Felix Salmon


Felix Salmon
Feb 17, 2011 05:33 UTC

“I wonder what a company would look like if you optimized around creating as many jobs as possible, instead of as few” — Noah Brier

“Keller added that if the experiment proved successful, the Times might create a section for moms in Brooklyn” — Onion

My bet with Marian Gibbon. If Facebook is still private in a year’s time, I win the value of one Facebook share — TweetDeck

Cricket-mad Jain inks Deutsche Bank ire — Indian Express

On female foreign correspondents and sexual assault — CJR


“Times executive editor Bill Keller said of the new section, which will be printed in smudge-proof ink so it doesn’t soil the soft, pink hands of its readers.”

Lmao! That article is so funny yet so true.

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The false promise of compound interest

Felix Salmon
Feb 17, 2011 05:18 UTC

A loyal reader on the sell side emails to object in strenuous terms to my contention that, when it comes to saving for retirement, “by far the most important number is the total sum of dollars that you’ve put into your retirement funds over time; the annualized rate of return on those dollars is secondary”.

Being a sell-sider, he attached an Excel spreadsheet. He assumes you start saving $6,000 a year every year from age 25 to age 60 and calculates that such a person would end up with $575,000 at a 5% return and $1.12 million at an 8% return.

But of course nobody does that. Saving is lumpy; very few of us diligently start socking away $6,000 a year at age 25. (Well, maybe those of us who go on to become investment bankers do. But no one’s worried about them.) In any case, of course if you keep savings constant, then the rate of return makes all the difference. That’s a tautology.

But much more common is the person who struggles through their 20s, brings up kids in their 30s and then wakes up in a cold sweat one morning in their mid-40s, worrying about what they’re going to live on when they retire. By that point they’ve had enough pay raises that they’re going to need an enormous sum in order to maintain the style to which they’ve become accustomed. But at the same time they’re spending everything they’re earning already. So they put away what they can and count on 8% or 10% annualized returns — or even more, if they’re investing in dot-com stocks or Miami condos — to get them where they want to be.

This, needless to say, is a strategy which is likely to end in tears. And it’s not just individuals thinking this way, either — municipalities do, too, and they really ought to know better.

My point is that the range of remotely sensible investment strategies for a working person is actually pretty narrow. You can’t just wave a magic asset-allocation wand and change your annualized return over a period of 35 years by 300 basis points. Frankly, you’d be doing well if you could improve it by 30 basis points. The market will return whatever the market will return and you will do a little bit worse than that, most likely.

So the way to have a comfortable retirement is not to think that by making a clever choice when it comes to stock-picking or investment strategy that you can somehow make up for the money you’re spending rather than saving. Instead, it’s to diligently save as much as you can, from as early an age as possible and simply invest it in a non-idiotic manner. The more you save, especially in your 20s and 30s, the more you’ll end up with in retirement.

Wall Street would love us to believe that the magic of compound interest gives us a free lunch; that a small amount of savings, if compounded at a high enough rate, can set us up for life. That might be true mathematically, but saving doesn’t work that way in the real world. Interest rates are low, now, and wages are growing sluggishly.

The three big drivers of big retirement accounts — sharply rising salaries, sharply rising house prices and a sharply rising stock market — are all looking very uncertain these days. So let’s not perpetuate this pipe dream that if only we can get an 8% return on our funds, everything will be fine. Because chances are we won’t. Absent that 8% return, the only way of getting to where we want to be is to simply spend less and save more.


Discussion regarding compound interest is only really relevant with respect to credit, in which case, the promise of compounding interest is not false.

For most people, the largest percentage of their wealth is tied up in their home. And, for most people, they have a significant mortgage to match. Compared to equity markets, interest rates are stable. Net wealth can be increased by reducing debt while holding savings constant. Accordingly, paying a mortgage is saving. Gains are made not in extra earnings but reduced interest expenses by paying down the loan early. Most people are more likely to achieve this through the discipline of regular repayment. Fail to make payments and the power of compound interest will wipe you out.

Simplistically speaking, when it comes to establishing strategies for building up wealth in equity markets, dollar cost averaging is a more useful concept.

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The for-profit microfinance debate

Felix Salmon
Feb 17, 2011 00:34 UTC

In which Matthew Bishop of the Economist schools me on the benefits of for-profit microfinance. For background, start with my post on why you shouldn’t invest in microfinance, and then my more recent post on what’s going on in Andhra Pradesh. Then check out Matthew’s post defending for-profit microfinance, my reply to Matthew, and — if you want more still — his reply to my reply. Matthew hasn’t succeeded in changing my mind, but he does give the best argument against my position that I’ve heard.


Agree with most of the discussion. The main reason why microcredit interest rates are higher than in other credit markets is the high operating expenses per dollar lent. The smaller the loan, the more expensive it is. This has been documented in the literature in places like here
http://www.themix.org/publications/micro banking-bulletin/2011/01/sacrificing-mic rocredit-unrealistic-goals
Great Discussion!

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The muni loan market emerges

Felix Salmon
Feb 16, 2011 17:32 UTC

When I was worrying about munis last week, I said that “the amounts here are far too big for states to go to the loan market instead: if investors won’t buy bonds, banks won’t lend the states the money they need.”

Which might be narrowly true, when it comes to state borrowers in particular. But other borrowers are finding the banks quite eager to lend to them:

J.P. Morgan Chase & Co. is devoting billions of dollars to direct loans this year to both refinance deals and for new projects, according to a bank official. Last year, the bank made a few hundred million dollars of direct loans to municipalities. Now, the bank would consider making a single loan for hundreds of millions of dollars, the official said. It also is dispatching teams to explain the concept to wary public borrowers.

Citibank also is courting municipal borrowers with direct loans, according to several bond issuers. A spokesman for the Citigroup Inc. unit declined to comment.

“This used to be unheard of,” says Eric Friedland, managing director of public finance at Fitch Ratings…

For banks, this is a potentially lucrative business at a time when they are sitting on cash that isn’t earning huge interest and are reluctant to make loans for mortgages and other areas they see as risky…

When word got out that Riverside, Calif., was floating a bond recently, several bankers called offering direct loans.

This is a welcome development, I think. It brings a whole new investor class to the muni market, as well as a lot more serious underwriting in an area where the amount of diligent credit analysis has always been much lower than it should be given the size of the market.

That said, if banks start picking off the most attractive borrowers in the muni market, that might only serve to reduce the overall quality of outstanding municipal bonds. Every time a municipality issues a bond from now on, potential investors will start asking themselves whether they’re being offered the sloppy seconds which various banks have all passed on. Direct loans might be very attractive, on a case-by-case basis, to both borrowers and lenders. But if people continue to look for reasons to mistrust the municipal bond markets, this isn’t going to help.


Banks and bankers have a way of finding money if the price and incentives are right.

The syndicated leveraged loan market was a mere 20% the size of the high-yield bond market in 2001, and even tinier in the early 1990s. By 2008, it had almost reached parity (92%) thanks to all of the LBO issuance and the numerous CLO and other structures the Street came up with to absorb the paper.

They don’t have the same buckets of cash to tap now, but if they can get the structures and IRRs right to match the demand (there’s a huge retail bid for high-income/low rate-vol investments right now) they can almost certainly find somebody to buy municipal loans.

(HY and leveraged loan data cited from Credit Suisse)

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Kabulbank datapoint of the day

Felix Salmon
Feb 16, 2011 13:49 UTC

Back when we last checked in on Kabulbank, no one really knew how big the hole there was, and the government was still saying that it was solvent. But now Dexter Filkins has some concrete numbers, and they’re insanely huge:

The money that has apparently been doled out by Kabul Bank to Afghan officials is part of an estimated nine hundred million dollars that is lost or missing from the bank. That amount far exceeds the three hundred million dollars in losses that emerged after the Central Bank’s takeover. Investigators said that the nine hundred million dollars includes failed loans and loans to apparently fictitious corporations. The chairman of the Central Bank said that it has recovered some of the loans, but a Western official told me that much of the money is gone: “They can’t find it.” …

The loss of nine hundred million dollars or more at the bank represents a significant percentage of Afghanistan’s gross domestic product, which is only about twelve billion dollars.

$900 million is 7.5% of $12 billion. A hole that size in the US would be over $1 trillion. That’s roughly the grand total of all subprime loans made from 2005 to 2007, all added together. Only the recovery rate on Kabulbank’s loans is going to be much lower than the recoveries on subprime.

The only conceivable silver lining here is that a lot of the money just came straight in from the US, and straight out to a well-connected elite: in a way, Afghanistan has lost only what it never really had. But that doesn’t stop the fact that the weak Afghan government and central bank now have to deal with a major banking crisis along with all their other problems. And I don’t know anybody who’s optimistic about their ability to do so.


Mahmoud Karzai, the president’s brother and bank employees carted out suitcases full of money for bribes for votes, silence about corruption and Dubai luxury homes to retire in when the bank failed and Americans pull out, whichever came first.

And Americans enabled the fraud and theft (and drug trafficing) so I guess Americans will just label it too big to fail… depending on who is being bribed. After all that’s what you do with big corrupt banks that fail, right? And keep the government propped up at all costs…

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Felix Salmon
Feb 16, 2011 06:26 UTC

Wherein Chris Harris burns his bridges with Ferrari in a most entertaining manner — Jalopnik

Nouriel Roubini sits on the board of “a company for carrying out an undertaking of great advantage, but nobody to know what it is” — Alphaville

Gibson Dunn is representing pro bono a bunch of millionaires fighting against the safety of their neighbors — Streetsblog

The Credit Suisse CoCo issue was placed with shareholders, not bondholders — NYT


“The Credit Suisse CoCo issue was placed with shareholders, not bondholders.”

From the article:

“In an exchange for bonds the two investors already held, Credit Suisse is issuing [the CoCos].”

Are you saying the Times flubbed because the investors– Qatar’s SWF and a Saudi conglomerate–were never bondholders to begin with (rather, they were/are common shareholders)? Reuters’ pieces suggests that they held some sort of (vanilla) convertible bond/preferred (describing it as a “hybrid” investment).

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Bankruptcy charts of the day

Felix Salmon
Feb 15, 2011 23:10 UTC

This chart comes from the official news release on US bankruptcy filings in 2010:


There’s no financial crisis, in this chart, and no sign of any let-up in the rate of increase of bankruptcies. That’s consistent with what the news release says:

Bankruptcy filings in the federal courts rose 8 percent in calendar year 2010, according to data released today by the Administrative Office of the U.S. Courts. Total filings remain at a five-year high.

But look a bit more closely and you see something very odd. Check out the x-axis: there’s a column every three months from December 2006 through December 2009. And then there’s a sudden jump to December 2010: three bars have been left out.

What’s more, the chart starts immediately after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect. The act caused a huge spike in bankruptcy filings before the Act went into law, and therefore an artificial drop afterwards — as a result, we have no indication of what’s remotely normal when it comes to these figures.

So let’s have a look at the same chart, presented a bit more honestly:

What we have here is the rate of filings not only slowing down but even falling a little in the final period, from 1.595 million filings to 1.593 million. And clearly we seem to be topping out — there’s much less of a sense, here, that there’s no end in sight to the growth in bankruptcy filings.

On top of that, there’s a lot of smoothing going on here due to the use of overlapping 12-month periods. If you look at the raw quarterly data, you get something more like this:

Here, bankruptcy filings peaked at 422,000 in the second quarter of 2010, and have subsequently fallen by more than 12% to 370,000 in the final quarter. Far from rising, as the official chart suggests, the actual number of bankruptcy filings in the fourth quarter of 2010 was lower than it was in the fourth quarter of 2009.

What’s more, in both of my charts it’s clear that the number of filings is more or less “back to normal” after the artificial interruption of BAPCPA. The act was meant to decrease the rate of filings; it doesn’t seem to have worked very well in that regard, although admittedly we’re still painfully emerging from a particularly nasty recession. But in any case adding the historical data does make the official chart much less scary.

None of this is remotely obvious from the press release, which unhelpfully provides the underlying data in an eight-column grid with the numbers running from left to right and bottom to top. If I didn’t know any better, I would say that someone at the press office was trying to make the bankruptcy situation look worse than it actually is. But I have to say I have no idea why they’d do that.

Update: Apologies, my charts somehow disappeared from this post when it was first posted. They should be there now!

Update 2: A quick show of hands, if anybody’s still reading this. My charts here are clever embedded things where you can mouse over the columns and see the actual figures. On the other hand, they don’t seem to show up in RSS feeds. So, should I continue with smart interactive charts, or should I go back to dumb pictures? Any opinions?


Bankruptcy is a very scary thing to do but it is better to start a clean slate if you financial crisis is to bad, at least creditors will stop calling and it will give you a chance to start over.

Financial Independence | http://www.ineedmoneyathome.com

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Duncan Niederauer’s English-German phrasebook

Felix Salmon
Feb 15, 2011 20:59 UTC

NYSE CEO Duncan Niederauer doesn’t speak German, despite the fact that he was a Grand Marshal in the 2008 German-American Steuben Parade of New York. So we at Reuters (with many thanks a certain very senior editor who shall remain nameless) thought we’d help him out with a few phrases which might come in handy:

English: Dick Grasso? Before my time, sorry.
German: Dick Grasso? Sorry, der war vor meiner Zeit.

English: Daimler-Chrysler? I don’t see any comparisons there.
German: Daimler Chrysler? Also den Vergleich kann ich wirklich nicht verstehen.

English: The New York Stock Exchange is the cradle of American capitalism. It is a national treasure.
German: Die New Yorker Börse ist die Wiege des amerikanischen Kapitalismus — ein nationales Heiligtum.

English: Just because we’re German doesn’t mean we’re intent on world domination.
German: Nur weil wir deutsch sind, heisst das noch lange nicht, dass wir die Welt dominieren wollen!

English: I, for one, welcome my new overlords.
German: Also ich, fuer meinen Teil, heisse meine neuen Chefs herzlich willkommen!

Further phrases are left as an exercise for the reader. A few to get you started: “This is a merger of equals, not a takeover”, “Chuck Schumer? He’s just a passing acquaintance”, “Flying commercial hurts productivity and is a major security risk”, “Greed, for lack of a better word, is good”, “Co-located algorithmic high-frequency traders are important liquidity providers and are fundamental to the efficient allocation of capital on modern electronic exchanges”.


NYSE Euronext & Deutsche Borse are already tied up in multiple ways. http://goo.gl/KpI5f

Also, Duncan Niederauer’s relationship map. http://goo.gl/aKj8f

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Art as an investable asset class

Felix Salmon
Feb 15, 2011 16:52 UTC

I sat down last week with Noah Horowitz and Marion Maneker to talk about art as an investable asset class.

It might be a bit hard to follow some of the subtext here, so let me try to spell it out. Essentially, if you look at the risk-adjusted returns on art, even taking at face value the improbable returns suggested by the biggest art indices, they’re not all that hot. Art is a negative-carry investment which pays no dividends, and as such it’s very risky. Its historical returns, on their own, don’t make up for that risk. So the people pushing art funds have tried a different tack, looking at the Capital Asset Pricing Model to come up with a way of saying that the risk-adjusted returns on art might not be all that great, but they’re uncorrelated, and that therefore they have a place in any efficient portfolio.

The problem with this argument is that the current art-market bubble, especially in contemporary art, has attracted so many hedge-fund managers and other financial types that art is now correlated, quite strongly, with various financial assets. The art market dried up very quickly during the crisis, and has come roaring back alongside the stock market as Ben Bernanke has continued to drop money from helicopters. The return of the art market and art values is great news for the art world and for art collectors, but it does rather put the lie to the idea that art supplies precious uncorrelated returns.

As such, it still doesn’t make any sense to invest in art as an asset class. Buy art because you love it, by all means. But don’t kid yourself that you’re making a sensible financial investment, because you’re not.


I have been in the financial markets and the art business for 25 years. I have seen stock markets crash and art markets crash. The only difference between the two is that the Stock market is regulated and has a secondary market for liquidation. The Art market has No regulation, No secondary market and is an illiquid asset, which makes it very difficult to get your money back if the financial markets crash. Having said that, making the case for The Regulation of the Art Business/Market would be a good idea for everyone except for a handful of big auction houses, galleries, collectors, dealers, and museums. If a work of art can be valued and sold for $100,000,000.00 dollars (case in point: Giacometti’s “L’homme qui marche I” which sold for $104.4 million at Sotheby’s in February 2010 and Picasso’s “Nude, Green Leaves and Bust” which fetched a record $106.5 million at Christie’s in May), then that art product/financial instrument is a Commodity. Therefore art should be sold and regulated as a Commodity.

In fact, all Art Funds should be regulated with the (SEC) Securities Exchange Commission so that investors can see what art is being sold and who is selling it, who is buying the art and at what price. Full disclosure should be made also of the mysterious phone and Internet buyers, with whom an auction house can claim to be negotiating a private sale for an undisclosed amount. This type of Chandelier bidding and smoke and mirrors method of dealing should be illegal. By regulating Art as Stock, you would need a secondary Art Exchange to trade the original oil paintings, sculptures, silkscreen prints and giclées. This Art Exchange would bring more transparency to the art business and would regulate what is already manipulated by a handful of big collectors, dealers, museums auction houses, and galleries, even by some art critics who can influence and help decide to push a single artist to increase the “value” of a painting by 50-1000% in a single transaction. The collusion and back room deals that go on in this business are criminal by Wall Street standards.

The history of Art as Stock was originated back in 1994 by an American Artist, Robert Cenedella. Cenedella was the first artist to come up with the idea to sell Art as Stock – Stock as Art as laid out in “The Art of the Deal”, an article written in the New York Times Style Section, by Bryan Miller, on Sunday, March 20, 1994. Cenedella was calling then for regulating the art market. Here we are 20 years later and we are still trying to do the same thing but with more technology and transparency. The idea was 20 years ahead of its time. In the NYT’s article, Leo Castelli was quoted as saying that he compared the 1980′s art boom to junk bonds and that Cenedella’s idea was a “conceptual work of art” when it was really an investment in Art as Stock. Nobody really understood the concept then.

Cenedella’s idea made more sense already then than all the current ideas. The Regulation D Private Placement was registered with the (SEC) Securities Exchange Commission. The offering was 200 Shares of a Deluxe Limited Stock Edition. The concept was similar to an (IPO) Initial Public Offering. The company issued 200 shares of stock valued at $1,000.00 a piece for a total of $200,000.00. With each share of stock the buyers received a bank note certificate indicating part ownership in the oil painting as well as a large serigraph (a high quality silkscreen) of the original oil painting. This assured buyers full disclosure about what they were buying under SEC rules. The silkscreen picture “2001 A Stock Odyssey” was of the inside of the New York Stock Exchange. Each investor would share in the profit above the original cost of the painting priced at $50,000.00. So if the sale price should exceed $50,000.00 the profits would be distributed to the shareholders and the serigraphs would also go up in value. If you bought 100 shares you would own 50% of the original oil painting and 100 serigraphs, which the investor could also sell separately while still retaining ownership in the original oil painting. With each investment, buyers came away with a tangible piece of artwork, the silkscreen that they could hang on their wall.

This brings us back full circle and the question is does the art market continue business as usual or does Wall Street and the Art business both figure out how to regulate the investments in the art market so that there is full disclosure and transparency.

I can tell you right now that I would rather own a Picasso, a Thomas Hart Benton or a Cenedella than a share of Lehman Brothers, Bear Sterns or Enron. This may also one day be the same case for allot of the Contemporary Junk Art market.

The art market needs to be regulated because the way it is doing business now is just a crime.

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