Opinion

Felix Salmon

Counterparties

Felix Salmon
Jun 17, 2010 05:09 UTC

In which Seth Godin explains the Ace Hotel lobby — Godin

Yahoo Finance hiring “a small team of professional bloggers” — Yahoo

White House Fact Sheet on BP Escrow Fund — iMarketNews

Chittum on the FT on Litton — CJR

It’s broken to say “I’m broke” — Amanda Clayman

A 5,000-word Slate investigation into wine forgery — Slate

“What motivated him to throw a puppy at the Hell’s Angels is currently unclear,” said a spokesman for local police — Orange

COMMENT

I’ve worked both remotely and non, as well as in offices that are linked to clients and colleagues in other places and time zones, so I can see merit to both sides of Seth’s argument.

But I hope it becomes more and of a reality. Then we could all live, play, and raise animals in a wide variety of places, in log cabins in the forest and on remote islands and the like, instead of slogging against the perception that only in Silicon Valley, Manhattan and a couple of other population centers can you find “knowledge workers” in this or that industry.

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Elliott Associates goes to Albany, again

Felix Salmon
Jun 17, 2010 03:32 UTC

Back in the late 1990s, Elliott Associates was embroiled in litigation with Peru. And it went to extreme lengths to try to collect as much money from the Latin country as it possibly could:

A federal district court in New York initially ruled against Elliott, finding that the fund had purchased the debt “with the intent and purpose to sue” and “rejected each and every opportunity to participate in Peru’s restructuring.” Elliott appealed and won. Then the fund began working the political system in New York. With the help of a lobbying firm in Albany, Elliott, through a subsidiary, persuaded the New York legislature to change an obscure law governing compound interest, increasing Elliott’s payout by $16 million, for a total, including interest, of $58 million. It was done so quietly that Peru’s lawyers didn’t find out until after the fact. A few years later the New York State Assembly eliminated another law that Peru had used to defend itself. Three months after the bill became law, Singer gave the lead sponsor, State Assembly Member Susan John, a $2,500 campaign donation.

Today, Elliott Associates is embroiled in litigation with Argentina. And it’s trying a very similar stunt, taking advantage of Albany’s broken system to try to maximize its payout:

Amid the chaos in Albany, the Senate has mooted the issue of deadbeat foreign government borrowers. Senator Brian Foley last month introduced a bill that would subject to special taxes any foreign governments that have defaulted on their debts and defied U.S. court judgments…

This bill is not about general principles. It’s about one judgment-evading foreign state, the only one that fits the bill’s criteria: Argentina…

The government has launched a new exchange offer, hoping to clean up the situation sufficiently to reestablish market access…

Rumor has it that one of the biggest holdouts, Elliott Associates, is behind this bill, which, if passed, would require New York banks, including the New York Fed, to collect a tax on any financial transactions conducted by Argentina. The law would impose new costs on the exchange and complicate it, leading to a delay or even forcing Argentina and its advisers back to the drawing board. That in turn would keep Argentina frozen out of the bond market.

At some point, financial markets are going to have to come to terms with the fact that when you issue a security under New York law, you’re engaging with a legal system which looks in some respects like that of many corrupt emerging markets. The jurists here are generally well-respected and honest, but the legislature is another thing entirely. Elliott might have been the first major hedge fund to work this out, but if it’s successful twice in a row, it surely won’t be the last.

COMMENT

Vulture Funds: a system of licensed usury invented by Elliott’s Paul Singer with the collusion of politicians in Washington DC and New York, NY.

Vultures obtain insider knowledge of where US taxpayer “aid” funds are headed, buy up paper debt in those destinations at cents on the dollar, then in remarkably impressionable not to say corrupt US courts of “Law” rabidly enforce preferential ius primae noctis pounds of flesh from, essentially, defenseless peasants. What’s more, everybody else doesn’t get paid and the “indebted” countries wind up in worse shape than ever before.

Of all the ways to make a living in this world, running a Vulture Fund has to be among the least savory and most dishonorable. Vulture targets in recent years have included Honduras in – hothead, please note – Central America, as well as necktie fashion capital Colombia, q.v.

You won’t get much out of Elliott without a writ but a relatively candid list compiled by their fellow predators may be viewed at
http://www.omnibridgeway.com/emerging-ma rkets/country-list/

That this systematically reduces emerging markets (their terminology, not mine) to carrion whilst robbing the unsuspecting US public is morally and Constitutionally improper. US jurisprudence is being blatantly subverted.

Public servants helping to feather Singer and his associates’ nests include New York’s most repulsive: Rudy Giuliani and “salty” homoerotic Eric Massa.

Elliott Associates aren’t the only ones in the game, but since they invented it the least they can expect is the brunt of blame for stealth credit so acquired. If America won’t shut down its own crooks, the rest of the world eventually will, in conclusion of a drama that’s been brewing for several years now.

That Paul Singer is a self-described “conservative libertarian who has given millions of dollars to Republican organizations that emphasize a strong military and support Israel” may afford comfort to the likes of Danny_Black but, to the less gullible, Elliott Associates plus bipartisan bribe-takers equals barely-legal embezzlement on a global scale. May soon they road-kill be.

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CEO succession planning: broken

Felix Salmon
Jun 17, 2010 03:23 UTC

If you make it to CEO of a major public company, chances are you’re pretty competitive. And if you’re that competitive, chances are you’re not going to stop being competitive just because you’re CEO. And if you’re CEO, there’s a very good chance that you’re chairman of the board as well. Put that all together, and you get one of the biggest problems when it comes to principal-agent disconnect: a lack of succession planning.

A new report from Stanford Business School lays out the gory details:

More than half of companies today cannot immediately name a successor to their CEO should the need arise…

While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position…

A full 39% of respondents cited that they have “zero” viable internal candidates…

The majority of firms – 65% – have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept.

One look at Citigroup is all that it takes to see how crucial succession planning is. (Talking of which, who is Pandit’s designated successor? There isn’t one, because he’s too weak to have one.) But we live in a world of celebrity CEOs, where boards would rather hire in some star from elsewhere after being placed in the lurch than elevate an internal candidate suffering from familiarity-breeds-contempt syndrome.

Personally, I like the idea of forcing the CEO to never be the highest-paid person in the company. But I doubt that one company in 1000 pays more than one or two employees more than it pays its CEO.

The FT talks up its paywalled blog

Felix Salmon
Jun 17, 2010 03:01 UTC

Robert Shrimsley, managing editor of FT.com, gave an interesting quote to Laura Oliver about the FT’s Money Supply blog moving behind the paywall:

“It’s absolutely core content, our best economics writers writing about what is going to happen in central bank and fiscal policy, stuff that moves markets. This is stuff that our readers really want to know; they want to glean every morsel of information and insight. This is so core to what we do that we absolutely shouldn’t be giving it away,” he said.

Describing Money Supply as “core content” is tantamount to saying that I’m wrong when I foresee the blog’s demise — so this is going to be an interesting test case for the FT, since we can’t both be right.

My thesis is that if you write for the newspaper, that’s great, because millions of people read the newspaper. And if you write for a free blog like Alphaville, that’s also great, because it’s available to the whole world and also gets a very large audience. But if you write for a paywalled blog, that’s not great at all, because the only people who can read you are the ones who subscribe to the website — and even then you’re almost impossible to find, given FT.com’s site architecture.

And even the people who do subscribe to the website, and who do know how to find you, and who do like what you do — even they might stop reading you once you go paywall. As commenter SBa wrote on my blog:

I monitor blogs for an international organisation that deals a lot with central banks, picking important entries for viewing by economists, researchers, statisticians etc.

I’ve now dropped Money Supply from the list of blogs that I monitor. Even though we have an institutional FT subscription, users need to register individually. Even once that’s done, the cookies get cleared regularly so users here are forced to log in every so often. This is all painful because I want the users to immediately access the content.

I have yet to find a subscriber to FT.com who isn’t annoyed by the paywall: it simply doesn’t work well, and it regularly locks you out when it shouldn’t. And of course the paywall is much more annoying for people who don’t subscribe.

Between demoralized journalists who have no desire to shout into a void, then, and annoyed readers who don’t like trying to gain access even after they’ve paid for it, I’m pretty sure that Money Supply is going to be hit both on the supply side and on the demand side. And at some point even Robert Shrimsley isn’t going to be able to credibly consider it “core content”.

COMMENT

Felix, I’m curious as to your thoughts about FT’s Long Room. It’s not behind the paywall(?) but rather a more elitist garden, I can only imagine that it’s thriving as many small closed communities are but increasingly I find Alphaville referencing the Long Room (including posting of primary source material in the Long Room.)

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The BP downgrade cycle

Felix Salmon
Jun 16, 2010 21:31 UTC

Quote of the day comes from Fitch’s Jeffrey Woodruff, in the wake of downgrading BP by a whopping six notches, to BBB from AA:

“We think the CDS market is overdone hence our decision to shift rating to BBB,” said Jeffrey Woodruff, senior director in Fitch’s EMEA Energy team and lead analyst for BP.

Inevitably, partly as a result of the downgrade, BP’s CDS gapped out: it seems that rising CDS spreads cause ratings downgrades, and ratings downgrades cause rising CDS spreads, in exactly the kind of death spiral that we all remember far too vividly from a couple of years ago.

In this case, however, I don’t think there’s much systemic risk. Real-money investors are buying BP cash bonds (Pimco’s just snapped up $100 million or so at double-digit interest rates), and BP has solved a lot of potential cashflow problems by suspending its dividend. I think we can leave the ratings agencies and the CDS markets to do whatever it is they feel they need to do: there’s no sign that the nervousness in the CDS market — or even the tone-deafness of BP’s chairman — is doing any damage to BP’s $100 billion market capitalization.

On the other hand, nervousness in the credit market is unpredictably contagious: it can have no effect for months, and then suddenly spill over into stocks and even the broad real economy if everybody starts getting worried about the banking sector again. That could, conceivably, happen if Obama signs a tough financial-reform bill.

Meanwhile, I’d love to hear from any investors in BP what and whether they think about the ethics of their investment. Does there come a point where a moral investor should avoid certain companies entirely? I, for one, wouldn’t feel comfortable buying shares in BP at any price. It just feels, well, slimy.

COMMENT

> Were [BP's safety violations] from employees smoking near flammable liquids? Were they from employees not wearing required PPE? Or were they design flaws that ignored obvious hazards? The number means nothing.

Why would BP be 750 times more likely to be violated for smoking near flammable liquids or employees not wearing required PPE? More importantly, does it even matter?

The number means everything. Assuming BP was not being singled out by regulators as a form of corporate harassment, with a statistic like that it’s probably safe to assume BP was–and is–operating with a significantly more lax attitude towards safety than the industry norm.

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The stock-market panic abates

Felix Salmon
Jun 16, 2010 20:50 UTC

Here’s the S&P 500 over the past five days — days which have included not only the massive Greece downgrade by Moody’s, but also big new developments on the BP front: the oil spill might be up to 60,000 barrels a day, it’s setting up a $20 billion fund for claims, and is suspending its dividend.

charty.tiff

At the end of all that, the stock market has managed to put on about 4%, in a relatively steady and non-volatile manner. That doesn’t mean that the news was good, of course: it wasn’t. It just means that the market is doing what markets are meant to do: anticipating bad news, pricing it in, and not panicking when it happens. Even BP shares are higher now than they were a week ago.

This says to me that volatility is falling and is likely to fall further, and that equities are beginning to look more like a coherent reflection of the underlying value of companies, and less like an insane casino. Insofar as there’s still craziness out there, it’s where it should be, in the high-risk margins. Look at the action in BP CDS, for instance: they spiked to 617bp today from 494bp on Tuesday, with total outstandings rising sharply to $1.67 billion from $1.28 billion a week ago.

So right now I’m less averse to investing in stocks than I was back in May. I’m still not sure that there’s an equity premium, but the insanity does seem to have abated for the time being. I’m not saying you should buy stocks, necessarily, but I’m less keen on selling them than I was back then.

COMMENT

CDNrebel:

What’s easier to predict, market trends or the weather? Like the weather, we’re at the mercy of forces we don’t fully comprehend and that leaves us with making assessments on how to act on relatively current conditions. You may plant a seed in the Fall hoping for the right balance of sun and rain in the Spring, but the yield is less than certain.

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Fixing bankers’ pay

Felix Salmon
Jun 16, 2010 17:55 UTC

I’m at a conference on the Squam Lake Report this afternoon, where Harvard’s Jeremy Stein has just given a very compelling presentation on the subject of executive compensation at banks. His bright idea is that you don’t regulate the level of pay at banks, and that you certainly don’t try to convert pay into stock, for reasons similar to those glossed by Justin Fox at HBR:

Equity in a highly leveraged firm (banks and investment banks have debt-to-equity ratios that start at 10-to-1 and go much higher) is equivalent to a call option. That is, if the firm goes bust the equity holders only lose a little but if it does well they can reap huge rewards. So shareholders have every incentive to push executives at highly leveraged firms to take big risks (and executives with big equity stakes have every incentive to take big risks).

This conforms with what we saw at Bear Stearns and Lehman Brothers, where the managers had large equity stakes.

So what to do? “It’s important to get incentive alignment,” said Stein, between managers and taxpayers. And one way of doing that is to force a large part of executive compensation to be paid in cash — and then to hold back that cash for several years, to be surrendered in the event that the bank fails or receives exceptional government support.

Stein writes:

Familiar forms of deferred compensation, such as stock awards and options, do little to reduce the conflict between systemically important financial institutions and society. Managers who receive stock become more aligned with stockholders, but this does not align them with taxpayers. Managers and stockholders both capture the upside when things go well, and transfer at least some of the losses to taxpayers when things go badly. Stock options give managers even more incentive to take risk. Thus, compensation that is deferred to satisfy this regulatory obligation should be for a fixed monetary amount. For example, firms might be required to withhold 20% of the estimated dollar value of each executive’s annual compensation, including cash, stock, and option grants, for five years. At the end of this period, employees would receive the fixed dollar amount of their deferred compensation if the firm has not declared bankruptcy or received extraordinary government support.

The ECB’s Lorenzo Bini Smaghi, at the conference, was broadly sympathetic to this idea, but feared — as I do — that it might not be particularly effective: after all, 80% of bank-executive compensation is already more than enough for anybody, so they might not care enough about the other 20%. And five years might be too short, given the length of the business cycle. Still, it’s a start.

COMMENT

Oh for the love of God, Jimmy Cayne lost a paper wealth of nearly a billion USD, Fuld lost hundreds of millions. If that ain’t going to motivate you what is?

And they also stuck their money in the company equity for years, sometimes decades and clearly equity meets the not paying out if “the firm has not declared bankruptcy or received extraordinary government support”. Or is he saying that CEOs should be forced to be unsecured lenders to the bank for say five years in return for what? There going to be a cap on the interest they will receive on this “investment”? Why five years? Why not 10? Or 100?

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Fannie Mae’s unneccessary evictions

Felix Salmon
Jun 16, 2010 15:30 UTC

Last month, I badgered Goldman Sachs about the unhelpful, self-defeating, and cruel attitude of its Litton subsidiary towards homeowners offering an everybody-wins way of staying in their homes. That story had a happy ending. So if the Vampire Squid can do the right thing in these situations, what are the chances that Fannie Mae might be able to follow suit? I’m not optimistic: so far Fannie’s flacks haven’t even managed to respond to multiple voicemails and emails. And Goldman can surely move a lot faster than Fannie can, when it puts its mind to it.

Once again, the story centers on a sale-and-leaseback proposal from American Homeowner Preservation, whom I wrote about in April. AHP’s principal, Jorge Newberry, explains what’s going on.

The homeowners here are Brad and Christina Brown, and the white knight is their neighbor Draga Sikanovski. Going via AHP, Sikanovski is willing to buy the Browns’ house in a short sale, at the market price, and then give the Browns an affordable five-year lease, along with a 5-year option to repurchase.

The Browns’ lender, One West Bank, was utterly useless. AHP offered to buy the home off them, but they lost the paperwork and then said that they needed the offer price raised to $115,000 to avoid a trustee sale on May 27. Sikanovski agreed to the higher price, and deposited the entire amount, in cash, into an escrow account, while the Los Angeles County Tax Assessor reduced the market value to $110,000.

And then, inexplicably, One West went ahead with the trustee sale anyway, which transferred title to Fannie Mae. Fannie Mae, working through local realtor Joe Mayol, did its standard thing, offering cash for keys: $3,000 if the Browns moved out within 15 days. AHP came straight back with a counteroffer: they would simply buy the house outright for $115,000 in cash, more than its appraised value. Newberry explains what happened then:

Mayol was friendly and indicated that he would like to help, but that the property was now controlled by Fannie Mae, whose REOs must go through the First Look program, whose stated intent is “to provide neighborhood stabilizing entities – owner occupants, public entities, non-profits, and similar organizations – a ‘first look’”. Thus, as Fannie Mae considers the AHP/Sikanovski offer an “investor” offer, the Browns would need to vacate the home and wait out a minimum 15-day waiting period before the AHP/Sikanovski offer could be presented.

In other words, AHP wants to buy the house to keep the present occupants in their home, but Fannie Mae is forcing the occupants out of the house before it will even consider the offer. You can see why Newberry is upset:

The AHP/Sikanovski offer would best achieve the “neighborhood stabilizing” goals of First Look and also net the highest return to Fannie Mae on this asset: the time and expense of cash-for-keys, preservation and marketing expenses would all be saved. Sadly, instead of allowing a neighbor helping neighbor solution to not only help stabilize this neighborhood, but also stabilize the Brown family, Fannie Mae is imposing their own solution which will displace the Brown family and result in yet another vacant bank-owned REO in Palmdale, a city already saturated with REOs begging for the buyers First Look is designed to attract.

Is there any way for Fannie Mae to embrace a bit of common sense here? It’s part of the government, so I’m not hopeful; they’re certainly not returning my calls. It’s increasingly looking as though Fannie Mae is one organization which makes even Goldman Sachs look good in comparison.

COMMENT

Fannie Mae is like the Idi Amin of housing finance, installed to make all its commercial competitors look pristine by comparison in exchange for cash duly shoveled to them out the back door.

Other than woe betiding its customers of course Fannie’s doing a fabulous job. A Fabulous Fab job, even. The banks will sorely miss ‘er when she’s gone.

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Who’s going to pay for deposit insurance?

Felix Salmon
Jun 16, 2010 14:14 UTC

Tim Fernholz has the details on the new FDIC deposit-insurance cap: it looks like the temporary $250,000 limit is not only going to be made permanent, but will also be made retroactive, to cover uninsured depositors in IndyMac. And then there’s this:

The $100,000 cap hadn’t been increased since 1980, and only in 2006 was it indexed to inflation; one compromise in this measure will keep the cap at $250,000 until it would have risen above that level under the inflation index.

I’m not sure what this means, since $100,000 in 1980 dollars is actually slightly more than $250,000 in today’s dollars.

In any case, what we haven’t seen yet is any indication of how the banks are going to reimburse the FDIC for all the money it’s spent to date and will spend in future bailing out depositors. Chances are this process is going to take decades — and giving the banks all that extra time to come up with the money is a substantial back-door bailout in its own right. It’s not like we’re asking them to borrow the money at market rates, give it to the FDIC, and then pay interest to their creditors: the difference between that and what we’re going to end up with constitutes a multi-billion-dollar subsidy from the taxpayer to the banks.

And, of course, if there’s another major crisis in the next couple of decades, the FDIC fund might at this rate never get replenished.

I don’t have a problem with deposit insurance: it helps to ensure a stable banking system, and that’s a good thing. But it doesn’t come free, and I want to see a lot more detail on how it’s going to be paid for. Let’s make sure it’s the banks doing the paying, not the taxpayer.

COMMENT

What’s the point of encouraging people to move money around, if you can so easily keep it at the same institution by opening several technically distinct accounts. The FDIC itself has web pages explaining exactly how to do this and to multiply your protection! Indeed, if you have a family and start being creative with POD accounts as well, there’s little practical limit to how much coverage you can get with one bank with the price being a bit of pointless convenience. Likewise: CDARS, tens of millions of dollars in protection, you deal with one institution, just more paperwork behind the scenes, and endorsed by FDIC. Do they want a cap or not? Right now we are in a silly no-man’s land where there is a cap for the “lazy” or uninformed. What public policy purpose does this middle ground serve?

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