Felix Salmon

Well done to Kid Dynamite for doing the math on the way that we taxpayers are swapping our AIG debt for equity in the company. There are three big problems here:

1. The fact that we’re doing this conversion in the first place. The preferred stock we currently own pays a regular coupon, while the equity we’re swapping it for was described as worthless by AIG itself not so long ago.
2. The fact that as part of the deal we’re giving current AIG shareholders free warrants to buy stock at $45 per share. Which is very generous of us, but what have they done to deserve this?
3. Most importantly, the fact that the stock we’re swapping into is worth less, at current valuations, than the preferred stock we’re swapping out of. To the tune of about $6.6 billion.

KD has a query in with Treasury about all this; it’ll be interesting to see how they respond.

The only thing I’d note here is that there isn’t a secondary market for the preferred stock we’re swapping out of. So while its face value might be $72.1 billion, its actual market value might well be 10% or more below that figure. In which case it can be argued that the government is getting a good deal here, assuming that it’s actually able to sell its stock into the secondary market at something approximating current levels.

Still the government strategy here does seem to be based on the theory that “the market can remain irrational longer than you can remain insolvent” — that Treasury will be able to monetize all the weird theoretical value that AIG’s current shareholders are ascribing to the company, if only it first gives up any claim to regular coupon payments from AIG.

I hope they’re right, but it is a risky strategy, especially when it seems, from the published conversion rates, that Treasury’s willing to admit that its preferred stock isn’t worth as much as AIG says it’s worth.

Paul Kedrosky is right: this is very weird.

A Facebook spokesman told Reuters on Friday that Facebook will enact a 5-for-1 split of the company’s shares…

Part of the reason for Friday’s split, said Facebook spokesman Jonny Thaw, was to help reduce the price of Facebook’s shares, which have risen significantly in recent years.

Stock splits normally take place because of concerns about retail investors, who sometimes don’t like being forced to buy stocks in multiples of more than $50 or so. But retail investors aren’t allowed to buy shares in Facebook, which trade in an opaque secondary market with fewer than 500 participants.

If Facebook stock was trading at thousands of dollars per share, the split might still make sense — if you’re handing out stock or stock options to relatively junior employees, for instance, a single extra share can make a substantial difference. But it’s not: the highest reported figure for Facebook stock is just $76 per share. A 5-for-1 split would bring that down to just $15 per share: there seems to be no particular reason to have a share price that low.

It’s possible that the $76 figure is wrong by an order of magnitude or so: that might explain the split. But absent that explanation, I can’t think of any good reason for this split, unless an IPO is much more imminent than anybody currently thinks. Can you?

If you haven’t seen it yet, it’s worth taking a look at Alan Blinder’s WSJ op-ed on Basel III. We’ll get to his conclusions in a minute, but whatever you think of those, he’s done us a great service in clearly laying out the big problems with Basel II that the Basel III needed to address:

1. Capital requirements were too low;
2. There was too much reliance on credit ratings;
3. Banks could use internal models to measure risk;
4. Banks could get around the rules by setting up off-balance-sheet entities like SIVs;
5. It lacked any kind of liquidity requirements.

Most of the emphasis and commentary about Basel III has, properly, concentrated on the first of these. Blinder doesn’t like the delayed implementation of the new levels, but that doesn’t bother me so much: as I’ve said before, these ratios are in place already, on a de facto basis.

Blinder also thinks that the backstop leverage ratio of 3% is too low. This gets into the debate between total assets and risk-weighted assets; David Leonhardt asked Tim Geithner about that yesterday at the Washington Ideas Festival. Geithner was clear that as far as he’s concerned, risk-weighted assets are what matters:

What matters is capital against risk. The assets in an institution are not a good measure of risk. What this [Basel III] requires you to hold is 10% of risk-weighted assets. And that’s the right measure.

Well, in the immortal words of Mandy Rice-Davis, he would say that, wouldn’t he. Basel III has been put in place by a group of 27 national governments. All of those governments have to borrow money. They want to ensure that their borrowing costs are as low as possible. And one very effective way of doing that is to ensure that government debt has a very low risk weighting, and that banks don’t need to hold much if any capital against it.

On the other hand, if government debt goes bad, then there’s going to be a banking crisis anyway, no matter what level of capital the banks are holding. Basel capital requirements can try to minimize the likelihood of some kind of banking crises, but they’re not going to be able to prevent a sovereign-debt crisis.

Blinder is quite right, though, that Basel III did nothing to address points 2 and 3, and only partially addressed point 4; that’s a failing.

Finally, there’s the crucial liquidity requirements: after all, the failure of Lehman Brothers was much more a liquidity issue than a solvency issue. The Basel III liquidity requirements still haven’t been nailed down, so we’re going to have to wait and see a bit longer on that front. But significant progress has been made, and banks now have to “to operate with much more conservative funding profiles”, in the words of Geithner — who also pointed out that in the wake of Dodd-Frank, those rules now apply to the shadow banking system as well as to entities which are formally banks.

Blinder concludes with one-handed applause for Basel III; I’ll stick to my two-handed applause, just because politically speaking it’s a very big achievement, and has been put in place very rapidly. Points 1 and 5 are much more important than the others, and those are the areas where the Basel committee concentrated.

I would have loved a mechanism within Basel to be able to revisit points 2 and 3, and maybe point 4 as well. So I don’t really disagree with Blinder on substance. But given how difficult it was to push Dodd-Frank through a single country’s legislature, it’s pretty amazing that 27 countries managed to agree to implement Basel III.

Now let’s keep their feet to the fire in terms of ensuring they actually do so.

Greg Lindsay knows a lot about airports: in fact he’s just written a whole book about them, called Aerotropolis. So I thought I’d ask him whether my uninformed ramblings about airports and infrastructure made any sense.

Specifically, I asked him about freight, which is where a huge amount of the real value in airports lies. How do freight airports compare to what we air passengers are used to? What’s their architecture like? Are the most modern and efficient freight airports just as beautiful, or even more so, than passenger airports, or are they just big ugly concrete sheds? How do they compare to the great resorts of America? (That one for Larry Summers.) And how important are they, from an infrastructure perspective?

He replied:

In many cases (especially overseas), the busiest cargo airports are also some of the busiest passenger hubs. Maybe the best example is Hong Kong, which cost $20 billion to build (still the most expensive ever) and boasts a passenger terminal which is both one of the nicest shopping malls and biggest buildings in the world. That’s what Larry Summers probably has in mind. But maybe more important is the airport’s cargo terminal, which is the second busiest in the world (after the FedEx hub in Memphis) and has all the ambience of the Port Authority Bus Terminal — it’s basically a giant loading dock hundred of feet tall. But you can’t have one without the other. The gleaming terminal isn’t a loss leader — it rakes in millions from duty free and other sources — and it attracts the passenger traffic which makes being a cargo hub possible. Eighty percent of the Apple iPods in the U.S. were made at the giant Foxconn plant in Shenzhen and flown to LAX in the bellies of Cathay Pacific passenger flights. Hong Kong’s airport is what makes it possible for Apple to manufacture nearly all of its products in a single factory on the other side of the world. So yes, sometimes it pays to have a gleaming airport.

I had one follow-up: How important is the “gleaming” bit? If Hong Kong’s new airport had all the atmosphere of Newark International, but still had the same capacity, what difference would that make? Here’s what I got back:

Bling doesn’t matter. Size matters. Speed and efficiency matter. Being able to move 50 million people a year in and out quickly and painlessly is the point. America’s airports can barely do that. Summers was wrong to compare airports and resorts; what makes Hong Kong’s or Beijing’s or Dubai’s super-sized terminals important is the fact that they’re super-efficient and haven’t outlived their lifespans by a good 20 years — not because they resemble a dragon or are filled with palm trees. Newark is a perfectly fine airport (the Continental piece of it, anyway), but an even better example is JetBlue’s Terminal 5 at JFK. It’s a big, cheap steel box with some nice restaurants and free WiFi inside, which distracts you from the fact that it was engineered to turn planes around in record time, which directly affects the airline’s bottom line. If all of our airports were that good, we’d be fine. And it cost a fraction of the airport resorts in Asia.

So I’m still not convinced that a major investment in airports is the best — or even a modestly good — use of federal infrastructure-investment funds. Yes, America’s airports are miserable places to travel through. But if what we want to do is boost long-term GDP, then there are better places for the government to spend its money. As and when airports get replaced and upgraded, they will naturally become more modern and efficient. Sadly, however, that’ll take time — and it might not make the passenger experience much better.