Felix Salmon

Pimco picks up Kashkari

Felix Salmon
Dec 7, 2009 18:38 UTC

It looks like Neel Kashkari did manage to get that financial-services job by year-end after all: he’s moving to Newport Beach and joining Pimco as a managing director in charge of “new investment initiatives” (which seems to mean, at least in the first instance, equities). You can be sure he’ll be earning substantially more there than he would have been making had he simply stayed in “Information Technology Security Investment Banking”, whatever that might be, at Goldman Sachs.

Pimco seems to be establishing itself as a key part of the revolving-door structure in contemporary finance: if you’re a senior government bureaucrat making decisions affecting the financial industry, there’s a good chance that if and when you leave there’ll be a job waiting for you in sunny southern California. It’s win-win for everybody: technocrats will tend to treat the financial industry with kid gloves when they’re in power, so as to maximize their chances of getting a good job upon their exit, while the likes of Pimco “make billions” as a result of doing so.

Who, in this clubby world, will stand up for the rest of us? Is there any way to prevent civil servants from parlaying their experience into seven-figure salaries in the private sector once they leave government? The short answers, of course, are no one, and no. If Pimco feels no compunction about hiring the likes of Greenspan and Kashkari today, it’s certainly not going to stop doing so tomorrow.


“Deutsche Bank tut, was Deutsche Bank will.”

(Did that come out right?)

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Iceland’s long night

Felix Salmon
Dec 7, 2009 17:57 UTC

If you’re wondering how well a country can function in the absence of a working financial system, it might be worth taking a look at Iceland, where GDP shrank 5.7% in the third quarter, with no expectation of a bounceback until 2011. And for all that Reuters’s PR guru Jolie Hunt and others might love to go there on holiday, I don’t think the tourism market is going to be particularly big so long as there’s only 4.5 hours of sunlight per day. Meanwhile, Iceland’s enormous geothermal value seems to be accruing mainly to Alcoa rather than to the country’s citizens. The long night looks as though it’s going to last well past the March equinox: sunrise seems further away than ever.


Felix, I am sure you realise that what goes around comes around: long nights become long days.
I vacationed in June: http://sunrisesunset.com/calendar.asp?co mb_city_info=Reykjavik,%20Iceland;22;64; 0;0&month=6&year=2010&time_type=0
21 hours of sunlight.
We played footy until well past 11pm.

Also, has anyone else noticed that this new Reuters format TOTALLY SUCKS.
I had to recreate my identity and my screen name had to include both letters and numbers… WTF?
Yeah – that makes sense.
Way to rebrand pointlessly Reuters.
Your pages take far longer to load too.

If it ain’t broke don’t fix it.

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Gold: The Glenn Beck indicator

Felix Salmon
Dec 7, 2009 17:19 UTC

Ken Vogel’s very good article on the rip-off gold merchants sliming their way around the broadcast punditosphere never attempts to guesstimate the total amount of money that’s changing hands here. But it’s clear that the gold bubble is bringing out some most unsavory profiteers, who are signing up right-wing talk show hosts as spokesmen and selling not bullion but coins, which they can mark up to basically whatever they like.

What I’m wondering here is how much all this eschatologolical rhetoric is affecting the actual gold price. Certainly it attracts buyers:

Peter Epstein, president of Merit Financial Services, which advertises on Beck’s show, says gold retailers expect favorable coverage from commentators on whose shows they pay to advertise. “You pay anybody on any network and they say what you pay them to say,” said Epstein. “They’re bought and sold.”

Beck, who through a publicist declined to comment for this story, addressed the Media Matters allegation on his Thursday show, saying “So, I shouldn’t make money?” And he made the point that he touted gold before he became a Goldline endorser, and urges viewers to study and pray before investing in it…

“I could care less what people think of him,” Merit’s Epstein said of Beck. “We advertise on Fox because it makes the phone ring.”

If a large number of people are buying gold coins after listening to the likes of Glenn Beck, you can be sure that even more are buying GLD. And eventually demand for gold coins is itself likely to show up in a higher gold price. But this trend is going to have to run itself out sooner or later: you only load up on gold once, after which your only options are to hold or to sell.

I’m not calling a top to the gold market just because it’s fallen for two days in a row following Friday’s job report. But I’m getting that feeling you get when your cab driver starts talking about buying calls on dot-com stocks, or your house cleaner turns out to have bought three single-family homes in Florida. The likes of Ron Paul have been riding this train for a long time. But now that pretty much every single right-wing pundit has jumped on board, I can’t believe it has much further to go.

(HT: Drum)


Many of these folks are also complaining about Al Gore’s environmental investments, and love to note that every time he advocates some anti-carbon policy he’s “talking his book”; I think it’s more true of both Gore and these conservative gold bugs that they’ve put their money where their mouths are. Not that one needs cliches to describe this; they have long-standing beliefs that influence both their advocacy and their investments, and that’s not necessarily a bad thing.

As for the feelings of gold vertigo expressed in the last paragraph, I have to concur there. These things do always seem to run farther and longer than I expect them to, though.

GLD is a play on tail risk, to some extent, and physical gold — most reasonably in bullion form, but even to some degree in overpriced forms — is a play on far worse tail risk — if you really think there’s a meaningful probability that our new communist overlords are going to confiscate anything you can’t hide in the woods, durable precious goods that you can hide in the woods become a hedge on that. You can’t eat gold, though; in some ways, this is the same hyper risk aversion that you’ve criticized from two and three years ago, and while it’s prudent to look out for tail risk, it’s also prudent to recognize that you’re simply never going to get rid of all of it. If 1% of the US population is moving to physical gold, then hundreds of people with gold buried in their back yards are going to be killed in car accidents in the next few years.

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The bailout profits

Felix Salmon
Dec 7, 2009 14:54 UTC

So, all’s well that ends well, right? The government’s making an $18 billion profit on its TARP bailout, or at least that part of it which went to the banks. (Never mind the $30 billion in losses on the money that went to AIG.) Kuwait has made $1.1 billion on its Citigroup investment — a gift horse the Arab state decided not to look in the mouth, selling out at a profit now rather than trying to hold on for further gains. And Singapore cashed in on Citi as far back as September.

Except of course not everybody’s making money: just ask Abu Dhabi, which negotiated much less favorable terms with Citi and has to buy $7.5 billion of shares at $31.83 each. CIC’s Blackstone stake is still underwater, and don’t even ask about Singapore’s experiences with Barclays and Merrill Lynch.

All the same, something’s working right here, at when it comes to the global financial system. The big sovereign investments/bailouts were made at a time when the public markets were closed, and big private capital raises were the banks’ only option. Now the public markets are open again, and the risk is being transferred back into them, where speculators are welcome to continue to bet on banks’ rising share prices should they be so inclined.

Of course, the dodgy assets which everybody was so worried about during the worst of the crisis are still on banks’ balance sheets: the only thing has changed is the degree to which everybody is worried about them. That, and the fact that the Fed’s Zirp has done a good job of force-feeding America’s (and indeed the world’s) largest banks with unprecedented quantities of free money.

What’s unarguable is that while the Fed has done a good job of making the banks profitable again, it’s done a much worse job when it comes to keeping a lid on unemployment. Wall Street loves Ben Bernanke; Main Street, not so much. Now, what are the chances that the two will come into alignment again thanks to the real economy improving, rather than the financial markets taking another stomach-churning lurch downwards?


“What’s unarguable is that while the Fed has done a good job of making the banks profitable again, it’s done a much worse job when it comes to keeping a lid on unemployment.”

The Fed’s job shouldn’t be to manage the economy, just to ensure the viability of the financial system. The money supply should not be used to contol the economy, as it doesn’t work. The idea that raising or lower interest rates will rein in or spur growth is wishful thinking, and the sooner we give up on this fantasy, the better.

When growth is higher than desired, it should be limited by restricting access to capital, not just by making it more expensive. Increasing capital requirements for both lenders and borrowers during bubbles not only puts the brakes on the biggest driver of bubbles – leverage – but it also reduces exposure to risk by lenders, including the government. Raising interest rates from 3% to 4$ won’t stop speculators from borrowing when the market they are investing in is rising at 20%. However, higher interest rates cause businesses that are capital intensive to raise prices, resulting in inflation.

Conversely, when we are in a recession, capital ratios should be lowered to encourage more investment and risk taking. Unless interest rates are stifling high, they don’t need to be lowered, all that does is induce bubbles in capital intensive assets, like real estate. Housing prices rise and fall as interest rates fall and rise, and because the cost of housing is a huge part of everyone’s budget, generate great uncertainty and instability.

The Fed, which does not answer directly to the voters, should not be assigned the task of managing the economy. The president and congress have plenty of tools at their disposal for doing that (which is ironic, as they throw most of them out).

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Felix Salmon
Dec 7, 2009 06:15 UTC

Best Venn diagram ever — Clusterflock

What New Yorkers are watching on Netflix — Twitpic

I’m loving this Clayton Homes ad: “Buy a home and receive a can of pork & beans absolutely FREE!” — Columbia Daily Herald

Numbers are really beautiful — UCR

56 newspapers in 45 countries speak with 1 voice through a common editorial — Guardian

Remember something on Twitter? Snap Bird lets you search for it — SnapBird

Stop grading your own students! Philip Greenspun rant about university teaching — Greenspun

Fortune’s stocks picked to last through the 2000s — Josh

Elin gets Tiger to pay for his infidelities. Literally — Mungo

“Is ‘magisterial’ simply a fancy word for ‘boring’?” — MR

4,000 words Matt Garrahan on the extreme dysfunction within MySpace. No wonder it’s imploding — FT

Had credit rating agencies followed their models, CDOs would have had lower ratings — SSRN

Wikipedia’s knowledge deserts — Guardian


I’m thinking that it’s these guys or pretenders to their trashy throne who are responsible for the pork and beans:


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Who’s the Warhol of fine-art photography?

Felix Salmon
Dec 7, 2009 05:08 UTC


The Economist has a great report on the market in Warhols, which turns out to have been written by Sarah Thornton. (Incidentally, if the Economist is going to encourage its writers to give radio interviews about their articles, isn’t it about time they had the occasional byline?)

The news in the piece is that Philippe Ségalot brokered a $100 million deal for Eight Elvises a year ago; judging by the success of 200 One Dollar Bills at Sotheby’s last month, he might well be able to get the same amount today. (The dollar bill is iconic. But it ain’t Elvis.) But the most interesting bit is this:

“Warhol really consists of two markets,” explains Brett Gorvy, co-head of Christie’s contemporary-art department. “One market chases ultra-rare, art-historically relevant paintings from the 1960s. The other is a perfect volume market where 24-inch Flowers and single Jackies trade like any other commodity.”

Marion Maneker elucidates:

What drives the Warhol market is a combination of ubiquity and differentiation. Damien Hirst found his way to a similar structure for his artistic output where huge quantity was counter-posed against an elite circle of highly valuable works. Takashi Murakami has accomplished something similar where circumstances and intention have created rare and important works within a large body of output.

The thing to note here is that the ubiquity is a necessary part of the forces driving the artist’s values. I’ve written before about the economic paradoxes of contemporary art, including the central one that the most expensive artists, even on a per-artwork level, are also the most prolific. But it seems that the great churning mass of 10,000 Warhols does more than just create a vibrant and liquid market in which prices are transparent (by art-world standards) and buyers have ever-increasing confidence in the value of what they’re buying, thereby helping to drive values up even further. All that art does something else, too: it helps to create a very strong foundation from which the value of masterpieces can be extrapolated.

But here’s another paradox of contemporary art: photography has been very hot for some time, and the biggest-name photographers (Andreas Gursky, Wolfgang Tillmans, Cindy Sherman) are just as bona fide art stars as any painter. What’s more, photography is valued by many collectors precisely because it’s fungible — even more than a Warhol flower painting, if you have a given photo, you know it’s worth the same as an identical photo from the same edition. So you’d think that photography would be the obvious medium where you’d get runaway art stars making enormous amounts of product and selling for ever-increasing sums. Yet that hasn’t really happened.

It’s almost as though photography is still suffering from an inferiority complex, and photographers feel the need to prune their work down to a relatively small number of pieces in order to be taken seriously. Consider the kind of thing that Team gallery feels the need to write about one of their star photographers, Ryan McGinley:

In the summer of 2007, for example, he traversed the United States with sixteen models and three assistants, shooting 4,000 rolls of film. From the resulting 150,000 photographs, he arduously narrowed down the body of work to some fifty images, the best of which are on display here at the gallery.

That’s so not Warhol. Why is it that Hirst and Murakami can become hugely successful by churning out thousands of artworks, while fine-art photographers still feel the need to keep their output relatively small? Maybe Jen Bekman can weigh in on this one. But I’m sure that if Andy Warhol were alive today, he would have thoroughly embraced the digital-photography revolution and be churning out enormous numbers of C-prints. Who will be anointed his natural heir, getting that much closer to creating the first $10 million photograph?

(Picture from the Andy Warhol foundation)

Those weirdly persistent counterfeiting statistics

Felix Salmon
Dec 6, 2009 20:42 UTC

Renee Richardson Gosline has done some research which, if it turns out to be true, could well show that the cost to established businesses of counterfeit luxury goods is actually negative:

In a working paper she just finished this fall, “The Real Value of Fakes,” Gosline interviewed hundreds of consumers who knowingly bought fake luxury apparel, many at “purse parties” where such goods are sold. Gosline found that within two years, 46 percent of these buyers subsequently purchased the authentic version of the same product — even though other people could not necessarily tell the difference.

I haven’t been able to find a copy of the paper (put it up on SSRN, Renee!) but this is an astonishing finding. It seems that fake luxury goods are pretty much the best form of advertising out there: people who buy them and live with them have a very high probability of being converted to the brand and then going out and buying the real thing. What’s more, every time they go out with their fake item, they’re publicly displaying the desirability of the brand.

This explains why smart companies like Dolce & Gabbana refuse to get involved in prosecuting counterfeiters. The more information that emerges on the scale of counterfeiting, the more it seems as though it’s small and helpful, rather than large and extremely damaging. And yet Bloomberg’s Meg Tirrell, reporting on Gosline’s research, still feels compelled to include garbage pseudostatistics:

Counterfeiting costs U.S. businesses as much as $250 billion a year, according to the Washington-based International AntiCounterfeiting Coalition.

No, it doesn’t. Not even close. And given that Gosline’s own research shows that counterfeiting might help US businesses more than it hurts them, one might think that Tirrell would treat the baseless numbers from the IACC with a bit more skepticism. But unfortunately they’ve been repeated so many times at this point that they seem to be lodged in the collective journalistic consciousness. Maybe Gosline can try to help a couple of her interviewers to join the anti-anti-counterfeiting crusade.


“Counterfeiting costs U.S. businesses as much as $250 billion a year, according to the Washington-based International AntiCounterfeiting Coalition.”

Beyond the fact that numbers like this and the ones that the record industry claims they lose to piracy are completly inflated is that a) the “lost” money is in revenues, not profits, and b) most people who bought the knock-off or downloaded the song wouldn’t have bought the real thing in the first place. In the case of the luxury item, people buy the fake stuff because they can’t afford the authentic product. And lots of people download every song they see, just because they want to have every song they hear of. Extreme downloaders may not ever listen to 90% of the songs they steal, so they would never buy them. As a result, the impact on profits is negligible, if unfair.

Counterfeiting and piracy are not nice things to do, and should be discouraged, but on the list of things the government desperately needs to address, they’re not even in the top 100.

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Can ARMs be swapped to a fixed rate?

Felix Salmon
Dec 6, 2009 16:53 UTC

A friend of mine took out a 5/1 ARM in early 2005, which is about to reset. Lots of other 3/1 and 5/1 ARMs are resetting over the next couple of years, which is one reason it’s important to keep interest rates low. The standard reset rate for a prime borrower is 1-year Libor + 225bp; with Libor at 1%, that works out at an extremely affordable 3.25% mortgage rate.

The problem is that these mortgages continue to reset every year going forwards for over a decade. Rates are low now, but they won’t be low forever, and when the Fed’s tightening cycle starts, there could be some very nasty mortgage shocks. These mortgages were designed to be refinanced, not held onto — but of course refinancing is expensive at best and, in many cases, outright impossible. Is there some way to lock in a fixed rate now without refinancing? Or, to put it another way, can you keep the credit risk and the prepayment risk with the originating bank, while layering an interest-rate swap on top?

In the case of mortgages written and held by banks, I don’t see why not. It should by rights be quite easy for that bank to enter into a simple swap agreement on top of the mortgage agreement, whereby in return for a fixed monthly payment, the bank will cover the mortgage payment going forwards.

This isn’t a normal swap agreement, because it doesn’t have a fixed maturity date: instead, the swap expires when the mortgage is either paid off or refinanced. Essentially, the bank is extending the prepayment option on the mortgage to the swap agreement itself. That doesn’t reduce the bank’s prepayment risk, but it doesn’t increase it either.

Clearly, however, it’s harder to enter into this kind of a deal with a securitized mortgage. And given the non-standard nature of the swap, there’s a risk that even an originating bank would end up ripping off the homeowner. Maybe there’s a role for the government here: mandate that all mortgages which readjust annually can be swapped at the borrower’s request into a mortgage with the same maturity as the original loan, at the prevailing 15-year fixed rate, so long as that fixed rate is higher than the rate to which the mortgage payment would currently be reset. Is there anybody who would be harmed by such a rule?


Why would you let the fix at the 15yr rate? Those are always lower than the 30yr rate, and the arm’s were undoubtably 30yr notes. People took arms because they cost less and they were trying to pull one over on the bank. There should not be a free exit from this while others paid higher costs choosing frm’s.

The loans were designed to be refi’d to the extent that the refi’s generated new fees for the bank, a very important point. Didn’t banks/securitizers (during the boom) prefer subprime loans because they prepaid at lower rates?

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Felix Salmon
Dec 4, 2009 23:24 UTC

“A Nov. 26 article incorrectly said a Public Enemy song declared 9/11 a joke. The song refers to 911, the emergency phone number.” — WaPo

If we were friends with John Paulson, we’d know what the roman numeral for “9″ was. But I love this series — NYMag

The freelancer scam at Time and NBC Universal: you wanna get paid? Then take a discount! — Gawker

French conservatism: “I may have been looking too far afield,” he said. In the future, “there may be less Languedoc” — NYT

Pandora, explained — xkcd

He wanted to become a great financial success. As a result, he did not mind wearing women’s clothing — NYMag, Reuters

New Jersey pulls a Larry Summers, and pays $22K a day for foiled bond plan — Bloomberg

“Picture you are in a room with 10 people screaming” — Rortybomb

Bonuses & ideology — Dillow

Inside information is a hallucinogen — D^2

The French CDS market is looking very messy — Risk

Problems, the infographic — Buzzfed


axg, flattered as I am by the implication that I’m important enough to be consulted on a major redesign of the entire reuters.com site, it’s not the case. But what I can say is that there turn out to have been rather more glitches in the blog part of the redesign than anybody had anticipated. We’re working on it, and fingers crossed all your issues (and many other problems too) will have been addressed shortly.