Felix Salmon

The “FDIC lotto” reason banks aren’t lending

Felix Salmon
Jan 27, 2010 14:52 UTC

“A California Banker” writes to Mish, giving yet another reason why banks aren’t lending:

If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.

This is a home run for the acquiring bank and far more of an instant benefit than any new lending.

The problem here is that healthy banks end up competing with each other to have the largest capital surplus and therefore the greatest chance of being anointed in this manner by the FDIC. If everybody was lending, the FDIC would still have to place failed banks’ assets and deposits with someone. But instead we get the opposite corner solution, where nobody is lending — except, presumably, for banks which are close to failure and need all the interest income they can get. I wonder whether the FDIC has anybody thinking about how to counteract this syndrome.


why lend ? the banks park taxpayer bailout bucks at the FED And get interest and next to zero risk, and other shenanigans that we all know about. We the people have been totally chumped. Oh, well… lotsa more Browns-types in congress soon. Times are a-changin’..come on, November !

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Acquiring companies with stock

Felix Salmon
Jan 27, 2010 13:22 UTC

John Gapper and Nadav Manham have both picked up on Warren Buffett’s explanation of how he thinks about M&A, especially when a company is paying with stock:

Kraft, in my judgment, well just in the past two weeks there’s been two things that caused me to feel poorer. They sold a very fine pizza business and they said they got $3.7 billion for it. But, because it had practically no tax basis, they really got about $2.5 billion. They sold a business for $2.5 billion that Nestle is willing to pay $3.7 billion. Now can Nestle run it that much better than Kraft? I doubt it. But that business that was sold for $2.5 billion earned $280 million pre-tax last year. But they sold that at less, right around nine times pre-tax earnings in terms of their own figure.

Now they mentioned paying 13 times EBITDA for Cadbury, but they’re paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. But on top of that, they’ve got a billion-three they’re going to spend of various rearrangements of Cadbury. They’ve got $390 million of deal expenses. They are using their own stock, 260 million shares or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they’re calculating Kraft at market price, not at what their own directors think the stock is worth. So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it’s hard to get rich doing that.

There’s a lot of very smart analysis packed into this extemporizing (Buffett was talking on TV). Kraft is selling a business for $2.5 billion, after taxes, which throws off $280 million a year. Yet it’s buying Cadbury at a much higher multiple than that, and it’s paying in undervalued stock.

In general, you see many more stock-based acquisitions when companies are overvalued than when they’re undervalued. (Think of AOL buying Time Warner, or for that matter just about any acquisition by WorldCom.) It’s even possible to use stock-based acquisitions as an indication that a company thinks its shares are trading at too high a level. But sometimes, as Buffett notes, companies will use their stock even when it’s undervalued. And that can be very bad for existing shareholders.

All of which raises the question: what are we to make of the fact that Bufffett himself is using Berkshire Hathaway stock to buy Burlington Northern? Does it mean he thinks that his stock is overvalued? Or, if he thinks BRK is undervalued, does that mean he’s making a similar mistake to that which he deplores at Kraft? Either way, there seems to be an implicit “sell” signal here. Or is there something I’m missing?


The comment I made wasn’t meant to deny that Buffett was a market mouthpiece. It was meant to point out that your statement (He has a derivatives bet the size of his entire company’s present value.. which requires the NYSE to remain elevated. Stock market falls? BRK goes BK.) was ridiculous.

If I wanted to deny the fact that Buffett was a market mouthpiece, I’d point to the 1999 Fortune article where he laid out very clearly why he viewed the stock market as extremely overvalued (while Berkshire had enormous market exposure): http://money.cnn.com/magazines/fortune/f ortune_archive/1999/11/22/269071/index.h tm.

If I wanted to point out that he’s fine pointing out when even Berkshire is overvalued, I’d point out that he said Berkshire was overvalued when the company issued its B class shares. (He said he wouldn’t buy the shares at that price, but I can’t find a convenient link.)

So given that Buffett has made public proclamations over the past 40 years that the market was overvalued and that the market is undervalued, it’s easier for me to believe that he’s simply giving his opinion than talking his book.

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Against the optimists

Felix Salmon
Jan 27, 2010 10:45 UTC

One of the more annoying aspects of the Davos echo-chamber is the way in which people are constantly asking each other what “the mood” is this year; the result is an inchoate consensus that since the crisis is over, markets are up, and countries are growing again, there must be grounds for optimism and the kind of yes-we-can thinking in which the World Economic Form has always specialized.

I’m moving the other way, however, siding with the pessimists like Nouriel Roubini and Martin Wolf. They’re both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That’s something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

Of course the one entity which will benefit from this is the Squid: Goldman Sachs seems to be taking the lead in trying to orchestrate a desperate and expensive sale of Greek debt to China. Expect more such desperate moves as the southern European macroeconomy continues to deteriorate; anybody who watched the world’s investment bankers swarming all over Domingo Cavallo in the final weeks of Argentina’s currency board will remember just how vulturish they can be in such situations.

My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There’s a good chance that 2010 could be the year of walking away from underwater mortgages; there’s no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there’s another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn’t reassure me in the slightest.


“And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn’t reassure me in the slightest.” This may turn out to be quite prophetic and unfortunately I believe much sooner than not expected.

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Howard Davies, man of the people

Felix Salmon
Jan 27, 2010 08:40 UTC

Howard Davies has taken an early lead in the Great Davos Narcissism Stakes, with this classic parenthetical:

As you climb the mountain to Davos (the train via Landquart is my demotic route of choice – eschewing the expensive corporate Audis) you tend to think you know what the Forum’s financial talking points will be.

This ranks up there with the Hollywood stars who congratulate themselves on helping to save the planet by flying commercial: taking the efficient and comfortable Swiss railway to Davos is not much of a hardship. What’s more, if you think that Davies is going to admit that he was thinking wrong about what the Forum’s financial talking points would be, think again.

It’s also the language which gives Davies away here: not just the use of the second person, but also the word “demotic”, which doesn’t mean what Davies thinks it means. If Davies had tried asking directions to Landquart in schoolboy German, and got an earful of incomprehensible Alpine Schweizerdeutsch in response, that would have been demotic. But I suspect he’s not enough of a man of the people to actually attempt talking to them: being in the same train as them is probably as far as he can bring himself to go.


Davies sounds like a real schmuck, yes.

That said, not only was his use of ‘demotic’ entirely proper, but you also imply that you’re not chatting up the locals very much yourself. When you speak schoolboy German to a Swiss native, you do not get Schwyzerdütsch in return. You may get high German, Italian-accented German, or the amusingly hostile fiction that said native only speaks French.

Moreover, Schwyzerdütsch is hardly incomprehensible. It’s a strong accent that includes some nonstandard vocabulary at which you can guess from context. It takes a little doing to parse without effort, but spend a few weeks hearing nothing else and you’ll be fine. The real trick isn’t understanding it, it’s speaking it.

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Security at Davos

Felix Salmon
Jan 27, 2010 06:32 UTC

As the World Economic Forum kicks off in earnest, the only real cause of buzz so far has been the apparent suicide of its long-time security chief, Markus Reinhardt. Reinhardt was an aggressive man: he took the decision to fire water cannons at demonstrators in sub-freezing temperatures in 2001; he was also acquitted of murder in 2002 after ordering the lethal shooting of a man.

For the 2010 meeting, I’m sure that this news will mean that security will be if anything stepped up. But I’m hoping that maybe as of next year calmer minds will start prevailing, and that the multiple layers of security cordons will largely be kept in storage. Part of the attraction of Davos is its small-town feeling, but everybody here has to plan out their day strategically, to minimize the number of times they have to pass through metal detectors to get into the convention center, the media center, or the Belvedere Hotel. The result is a constant and not particular pleasant feeling of being hemmed in whenever you’re taking part in official activities. More generally, the omnipresent and high-profile security does tend to cut against the much-vaunted “spirit of Davos”. It would be wonderful if, next year, the World Economic Forum was the first major international confab to start reducing its security levels.


who suicided him and why Felix?

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Why it’s safe to ignore Davos

Felix Salmon
Jan 26, 2010 23:52 UTC

Lawrence Delevingne has got Davos completely wrong: his list of “The Only 12 Davos Panels Worth Paying Attention To” is in fact a list of the 12 panels which can be safely ignored by just about all the delegates here. Larry Summers is more likely to turn up with only one chin than he is to commit anything approaching news in his Saturday discussion with Charlie Rose. People looking for interesting investment ideas would probably be better served by something like the “What is Life?” panel on Wednesday — and they’ll certainly find it much more interesting.

As Davos has embraced increasing numbers of journalists over the years, the alpine gabfest has developed a public face where CEOs and VIPs give us all the benefit of their best thinking on issues of global importance. But that’s not really what Davos is about. At its best, Davos is a way of learning a great deal about things you didn’t know you had any interest in; of meeting people you’d never otherwise meet or even know existed; and of giving human three-dimensionality to people whom you’d previously thought of just as simplistic caricatures. (At its worst, of course, Davos is a malign enabler of systemically-damaging hubris, but that’s a different story.)

In any case, if you think of Davos as some kind of Sunday-morning talk show where you passively sit back and listen to Important People talk about international capital flows and the global macroeconomic outlook, you’re pretty much missing the point. When Davos works, it does so by bringing interesting people together and sparking conversations. But those conversations usually happen on the sidelines, on couches in the conference center or in hotel bars around town. They rarely happen in the formal sessions, and they never happen in the big formal sessions with heads of state and other marquee names.

The fact is that if you’re not here, Davos is not for you. You can try to watch a few webcast panels, but you’ll probably drift off very quickly. It’s the action off-screen which keeps the plutocrats coming back.

Ordering expensive wine by mistake

Felix Salmon
Jan 26, 2010 23:18 UTC

If you order a $2,000 bottle of wine by mistake — or even a $6,000 bottle, for that matter — you have no one to blame but yourself: getting angry at the restaurant is silly, even if it’s psychologically understandable. But I think there’s something missing from the commentary about these cases: part of the reason for the anger is that the drinkers in question didn’t get anything like full value out of the wines.

When people enjoy ordering and drinking expensive wines in restaurants, an enormous part of the the pleasure they get is a simple function of the amount of money that they’re paying. If you know that you’re drinking an expensive wine, you pay it more attention, and you discover and delight in aspects of its structure that you might not otherwise notice or even particularly like. If you served a thousand-dollar wine in a twenty-dollar bottle and charged $20 for it, not a single person, no matter how sophisticated their palate and no matter how deep their pockets, would ever take a sip and declare that they would happily pay $1,000 for it. If they buy it and know what they’re drinking, on the other hand, they’re as likely as not to declare it cheap at the price.

As to the question of what restaurants can do to avoid situations such as these, I think a little bit of pomp and ceremony goes a long way — further than simply just letting your hand drift over in the general vicinity of the price column when confirming the order. If you make a show of polishing new glasses for the wine, and ask if the customer wants it decanted, and generally make it clear that they’ve chosen a very special wine, then no one is likely to be offended, while someone who ordered the wine by mistake might well get the message that they’ve ordered something unusually expensive.


KenInIL, the problem of being offended is huge if it’s a high end restaurant, customers expect to be pampered and treated as if they were rich and famous, even if they’re not. People are willing to pay several times more for food not several times as good in part due to the better overall experience which includes better service. There’s really nothing worse than poor service at a high end restaurant because the diner expects it–he’s paid for it and feels ripped off, even if the food was great. You only need to check the comments on restaurant reviews to confirm that service is increasingly important as the price of a meal increases.

I think a better analogy to carding for alcohol which is mandated by law, is to profile for terrorists at airports and other high density public places. There is no doubt that most people would be greatly offended by profiling even if the officer was tactful about it–I do not want to be profiled at a high end restaurant either.

There’s no reason to be snotty over social signaling. Social status always has and always will be important to humanity (I should say as long as women find higher social status to be appealing).

According to another commentator on another board, Screaming Eagle for $2000 at a restaurant was a bargain. Another had this to say,

“To Garbanzo. Restaurants are allocated 3 to 6 bottles a year of wines such as Screaming Eagle. It is an investment for them with an expected return. They can not comp the profit away and then just get another bottle later. The guest made the mistake of not reading the listed price.
— tspoon64 “

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Looking for contrition in Davos

Felix Salmon
Jan 26, 2010 12:59 UTC

So I’ve arrived in snowy Davos, where with typical modesty the miscellaneous moguls will attempt to “Improve the State of the World: Rethink, Redesign, Rebuild”. (Seriously, that’s the official slogan this year.) The official “purpose” page is full of claptrap of the highest order — a “Network of Global Agenda Councils” “driving the rethink” over here; “an unprecedented multistakeholder dialogue ” over there; and on top of it all, naturally, “a collaborative platform that integrates Web 2.0 technology”.

Or, to put it another way, there’s no indication whatsoever that anybody at the World Economic Forum actually Gets It. Davos is great at throwing a couple of archbishops onto a panel with Niall Ferguson entitled “Restoring Faith in Economics” (geddit?) — but what I see none of in the programme is an indication that much if not all of the crisis was caused by the arrogance of Davos Man and by his unshakeable belief that the combined efforts of the world’s richest and most powerful individuals would surely make the world a better, rather than a worse, place. Excitement about the opportunities afforded by the Great Moderation (as the credit bubble was known before it burst), financial innovation, the rise of the bankers — Davos was ahead of the curve on all of them. And as the annual symposium of smug sermonizing became increasingly established, it served as a crucial reinforcement mechanism.

It’s not like CEOs and billionaires (and billionaire CEOs) need any more flattery and ego-stroking than they get on a daily basis, but Davos gives them more than that: it allows them to flatter and ego-stroke each other, in public. They invariably leave even more puffed-up and sure of themselves than when they arrived, when in hindsight what the world really needed was for these men (it’s still very much a boys’ club) to be shaken out of their complacency and to ask themselves some tough questions about whether in fact they were leading us off a precipice.

Now that it’s clear that many of them were leading us off that cliff, there’s still no sign of contrition, although you can be sure that a few fingers will be pointed at various past attendees who aren’t here to defend themselves. Is anybody here seriously examining the idea that Davos was institutionally responsible, at least in part, for the economic and financial catastrophe which befell the world in 2008? I’ll be on the lookout for that over the next few days. But I suspect that the preening potentates will be far too busy giving themselves the job of rebuilding the world to stop and ask where they went wrong in building the last one, and whether they might actually owe the rest of us a large collective apology.


Rumor has it the ticket to get at this thing is the Bilderberg breakout session in the spa. Entry only upon display of a special signet ring and delivery of a secret handshake involving tickling of palms with middle fingers.

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Felix Salmon
Jan 25, 2010 22:24 UTC

Dan Primack has a bone to pick with PRs: PE Hub

I wonder whether the Times-Picayune will lose money on increasing and reprinting its press run after the Saints win — Nola

John Gruber on why Apple probably won’t include Flash on the Tablet — Daring Fireball

Every day of the NYPD’s terror trial will cause 2,200 additional hours stuck in traffic — Streetsblog

The Economist’s blogs gets initials! “RA | Washington” (Ryan Avent) now distinct from “GI | Washington” (Greg Ip) — Economist

Why is it that the SEC is only diligent on matters where it shouldn’t be, like keeping public information secret? — Reuters

US to lift 21-year ban on haggis — Guardian

Pandit said no when Obama summoned him to DC (he tried to send Parsons in his place), but can make it to Davos — Reuters

Alice Schroeder says it’s “frightening” how an “undignified” Warren Buffett has “behaved vindictively” toward her — AS

I’m with the redheaded girl — Vimeo

Annals of surreal libel cases, crossword edition — Sky

Epic customer service fail by B&N with an early oder for its new Nook — fsck

Not Having A Mortgage Doesn’t Stop Bank Of America From Foreclosing — Consumerist

The 37 most liberal Senators represent 51% of America — The Bellows

That 4,170-word Steve Waldman post you’ve been waiting for, on how inequality impedes growth, has finally arrived — Interfluidity


The Times-Picayune may not make any money on the reprints, but http://www.nola.com/saints/index.ssf/201 0/01/super_saints_newspapers_sell_o.html

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