Felix Salmon

Lehman liquidation datapoint of the day

Felix Salmon
Jan 13, 2010 15:32 UTC

Linda Sandler reports:

Fourteen months into the bankruptcy, Lehman had paid its bankruptcy advisers $533.5 million, with $202.4 million going to Alvarez & Marsal.

The Marsal in Alvarez & Marsal has now decided he wants to become a fixed-income speculator, as well as a multi-millionaire liquidator:

Marsal, acting as Lehman’s chief executive officer, wants to buy $3.5 billion in loans and mortgages, according to court filings. He proposes to pay $1.4 billion for the debt. A bankruptcy judge will review the proposal today in New York.

Any debt trading these days at 40 cents on the dollar is extremely impaired, and it’s not at all obvious why one bankrupt entity should be putting billions of its creditors’ dollars into the distressed-loan market. Surely the creditors themselves are more than capable of doing that on their own, should they so desire.

On the other hand, the choice isn’t really between investing the money in distressed debt and handing it straight back to creditors: the creditors are going to have to wait a very long time to get any money at all even if the money isn’t invested. Marsal seems to have a time horizon of “three to five years” before he expects to actually start giving back money, and doesn’t seem remotely shy about making directional bets in asset markets. After all, if you’re being paid hundreds of millions of dollars a year, you must be very good at what you do, right?


You have to understand that LBHI and certain affiliates (“Lehman US”) were entering into this transaction with Lehman Brothers Bankhaus AG (“Bankhaus”), a German affiliate in a German bankruptcy. There were significant disputes regarding the entity’s ownership rights regarding these loans. Basically, in some cases, Bankhaus had the economic interest in the loan and, in other cases, Bankhaus may only be entitled to an unsecured claim against Lehman US. This is a big factor in why the amount paid for the loans was so low. In addition, Bankhaus received claims in excess of $1 billion against Lehman US.

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The too-big-to-fail tax

Felix Salmon
Jan 13, 2010 15:01 UTC

Barry Ritholtz knows what he’d like to see in terms of a new bank tax, and I like the way he’s thinking:

Exempt small regional banks with under $25 billion in deposits. Make the tax progressive so it become increasingly larger as deposits become greater. $25-$50 billion in deposits is one fee (Let’s say 0.1%, that’s $25 million on $25 billion in assets). Have it scale to the point where its punitive — 1% on a trillion dollars in deposits.

The goal here isn’t to raise money — its to force the TBTF banks to become smaller — to break up the Citigroups and the Bank of Americas. This tax will restore competition to the banking industry.

I think that total liabilities are a better number to use than total deposits: we want this tax to apply to Goldman Sachs as well as Wells Fargo.

Barry’s plan might not be far from what the Obama administration wants to do — although I doubt that the fee will approach a full 1% of liabilities, no matter how big a bank gets. Shahien Nasiripour has talked to “a senior administration official”, who says that the tax is designed to claw back from too-big-to-fail banks the windfall they’re getting from their TBTF status. (Dean Baker calculates that windfall as being $34 billion a year.)

The banking industry, when this tax is announced on Thursday, will certainly start making noises about how the extra costs are going to be passed on to customers. And I daresay they’re right: if you bank with a TBTF bank, you might well see your costs rise. So move your money to somewhere smaller!


A one time tax on these TBTF banks is nice, but really not critical at all in the big picture of things. I hope the WH is only using it as political drama, and more importantly, as a bargaining chip to get those banks to call off their lobbyists against comprehensive financial reform, which is way more important in the long run than a ‘mere’ few billions.

Honestly, if the financial reform gets watered down as the Health Care reform did, we will all be in deep, deep trouble for years ahead – we as the whole world.

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The Sith Lord revealed!

Felix Salmon
Jan 13, 2010 14:29 UTC

Thousands of people have wondered over the years who on earth Overstock CEO Patrick Byrne was talking about when he started muttering darkly about a “Sith Lord” orchestrating a devious conspiracy of short-sellers. Well, Max Abelson has finally found out who it is, from Byrne’s lieutenant Judd Bagley:

The Sith Lord turns out to be Sith Lords. “It’s Steven Cohen and Mike Milken, though I’ve never said that to a reporter,” says Patrick Byrne, Overstock’s CEO.

So there you have it: one guy who makes most of his money from high-frequency algorithmic trading, and another guy who’s pretty much a full-time philanthropist at this point. But maybe those public profiles are just covers for their nefarious conspiracy!

A bit further down in the piece, Patrick Byrne flouts Regulation FD by telling Abelson that Overstock is about to report its first annual profit. I wonder which accounting firm will ratify them.



As an alleged member of Byrne’s delusional conspiracy fantasy, I have good information that REAL Sith Lord is a cute stripper named Molly.

http://www.businessinsider.com/meet-the- sith-lords-2009-12#sam-e-antar-new-york- ny-20

Sam E. Antar

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Felix Salmon
Jan 13, 2010 06:09 UTC

Me, on NewsHour, on bank taxes. Complete with TBTF BofA pre-roll. — PBS

Windmill gone wild — Discover

RBS executives who have never earned more than £1m have this year been told they’ll be pocketing over £5m — BBC

The redacted AIG exhibit — SEC

When Jon Stewart Fails — Prospect

Nigerian president Yar’Adua is alive, at least. But he’s very weak, and not in Nigeria. My guess is he won’t return — BBC

Charles Pelton on how to monetize journalists, holds up the Economist as a good example — Paid Content

The Christoph Niemann weather forecast — NYT

Is the digital music market maturing? — Billboard


You’re British?!?!

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Will banks pass on any new fee?

Felix Salmon
Jan 12, 2010 19:21 UTC

If and when the Obama administration unveils its new tax on banks, will the banks just turn around and pass that extra cost onto consumers? Matthew Yglesias and Ryan Avent both make the case that if big banks raised the cost of banking with them, that would be a feature rather than a bug. We want the big banks to get smaller, and if they become more expensive, then that will help shrink their market share.

On the other hand, there’s a good chance that any fee won’t be passed on to consumers at all. If the levy is based on bank size at the end of 2009, and if it’s a one-off fee, then that makes it a sunk cost. The economics of banking remain exactly the same in 2010 as they were before: any given fee or loan will be just as profitable for them post-tax as it was pre-tax. They’re still going to be trying to maximize their profits, of course, but they’ll do that anyway.

Might the fee at least reduce the amount of cash that the banks have available for lending? Yes. But this is a large reason for levying the tax in the first place. America’s fiscal and monetary policy during the crisis involved recapitalizing the banks in the hope and explicit expectation that they would turn around and lend that money into the real economy. They didn’t do that, so it makes sense to take some of that money back — certainly that part of it which is basically just windfall due to Fed policies.

The fee won’t — and isn’t designed to — singlehandedly eliminate the problems of moral hazard and systemic risk in the US banking system. But it will raise much-needed revenues for the government, from precisely the sector which made windfall profits in 2009 even as the economy as a whole continued to struggle mightily. I like it — even though I haven’t yet seen any indication of exactly how it’s going to be structured.


The Next Wave of Derivatives, VERNON SMITH, Professor of Law and Economics, Chapman University School of Law | http://bigthink.com/ideas/18203

What, if any, are the rational arguments for not taxing derivatives in order to raise much needed general revenues for exchequers worldwide?

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Why do AIG’s executives suddenly covet its stock?

Felix Salmon
Jan 12, 2010 18:40 UTC

Paul Smalera asks — but, sadly, doesn’t answer — the big question surrounding AIG’s bonus compensation: why on earth are the company’s executives specifically asking for it to be paid in worthless AIG stock, when they already got permission from the special paymaster to pay bonuses with a special “basket” of stock that reflected the value of four profitable AIG divisions?

It’s certainly true that AIG executives know something we don’t: they know, for instance, the contents of the SEC filing which won’t be made public until 2018. But AIG is saddled with enormous obligations to the government, which have already been restructured at least once, and no one has ever indicated that they can be repaid in full. So long as the government ends up incurring a loss on its AIG bailout — and everybody expects there to be some kind of a loss on the deal — AIG stock should be worthless, no?

I understand that there’s some tiny possibility that AIG will be able to pay the government back in full, and that therefore AIG stock has a small amount of option value. But I don’t think that explains the desire of AIG executives to be paid in stock with a high probability of being worthless and only a small probability of ending up in the money. It certainly seems as though here’s something very fishy going on here. Smalera has one theory:

If AIG does end up spinning off its profitable units, it might be able to construct the IPOs in such a way as to grant executives valuable stock in the new companies in exchange for their worthless AIG shares.

I don’t buy it: the probability of such a scheme working out is, again, too low. But I have to admit I don’t have a better idea.


here is a clip from Jonathan Weil from Bloomberg:

“Disclosure Shortcomings

The old GM has said repeatedly in its financial filings that its shares are worthless, which shows its officers believed this was a material fact worthy of public disclosure. AIG so far hasn’t taken this step. It’s unclear why its executives didn’t feel a similar obligation.

An AIG spokeswoman, Christina Pretto, declined to comment, aside from encouraging me to read the company’s financial reports. Those say the company may need even more government money later, and that AIG may not survive without it.

The latest twist in the AIG saga provides a reminder of one of the fundamental flaws in the government’s bailout efforts. Rather than insisting that failing banks and insurance companies come clean about the rot on their balance sheets as a condition of accepting taxpayer money, the government plied them with cash first and let them keep their true financial condition hidden.

Beyond Fundamentals

While many financial companies’ stocks and bonds have soared since last spring, that’s not necessarily because their fundamentals are so great or their numbers are so credible. The main thing propping them up is the promise that the government will backstop companies it deems too important to fail. Take away that support and market confidence would go with it, because investors still wouldn’t know which companies’ books to trust.

At least at AIG, some of the secrets are starting to come out. Fed and Treasury officials should feel ashamed for letting AIG’s bosses keep them from the public for so long.”

http://www.businessweek.com/news/2010-01 -06/-worthless-aig-shares-belie-company- s-books-jonathan-weil.html

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The Dubai mess

Felix Salmon
Jan 12, 2010 16:30 UTC

If you think that the Dubai situation has pretty much been resolved with that cash infusion from Abu Dhabi, think again. Paul Whitfield and Vipal Monga explain that nothing really has been cleared up at all, and that there are far more — and far bigger — uncertainties surrounding the emirate’s finances than most of us had suspected.

For one thing, Dubai has no real legal structure capable of dealing with a default on this level, which has forced it to hurriedly import a jury-rigged system with UK and Singaporean jurists, based on British and American (not Islamic) legal structures.

But it’s not clear how trustworthy the Dubai’s government — its ruling family — really is, given that they actively encouraged the idea that Dubai World had a sovereign guarantee.

And it’s also far from clear what has happened to the $10 billion received from Abu Dhabi in February, or, for that matter, another $5 billion that was lent to Dubai by two Abu Dhabi banks in November. As for the further $10 billion which arrived in December, we know that $4.1 billion of it was used to repay Dubai World’s sukuk. But the final destination of the remainder of the money is also opaque.

What’s more, no one has much of a handle on the total liabilities involved, either:

Dubai World has officially released a $59.3 billion debt figure as of the end of 2008, but that number isn’t taken at face value by financial experts.

Deutsche Bank AG, for example, says that the figure included more than just financial debt, including equity, and payments due to suppliers. Discounting the nonfinancial debt led the German bank to estimate Dubai World’s financial external debt at $24.27 billion.

Morgan Stanley has its own estimate of the liabilities, taking a disclosed $26.2 billion number from Dubai and then adding another 30% to that to account for a presumed undisclosed amount, putting Dubai World’s debt at a seemingly arbitrary $34.1 billion.

The upshot is that the restructuring is going to be messy and unpredictable: my guess is that it’ll be a highly political process which will drag on for years. As ever, the big winners are certain to be the lawyers.


Dubai had made a major blunders by relying only on its real estate and tourism industry and if it had concentrated on other sectors of economy as well like Abu Dhabi then it could have survived bad times from which it is going through right now.

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House-price chart of the day

Felix Salmon
Jan 12, 2010 14:45 UTC

This is my new favorite toy: a fabulous interactive house-price charting tool from the Economist.

After playing around with this chart for a while, it seems to me that the US housing bubble was really not that big by international standards. So why was its bursting so harmful? Partly because of the sheer size of the US market — but more importantly because the US saw a much greater deterioration in underwriting standards than most other countries, and therefore faced a much larger wave of defaults.

It seems to me that different bubbles are associated with different degrees of harm. A stock-market bubble is bad, a housing bubble where the buyers can afford their homes is worse (because it’s still leveraged), and a housing bubble where the buyers can’t afford their homes is the worst of all. In the US, of course, we had the latter type.

(Via Kedrosky)


I’ve been looking at the Australian housing market, which after a small dip at the end of 2008 is back to booming. There doesn’t seem to be any relationaship between interest rates, population increase or new construction and the price of houses. see graphs http://demokratia.jesaurai.net/2010/10/1 0/the-fallacy-of-supply-and-demand/

Herd mentality and loss aversion seem to be better explainations. The expectation of rising prices raises prices, and the expectation of falling prices lowers them. This is why fiscal and monetary policy has little direct effect. They only act as a psycholgical drivers on those that beieve in the accepted group theories of supply and demand.

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Felix Salmon
Jan 12, 2010 06:28 UTC

Why iPhone OS is better than Android: coders aren’t designers. — Boy Genius

Mark your calendars for Nov 25, 2018! That’s when we’ll finally find out what AIG wants to keep secret about its CDSs. — Reuters

Matt Stevens unloads on Donald Luskin — The Melon

The yield curve might be steep, but banks’ net interest margins are still low, because they have too much cash — Winkler

Brad DeLong unloads on the Fiscal Times — DeLong

Arthur Rosenfeld, discoverer of more free lunches than anybody else — Drum

A fantastic comment letter — SEC

Dick Parsons: “it was beyond certainly my abilities to figure out how to blend the old media and the new media culture” — NYT

Bloomberg fights Fed secrecy at the US Court of Appeals — Yahoo

Why the filibuster is unconstitutional — NYT

“Should Heineken be victorious, as expected, it would mark a surprise outcome.” — WSJ. So, should we be surprised?

Kenya fishermen see upside to pirates: more fish — Yahoo

Buffett on share dilution: “do as I say, not as I do” — Barrons

Jeffrey Deitch is the next director of MOCA?! — Maneker

The story of Petunia — Salmon

10 Key Charts To See Before You Buy A Home — New Observations

Fox News is believed to make more money than CNN, MSNBC and the evening newscasts of NBC, ABC and CBS combined — NYT


The story about Petunia is the most disturbing thing since the fall of Lehman. I advise people to stay well away from that link and internet blocking software should be updated with the URL of that page.

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