Felix Salmon

The bank-recapitalization supertax

Felix Salmon
Dec 10, 2009 22:17 UTC

My colleague Peter Thal Larsen has an interesting take on the numbers associated with the UK banker supertax, and how a 50% tax on a £6 billion bonus pool can generate only £550 million in revenue:

The government’s estimate assumes that banks will reduce their bonuses. It is also a net figure – it takes into account that the government will collect less income tax because the bankers will receive lower bonuses.

So if you assume the bonus pool covered by the tax is £3 billion, then £1 billion of that goes to the government. But because bankers aren’t paying tax on that £1bn, the government also “loses” £400m. Which gives you a net figure of £600m – close to the government’s estimate.

Now, it’s not certain that the bonus pool would have been £6 billion had the tax not been imposed. But if that’s an accurate figure, and if Peter’s numbers are also right, then total bonuses paid to UK bankers will fall, as a result of this tax, from £6 billion to just £2 billion — a massive 67% drop.

What’s happening to the other £4 billion? £1 billion is going to Treasury, which gives the government a net revenue increase of £600 million. But the other £3 billion is being kept by the banks, and I can promise you that they’re not going to give it away in dividends. Instead, it will go straight into retained earnings — the purest and strongest form of capital there is. It might even help prompt the banks to lend more.

I also like the idea that fully 1/3 of the UK bonus pool will be spent on bonuses of less than £25,000. You can be sure that’s not going to be true in the US. The more I look at this scheme, the more I think that it would be great if we tried something similar here.

Update: Peter’s own take on the supertax is here.

Update 2: Peter clarifies: it turns out he reckons fully £3 billion of the £6 billion bonus pool is exempt from the tax, £2 billion because it’s in the form of bonuses under £25,000, and another £1 billion because it’s in the form of guaranteed bonuses, which are exempt.


Felix, just to clarify my maths on this: the best estimate for the City of London bonus pool is £6 billion.

Of this, maybe £2 billion falls under the £25,000 tax threshold and so will get paid out as normal. Another chunk – maybe £1 billion – is in the form of guaranteed bonuses that are exempt from the tax. So half the £6 billion will get paid out as before.

It is the remaining £3 billion that is subject to the supertax. The Treasury’s estimate appears to assume that the banks will cut this by a third, to £2 billion. But because the supertax on this will cost them £1 billion, the net cost for the banks is the same. It’s just that the bankers get less, and the government gets more.

Posted by petertl | Report as abusive

Chart of the day, hedonic treadmill edition

Felix Salmon
Dec 10, 2009 21:49 UTC

Here’s my favorite pair of charts from David Kochanek’s latest hedge fund compensation report. The first shows how much people get paid, by job title:


and the next shows how happy they are, also by job title.


Quite the inverse relationship, it seems! The accounting types get paid less than anyone else, but are also much happier with how much they’re paid than anyone else. Meanwhile, the portfolio managers and COOs, who get paid more than anyone else, are generally pretty unhappy people. Indeed, overall, a whopping 61% of the people in the hedge-fund industry are unhappy with their jobs.

Of course, it comes as no surprise to see the lowly analysts at the bottom end of both charts. But maybe people might (or should) be much less keen to become hedgies if they knew that only one in three hedge fund managing directors is actually happy with their lot.


http://en.wikipedia.org/wiki/Cognitive_d issonance#Boring_task_experiment

‘When asked to rate the boring tasks at the conclusion of the study (not in the presence of the other “subject”), those in the $1 group rated them more positively than those in the $20 and control groups. This was explained by Festinger and Carlsmith as evidence for cognitive dissonance. The researchers theorized that people experienced dissonance between the conflicting cognitions, “I told someone that the task was interesting”, and “I actually found it boring.” When paid only $1, students were forced to internalize the attitude they were induced to express, because they had no other justification. Those in the $20 condition, however, had an obvious external justification for their behaviour, and thus experienced less dissonance.[7]‘

Posted by hlob | Report as abusive

Chart of the day: Credit card late fees

Felix Salmon
Dec 10, 2009 21:11 UTC

This chart comes from the Center for Responsible Lending’s latest report on the latest tricks and hidden fees in the credit card industry:


What you’re seeing here is the slow introduction of something called “tiered pricing” in late fees. Since 2001 or so, not all late fees have been equal: if you only have a small balance, then the late fee might be smaller. But the banks have done something rather cunning: they’ve steadily reduced their headline minimum late fee, while raising the late fee which is levied on most cardholders. As report author Josh Frank says,

A top late fee tier typically starts for balances of $250 and up. Roughly 9 in 10 consumers fall into this top tier, showing that issuers are not trying to create true proportionality in their late fee system. Instead they are creating a system that suggests a low fee exists, while in reality charging almost everybody the highest fee.

And that’s just the beginning of the card companies’ shenanigans. There’s minimum finance charges, for instance: you might have racked up just a few pennies in interest, but you’ll still be charged a $2 minimum finance fee — a fee, what’s more, which can even be applied on cards with 0% introductory rates.

And then there’s the interest rates, which have moved from being based on the Prime Rate, to being based on the highest Prime Rate in the previous three months.

Of course there’s more. There are inactivity and “account management fees”, for instance. There are rising minimum cash-advance and balance-transfer fees. And there are fees on dollar-denominated transactions in foreign currencies — that’s tripped me up in the past, and often it’s simply impossible to know which country a vendor might be technically based in. I once bought tickets to a gig in New York from the venue’s own website, for instance, but the ticketing company was technically based in Ireland, so bang, a foreign-transaction fee got levied. And real international transaction fees are going up too:

In 2004, the majority of the Top 8 issuers did not charge an international transaction fee. In 2009 three-quarters of the top issuers charge this fee to most of their accounts. The size of the fee has also increased. In 2004, most of the issuers who charged this fee had a fee of 2%. Today most issuers charge 3%.

There’s only one thing that consumers can really do to avoid all these fees, and that’s stop using their credit cards altogether. Banks are better at hiding fees than you are at finding them, and even if you think you’re being terribly clever by paying off your card in full each month, chances are you’d still be better off just using a debit card instead.

The longer-term hope, of course, is that a principles-based Consumer Financial Protection Agency would crack down on this kind of behavior, and force card issuers to make their fees much more transparent than they are now. But we’re not remotely there yet. For the time being, caveat emptor.


Unfortunately, protections on debit cards are a lot less reliable than those on credit cards. Most people I know have been the victim of some minor level of credit card fraud, whether it’s dodgy restaurants, or shady shopkeepers when paying for Oyster credit leading to charges from India, or some insecure website losing its CC database (lead to charges from a US credit score company for me). There’s never a problem getting rid of those charges with a credit card.

With my Irish bank (Bank of Ireland), cash advances are free – both of fee and interest – if paid before the end of the month. And it’s one of the cheapest and easiest ways of getting foreign currency abroad, from ATMs, so I can avoid the vampires in the airports, never mind the vultures in the bank’s BdeC. (If I have to get cash, I’ll get it from the cash desk of a forex trader here in London.)

Barclay’s credit card, on the other hand, is a lot less useful: fees and interest on cash advances, fees on forex, fees etc. But it’s not like there’s a choice in the UK credit card market; they’re all crap.

Posted by BarryKelly | Report as abusive

Is this just the beginning of a depression?

Felix Salmon
Dec 10, 2009 17:28 UTC

David Rosenberg, the former Merrill Lynch economist now at Gluskin Sheff, has another of his very bearish reports out, and kicks off with this observation:

The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said repeatedly that this recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses.

This rings true to me. The recession vs depression debate is really a matter of semantics, but the facts are that although markets have rebounded impressively, and big companies have regained access to credit, most of the economy and its working-age population will continue to suffer the effects of the current deleveraging for the foreseeable future.

America’s demographics don’t help, either:

The last time we had a consumer recession in the early 1990s, the boomer population was in their early 30s and they were still expanding their balance sheets. The last time we had a bubble burst in 2001 they were in their early 40s. Now they are in their early 50s, the first of the boomers are in their early 60s, and we are talking about a critical mass of 78 million people who have driven everything in the economy and capital markets over the last five decades.

I’m not optimistic that those of us in the post-boomer generation will be able to rekindle America’s historic rates of growth even as the percentage of the population of working age continues to dwindle and the boomers continue to demand the lifestyle to which they have become accustomed.

The point here is that while most recessions are cyclical phenomena, this one could mark a secular turning point — the beginning of the end of America’s hegemony in the global economy and the capital markets. And the turning point has come too early, before the rest of the world has generated enough internal momentum to take America’s place.

None of this means that Rosenberg’s market strategies are going to make money: even when economists are right about the economy, they’re often wrong about what that means for asset prices. But if you think that a happy stock market means a happy economy, it’s definitely worth reading Rosenberg to see just how big the disconnect between the two might be.

(HT: Chittum)


It is difficult to fathom where the belief that the US is going to ‘regain its greater glory’ springs from. The last figures that I consider credible before the crash put the US at 22 percent of the world economy. Obviously that wasn’t sustainable.
What would have been sustainable? Ten or eleven percent? Who knows, and anyway it matters little as that was before the crash

What percentage of the world economy is the US now? I recently saw figures that indicated that 70 odd percent of the US economy was ‘retail’. That is selling crap that you import, but cannot pay for.

A fair picture of the US is that collectively the population has maxed out its credit, and the country’s credit is being held up by those who having invested heavily in US government ‘paper’ have to support the illusion long enough to unload as much of the worthless ‘paper’ as they can dispose of.

One example is China is out buying access to resources wherever it can find them, and whatever price they pay, as they are paying with their US ‘paper’, the price is cheap.

The US has been closing factories and sending the jobs offshore for what, thirty or forty years. Your factories closed because they were obsolete, with some notable exceptions, so were the products and the labour force had priced itself out of the market.

Today you have no modern factories, it is ‘others’ where have the ability to design super efficient plant, nor does the US have the skilled workforce the operate such factories, and even if you did, getting them to work at competitive wages would be all but impossible. Assuming that you can overcome all that, you would only be in a position to compete on an equal playing field against already established competition.

If you were looking to invest in a start up company with those prospects you would look elsewhere.

What has the US got to export? What raw materials do you have?

If the US was a company, would you invest your money in it, and if so, why?

That the $US will lose its status as the reserve currency is a certainty. For some considerable time there has been discussion on this issue, and the fact is that various countries have already begun moving to avoid utilising the $US. Notably China and Russia who recently agreed to conduct all trade between them in their own currencies.

Middle East oil producers have long been buying gold as opposed to US ‘paper’, and increasingly oil contracts are being written in other than the $US. Notably in Euros.

This leaves as the US as a ‘superpower’ in terms of its military, but ‘broke’. With the changing face of warfare what is regarded as the ‘awesome’ military technology, built to face another enemy in another time, will be seen as nothing but a pile of expensive junk.

Recently I threw out a Epsom colour printer, $800 odd worth. When I bought it, it produced a better image than the ‘Proof printer’ that a printer friend paid $30 odd for. Today I can buy a better printer, better in all respects for less than $100.

Similarly time and world has passed the US by.

Posted by peterhindrup | Report as abusive

Britain’s very modest surtax revenues

Felix Salmon
Dec 10, 2009 16:27 UTC

Andrew Clavell notes something very interesting about the amount of money the UK Treasury expects to raise from its bonus tax:

Given £6bn of bonuses originally expected to be paid to UK based bank employees, HM Treasury’s anticipation of proceeds from the 50% levy of only £550m says a lot about what the government supposes the banks’ reactions will be.

No, the reaction isn’t that they’ll suddenly decide to slash bonuses from £6 billion to £1.1 billion. Instead, they’ll find loopholes: most likely just deferring the payment of bonuses until after the supertax expires. At that point, the top tax bracket rises to 50% from 40%, so the government will still get a bit more money. But not nearly as much as the headline rate on the supertax implies.

Even so, the £550 million estimate does seem incredibly small: it implies total bonus pools this bonus season of just £1.1 billion. Can that really be the case?


Is it really that hard to provide the bonuses in creative ways?

Posted by Uncle_Billy | Report as abusive

The behavioral economics of data consumption

Felix Salmon
Dec 10, 2009 15:48 UTC

I know that when you know how much electricity you’re using, you use less of it. But I always thought that was because the more electricity you use, the more you pay. In fact, it might just be a function of the fact that it’s being measured and reported back. I was puzzled by this story in today’s NYT:

Mr. de la Vega cited the heaviest data users, saying that 40 percent of AT&T’s data traffic came from just 3 percent of its smartphone customers.

But he emphasized that the company would first focus on educating consumers about their data consumption in the hope that doing so would encourage them to cut back, even though they are paying for unlimited data use.

Then I saw the WSJ explain:

Many customers don’t know how much bandwidth they’re consuming, Mr. de la Vega added. When AT&T conducted a broadband test, customers often reduced their data use.

I’m not entirely clear on what the mechanism is here: why would you reduce your consumption of something you’re getting an unlimited amount of for free, just because you’re told how much you’re using? The only thing I can think of is that some people are turning off wifi to preserve battery life, which means that they use the 3G network more, and when they find out how much they’re using 3G, they realize that they’d be better off turning wifi back on. But it doesn’t really matter why it works, if it works.


Way OT — Felix, the new pic makes you look like the long-lost triplet Proclaimer. Presumably, the one who refused to walk 500 miles.

Posted by SelenesMom | Report as abusive

Why can’t I hide my list of Facebook friends?

Felix Salmon
Dec 10, 2009 15:23 UTC

The sleazy anti-shorting crowd at Deep Capture has published a list of my facebook friends, along with those of other critics of the site like Barry Ritholtz, Dan Colarusso, Dave Kansas, David Einhorn, Eric Savitz, Henry Blodget, Jeff Matthews, Joe Nocera, Joe Weisenthal, John Carney, John Hempton, Paul Kedrosky, and Sam Antar.

First, I’d like to apologize to the friends whose names were published. But it’s not my fault, it’s Facebook’s. Here’s their privacy policy:

Certain categories of information such as your name, profile photo, list of friends and pages you are a fan of, gender, geographic region, and networks you belong to are considered publicly available to everyone, including Facebook-enhanced applications, and therefore do not have privacy settings.

I’m a semi-public figure, and although I might not be happy with this kind of cyberstalking, I know I’ve put myself out there and that there will be consequences of that. But that decision of mine shouldn’t have some kind of transitive property which feeds through to my personal friends, and I don’t want the list of their names to be publicly available to everyone.

There’s one thing I can do which makes retrieving this list a bit harder: I can restrict the list of people who see my name in search results when they’re searching for me. But the whole point of having a Facebook page is so that old friends can find me: I don’t want to be hard to find. I just don’t want people who find me to automatically thereby find my list of friends as well. My friends deserve more privacy than that.

Update: Maybe it is possible after all. Thank you to Heidi Moore, who showed me this trick: if you click on “Profile” at the top of the page, you’ll see a box of “Friends” in the left-hand column. That has a pencil in it; click on that, and then uncheck the box saying “Show my friends on my profile”. It’s got to help, anyway.


Update 2: This isn’t a perfect solution, by any means. Heidi adds:

Even if you close off your friends list in your profile, it’s open to anyone on all of Facebook who shares even one friend with you.


Here’s the problem with me…..MY FRIEND’S look up MY FRIEND’S…..the beautiful ones…..and then ask them to be THEIR FRIENDS!! I cannot believe you haven’t thought of this Mr. Zuckerberg!! This is why I WANT TO HIDE MY FRIENDS!!! Simple answer!!! PLEASE CONSIDER THIS!!!! My male friends are not trying to “network” with my gorgeous girlfriends……they want to begin a “friendship” with the beautiful ones!!!! Of course they do not request to be friends with my male friends!!! PLEASE BRING BACK A FEATURE TO HIDE MY FRIENDS FROM MY FRIENDS!!! Thank you!!

Posted by pinkwoman | Report as abusive

Closing loopholes

Felix Salmon
Dec 10, 2009 14:42 UTC

Remember how Gary Gensler persuaded Barney Frank to close a big loophole in the derivatives-regulation legislation? I was hopeful then — poor, naive soul that I am — that the banking lobby had been effectively neutered on the loophole front.

Of course it hadn’t: it just started looking for another loophole instead. Remember that the main point of the legislation is to force all derivatives trading onto an exchange. The first loophole tried to get around that by saying that “end users” could get a pass; inevitably, all the major banks would somehow manage then to define themselves as end users.

The new loophole, as explained by Mike Konczal, takes another tack. It says that you don’t need to trade derivatives on exchange — you just need to trade them on an exchange or a “swap execution facility”. And then it defines “swap execution facility” so broadly that two traders talking on the telephone — just like they do in the current OTC market — can be considered such a thing.

There’s been enough publicity surrounding this loophole that it might yet get closed. But the bigger picture is clear: Wall Street, in the pursuit of large profits, will always try to find a way around regulations it doesn’t like. And eventually it’s going to succeed. Which is one reason why we need a more principles-based approach to regulation. Rules always grow loopholes.


Regulations are crafted to be circumvented by those who draft them. Regulators can be circumvented if they are greedy or lazy. The real crisis in America is one of character.

Posted by eddieblack | Report as abusive


Felix Salmon
Dec 9, 2009 22:43 UTC

A laid off i-banker applies to law school — McSweeney’s

Mexico’s Carstens moves from FinMin to Banxico. Where next, the OECD? — Reuters

Tett: “The IIF is frantically fighting back by wielding a list of bullet points intended to bore its opponents into submission” — FT

All about my suit — Twitter, Twitpic, TBI, BNN

When Bess Levin met Steve Cohen — Dealbreaker

Fox News has difficulty counting to 100, again — MR

Konczal to the Roosevelt Institute. Blog, wonderfully, remains — Rortybomb

Stupid reporters argue on the air — Stupid Videos


Zdneal, that’s a known bug, we’re working on it.