Opinion

Felix Salmon

Does more economic activity mean more driving?

Felix Salmon
Nov 30, 2010 22:07 UTC

Mark Perry is convinced that the recent uptick in vehicle miles is a good sign, economically speaking; Calculated Risk is not as convinced. Both, however, are working on the assumption that vehicle miles are an excellent proxy for economic activity as a whole, and that the more they rise, the better the economy is doing.

Perry’s chart, in particular, would seem to back that up:

saupload_miles.jpg

The way in which vehicle miles fell steadily over the course of the recession is startling. But look at CR’s chart:

VehicleMilesSept2010.jpg

And suddenly recessions don’t seem as big of a deal: vehicle miles simply tend to rise over time, except for during oil spikes.

It’s worth remembering here that the recession started in December 2007, while oil prices were still rising; they didn’t reach their all-time (nominal) high until July 2008. Given that gas prices lag oil prices, a large part of the fall in miles can probably simply be attributed to high gas prices, rather than to the recession — especially since, as Nate Silver notes, “the cost of gas twelve months ago has historically been a much better predictor of driving behavior than the cost of gas today.”

More generally, vehicle miles are a cost of economic activity, and to the extent that they can be minimized through various kinds of efficiency gains, they should be. Things which are good for a vibrant economy — mass transit systems, telecommuting, e-commerce, walkable neighborhoods — tend to mitigate against driving, while — to take the extreme counterexample — I’d guess that people who have been foreclosed upon tend to spend a lot more time in their cars.

My feeling is that what we’re seeing in the latest driving numbers is no more than the fact that gas prices were low a year ago. I do hold out some hope that we’re decreasing our national reliance on autos, if only a little bit; it would be sad if any economic recovery had to be associated with a concomitant rise in driving. As America moves back into the cities from the crumbling suburbs, is that really too much to hope?

(HT: AR)

COMMENT

How are Miles Driven calculated exactly?

Posted by Skarum | Report as abusive

Opposing QE2

Felix Salmon
Nov 30, 2010 17:41 UTC

Jim Surowiecki has a spirited defense of QE2, and specifically calls me out as one of its “hysterical” opponents:

What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.” This response reflects a pervasive sense of anxiety about both the state of the economy and any attempt to fix it. You can see it in the inflation hawks’ conviction that a crashing dollar and higher prices are right around the corner, even though core inflation is lower than it has been in the past fifty years, while the dollar’s value has actually risen in recent weeks. The same kind of anxiety fuels assertions that QE2 is “artificially” elevating stock and commodity prices around the world, as investors take cheap money from the Fed and invest it elsewhere. (The influential Reuters blogger Felix Salmon calls Bernanke a serial “bubble-blower.”) Never mind that stock prices are virtually unchanged since this spring, and commodity prices have actually tumbled in the last couple of weeks. The simple fact that some asset prices have risen since QE2 was first hinted at is treated as prima-facie evidence that markets are disastrously out of whack.

The weird thing is that Surowiecki and I actually agree on most of the issues here. He’s quite right that QE2 might be ineffective—indeed, I’d consider the probability of that to be pretty high. It might also be mildly inflationary: that’s what the Fed wants, and there’s a genuine possibility that QE2 will go entirely according to plan.

The “high-grade monetary heroin” quote comes from some guy trying to be noticed on TV, as does my “bubble-blower” quote, for that matter. The “eviscerates” quote I think comes from Paul Ryan, a politician who, as Surowiecki himself puts it, has as his top priority that Obama be a one-term president; as such, he can be counted on to harshly oppose all government economic policy, even when it comes from a semi-independent Fed.

And while I’m genuinely happy that Ultimi Barbarorum’s anonymous Baruch has made it into the pages of The New Yorker, I fear that he’s being deliberately misquoted for effect.

What Baruch and I are worried about is fat tails and unintended consequences. I don’t think that we’re hysterically attacking QE2, so much as pointing out that it’s never been done before, that we don’t know whether it will work, and that, if it doesn’t work, we don’t know how it’s going to fail, either. Speaking for myself, I am not hysterically opposed to QE2. In fact, in the very video which Surowiecki quotes, I say this:

Frankly this is all that Bernanke can do. If he raised interest rates, things would be even worse. The problem is that interest rates are so low already that if you bring them down, it doesn’t induce more borrowing… It’s really hard to see how the unemployment rate is going to come down. Ben Bernanke’s going to have to do everything he can, and that means blowing these bubbles, doing his quantitative easing, and all manner of other inventive and weird stuff that he does. Will it work? Probably not. He has to try… this is the only chance we realistically have to turn this economy around, and really start making it grow in a sustainable way, and bring the employment level up, and bring the unemployment level down.

Contrast Surowiecki’s paraphrase:

In any reasonable accounting the biggest risk we face isn’t inflation or a currency war or a stock-market bubble. It’s the risk that, a year or two from now, fifteen million people will still be unemployed. Opponents of QE2 are effectively saying that the government should do nothing to try to change this.

Well, I can’t speak for people like Paul Ryan, but I can certainly speak for myself: the follow-up video, recorded in exactly the same take, explicitly says that the government should do something—much more than it’s doing right now—to bring down the unemployment rate. I’m just saying that the best way of the government doing that is not via monetary policy—which doesn’t seem to be having much effect on unemployment, and which can have nasty unintended side-effects—but rather by fiscal policy. Would Surowiecki not agree with me on that?

I’m all in favor of the Fed, in Surowiecki’s words, “nudging people to take a little more risk”—especially when it can do so the old-fashioned way, by cutting interest rates. But it seems to me that insofar as people are taking on more risk these days, they’re doing so in the speculative financial markets, which have fatter tails than ever before and which are just as capable of creating a crisis as they are of helping the economy to grow by allocating capital efficiently.

Here’s a chart of the S&P 500 over the past year: Surowiecki can characterize its current levels as “virtually unchanged since this spring” if he likes, but I have to say it looks pretty high to me, especially as Europe struggles with a major crisis of possibly existential proportions.

500.tiff

Can I say for sure that the strength of the S&P 500 in the face of global uncertainty is a function of QE2? Of course not. But remember that “higher stock prices” are an explicit goal of Bernanke and the Fed. If QE2 is working, this is one way that it will do so, by encouraging companies to raise permanent capital because stock prices are high. I just worry that the Fed is out of ammunition, and that with interest rates at zero, it can no longer help the real economy by manipulating the financial economy. And that QE2, far from making the real economy better, will just make the financial economy more volatile and fragile.

COMMENT

Your graph seems to go from 1000 to 1250. That gives an exaggerated view of recent changes. At least you didn’t make it twice as high, stretching the Y axis! That would mean the index had doubled!

Posted by pbasch | Report as abusive

Why European debt defaults are necessary

Felix Salmon
Nov 30, 2010 15:33 UTC

Jim O’Neill of Goldman Sachs is now going around saying that the eurozone needs “solidarity,” and that Germany in particular needs to get with the all-for-one-and-one-for-all program, after getting itself into this mess by encouraging far too many countries to join the euro in the first place. At the same time, the survival of the euro, he says, “requires Germany to be not so noisy and aggressive about how other countries should run their economies.”

You can see the problem here: if enacted, it would mean that the European periphery can run up massive debts, safe in the knowledge that Germany will pay them off. Willem Buiter calls this by its proper name—permanent fiscal transfer—and says that it’s “most unlikely” even in Ireland, let alone in (say) Greece.

Even Buiter—who now works for Citigroup, remember, which has a long and painful institutional memory when it comes to sovereign lending—is talking about the fact that some kind of default (he calls it “restructuring”) will be necessary, certainly in Greece and Ireland, before markets have any confidence that the problems in those countries are resolved.

Certainly the current pain in Greece—retail sales down 10% year-on-year—feels very similar to the deflationary nightmare that Argentina lived through pre-default. The post-default chaos was worse, but the fact is that default was needed, in Argentina, to get the country back onto a growth path. And Argentina’s debt levels were much lower than those in the European periphery.

Europe is going through a debt crisis, and a debt crisis can only be permanently resolved by reducing—rather than simply rolling over—the debt in question. Sovereign debt crises are special cases, and in some rare cases—Brazil in 2002, say—they can be resolved through fiscal policy and economic growth rather than through default. But Greece 2010 is not Brazil 2002. It has vastly more debt, for starters, it doesn’t have a free-floating currency, it doesn’t have oil and other natural resources like soybeans and iron ore which bring in enormous income during a commodity bubble, and more generally it doesn’t have the ability to grow quickly for a sustained period of time.

The EU in general and the European Financial Stability Facility in particular have bought Europe’s periphery some breathing room. They need to take the next couple of years to work out an equitable and workable debt restructuring in these countries. Without one, they will be mired in deflationary recession, exacerbated by massive fiscal cutbacks, for years to come.

COMMENT

Do you remember old adagyum: homo homini lupus, means human is ones fox for the others ?
this is the old economic system of capitalist which borne collonialism we have burried some decades ago, but now tend to wake up again.
The fall of communist economic system in Rusia caus by its own people without out side intervention, which can not stand the sistem that wealth hold by the state and not distribute to full fill their people needs.
The capitalist economic system is shacking now all over the world lead by occupy wall street and now spread over all capitalist system. the contagion already in Germany. So how could you ask germany to shoulder the fall of the system. if I am a german people i would say save germany first. greek have to save by the greek. How could others help greek when their people not willing to safe their own country?
The furry of Euro and occupy wall street can only resolved by new and justice economic system.
Lets forget the “LUPUS ECONOMIC SYSTEM”,and find a more human and justice system.

Posted by OKTA | Report as abusive

Counterparties

Felix Salmon
Nov 30, 2010 07:12 UTC

Early next year, a major American bank will suddenly find itself turned inside out. Tens of thousands of its internal documents will be exposed on Wikileaks — Forbes

Fiji Water announced today that it will close its operations in Fiji: Please let this be permanent — MoJo

Mary Meeker to Kleiner Perkins — WSJ

COMMENT

I agree it is entirely disruptive and a little scary because all countries veil information and value secrecy, but to me it is embarrassing because supposed diplomats were unable to say what is the truth in less brash tone.

That Diplomats are not diplomatic out of the public eye shows they are not as skilled as they should be, and that could damage diplomacy more then the breach. Perhaps people will be chosen for skills and not nepotism or political favours.

It seems Wikileaks had Bofa data for sometime, from an executives computer no less. Sounds like a few skeletons are rattling, or is that the sound of knees knocking as they tremble? One can only hope… and yes I make no bones about relishing banks that damaged the economy for greed being rattled to the core.

http://www.reuters.com/article/idUSTRE6A T40520101130?feedType=RSS&feedName=topNe ws

Posted by hsvkitty | Report as abusive

The user-hostile AFR

Felix Salmon
Nov 30, 2010 07:05 UTC

Think of this as the web-publishing equivalent of Joseph Kosuth’s One and Three Chairs.

First, there’s the web page: an interview, at AFR.com, with Rupert Murdoch.

The interview looks like this, when you look at it in a browser:

murdochtext.tiff

The text is quite simple:

The average gray-bald grandfather in his 70s tends to play with his grandchildren. Italian Prime Minister Silvio Berlusconi, 72, it now seems indisputable, likes to play with teenage girls. Rupert Murdoch, 79, likes to play with newspapers . . . still.

I didn’t copy that text out manually, I just printed the web page to a PDF, and copy-and-pasted the PDF. Why didn’t I copy-and-paste the website itself? Because if I do that, I get this:

The average grey-bald grandfather in his ©afr.com 70s tends beautifully to ©afr.com think play with technology&rdqu with ©afr.com See his grandchildren. Italian for Prime on Minister Silvio it mind growth Berlusconi, it. a 72, ©afr.com the it subjects now seems results. said mind likes indisputable, ©afr.com may not likes to On play with teenage girls. Rupert ©afr.com Murdoch, teenage ITV 79, likes ©afr.com Italia to ©afr.com ©afr.com accelerated. Th play ©afr.com with ©afr.com the newspapers ©afr.com system. price America . . . ©afr.com still.

And if you look at the raw HTML source for the text in question, it looks like this:

The average gray-bald grandfather in his <span class=”edbe7″>&copy;afr.com </span>70s tends <u class=”a187a9″>beautifully </u><span class=”o4f”>to</span> <u class=”edbe7″>&copy;afr.com </u><em class=”f78f8″>think </em><i class=”a187a9″> </i><span class=”o4f”>play</span> <em class=”f78f8″> with </em><b class=”f78f8″>technology&rdqu </b>with <i class=”edbe7″>&copy;afr.com </i><em class=”a187a9″>See </em>his <span class=”o4f”>grandchildren.</span> Italian <i class=”f78f8″>for </i>Prime <b class=”a187a9″>on </b>Minister Silvio <span class=”a187a9″>it mind </span><b class=”a187a9″>growth </b>Berlusconi, <em class=”f78f8″>it. a </em><span class=”a187a9″> </span>72, <span class=”edbe7″>&copy;afr.com </span><i class=”a187a9″>the </i>it <u class=”a187a9″>subjects </u>now seems <span class=”a187a9″>results. said </span><b class=”a187a9″>mind </b><b class=”a187a9″>likes </b>indisputable, <span class=”edbe7″>&copy;afr.com </span><em class=”f78f8″>may not </em>likes to <i class=”a187a9″>On </i>play <span class=”f78f8″> </span>with teenage <span class=”o4f”>girls.</span> <span class=”o4f”>Rupert</span> <em class=”edbe7″>&copy;afr.com </em>Murdoch, <i class=”a187a9″>teenage ITV </i><span class=”a187a9″> </span>79, likes <u class=”edbe7″>&copy;afr.com </u><u class=”f78f8″> </u><u class=”f78f8″>Italia </u><span class=”o4f”>to</span> <i class=”edbe7″>&copy;afr.com </i><span class=”edbe7″>&copy;afr.com </span><u class=”f78f8″>accelerated. Th </u><span class=”o4f”>play</span> <i class=”edbe7″>&copy;afr.com </i>with <span class=”edbe7″>&copy;afr.com </span><i class=”f78f8″>the </i>newspapers <em class=”edbe7″>&copy;afr.com </em><b class=”f78f8″>system. price </b><b class=”a187a9″> </b><em class=”a187a9″>America </em><span class=”o4f”>. . .</span> <em class=”edbe7″>&copy;afr.com </em>still. </p><i class=”a187a9″>to </i>

As John Gapper notes, if you thought the FT was user-hostile, you have no idea what other publishers are up to.

This isn’t Tynt abuse, it’s simple user hostility, with no added value for the publisher at all. When I copy-and-paste something from the Fin, the publisher has now idea what I’m copying, and therefore can’t use that information to help improve the quality of the publication. There aren’t even any sharing tools on the web page, beyond the obligatory “email a friend” link. It’s pure user hostility.

No one will subscribe to AFR.com as a result of this idiocy, and some non-negligible number of people will unsubscribe because of it. No one wants to be made to feel like a criminal just for copying a snippet of something they’re reading.

I’m astonished that Australians put up with this — and even more astonished that Australian publishers (or Fairfax, at least) go to so much effort to shoot themselves in the foot. But if you ever wanted a prime example of a news publication rebelling like some screaming two-year-old at both its readers and the internet, this is surely it. The Fin is a noble paper; I do hope it changes its ways soon.

Update: Kevin Drum emails to say that the text is unreadable in the Opera browser; it’s also unreadable to the blind.

COMMENT

Another Australian here and a regular reader of the AFR – though I read the print version because it is made available to me via my employer.
Just to add a bit of balance to Will Derwent comment, imo the AFR is definitely not biased towards the left side of politics. If anything, it is right-leaning. Its big business agenda means it supports policies right of the centre, eg it recently vigorously supported a political campaign by mining companies against a rent resource tax proposed.
It is the best paper for financial and business news in Australia, but I have noted a deterioration in its standard. It often recycles articles – even on the same day – printing the same material under a different headline.

Posted by AFRReader | Report as abusive

Goldman’s CELF-interest

Felix Salmon
Nov 29, 2010 22:26 UTC

The Epicurean Dealmaker has a very smart gloss on the CELF transaction I wrote about on Friday:

Investment banks traditionally thought of market making as a client service. An agency business. We put our capital at risk to facilitate the trading of our investing clients. In exchange, we earned a small commission, the occasional chance to put our capital to work in longer-term trades where we thought we had an edge, and—most importantly—priceless insight into the daily operations of particular securities markets, including the appetites, biases, and weaknesses of countless third party market participants. This insight is incredibly valuable, not only in market making itself, but also in making the investment bank possessing it a better informed underwriter for new securities. Securities markets are hotbeds of asymmetric information. The party with the best information has the greatest power. Market making can provide that power.

All of this is well and good, says TED until the market makers’ balance sheets balloon into the trillions of dollars. At that point, market marking becomes indistinguishable from large-scale prop trading.

And in the CELF trade, for all Goldman’s protestations that it was making a market in otherwise-illiquid structured securities, in fact it was simply bidding on those securities, against other bidders:

Goldman’s actions in 2010 bear absolutely no resemblance to behaving like an agent when it purchased the outstanding CELF securities and liquidated them. It did not behave like a normal market maker, buying securities from one investor and selling them to another. It paid an arm’s length price, determined after an auction run by a third party, to the investor it originally sold the AAA rated tranche to. It then triggered the liquidation of the securitization by purchasing a majority stake in its equity. With respect to the seller of the AAA tranche, it acted as a pure trading counterparty. A principal.

I’ve since learned a few more interesting facts about this transaction, none of which make Goldman look particularly client-centric.

For one thing, the investor selling the AAA tranche was exactly the same as the investor from whom Goldman bought enough equity that it could gain control of the CLO and liquidate it. That’s really weird. It makes sense that a Dutch pension fund might want risk-free assets — pension funds are like that. But why on earth would they want a piece of the incredibly risky and volatile equity tranche as well?

Goldman’s trade, here, was to buy the AAA tranche at a discount, and then to also buy up the equity tranche — which, when added to the residual equity which Goldman already held, pushed its total shareholding over 50% and gave it control of the deal. It then found a couple of outside investors (hedge funds, I assume), to come along for the ride and to promise that they would vote as a bloc, and sold them a package of bonds and shares on the understanding that if the shareholders voted to liquidate, the bonds were sure to be paid off in full.

This is a really complicated way of adding value which could have gone much more easily, with much less use of Goldman’s balance sheet. Goldman’s financial advisers, with the best interests of their client at heart, could have looked at the pension fund’s assets and noticed that it had almost enough equity to liquidate the CLO and be paid off in full on its bonds. And looking into their own bottom drawer, they could have noticed that Goldman’s own shareholding would be enough to push the pension fund over the 50% mark.

The most obvious thing to do would be to simply tell their client that Goldman would vote with them to liquidate the deal, and thereby help them get 100 cents on the dollar for their AAA tranche. But since that might involve Goldman taking a loss on its equity tranche, the next most obvious thing to do would be for Goldman to sell its shares to the pension fund at a small premium, and simultaneously help the fund liquidate the CLO, making a substantial mark-to-market profit on the deal.

Both those actions would have been client-centric things to do, and neither would have constituted proprietary trading. But Goldman instead decided to wheel out more than a billion dollars of its own money to buy up the pension fund’s holdings at a discount and take the profit for itself. It was so much money, indeed, that Goldman felt the need to bring in outside partners to share the risk — risk it never even needed to take in the first place.

A clearer example of what TED is talking about could hardly be found. Goldman had asymmetric information: it knew that there was a good enough bid for the loans which made up the CLO that if the structure were unwound, all the debtholders would be paid off in full, and even the equity holders would make decent money. (I’m hearing that the equity holders walked away with 80 cents on the dollar.) Goldman then used its monster balance sheet to profit from that information itself, rather than simply sharing the information with its client and letting the client do the trade instead.

Goldman is adamant that what it did on this trade was client-focused market-making. “This is a good example of helping a client achieve its objective,” the bank told Jesse Eisinger, “and underscores the critical importance banks play in using their capital to facilitate transactions on behalf of clients.”

TED, on the other hand, sees things slightly differently, calling that statement “a patently disingenuous dodge” and “pure, unadulterated horse****”.

I’m tempted to side with TED on this one. Yes, the client’s objective was to get out of its position. But Goldman could have helped it do so more profitably than it did, and what’s more could have done so without using its capital at all. The only reason it didn’t was that it made more money this way round.

COMMENT

foodist, it actually is not that complicated…

Basically what happens is that GS has a load of loans. Either loans it made or loans it bought. It doesn’t want to keep them on its balance sheet so it forms a new company. This company issues bonds with the promise to go out and buy these loans – it does not appear to be a static portfolio but the general characteristics are defined.

Thinking of the cash flow as water, there is a certain expected flow from the loans in terms of interest payments and then principal repayments. This is one bucket. There is typically some extra cash added in, this is the “over collaterisation” bucket, it is used to make up any shortfall in the loan bucket. These two then poor water into the third bucket. Imagine this bucket has holes in it. The first hole at the bottom of the bucket is the A1a note, water comes out if it first and the amount depends on the amount of water the loan bucket and O/C bucket are pouring in up to a limited amount. Above that hole is A2a and water comes out of there as soon as the A1a hole is flowing freely. Then A2b after. This is the AAA tranche. Any water left over is flows through the sub note hole. In principle, this structure should stay in place until 2020. It has to stay in place until Sept 2010 and then if people holding 50% or more of the sub notes vote so then the entire thing can be unwound – so the underlying loans are sold to someone else and the bonds are bought back with the money earnt from the sale plus the excess cash. The AAA tranche gets paid off in full – this is a requirement – and then what is left over goes to the sub note owners.

What GS did was buy back the AAA tranche and some of the equity and then use the right to unwind. Mr Salmon is suggesting that if GS was serving the client then they would have done it the other way round ie sold **their** equity to the client and left it to the client to unwind.

What makes this stuff complicated – and by the way gives it a major reason to exist – is tax and regulatory treatment. If the sub notes paid no interest and GS and others bought at 72.5 and sold at 80 then that is a capital gain whereas interest would be income and the tax treatment is usually different. The other issue can be regulation. The client might be the same but there might be different funds run by that client that invested, so maybe the ABC high-grade fund bought the AAA tranche and the ABC high-yield fund bought the sub notes. The high-grade fund won’t be allowed to buy the sub notes and the high-yield might have limits on their exposure to it. Also ABC might be the same company but the two funds might have different managers and will be separate legal entities.

Equity=subordinate bond, note=bond( normally a medium tenor bond ) in above.

Posted by Danny_Black | Report as abusive

The president’s market report

Felix Salmon
Nov 29, 2010 13:49 UTC

One of the silliest yet most ubiquitous things in financial journalism is the daily market report. The Dow did this, the Nasdaq did that, lookee the dollar, or Gold, or the Hang Seng. Invariably a word like “as” or “after” is used to connect the market move to some news item of the day without quite coming out and saying that there’s a causal relationship.

For individual investors, who should probably check up on the value of their investments no more than twice a year (and even once every two or three years is fine), there’s no reason at all to be blasted with hundreds of these reports a year. They overemphasize noisy intraday moves, and tend to miss out on the signals of big and genuinely important market trends.

All that said, however, if you feel the need to read a daily market report, I know exactly which daily market report it should be. Here’s Brady Dennis, reporting on the activities of Treasury’s markets operation:

A team member also puts together a one-page summary of the day’s activities as part of the daily economic briefing for Obama.

“It’s the hardest document we write, because it’s got to be smart, and it’s got to be in depth, but it can’t be technical,” Pedroni said. “Avoiding getting superficial is the big challenge. Sometimes the weeds have to be there, because the weeds matter.”

Although the environment in some ways resembles a Wall Street trading floor, Pedroni says the staff has an altogether different goal.

“At the end of the day, for us it’s not about profit and loss,” he said. “It’s going to be about good policymaking.”

I’m pretty sure I’ve never seen a copy of this daily markets summary, which is sad—I’d love to see what it looks like, and I can’t think of any good reason why it should be classified. I wonder: could Treasury post it online every day? Maybe even send it out by e-mail to subscribers? I’m sure that the product would be extremely popular on Wall Street and beyond, and help build a fair amount of free goodwill for the White House.

COMMENT

In an uncanny bout of synchrocity, tonight I heard the obligatory “dow up/down #, NASDAQ etc.” blurb at the end of the NPR news update while driving home and wondered whether that was even still the most relevant number to be reporting for daily updates on the economy.

Was that cemented as a practice before there were a wide variety of other financial instruments? Or do they serve other purposes (akin to a weather report for people’s retirement portfolio)?

A lot of the suggestions to improve financial reporting are rather difficult, but fixing this seems like a really easy win.

Posted by gregbrown | Report as abusive

Counterparties

Felix Salmon
Nov 29, 2010 08:12 UTC

Europe Approves Irish Rescue and New Rules on Bailouts — NYT

Can’t read the recap of the Spider-Man musical preview without wincing — NYT

Guardian editor says they provided copy of cables to NYT — Yahoo

“Our package received more abuse when marked ‘Fragile’” — Popular Mechanics

“One West has upgraded its voicemail, from purgatory to hell” — Hirsch

The Guardian’s Wikileaks interactive visualization — Guardian

When Afghanistan’s vice president visited the UAE last year, he was carrying $52 million in cash — NYT

Katrina vanden Heuvel: An Apology to John Tyner — Nation

The amazing story of DecorMyEyes.com – long-form consumer-advocacy at its best — NYT

Keeping us safe: a video of the TSA madness — Atlantic

High-speed video on a fast-moving train — Capn Design

TPG is risking more than all the money it ever made on J. Crew—$1.2 billion—to get back in the company it recently owned — CNBC

“It Gets Better” — Love, Pixar — YouTube

Spectacular, must-read David Roodman post on the Andhra Pradesh microfinance crisis — CGD

New Avedon record: $1.15 mil for “Dovima with Elephants” fashion shot — Artnet

COMMENT

Hopefully Google did solve the problem. At least DecorMyEyes.com doesn’t come up in the rankings first before the home site of the disigner glasses.

HOWEVER, they still come up as the first five of a search for DecorMyEyes and 7 of 10 are directed to the site and not bad reviews. If they had “fixed it” only the home site would have come up and the others would have been pushed down by bad reviews.

We shall see…

http://googleblog.blogspot.com/2010/12/b eing-bad-to-your-customers-is-bad-for.ht ml

Posted by hsvkitty | Report as abusive

The lessons of CELF

Felix Salmon
Nov 26, 2010 22:48 UTC

Jesse Eisinger has the story of CELF, which has some interesting implications. Essentially, Goldman Sachs took a bunch of leveraged loans it had lying around on its balance sheet, and bundled them into a CLO called CELF which it sold in July 2008.

The transaction was clearly profitable for Goldman — if it wasn’t, the bank wouldn’t have done it. And like all CLOs, the reason was that there was insatiable investor demand for triple-A-rated securities. As a result, by bundling up a bunch of loans and tranching them so that a triple-A-rated security fell out the other side, Goldman could make money: demand for AAA debt was much greater than demand for leveraged loans, so turning the latter into the former was profitable.

Then, this year, Goldman unwound the deal. It bought back those AAA-rated loans — I’m hearing at about 96 cents on the dollar — and bought a bunch of the equity in the deal as well, enough to bring its equity stake to something over 50%. With control of the CLO, Goldman then decided to liquidate it entirely, breaking it up into its constituent parts and selling off those loans in the secondary market.

This deal, too, was profitable for Goldman — for exactly the opposite reason that the CLO was. Today, there’s a lot of demand for high-yielding loans, or high-yielding anything, really. Meanwhile, there’s no appetite at all for structured products carrying AAA credit ratings which no one believes. So Goldman can make money by turning out-of-favor structured product into highly-desirable loans.

Eisinger’s point here is that Goldman reckons it can do this kind of thing — making money by structuring and unstructuring complex financial products — without falling foul of the Volcker Rule: at each step along the way, it can claim to be acting in its clients’ best interest. He’s right about that, and he’s also right that if the Volcker rule can’t stop this kind of activity, it’s likely to prove pretty toothless.

But we can also draw another lesson from this story: that securitization is still pretty dead. So long as investors prefer plain-vanilla loans to collateralized loan obligations, the securitization market — which bankers and politicians both have said is crucial to the efficient functioning of the economy — will remain moribund. Let’s hope they’re wrong, and that securitization isn’t all that necessary for a vibrant economy after all. Maybe it’s mainly just good in terms of making money for investment banks.

COMMENT

At the risk of losing you some sleep at night, Mr Dealmaker, I respectfully disagree.

1) Normally in underwriting the bank is taking a hopefully small risk that between closing the price and actually selling on the securities the market does not change too substantially. It does and has happened that the underwriting banks lose substantial amounts of money even in vanilla equity underwritings. I also disagree that there are terribly many reputational issues with bringing crap to the market, as long as it is crap du jour such as Internet stocks or dare I say it CDOs and CLOs.

2) With the original CLO, I suspect GS bought the loans off some clients packaged them up and sold them to other clients. Yes for a period of time those loans were warehoused but I highly doubt GS bought the loans because they thought qua loans there were a great investment they wanted to take a view on, it was just balance sheet rental for another client or clients. Classic middleman. Just like the pharmacist bought the box of Preparation H, held it for a short time till another client – you – came in and paid a slightly higher price. It was hardly a principal investment by the pharmacist.

3) I also suspect that in buying back the AAA tranche that it was not quite as arms length as you suggest. I suspect GS wanted to call, needed to buy out the AAA tranche and to make sure it seemed pucker got a third-party to run an auction which, within reason, GS would always have won. The third-party and the auction was so GS and the client could wave a piece of paper around saying look it was kosher.

The only vaguely nefarious way this can be viewed is possibly the reality was that GS in 2008 was trying to shrink its balance sheet, offered a meaty coupon to clients with the nod-nod-wink-wink we will call the notes when all this blows over. Of course the journalist in this case didn’t bother chasing up the interesting bit because he is more concerned in the moral outrage that a firm isn’t aiming to provide a service at a loss – something the NYT has been doing well for a while now.

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