Felix Salmon

Barack Obama wants the banks to start lending again:

This is something I hear about from business owners and entrepreneurs across America — that despite their best efforts, they’re unable to get loans.

I would love to see some empirical data on this, because I suspect that insofar as lending volumes have dropped, it’s more a function of reduced demand than newly-recalcitrant bankers.

Tom Lindmark points to a Deutsche Bank survey of small businesses which puts availability of credit way down the list of problems, and “poor sales” easily at the top. During the credit boom, maybe small businesses, facing a drop-off in sales, would try in the first instance to cover the gap by taking out a bank loan. But nowadays people are much more aware of the dangers involved in taking out a loan you can’t afford to repay: if your business is losing money, borrowing more only makes matters worse. Borrowing for productive investment makes sense; borrowing to cover an operating shortfall does not.

What’s more, I’m still convinced that overall there’s too much credit rather than too little, and that over the long term we want to see a less levered economy, with less debt and more equity. Releveraging now is not helpful in terms of achieving that end, even if it does provide a short-term boost to GDP.

At the same time, there’s been an interesting shift in the leveraged loan market, with its $431 billion of loans coming due before 2014. The banks haven’t done much to address the problem — but the borrowers have, by refinancing into longer-term high-yield bonds. Vipal Monga reports:

Among the most popular avenues for balance sheet restructuring is the high-yield bond market, where companies such as Apollo Management LP- and TPG Capital-backed Harrah’s Entertainment Inc. have been issuing longer-dated bonds to pay off loans. Standard & Poor’s Leveraged Commentary & Data unit notes that so far this year about $20 billion of loans have been refinanced in this manner.

All in all, LCD estimates that this year’s work on the 2012 through 2014 maturities (which includes debt pay-downs, high-yield takeouts, defaults and the amend-and-extend activity that has allowed some issuers to push out maturities) has lowered by 17.2% the total amount of loans due by 2014.

This doesn’t solve the problem, of course, but it does make it slightly more manageable. And when debt is being held by real-money investors rather than by leveraged banks, the systemic consequences of a big wave of defaults are seriously reduced.

None of which means there aren’t huge problems with banks’ loan books. Mike Phillips notes that £14 billion (about $23 billion) of highly-structured RBS commercial-property debt is coming due in 2010, with RBS declaring that it has no intention of refinancing those loans when they come due:

It is a fair assumption that a lot of the borrowers within that £14bn will next year be asking other banks to refinance large, complicated loans that are probably under water.

Even if the current market recovery continues, that is not a likely prospect. This could be one of the first places where we find out what happens when the unstopable force meets the immovable object.

I think it’s pretty obvious what’s going to happen: an entirely predictable, and predicted, wave of commercial-property defaults. The question is whether RBS has deep enough pockets to cope with them. And given that the UK government now owns 84% of the bank, the answer has to be yes.

Insofar as there are creditworthy small businesses out there desperate for funding, then, the banks should extend them credit: that will help create much-needed jobs and growth. But I’m not sure just how much demand there is for small-business loans with a high likelihood of being repaid. And more generally, I’m not sure that banks’ loan books shouldn’t be shrinking rather than growing.

Update: Ryan Avent adds some smart thoughts.

I’m glad that Reuters, along with the Guardian, the FT, the Independent, and the Times, has won its case at the European Court of Human Rights over the protection of journalistic sources.

The facts of the case are quite simple: in November 2001 (yes, the wheels of justice move very slowly indeed), Reuters, the FT, the Guardian, and the Times all received, anonymously, a fake presentation saying that Interbrew was ready to launch an imminent bid for rival SAB, at between 500p and 650p per share. Most of the presentation was real (and confidential), but the share price had been boosted, and a timetable inserted.

When the media reported the contents of the presentation, SAB’s share price naturally rose sharply on very high volume; one can only suppose that the leaker of the fake document made substantial profits as a result. Interbrew, seeing its SAB bid plans sabotaged, naturally wanted to identify the leaker, and believed that doing so would be made easier if it had a copy of the fake presentation.

At that point, unhappily, the eight-year court case began. Interbrew sued the media outlets to force them to give up a copy of the presentation; they refused, saying that complying with such an order would have a chilling effect on their ability to promise confidentiality to sources; and eventually the ECHR agreed with them.

The news organizations were right to fight the court case. If you can be forced to turn over fake documents received anonymously, you can be forced to turn over real documents received from known sources, or even be forced to reveal the names of those sources.

At the same time, however, none of these media outlets had ever promised confidentiality to the leaker, or even knew who the leaker was. Quite the opposite, in fact: the whole purpose of the leaker’s exercise was to make the fake document public. Eight years on, Interbrew would probably never need to go to court in the first place: a good editor, after making the decision to run with the story, would naturally and automatically make the document freely available online. Especially if doing so distinguished that media outlet from others who only reported the contents, rather than publishing them.

News organizations are getting pretty good, these days, at putting primary documentation on their websites — although the New York Times, in particular, which has an otherwise excellent website, is surprisingly bad on that front. It’s one of the most profound ways in which the web is changing journalism: readers are no longer satisfied with trusting a journalist’s account of what a document says, and want to read the document itself. Most of the time, so long as you’re not breaking a promise to a source, journalists should allow them to do just that: it was, after all, readers, not journalists, who worked out that the Killian documents were forgeries.

The problems of getting an artist’s visa to travel in the US — WSJ

McArdle says homeowners should pay non-recourse loans even if it doesn’t make financial sense to do so — Atlantic

Ozimek’s latest on homes-as-investments — Modeled Behavior

Fraudulent Italian wine — Decanter

Daniel Lippman is a star. One question the article doesn’t answer: how come he knows so much about wine? — Politico

The very first Felix the Cat cartoon, 90 years ago today! — Daily Motion

Call it the final death knell for arguably the frothiest deal that the US residential real-estate market has ever seen — the sale of Stuyvesant Town and Peter Cooper village in Manhattan for $5.4 billion in 2006. The driving force behind the deal was the expectation that the new owners could and would be much more aggressive than the old owners (Met Life) in converting rent-stabilized apartments to market rate. Now, however, all the apartments they did manage to convert to market rate are being converted back:

Lawyers for the Stuy Town tenants as well as for landlord Tishman Speyer have just announced an interim agreement while the bigger issues (like refunds on years of rent overcharges) get sorted out. Apartments will return to rent-stabilized levels in January, and each affected tenant will be granted benefits—lease renewals under stabilized rates, succession rights—under the Rent Stabilization Law.

To put this news in context, rental income from the complex was $112 million in 2006, when the deal was done; the new owners expected that number to rise to $336 million by 2011. Instead, far from rising, rental income actually fell, despite the new owners’ best efforts to convert as many apartments as possible to market rate. That income is now sure to fall further.

With hindsight, the biggest conceptual mistake the buyers (and the lenders to the buyers) made — and we’re talking some very smart people at Tishman Speyer and BlackRock here — is that they forgot about the whole living-in-a-democracy thing. Landlords, in general, are good at asserting their legal rights. But when you’re trying to make life significantly more expensive for 11,000 families all living in the same place, you have to expect that those people will organize and fight back — and that they’ll have local lawmakers on their side.

Political and legal risks are hard to price or to hedge, of course, but it really seems in this case as if none of the investors in the deal even tried. If you’re betting billions of dollars on your ability to navigate the legal system, you have a fiduciary obligation to at least think about the possibilities that (a) you’ll lose, despite your best efforts; or that (b) the law itself might change. But that’s the problem with the whole credit bubble, in a nutshell: people just stopped thinking.

How incompetent is Citigroup? Incompetent enough that even today, when the bank is announcing a major agreement with the government to pay back its TARP money, neither its chairman nor its CEO was able to turn up to a meeting with the president of the United States of America.

The bailout repayment news kept Citigroup CEO Vikram Pandit from attending Monday’s meeting, Citi spokeswoman Molly Millerwise Meiners said. She said chairman Richard Parsons planned to attend but bad weather kept him from reaching Washington in time.

A couple of quick points here:

1. Why on earth should repaying TARP prevent Pandit from showing up to the meeting?
2. Is DIck Parsons really such a diva that he won’t show up to a meeting with POTUS unless he can travel there in a private jet? (Update: no, see below.)

The other winners of the Diva Award, incidentally, are Lloyd Blankfein and John Mack, both of whom are joining Parsons on the phone. They should rightly be excoriated for this: it’s one thing using shareholder money to fly around the world on a private jet if that makes getting to your meetings easier. It’s quite another thing to miss meetings entirely on the grounds that if you can’t get there by private jet, you’re not going to get there at all.

I’m reminded of the bankers who turned up very late to the emergency meetings at the Fed in September 2008 because they insisted on trying to inch down the FDR Drive in bad weather rather than taking the 4/5 train like any sensible person. And I’m reminded too, of course, of the Detroit executives who took private jets to Washington to beg for a bailout. The minders at Citi, Goldman, and Morgan Stanley surely know that anything which reminds the public of that debacle is not going to be good for optics.

(HT: Chia, who got to DC on the Acela without any problems this morning.)

Update: Citigroup calls to say that Parsons was flying commercial, and got caught in fog.

Update 2: More information emerges! Apparently both John Mack and Lloyd Blankfein, like Dick Parsons, failed to get to DC because they were flying commercial; Jamie Dimon got there because he took his jet. Maybe he should have offered his fellow CEOs a ride down.

Eric Lipton has an excellent summary of a scathing government audit of a scheme to improve the quality of the information that states and cities have about traffic congestion. (The report isn’t meant to be online until later this afternoon, but I downloaded it from the inspector general’s website with no problem, and have put it here.)

What seems to have happened is that a small group of lawmakers, all of whom received campaign contributions from a financially-troubled company called Traffic.com (a subsidiary of Navteq), pressured the Federal Highway Administration to give sweetheart deals to the company which involved less money for the public and much less benefit for people stuck in traffic.

Traffic congestion is estimated to cost Americans $78 billion a year, and a good way of bringing that number down is to be able to inform drivers in real time where bottlenecks are. To that end, the government paid Traffic.com the full cost of installing sensors along highways in 27 cities. But then, astonishingly, the cities in question weren’t allowed to share that information with the public:

The Massachusetts Highway Department, the report says, was formally prohibited from using the data to offer highway message board estimates to Boston-area commuters on traffic delays. Local and state governments were also prohibited from posting the traffic information on government Internet sites or traffic information telephone hotlines, unless they paid Traffic.com a fee for the data.

The inspector-general doesn’t attempt to calculate the amount of money lost to congestion which might have been saved had Traffic.com’s information been more freely available. But it does show how Traffic.com managed to get around the requirements to share its revenues with the states:

Although the Federal task orders specified that the public partners would share TTID revenue, FHWA allowed the service provider to reserve the public partners’ shares for system operations or capital improvements related to the service provider’s assets. The certified public accounting firm’s 2002 report quotes the service provider’s financial statements that said, “[the shared revenue] will be reinvested in the Company for upgrades to the digital traffic systems.”

In English, Traffic.com was basically saying “yes, we owe you this money, but we’ll just plough it back into our own privately-owned company instead, I’m sure you’ll be OK with that”.

Was the highways administration indeed OK with such shenanigans? The general message from the report is that the bureaucrats knew that the deal was a bad one, but that they didn’t want to pick fights with powerful lawmakers.

The FHWA Deputy Executive Director’s April 2001 memo stated, “. . . there may be less expensive ways of acquiring the data. We believe that competition will allow the marketplace to sort this out and result in the greatest return on the public investment in these data.” However, FHWA referred us to at least nine letters from members of Congress that generally directed the Department and FHWA to use the ITOP accelerated procurement process, rather than full and open competition, to select a service provider.

Members of Congress might not be authorized to direct the Federal Highways Administration on such matters, but that doesn’t stop them from trying — or the FHWA from complying. This is one reason why all public-private partnerships should be negotiated through an arm’s-length agency which is insulated as much as possible from Congress.

The FHWA, in its response to the report, is a little sheepish, but also proves its mastery of the art of producing incomprehensible gobbledygook:

We do appreciate the OIG’s recognition that FHWA’s implementation of TTID necessarily balanced statutory requirements in order to achieve the legislative objective of providing private technology commercialization initiatives to generate revenues.

Insofar as this means anything at all, it’s wrong. The primary legislative objective here wasn’t to generate revenues for Traffic.com or anybody else: it was to reduce congestion. It would be great if both the FHWA and the OIG kept their eyes more on that particular prize. Although I suspect that this whole scheme is becoming increasingly outdated, and that over time aggregated information from GPS-enabled phones and other devices is going to provide much better real-time congestion data than expensively-embedded road sensors.

Citi’s paying big to exit TARP:

The moves will result in a pre-tax loss of $10.1 billion that will likely be taken in the fourth quarter from accounting charges taken on the value of the repaid preferred shares and the cancelation of the insurance plan. The new stock offering, meanwhile, will severely dilute erode the value of existing Citigroup shares.

Once the repayment deal is completed, it will still take several more years to clean up the financial carnage. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans.

There’s lots of talk this morning of Citi’s strong capital ratios once this deal is done. But capital ratios aren’t everything. Citi needs to become (a) smaller and (b) more profitable, while (c) being a force for good rather than evil with consumers. It’s actually doing a reasonably good job with (c): on things like overdrafts and credit-card fees Bank of America and even Chase are generally much worse, maybe because their US consumer-banking arms are so much bigger.

But Citi is still weighed down by those toxic assets that the government has put so much effort into trying and failing to get off the banks’ books. It’s selling some of them, slowly, but what it really needs to be able to do is recapitalize itself through earnings power. And there’s no sign of that happening any time soon.

Update: Citi calls to say that they’re reducing assets quickly, not slowly. They’ve put the assets they’ve marked for getting rid of into a vehicle called Citi Holdings, which includes business with about $900 billion in assets at the peak in the first quarter of 2008. That number was reduced by about $183 billion to $715 billion by the end of 2008, and today it’s $617 billion — a further reduction of almost $100 billion. More’s to come: selling Nikko Holdings will take another $25 billion off that total, and with the exit from the loss-sharing agreement with the government, Citi no longer needs Treasury approval to sell assets in the loss-sharing pool.

Still, it does seem that the low-hanging fruits — things like the Smith Barney brokerage — have largely been plucked, and that the pace of reductions in the assets at Citi Holdings is going to continue to decelerate in the quarters and years ahead, even accounting for divestitures like the upcoming IPO of Primerica. What’s more, core assets at Citicorp have been flat all year at $1 trillion, which itself is Too Big.

I’ll give this to Citi, though: at least they are shrinking, deliberately: they’re moving in the right direction. Which is not something you can say about most other too-big-to-fail banks.

Charlie Calomiris owns a bank! Which just got seized by the FDIC! — WaPo

Toyota to sell plug-in hybrid within two years getting 134 mpg — Bloomberg

Best detail of Berlusconi story? “The attacker was holding a small model of Milan Cathedral” — Sky

Immigration and Customs Enforcement seizes an illegal immigrant. Which does 0-60 in 4 secs — NYT

Very, very bad pun — Pearls before Swine

Well done, Houston! — Chronicle

Ashley Dupre, NY Post advice columnist. For realsy — Mediaite

US vs UK household leverage — Blogspot

The work-for-Amazon fitness program — Whimsley

On Matt Taibbi, flame throwing and making sense of things — Digby

“The Twitter API may have just become an open standard” — UnBerkeley

The only thing better than getting Kurt Andersen to write about the LHC? Getting Todd Eberle to photograph it — VF

Tyler Cowen says that FairTrade coffee is “mostly a marketing gimmick” — MR

Taibbi slaps down Fernholz — True/Slant

Bill Ackman’s studio apartment: Asked $950k. Sold for a rather more reasonable $320k — Curbed

I cannot distinguish / some phonemes in Enguish / which causes me anguish / in learning the languish — Language Log

“I never had trouble with Vista, but upgraded to Windows 7 and I haven’t seen so many blue screens in years” — Thoma

Fake Steve UNLOADING on AT&T. An instant classic — Fake Steve

Here’s a full-page ad I just found in the WSJ; it seems that Bank of America considers $760 billion in lending to be “a good start”. Me, I consider it to be “too big to fail” and a clear sign that BofA needs to get smaller, not bigger. I do wonder: is there any point at which BofA would consider itself to be too big? Judging by this ad, it seems the answer is no.

(more…)

The WSJ has new details on how banks would pass CDO risk between each other in an improbably long chain:

One of Goldman’s trades with AIG involved a financial vehicle called South Coast Funding VIII. South Coast was one of many pools of bonds backed by individual homeowners’ mortgage payments that Wall Street turned into collateralized debt obligations or CDOs.

Merrill Lynch, now part of Bank of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages of home loans originated by firms such as Countrywide Financial Corp., the big California lender.

Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and Canada.

The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

The risk, here, originated with Countrywide. It then got moved to South Coast Funding, whence it moved to Merrill Lynch, and thence to European banks, who sold it on to Goldman Sachs, who in turn passed it on to AIG. When the music stopped, AIG bore the brunt of the losses.

The obvious question here is why the chain was so long: why couldn’t Merrill (or even Countrywide) just insure the mortgages with AIG itself, instead of sending them off on a long and winding road to end up in the same place?

There’s actually a good answer to the question. Countrywide considered itself to be in the originate-to-distribute business, it didn’t want an exploding balance sheet. So it was very happy to sell its mortgages to the likes of South Coast Funding and book the profits immediately. South Coast Funding, in turn, had no real equity of its own, it was just a special-purpose vehicle set up by Merrill Lynch. And Merrill considered itself to be in the moving business rather than the storage business, so it wanted to sell as much of the debt as it could.

Eventually, the bonds ended up with big European and Canadian banks, who were attracted by their triple-A credit ratings: under Basel II, that meant they needed to hold very little capital against them. Crucially, it was these banks, who had no size limits, which were happy expanding their balance sheet as much as they could, so long as that meant extra profits. They even managed to bring their risk down near zero by getting Goldman to insure the credit.

Finally, Goldman was basically in the trading business, insuring CDOs only if and when it knew that it could get someone else (in this case, AIGFP) to reinsure the risk at a lower rate; eventually the European banks got wise to that trade, and started dealing directly with AIG themselves.

There’s a lot of blame to go around here, but right at the heart of it is the fact that there were no limits on the size of banks’ balance sheets. The European banks (and, later, once AIG stopped insuring this stuff, Merrill Lynch itself) would happily balloon up as large as they could with stuff like this, because sheer size was one of the profitable attributes that regulators didn’t mind in the slightest. If there were a cap on size, this chain would have been much harder to construct.

How much money does the international drugs trade make, and how much of that money helped out the global banking system when liquidity dried up last year? According to the UN, the answer to both questions is “a lot”:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

I’ve spent a chunk of this morning rooting around the UNODC’s website to see if I could find a source for that suspiciously-precise $352 billion number, but I couldn’t: if someone can point me to the report which generated it, I’d be much obliged. I did however find a press release in which Costa said that corruption was “the cause and consequence” of the financial crisis, which does make me suspect that he’s prone to talking his own book here. (The financial crisis had many causes, but corruption wasn’t even in the top ten.)

So I’m filing this one under “empirically-dubious publicity-seeking” for the time being, if only because Costa is prone to statements like this:

Mr. Costa said: “Nicolas Cage’s characters have exposed us to some of the darkest aspects of human nature. Now he is championing one of the most noble – the quest for justice. The Lord of War has become a messenger for peace, the Bad Lieutenant has turned into a good cop, and the inmate from Con Air has become a champion of prison reform. His star status and strong conviction on these issues will help us achieve security and justice for all.”

Or, to put it another way, the forces of evil and corruption were responsible for causing the financial crisis. But don’t worry, we’ve got Nicolas Cage on our side, so the good guys are bound to win.

(Via Yves)

Tyler Cowen is weeping over the fact that younger listeners now prefer the sound of degraded-quality MP3s to that of CDs. Nick Spence has more, pointing out that this is just a 20-years-on reprise of the CD vs vinyl debate; his story ends with this quote.

“What you are hearing is that everything is being squared off and is losing that level of depth and clarity,” said producer Stephen Street, the man behind hits from The Smiths, Morrissey, Blur and Kaiser Chiefs. “I’d hate to think that anything I’d slaved over in the studio is only going to be listened to on a bloody iPod.”

The fact is, of course, that consumers never have listened to uncompressed digital music files played through high-end studio monitors, and they never will. Meanwhile, Lou Reed dreams of a world where people who try out an MP3 then go out and buy a version they “can actually listen to”.

In the real world, something similar but more exciting is happening: people try out an MP3 and then go out and listen to the artist in question live. We’ve left the world where recorded music tries to replicate the live experience with maximal fidelity; we’ve entered a world where recorded music is its own art form, as well as acting as an advertisement for a separate-but-related art form of live music. The bifurcation has created some interesting epiphenomena, such as the auto-tune craze; it has also helped to create what is arguably the largest and most vibrant live-music scene of all time.

The losers in this game might well be the likes of Stephen Street: there are fewer mega-artists willing and able to spend millions of dollars producing and polishing studio albums. Indeed, even the likes of Radiohead have decided that the whole concept of the studio album is outdated and have said that they will not record any more of them. But live shows will continue to improve, and music of both kinds will continue to be made and consumed by more people than ever before. So me, I’m smiling, not weeping.

Update: D^2 has some trenchant words for Mr Reed.

Many congratulations to Mark Whitehouse for writing an evenhanded and even positive article about walking away for the WSJ. He says that “a growing number of families are concluding that the new American dream home is a rental”, and talks about Shana Richey, a schoolteacher who took a $430,000 no-money-down mortgage in 2004 on which she was making payments of $3,700 a month.

Wells Fargo offered Richey a modification down to $3,300 a month, but then she found a larger, nicer rental for $2,195 a month, which includes not only a swimming pool but also the cleaning of that pool. It was a no-brainer, especially since California is a non-recourse state:

Ms. Richey’s family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March… “We’re saving lots of money,” Ms. Richey says.

Good for her. In California especially, no one should pay vastly more for their housing than they have to.

Here’s the friend list of “Larry Bergman”, the Overstock-financed sock-puppet who helped to generate the notorious list of friends of those who are critical of crazy Overstock CEO Patrick Byrne. Gary Weiss has the details of exactly how that list was generated; although “Bergman” never asked me to be his friend, he friended a few friends of mine, and that’s all he needed to see my own friends list.

The funniest part is that “Bergman” claimed to work at Goldman Sachs, and to have the email address sellrshort@gmail.com. You really can’t make this stuff up, but the problem is that public ridicule has no effect on these people. I guess they’re a bit like David Zinczenko that way.

Update: “Larry Bergman” has now been removed from Facebook, but Judd Bagley, his puppetmaster, has popped up on TBI, saying that he was “a composite” and “a simple labor-saving device”.

Andrew Leonard takes the Tim Fernholz approach to Matt Taibbi:

The co-optation of regulatory reform by Wall Street is an important story, and one that needs to be pressed at every point. It would be nice though, if the left could pursue that story without flaunting the same cavalier attitude toward the complexity of the economic challenges faced by the current administration that we are already so familiar with from the right.

Really, Andrew? I think the left is doing that very well, thank you — and you’re a prime example, as is Tim Fernholz. And then there’s the likes of Dean Baker, Joe Stiglitz, Paul Krugman, I don’t need to go on, you know all the names better than I do.

The existence of a Taibbi screed in Rolling Stone is not going to invalidate or render irrelevant the substantive criticisms of these people, and neither will it change the way in which “the left” is being seen to react to Obama’s economic policies. We have a left-leaning government now, and one which is proud to encourage and participate in economic debates. Taibbi’s not going to change that. We’re happy judging Krugman on his own merits; we shouldn’t seek to judge Taibbi on Krugman’s merits too.