Felix Salmon

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?

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!

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.

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

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.

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.

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.

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)

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

Neil Irwin has worked out that the Federal Reserve earned $45 billion in 2009, thanks to the steep yield curve that it engineered and its move into higher-risk, higher return securities. This is good news: all that money is being dividended back to the public fisc, keeping the deficit that little bit lower.

Essentially all that $45 billion was earned by one profit center, the New York Fed: the rest of the Federal Reserve system is basically cost centers. Now if the New York Fed was a commercial investment bank, it would pay half of that money out in bonuses. Let’s be conservative and call it $21 billion. The New York Fed has 3,000 employees, which means that the bonus pool would work out at $7 million per employee: a full order of magnitude greater than the equivalent number at Goldman Sachs.

Of course, making money is much easier when you can print the stuff. But it wasn’t at all obvious, at the beginning of 2009, that the Fed was going to have such a banner year. So let’s file this one — along with the lack of bonuses at the Fed — under “happy” for the time being. Yes, as Irwin points out, it’s still entirely possible that the Fed might end up taking substantial credit losses. But it’s becoming increasingly probable that any such losses will ultimately be more than made up for in higher coupon payments along the way.

Frank Hansen has put together this chart from OECD data:

(Via Gelman, who earlier found something similar putting life expectancy on the y-axis.)

Of course it would be great if the big banks, currently making outsize profits thanks to the Fed’s zero interest-rate policy, had to pay back some of the enormous fiscal cost of the financial crisis they were largely responsible for causing.

The Obama administration has come under pressure at home and abroad to support a financial transactions tax on institutions and to heavily tax their executive compensation.

But the United States, led by the Treasury Secretary Timothy F. Geithner, has been opposed, arguing that a transactions tax would simply be passed on to customers and a bonus tax could be easily circumvented.

So, how to do this? The NYT and Politico are talking about some kind of “fee”, but it’s hard to see how to stop that from being passed on to customers. Simon Johnson, then, reckons it should be the bankers who are targeted, rather than the banks:

The answer is easy: people working at our largest banks – say over $100 bn in total assets – should get zero bonus for 2009…

The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.

The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses.

Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.

I think Simon is right that such a tax is hard to design, and therefore wrong that it’s in any way “easy”. If you tax 100% of bankers’ 2009 bonuses, then the banks simply won’t pay any 2009 bonuses, and you’ll get no revenue. Meanwhile, banks will just double those bankers’ bonuses in 2010.

I don’t think there’s any easy answer here, but I do think that Simon is unnecessarily harsh on the UK supertax, which seems to have worked quite well: banks are doubling their bonus pools and paying half to the government, raising a lot of money for the public fisc. Yes, the public does own a large number of bank shares. But I see no evidence that the UK supertax has done particular damage to bank stocks.

The departure of Terri Dial from Citibank only serves to underline how dysfunctional Citigroup remains, long after Vikram Pandit was meant to have created small-enough-to-manage Citicorp within the larger behemoth. Tellingly, Dial is being replaced by Manuel Medina-Mora, a manager who has succeeded within Citigroup largely by having enough power from day one to do what he wanted, rather than having to navigate Citi’s labyrinthine bureaucracy. Medina-Mora, for instance, flat-out refused to rebrand Banamex as Citibank, and so Banamex it remains to this day.

Aaron Elstein quotes Dick Bove as saying that Dial was “severely constrained in what she could do”; Bove thinks that Dial left “in total frustration” rather than being pushed. My feeling is that either way she failed to deliver results, and that she was beginning to be more trouble for the bank’s top management than she was worth.

Citi’s branch network in the US is not huge — Wells Fargo and Bank of America both have six times as many branches as Citi does — but it’s symbolically very important, as the public face of the troubled bank. The problem is that making significant changes across 1,000 different branches is an extremely expensive proposition, without any guarantee of success.

The real problem for Citi here, of course, is that it lost Wachovia to Wells Fargo. Pandit had it all worked out: Citi’s US consumer bank would get folded into Wachovia, and run out of Charlotte, by people who had a proven ability to run a US branch network extremely efficiently. (It wasn’t Wachovia’s branches which caused its downfall.) When Wells swooped in at the last minute to snatch Wachovia out of Citi’s grasp, the California bank probably saved Citi untold billions in extra losses. But it also destroyed Pandit’s last real hope for being able to build a top-tier retail franchise in the US. Terri Dial couldn’t change that fact, and I doubt that Medina-Mora will be able to do so either.

Judith Dobrzynski has come up with her own version of the Ellis rule when it comes to museums selling off their art. Adrian Ellis’s rule is quite elegant:

You can deaccession and spend the money on whatever you want – a new roof, working capital, education programs, or even a boffo night out with your chums on the board — provided that you ensure that the institution or individual to whom you sell commits in some binding form to equal or higher conservational standards and equal or higher public access.

Dobrzynski’s proposed alternative has two parts. The first is that any museum wanting to sell art first would need to argue its case before an “impartial arbitrator”, someone “schooled in art, art law and nonprofit regulations”. Given the heat surrounding the deaccessioning debate, I don’t actually believe that there is anybody impartial on this front, so this part of Dobrzynski’s test might be very hard to implement fairly.

Then there’s the second part:

Most important, as part of any deal permitting the sale of art, the de-accessioning museum would have to offer the works to other museums first. If it received no offers, it could sell the pieces via a public auction — and any American museum would then have the opportunity to match a winning bid if it promised to keep the work in a public collection.

Is this realistic? Would auction houses agree to such a deal, whereby the winning bidder might win the auction but still lose the piece in question? I asked Christie’s, who said that although such deals haven’t been seen in the US, they are reasonably common overseas: in the sale of the of Yves Saint Laurent and Pierre Berge collection in Paris in February 2009, for instance, several museums exercised just such a right and acquired works for their collections.

I suspect that cultural norms would make the first such sale quite difficult in the US, but that eventually both auction houses and their clients would learn to live with them. On the other hand, that could take some time, if Dobrzynski is correct and her rule makes deaccessioning nearly impossible.

Essentially, Dobrzynski here is taking the Kimmelman rule — that museums should get first dibs on any deaccessioning sale — and beefing it up with two extra layers: first arbitration, and second the option to buy in the wake of a public auction. Personally, I think that the Ellis rule is still the best option, since it puts the focus where it belongs — on the art, rather than on the museum. Both Dobrzynski and Kimmelman would let art disappear from a museum into private hands, never to be seen again; Ellis wouldn’t. I wonder whether Christie’s could find a way of putting an Ellis binder on works before auctioning them.

(As ever, Donn Zaretsky is the first place to go for more on this subject.)

Brett Arends — journalist and published author — is a real thinker, not a blogger.

I’ve seen bloggers at work. They sit at their desk and stare at a computer screen for 10 or more hours a day. Tap, tap, tap. Click, click. Tap, tap, tap. Tap. Tap. Double-click…

Is blogging journalism or a nervous tic? I couldn’t do it. I don’t know how anyone can.

I am equally baffled by the readers. Who says “Hmmm, it’s 11 o’clock. I wonder what Felix Salmon has written about Morgan Stanley since breakfast?”

At least writing books involves real research, real thinking and real writing.

Let’s examine, then, what happens when Arends does real thinking, on the subject of Apple’s capital structure and dividend policy. Maybe this blogger could learn a thing or two!

Arends first declares that Apple’s cash hoard is reducing shareholder returns:

Even by conservative estimates the surplus is probably nearing $30 per share.

This is not all money Apple needs to run its business. Most of it is sitting in low-yielding investments like short-term corporate bonds. It’s earning next to nothing.

Apple should therefore start declaring a dividend, says Arends. But that’s not all:

Apple should — gasp — start borrowing, and hand that money back, too. All told, it could probably hand out more than 60 cents or so per share without breaking a sweat…

It could surely borrow, say, $30 billion without any serious risk or problem.

In the current bond market it could get excellent terms, too. Top, AAA-rated companies are paying just 5.5% or so on long term bonds. As Apple earns more than that on its invested capital, borrowing (within reason) would add value.

On the one hand, then, Arends is saying that Apple’s earning nothing on its cash, and so should hand it back to shareholders. Then he adds that Apple should borrow $30 billion at 5.5%, and hand that back to shareholders too — because, and this is where he loses me — “Apple earns more than that on its invested capital”.

But Apple wouldn’t be investing that $30 billion, it would be handing it back to shareholders. What’s more, if Apple could invest $30 billion, it would surely do so with the cash it has on hand — with its opportunity cost of “next to nothing” — rather than borrowing it at 5.5% interest.

What Arends doesn’t mention here is that Apple stock is trading at an all-time high. He also neglects to mention that economically speaking, dividending $30 billion or $60 billion to shareholders is identical to taking that money and spending it on share buybacks. Except that shareholders generally prefer buybacks to dividends, because buybacks don’t end up saddling shareholders with taxable income.

Now if Arends ever read the tap-tap-tapping of bloggers, he’d understand why it’s an idiotic idea for Apple to buy back its own stock at north of $200 a share. I explained as much back in December 2007, and again in February 2008: buybacks mainly benefit short-term speculators. Meanwhile, companies which buy back their own stock at the top of the market are liable to regret it.

In any event, it’s far from obvious that long-term Apple shareholders — none of whom have ever expected a dividend — particularly want Apple to start paying them 60 cents a year in cash. With the stock at $210 per share, that kind of money would barely make a difference to the share price. And that cash still belongs to them: it’s quite literally money in the bank, and if they want to monetize their stock by selling 0.3% of their holdings, they’re more than welcome to do so.

Apple says that it likes having the cash on hand because it gives the company strategic flexibility when it comes to investments and acquisitions. That makes sense. But I think there’s another good reason for Apple to be cash-rich: it allows the company to continue to play the long game, rather than worrying overmuch about quarterly cashflow. To give just one example, Apple spent five years, from 2000 to 2005, writing and developing a version of its operating system, OS X, which would work on Intel chips. It didn’t do that because it wanted or expected to move to an Intel-based architecture, but it felt that the option value was worth it. And then, after five years of capital expenditure with no expectation of any return on that investment, it decided to exercise the option.

In Brett Arends’ ideal world, Apple would lose its cash hoard entirely, and would have to pay for all such projects out of operating earnings. What’s more, it would also have to pay $1.65 billion a year in bond coupons, plus another $540 million in dividends. That’s more than $2 billion a year going out the door, most of which would go to banks rather than shareholders, and none of which would make Apple a better, or more innovative, or more profitable company.

Apple is a fast-growing technology company; the iPhone makes it a major player in the high-capex world of telecommunications. I don’t know what kind of strategic possibilities Steve Jobs and his inner circle are thinking about, but it’s entirely reasonable to assume that at least some of them might involve spending large sums of cash — which doesn’t necessarily mean big acquisitions. So long as Apple’s shareholders evince no desire to start receiving a dividend, I see no reason why Jobs should start paying one.

As for borrowing money in order to return it to shareholders, that’s the kind of desperate move engaged in by companies on their last legs. It’s most decidedly not the kind of thing Apple would, or should, ever do. As Arends would probably realize, were he to engage in some real research and real thinking.