Bonds are good ways of securitizing an income stream — but Leibovitz just has intellectual property, as opposed to anything which looks like a predictable income stream. And to make matters worse, that intellectual property is encumbered by a whopping great lien.

At some point next year, then, Leibovitz is going to find herself back where she was in August: with a huge loan maturity looming, no cash to pay it back, and no ability to refinance except for on Art Capital’s terms, since they hold all the relevant liens. Salkin makes no mention of Leibovitz trying to sell the rights to her art, which means that her only hope of avoiding a replay of this summer’s nightmare is to try to cobble together $30 million between art sales and real-estate sales. It’s not impossible, but it’s definitely unlikely, and of course it would mean Leibovitz losing her beloved custom-built Manhattan studio, along with her home in Rheinbeck.

So the chances of a happy ending here, for anybody concerned, are still very slim. And I suspect that Art Capital Group will think long and hard before ever again advancing a loan against intellectual property, as opposed to real physical art.

Michael Froman and the revolving door

Felix Salmon
Dec 11, 2009 18:38 UTC

Michael Froman is one of those behind-the-scenes technocrats who never quite makes it into full public view. But according to Matt Taibbi, he’s one of the most egregious examples — up there with Bob Rubin, literally — we’ve yet seen of the way the revolving door works between business and government generally, and between Citigroup and Treasury in particular.

I’m not sure how much of this information is new, but a lot of it was new to me, especially the bit about Froman “leading the search for the president’s new economic team” — while he was still pulling down a multi-million-dollar salary at Citigroup, no less. Apologies for quoting at length:

Leading the search for the president’s new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama’s biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama’s economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin’s son. At the time, Jamie’s dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments…

On November 23rd, 2008, a deal is announced in which the government will bail out Rubin’s messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees… No Citi executives are replaced, and few restrictions are placed on their compensation. It’s the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin’s fuck-up-rich tenure at Citi. “If you had any doubts at all about the primacy of Wall Street over Main Street,” former labor secretary Robert Reich declares when the bailout is announced, “your doubts should be laid to rest.”

It is bad enough that one of Bob Rubin’s former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama’s Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government’s bailout generosity would not die with George W. Bush and Hank Paulson.

How much influence did Froman have over the appointment of Geithner as Treasury secretary? Geithner, who wanted to become Treasury secretary and who as New York Fed president was a central (if not the central) figure in orchestrating the massive Citigroup bailout just after the election, knew what Froman’s job was in the Obama transition team, and knew that Froman was a senior executive at Citigroup.

As Taibbi says, the optics are atrocious — especially when you combine all these decisions with the marginalization of the more anti-Wall-Street types among Obama’s economic advisors, and the elevation of people like Larry Summers and Rahm Emanuel who might not work for Wall Street for very long, but who make many millions of dollars doing so when they do.

My only wonder is that this Froman story has been kept so quiet for so long, given the importance of perception in politics. Still, I’d like to see it confirmed elsewhere — what’s Taibbi’s source for his assertion that Froman led the search for the new Treasury secretary? Has that been reported before?


While I admire Matt Taibbi’s journalism–and his chutzpah–there is an egregious error in one of the paragraphs you quoted. Jamie Rubin, former State Department spokesman, is not Bob Rubin’s son. His father is named Harvey, according to a New York Times story about his 1998 wedding to Christiane Amanpour.

http://www.nytimes.com/1998/08/09/style/ weddings-jamie-rubin-christiane-amanpour .html

Bob Rubin does have a son named James, but he’s not the James cited in Taibbi’s article. Rolling Stone’s fact checkers really dropped the ball on this one.

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BofA’s dismal mortgage-modification rate

Felix Salmon
Dec 11, 2009 17:10 UTC

Yet more proof, if proof be needed, of Bank of America’s dysfunctionality comes in the latest HAMP report from Treasury. BofA has 1,018,192 loans eligible for modification — more than twice as many as anybody else; JP Morgan is in second place with 448,815. Of those million-plus mortgages, BofA has managed to turn the grand total of 98 into permanent modifications — a conversion rate of 0.0096%.

Elsewhere, the conversion rate is much higher: Ocwen Financial, for instance, has 4,252 permanent conversions out of 66,351 eligible loans, for a rate of 6.4%. Even JP Morgan Chase has managed 4,302 permanent conversions, for a rate of just under 1%.

It takes time to move clients through the trial-modification process and into something permanent, of course. But it also takes competence. And that seems to be a commodity in short supply at BofA.


Well, there’s eligibility for the modification program as a whole, and then there’s eligibility for the permanent mods, so you do have a point, to some extent.
But so long as Felix is comparing apples to apples (and I’ll bet you dollars to donuts he is), his conclusion will stand.

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Those surprisingly small TCW redemptions

Felix Salmon
Dec 11, 2009 15:11 UTC

How much has the abrupt departure of star bond fund manager Jeffrey Gundlach cost his former company? Maybe less than you might think: about $2 billion left his fund in the 48 hours after he was fired, but redemptions seem to be slowing down, and that still leaves over $60 billion remaining.

Most of Gundlach’s investors are large institutions, of course, and they can sometimes move relatively slowly, and might be biding their time to see if they can renegotiate their deals with TCW or to see where Gundlach pops up next. But the good news is that an event which might have caused serious chaos in the volatile and illiquid mortgage market seems in reality to have passed with barely a ripple.

The guy who’s replacing Gundlach, Tad Rivelle, is having a torrid week, for sure. But institutional investors often respect relatively modest fund managers who have yet to reach the point at which they start believing their own press clippings:

Mr. Rivelle rejects the notion any bond manager has a secret formula that can’t be replicated. Bond selection “doesn’t rely upon some supercomputer or massive brain,” he says.

In the early days of this week, when TCW was releasing letters saying that Gundlach had “threatened to take certain actions that could have jeopardized the firm’s ability to manage clients’ fixed income assets,” the probability that it could all end in anything but tears seemed slim indeed. But it’s a testament to the newfound strength of the bond market that so far this is more of a financial-gossip story than anything with systemic implications. Well done, bond market, for keeping your head and not going crazy on the immediate-redemptions front.


Given that only $12 billion of the money Gundlach was running was in the mutual fund (TGMNX/TGLMX), $2 billion in withdrawals is pretty significant to the company. They also got smacked by the Treasury and may lose that business. No standard institutional investor is going to reallocate money in less than a week, and those that do want to move money might well cut deals with TCW not to express their concerns publicly. Of course it’s also in their interest to keep quiet to make sure they get their cash promptly.

Given that the mutual funds were ~65% in government-backed securities, it’s unsurprising that $2 billion in redemptions failed to move a multi-trillion dollar market. As to the supposed illiquidity of the riskier end of the portfolio, banks have been using illiquidity as an excuse for their insolvency since the beginning of the crisis and it remains just as false. There’s a price for any security you can name, because there are simply too many arbs and nerds out there for there to be any market in which the world collectively throws up its hands and says “Dunno what it’s worth”. That price may not be as high as the long-term holders of bad paper would like, but Gundlach bought all these securities at a low price and TCW could sell them at a higher price today. Banks just pretend they’re illiquid because they’d rather mark the paper at 80 cents on the dollar than take the market quote of 70 or less. Maybe we’ll successfully inflate/earn our way out of this and they’ll be right, but paper that you might have to sell any day to remain solvent/meet cash demands is worth what the market will pay you for it. I really hope for their sake that TCW has been marking their paper honestly when the institutional redemptions start coming in.

But I agree with you that this won’t have any bond market impact since TCW isn’t big enough. It will hurt their company because they have lost not just Gundlach but an excellent team around him that were highly successful at gathering and managing assets. It’s also pretty damaging to the company’s reputation as a fiduciary that they will make a huge adjustment on a Friday afternoon without consulting or warning shareholders. I’ll never invest with them again, and I had been adding to the fund since I found out about it earlier this year.

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Felix Salmon
Dec 11, 2009 06:01 UTC

Facebook will soon let its users keep friends lists private — PC World

A spectacular new piece of information design tracking how the UK govt spends its money — Where does my money go?

Fatal police shooting in Times Square — NYT

Does Advertising Bias Product Reviews? — Wine Economics

Amazing video of the James Turrell installation in Wolfsburg — Kunstmuseum Wolfsburg

When boards are too independent

Felix Salmon
Dec 11, 2009 05:45 UTC

We all love independent board members of public companies. But can they be too independent?

Townsend expressed concern that Massey has been ineffective at building consensus among directors who have proven themselves to be fiercely independent. “That has been an unintended consequence” of April’s shareholder actions, he said.

The problem, of course, is that of who will replace Ken Lewis as BofA CEO. Lewis had no coherent succession plan, and the board can’t seem to come to an agreement either.

Ultimately the important thing is not that board members are independent of each other but rather that they are independent of management. There are definitely many advantages to have the board broadly pulling in the same direction, and then hiring and firing the CEO accordingly. And I think we’re beginning to see, at BofA, the disadvantages of having an ineffectual chairman who has less money, power, relevant experience, or charisma than just about anybody else on the board: it’s a recipe for sclerosis and infighting.

How buying a home is gambling

Felix Salmon
Dec 11, 2009 04:44 UTC

Ryan Avent adjudicates the homes-as-investments debate, and comes to a positively Solomonic conclusion:

Sure, it’s fine to think of homes as investments, so long as the kind of investment you have in mind is the highly risky sort you wouldn’t recommend to anyone who didn’t have the ample knowledge and financial cushion you’d expect to see in a successful entrepreneur. And that does not describe most potential homeowners.

I think that both Adam Ozimek and I might well agree with that. Here’s Ozimek’s latest:

I agree with Felix that buying a house is not a certain investment; you can lose your money and your home. Obviously in the past few years many people have, and that’s terrible. Where I disagree, is with his contention that since the outcome is so bad, the potential investment returns are never worth it, and you should stick with other investments which don’t have the added downside of homelessness…

Why can the potential cost of losing your money and your home be worth it for the consumption or psychological benefits, but not for benefit of potential financial returns?

The problem here is that no one ever buys a house with their eyes that wide open, fully cognizant that they are taking a calculated risk in which they know full well that there’s a non-trivial probability that the consequences of their “investment” will be foreclosure, bankruptcy, and homelessness. Investments don’t work like that: if you’ve laboriously saved up enough money to scrape together a downpayment on a home, that’s money you’re not going to gamble. The number of people genuinely comfortable with taking that kind of downside risk is basically zero, as it should be. (Remember that most homeowners have families to support: they’re not just gambling their own livelihood, but that of their family too.)

So yes, Adam, I do feel comfortable giving this much investment advice: no potential investment returns are worth it if the downside is that there’s a good chance that you’ll end up financially devastated. That’s not sensible diversification: it’s putting all your eggs into a basket that you have essentially no control over. Avent is right that buying a home is a bit like starting a small business, but the big difference is that the value of a small business comes in large part down to the owner. Whereas in the property market, the owner can only affect value at the margin.

If you have essentially no control over the outcome of your investment, and you have no way to exit that investment if it starts to go bad, then you’re a gambler. And as Avent says, that does not describe most potential homeowners.

Update: Konczal also weighs in, and reckons that buying a house is basically the same as buying a hedge fund with a 2-and-66 fee structure.


I’m not advocating Robert Kiyosaki, but, he did mention in one of his books that you should not look at your personal residence as an investment. You should primarily view it as a place to live.

Of course, you should be smart in your decision-making process when you obtain a home. You don’t want to lose money.

But, if more people looked at as a place to live, many more people would have bought smaller, lower-cost homes and they may have been able to keep up the lower payments. That’s what I did.

I and my wife have been unemployed multiple times in the past few years (beginning before the financial crisis). We have not been late on any debt payments because the payments are low and reasonable.

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