Opinion

Felix Salmon

Annals of dubious statistics, crowdfunding edition

Felix Salmon
Jul 27, 2012 19:25 UTC

Are crowdfunding statistics the new counterfeiting statistics? Certainly they seem to have become a meme. If you know that crowdfunding is a big deal, it’s probably because you read all about it in TechCrunch, in May (“these portals raised $1.5 billion and successfully funded more than 1 million campaigns in 2011″), USA Today, a few weeks later (“About $1.5 billion was raised in 2011 by about 450 crowd-sourcing Internet sites worldwide”), or maybe the Economist, a week after that (“$2.8 billion will be raised worldwide this year, up from $1.5 billion in 2011″). More recently, Forbes upped the ante even further: “This year alone, an estimated $3.2 billion dollars is expected to be raised through donation-based crowdfunding platforms like Kickstarter”.

All of these statistics, you won’t be surprised to hear, come from the same place: a May report from Crowdfunding.org and its research arm, Massolution. The report lists — by placing their logos on five successive pages of the report, so that their names can’t be searched — 135 different “participating companies”, starting with Lending Club and Kiva, and ending with… um, hang on a sec. Lending Club and Kiva? Since when are they “crowdfunding platforms”?

It turns out, if you look at the definition of a “crowdfunding platform” that the report uses, it’s incredibly broad: “an operator of a funding platform that facilitates monetary exchange between funders and fundraisers.” Which turns out to include not only peer-to-peer lenders but also FirstGiving, a website which non-profits use to accept donations, and which claims to have moved $1 billion of funds through its system. For that matter, the definition doesn’t even say that the crowdfunding platform needs to be online: I reckon that if anybody hosting a political fundraiser probably counts as a crowdfunding platform under this definition. Hell, the New York Stock Exchange would even qualify.

Oh, and guess what: if you add up all the money raised in 2011 from all 135 companies listed, it doesn’t come to $1.47 billion at all. It comes to just $575 million. Where does the other $895 million come from? The report basically pulls it out of thin air, reckoning that since it didn’t manage to get numbers from all of the crowdfunding companies in the world, it would try to extrapolate, somehow. Or, in the language of the report:

Each CFP was modelled individually based on key metrics, market growth dynamics and other characteristics for a number of large CFPs that did not provide data in order to estimate the total funds.

It’s very hard to know what this means, but when it comes to crowdfunding platforms, all of the big ones, including Kickstarter, are already on the list. It beggars belief to assert that there’s a whole bunch of other platforms out there which together raise more money than those 135 companies put together.

In any case, you won’t find it in the abridged version of the report, but the key chart is this one:

crowd.tiff

According to this chart, of the $575 million that Massolution managed to total up, fully 49% is “donation based”, from companies like FirstGiving. And another 22% is “lending-based”, from companies like Lending Club. (I don’t know which bucket Kiva is in; I suspect it’s lending, but it’s certainly one or the other.) I don’t consider peer-to-peer lending to be crowdfunding, and I don’t think that giving money to charity online counts as crowdfunding either. So what happens if you exclude those two categories? You get $63 million in reward-based crowdfunding (think Kickstarter, which is now up to $247 million in total funds raised), and another $103 million in equity-based crowdfunding, all of which comes from outside the US.

Recently, SecondMarket has been moving into the business of raising money for fund managers of various descriptions — this too counts as crowdfunding under the Massolution definition, even if it’s just a couple of high net worth individuals putting their money into an art fund. And SecondMarket is adamant that it does not want to get into the crowdfunding game.

All of which is to say that Massolution has done a very good job of taking the relatively small amount of genuine crowdfunding which is going on out there, throwing it into a bucket with a lot of stuff which is not crowdfunding, and persuading the media that crowdfunding has already become a billion-dollar business, even before all the new activity legalized by the JOBS Act kicks in.

So what are the real numbers? Well, if you take only the “reward-based” and “equity-based” slices from the Massolution pie, they come to $165 million for 2011. That’s more or less in line with the $123 million number which the Daily Crowdsource came up with earlier this year. It’s not chump change, but it makes the entire global crowdsourcing space roughly half as big, in revenue terms, as, say, the Fifth Avenue Apple Store.

The lesson of this story is that we shouldn’t be getting ahead of ourselves, and we certainly shouldn’t be accepting uncritically any statistics which come from Massolution. Carl Esposti, Massolution’s CEO, is on the executive board of the Crowdfunding Professionals Association — which is to say he very much has a dog in this fight. Next time he starts throwing out statistics on the size of the crowdfunding market, it would behoove any journalist to double-check exactly what he means by that. And whether he thinks it includes things like online donations to the Red Cross.

COMMENT

Here’s a comprehensive view and excellent commentary on crowdfunding by A. Brian Dengler, citing research from Wharton, Indiegogo, massolution and more:

“Crowdfunding Adds Up”: http://www.cfira.org/?p=856.

Also, here’s Somolend’s take in a blog post titled “Crowdfunding: One Size Doesn’t Fit All”: http://somolend.wordpress.com/2012/07/26  /crowdfunding-one-size-doesnt-fit-all/.

These debates are great and will help this very young and booming industry form around a common taxonomy.

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Counterparties: The clarifying effects of CEO retirement

Ben Walsh
Jul 26, 2012 22:20 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

It was a comment that launched a thousand strained attempts to capture its essential absurdity. Sandy Weill, the man who broke the wall between commercial and investment banking, the architect and former chief executive of Citigroup, has decided the whole thing is now a bad idea:

What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.

That’s a massive reversal for a man who two years ago hung a “hunk of wood – at least 4 feet wide – etched with his portrait and the words ‘The Shatterer of Glass-Steagall’” in his office. Even then things had changed: Citi was in a shambles, and Weill had gone from the pioneer of an economic boom to an early harbinger of the dangerous financialization of the American economy.

Weill, it turns out, is not the only now-retired finance chief to have second thoughts. The American Banker has a list of other prominent proponents of breaking up the big banks. Phil Purcell, former CEO of Morgan Stanley; John Reed, former chairman of Citi; David Komansky, former CEO of Merrill Lynch — each one is on the list. Dick Parsons, another former Citi chairman, isn’t on American Banker’s list, but he should be.

The public mood toward finance has shifted dramatically, but so has the employment status of each of these men. Parsons’s post-retirement alacrity was particularly bold: It took him just three days away from Citi’s board to have second thoughts. It seems that once you receive the banking chieftain’s version of an AARP card, repressed doubts about the value of your life’s work emerge. Or perhaps your incentives (and ego inflation) now come from public plaudits and not compensation.

Lining up against Weill et al to defend big banks is former senator Phil Gramm, the co-author of the bill that retroactively legalized the merger that created Citigroup. He’s joined by Rodge Cohen, the Sullivan & Cromwell rainmaker famous for advising numerous bank CEOs through the financial crisis. Wells Fargo Chairman and CEO Richard Kovacevich disagrees based on Rumsfeldian existentialism: “Investment bankers are risky, not investment banking”. Other big-bank CEOs have been silent, but they might say they’ve already addressed the matter – they’re not too big to fail, because they have filed a piece of paper with the Fed saying they can fail.

It will take more than armchair advice from former titans, it seems, to persuade current big-bank executives that Weill is on to something. It will take demonstration of real economic gain: Even if Jamie Dimon “can’t imagine” that any unit of JPMorgan would be more profitable alone, the idea of more than doubling shareholder value could, one suspects, catch James Gorman’s eye. – Ben Walsh

On to today’s links:

EU Mess
Germany’s finance minister declares that markets are wrong, then goes on vacation – Bloomberg
Draghi’s bazooka: The ECB will “do whatever it takes to preserve the euro … believe me, it will be enough” – Bloomberg

Charts
The “Garbage Indicator” has something very grim to say about US GDP – Business Insider

Alpha
“Brokers are being paid 12% to put your money into these private vehicles that are opaque, illiquid and frankly, unnecessary” – Josh Brown

Politicking
Ron Paul’s “audit the Fed” bill passes the House, paving the way for certain death in the Senate – Yahoo News

‘Liebor’
BlackRock, Fidelity and Vanguard considering legal action against banks – Bloomberg

Surprisingly Difficult
Pop quiz: British Olympian or London Tube stop? – Slate

Takedown of a Takedown
Jason Linkins rips the dismissive review of Bailout by the NYT‘s Jackie Calmes – Huffington Post

That Better Get Better Fast
In 29 states, companies can still legally fire a worker for being gay – WSJ

COMMENT

In response to Kovacevich, both investment banking and investment bankers are risky. The profession is too risky, and a risky practice by one firm will probably set off a slide towards risky practices by all firms less they displease their investors. And besides which the sorts of people attracted to investment banking are risk inclined.

And what does he care anyway?? Wells is mainly a retail bank. A very big one, but mostly a boring and well-run one. IIRC it owns Wachovia’s leftover investment bank, but that is mainly because it bought Wachovia. That is precisely why I invested in Wells, by the way (consider that my required disclosure). And I hope that Wells stays that way. It was making money turtle-style, not hare-style. And I’m fine with that.

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Bloomberg with attitude

Felix Salmon
Jul 26, 2012 21:39 UTC

Bloomberg News has been run, since inception, along the lines laid out very clearly by its editor-in-chief, Matt Winkler, in The Bloomberg Way. But you don’t need to buy a copy of the book to know what the Bloomberg Way means: if you spend any time at all reading Bloomberg articles, you’ll know exactly how it feels to read them.

Of late, however, Bloomberg has started injecting some serious attitude into various parts of the empire which are close to — if not strictly part of — the central news organization. Look at Richard Turley’s covers for Bloomberg Businessweek, for instance: “Most of my work involves trying to turn the capitalist system against itself,” he told AdAge, “but try not to tell anyone that”. Or look at @bobivry’s balls-out Twitter feed (sample tweet, from yesterday: “Sandy Weill just made me throw up.”)

Now a Bloomberg View columnist, Bill Cohan, has delivered an entire column devoted to fisking Loren Feldman’s long NYT piece about the court case currently pending against Goldman Sachs brought by James and Janet Baker, a couple who sold their company for $580 million in worthless stock.

I remember thinking, when I read Feldman’s story, that it felt like it wasn’t telling the whole story. For one thing, how was it that this lawsuit has managed to drag on for over a decade? (Although Feldman never actually says when the suit was filed, so that bit was always a bit fuzzy.) And secondly, what kind of M&A banker blithely goes on vacation when his client is having a hugely important meeting with the acquiring company, saying that he would be unable to call in “and that it was pointless to send anybody else from Goldman because there wasn’t time to catch up on the deal”?

Cohan doesn’t answer either of those questions, but he does reveal other germane information which Feldman either missed or chose to ignore. For instance: Goldman advised the Bakers consider hedging the stock they received in the transaction; the Bakers rejected that advice. And: the Bakers’ suit against Goldman is just one of many different lawsuits they have brought against more than 30 separate defendants, including KPMG and SG Cowen; so far those suits have resulted in the Bakers being awarded more than $70 million. And: in those suits, at least according to Goldman, the Bakers swore under oath that their company had done due diligence on its acquirer; that the due diligence was not Goldman’s job; and that in any case “no amount of due diligence could have detected the fraud”.

Cohan concludes by describing Feldman’s story as a “one-sided potshot” — and I have to say I love it when I see that kind of say-what-you-mean language coming from any part of the Bloomberg empire. Winkler is notoriously allergic to ad hominem attacks, and media organizations in general tend to be very shy when it comes to criticizing each other, especially outside clearly-labeled media-criticism ghettoes. No one wants to throw the first stone.

The fact is, however, that Cohan’s column does a good job of placing Feldman’s story in a bigger perspective. I don’t sign on to Cohan’s opinions, either in this piece or elsewhere: I think his sympathy with Goldman’s argument that it was only advising the company and not its shareholders, for instance, is misplaced. And while I’m OK with opening sentences which liken Goldman Sachs to a deep-sea cephalopod, Cohan’s decision to compare the company to Jerry Sandusky seems unnecessarily vile.

But when it comes to the substance of Cohan’s column, I think he makes his case quite well: it can be dangerous to take NYT stories about Goldman Sachs at face value. I only wish that Feldman felt free to reply, and that we could have some real iterative journalism here about what really went on in this deal.

Most of all, though, I wish that one of Feldman and Cohan had seen fit to upload some or all of the legal source materials they reviewed. The NYT’s document viewer is great for such things, and Bloomberg is entirely capable of publishing primary documents too. Here’s the one place where Feldman and Cohan are saying exactly the same thing: Feldman talks about how his account “is based on a trove of legal filings”, and Cohan talks about how his piece is based on vague “court documents I reviewed”. Neither links to any of those documents, and neither gives much of a hint of what exactly those documents are, or where they might be found. It’s classic “trust me, I’m a journalist” reporting, and it’s offputting in both instances.

By all means tell us what certain documents are saying. But when you do so, show us those documents at the same time, so that if we’re so inclined, we can judge for ourselves. At the very least, if you don’t upload or point to the documents, explain why you’re failing to do so. Right now, we know that Feldman looked at a bunch of documents and came away thinking very little of Goldman; we also know that Cohan looked at a bunch of documents and came away much more sympathetic to the bank. But we don’t even know whether they were even looking at the same documents or not. And neither is letting us draw our own conclusions.

So while Bloomberg’s move into content-with-attitude is entirely welcome, I’d love to see it do more when it comes to linking to primary documents. The NYT, too, for that matter. Both of them are good at such things sometimes: Jonathan Weil, in particular, is great. But it doesn’t seem to have sunk in to the corporate DNA yet.

Update: Apparently Cohan did attach two documents to his column, but they initially showed up only on the Bloomberg terminal. They’re up online now; let’s hope for more!

COMMENT

The NYT articlde was incomplete in that it didn’t provide links to documents or why they are not available…true, but it was a story woven to make Goldman look bad and remind us that Dragon was a pioneer in speech recognition that Suri is based on… yet now is defunct … and so it should!

Goldman may have legal standing to say only “Dragon” can sue and not the Bakers as it is now defunct. Goldman should not be able to stand on its comments that they followed it through to completion so, job well done and win the case without the fallout “due” on their reputation!

At an earlier time,in preliminary due diligence when seeking to invest themselves, Goldman spent very little time and trouble before considering L&H as a company they themselves would NOT invest in:

“Whenever we invest, we always want to talk to customers,” Luca Velussi, a Goldman analyst who worked on Project Sermon, later testified. Based on what Project Sermon’s team leader, Ramez Sousou, termed “preliminary” due diligence, Goldman declined to invest in L.& H.

Although you mention the elder of the 4 bankers going on vacation, reread it. He went on vacation TWICE during the crucial late stages of the negotiations. TWICE within a matter of weeks.

Yes realist50, “Cohan has the background to understand the role of different parties on an M&A deal, as well as the fact that quality of earnings reports are routinely commissioned even on deals much smaller than $580 million.”

If not to do due diligence in finding the right investor, exactly what was Goldman hired to do? Cohan also has the background of getting huge bonuses to do very little while promising much and sounds more as though he is defending Goldman to get hired rather than making counter points. That is a great way to get your resume out there…

It makes one wonder … whether the Goldman supervisor of the 4 banker assigned actually had anything to do with the clients being he has denied having been a part of the Dragon deal, whether the other client that had speech recognition interests might have meant there were some “other” conflicts of interest still to be determined, and who advised the UK Goldman analyst to take the call and lie about L&H to appease the Bakers when he had not been following them at all.

It makes one wonder, who sent the unsigned memo and why will no one take credit for it… was it a cryptic warning, from someone (a Greg Smith type) at Goldman who wished to remain anonymous, that Goldman knew something they didn’t and why do minutes from the meeting where the decision was made, say that Goldman bankers expressed confidence that the combination of Dragon and L.& H. would produce a market leader, when they had not done even the preliminary due diligence they had done to protect themselves?

Even though all that is pure speculation, at the very least the Baker’s lawyer is correct that “The Goldman Four were unsupervised, inexperienced, incompetent and lazy investment bankers who were put on a transaction that in the scheme of things was small potatoes for Goldman.”

So 10 years ago 5 million was a paltry sum that deserved little consideration to take to a task to “completion” (regardless of the actual outcome such as a total loss of their company and bankruptcy) how much $$$ does it take for actual competent consideration and “due diligence” now?

It also makes one wonder about $300 million Greece paid for the books to be more gently sauted after being julienned, leaving their taxpayers to fend for themselves. How much more do we not know about Goldman, after seeing “God’s work” in action?

I think Greg Smith, was being far too kind, knowing what we know about Goldman and other TBTF banks… Wall Street puts its own interests ahead of its clients and will screw anything or anyone along the way.

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Counterparties: The housing drag of student loans

Peter Rudegeair
Jul 25, 2012 21:20 UTC

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The Consumer Financial Protection Bureau and the Department of Education released a great new report last week detailing how the market for private student loans ballooned from less than $5 billion in 2001 to more than $20 billion in 2008. In its arc, its reliance on securitization for rapid growth, and its push to lend superfluous amounts of money to individuals with relatively low credit scores, the boom and bust in this market very much resembled the subprime mortgage market. All told, the report points out that there’s more than $150 billion in outstanding private student loan debt, and that the poor outlook for jobs for recent grads is making defaults all the more likely:

In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.

And that’s just private loans. The New York Fed pegs total student loan debt outstanding in the United States at $902 billion as of the first quarter of this year. Dylan Matthews notes that the median amount of student debt last year was $12,800, or about 17% of median household wealth.

Rohit Chopra, the student loan chief at the CFPB, reckons that the links between the mortgage market and the student debt market aren’t just superficial – they’re causal, too: “Student debt may be more intertwined with the housing market than we realise and it may prove more important every day to understand that connection,” he told the FT’s Shahien Nasiripour and Robin Harding. That connection may already be having an impact: In June, first-time purchasers made up 32% of homebuyers, down 2% from May. In 2011, first-time buyers accounted for 37% of all purchasers, but that’s still the second-lowest level in the past decade, according to the National Association of Realtors. Regulators and realtors aren’t the only ones who are noticing or who are concerned by this macroeconomic relationship. Credit Suisse’s chief economist, Neil Soss, agrees with Chopra’s diagnosis:

“We are trying to migrate towards a much safer underwriting standard, with let’s say 20 percent down payments required,” Soss said today. “It takes a certain amount of time for people to save that up, and the more they’re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that.”

If Chopra, NAR and Soss are on to something, then the proposed policy solutions that the CFPB and the Department of Education outline in their report – namely, allowing only private student debt to be discharged in bankruptcy, while federally issued student debt remains inviolable – are too anemic to have much of an effect on the broader economy. – Peter Rudegeair

On to today’s links:

Liebor
Not my bag – Geithner says it was “on [the British] to take responsibility to fix” Libor – WSJ

You Say That Now
Sandy Weill decides big banks aren’t that great after all – CNBC

Munis
No, unions did not bankrupt California’s cities (housing did) – LAT

The Fed
The Fed is closer to action than the last time it was close to action – WSJ
The Fed’s “monetary policy has little effect on a number of financial markets, let alone the wider economy” – NYT
Inflation: from threat or menace to friend and benefit? – LAT

New Normal
After arbitrage, arbitrary rage: Getting punched in the face is just like risk-taking on Wall Street – Bloomberg

Apple
Apple’s strangely mediocre quarter in charts – SplatF

EU Mess
More people in Spain are betting, but they’re wagering less – Phys Org

Oxpeckers
Unlike Gretchen Morgenson, the NYT’s fiscal policy reporter is no fan of Neil Barofsky’s book – NYT

Analytic Rigor
Dick Bove thinks Wells Fargo is smart enough to hate serving customers, himself included – Dealbreaker

Cephalopods
There really is something in the water at Goldman Sachs – DealBook

 

COMMENT

I am so excited hearing this news. Getting this post article, I just surprised. I think that it is a great announcement, which is so helpful to us. A big thanks for this announcement. Keep it up…
online student loans

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How to help underwater homeowners

Felix Salmon
Jul 25, 2012 19:04 UTC

I’m a huge fan of Senator Jeff Merkley’s new plan to help out the 8 million American homeowners who are current on their mortgages but underwater and therefore unable to refinance. If you like to see such things in video form, the YouTube announcement is here; for the nerds among us, the full 31-page proposal is here.

I’ve been bellyaching for a while about one of the biggest and most obvious market failures out there: the fact that huge numbers of mortgages are trading well above par — at roughly 106 cents on the dollar, on average — just because the homeowners are locked in to high interest rates because they’re underwater. When investors made these loans, they made them in the knowledge and expectation that if rates fell sharply, the loans would be refinanced and prepaid. But that never happened, and now they’re reaping an undeserved windfall.

Merkley’s plan addresses that problem straight on, and because it only concerns homeowners who are current on their mortgages — and not the 3 million homeowners who are underwater — it doesn’t come with any moral hazard problems attached: indeed, at the margin, it encourages homeowners to stay current on their loans, rather than defaulting on them.

The basic idea’s very simple: the government will buy, at par, any new underwater mortgage written on certain terms. So if you currently have a $240,000 mortgage on which you’re paying 8% interest, but your house is only worth $200,000 and you can’t refinance, then suddenly now you can refinance. In fact, you have three options. You can get a $240,000 15-year mortgage at 4%, which keeps your payments roughly the same, but which gets you paying down principal quickly, so that you should be above water in about three years. You can get a $240,000 30-year mortgage at 5%, which cuts your monthly payments substantially. And there’s a third option I don’t fully understand, which includes a $190,000 first mortgage at 5% and a $50,000 second mortgage with a five-year grace period; on that one, monthly payments, at least for the first five years, drop even further.

In many ways, if you don’t sell your house, this is functionally equivalent to a principal reduction. That $240,000 15-year mortgage at 4%, for instance, has exactly the same cashflow characteristics as a $198,000 15-year mortgage at 7%. And the $240,000 30-year mortgage at 5%, similarly, asks homeowners to pay exactly the same as they would if they had a $193,00 30-year mortgage at 7%.

Problems arise, of course, if and when you want to move, or sell your house. In that event, Merkley told me, “we have to be very aggressive in not accepting short sales that dump losses onto the taxpayer. They’re on the hook for the amount”. He suggested that instead of selling, homeowners simply rent out their home until they’re no longer underwater. That works for some people; it doesn’t work for others. But in any case, his proposal is clear: “the program would not entertain short sales during the first four years of a loan,” it says.

And bigger problems might well arise with banks and investors, who are not going to be happy to see the loans they’re carrying on their books at 106 cents on the dollar suddenly reduced to par. On top of that, the banks are going to be asked to pay a “risk transfer fee”: 15% of the first 20% that the loan is underwater, and 30% of the second 20% that the loan is underwater. Beyond a loan-to-value ratio of more than 140%, banks are going to be asked to write off everything.

For Merkley’s typical family in a $200,000 home with a $240,000 mortgage, the result is that the bank would have to pay the government $6,000 in risk transfer fees, on top of any losses it might take if it had been holding the loan on its balance sheet at more than par. In total, the bank losses could reach $20,000 — a substantial sum, and one which might well result in the banks dragging their feet quite a lot.

On the other hand, there’s upside for the banks, too. For one thing, all their default risk — which is non-negligible, on underwater mortgages — goes away. And for another thing, they get paid off on second mortgages as well as firsts: the Merkley plan will refinance everything, up to 140% of the value of the home. And the opportunity to exit an underwater second mortgage at or near par is one that few investors would pass up.

The Merkley scheme has been very carefully assembled, so that it should make money for the taxpayer even at higher-than-expected default rates. Nothing’s guaranteed, of course. But after all the bailouts of banks, if there’s a plan which will credibly make money while saving homeowners enormous amounts of money at the same time, the government really should adopt it — especially since the funding will come from the private sector.

If you’re not persuaded, maybe these numbers will help. If you have a 30-year $240,000 mortgage at a blended interest rate of 8% (between your first and your second), your monthly payment is $1,761, and over the course of those 30 years you’ll make a total of $633,967 in mortgage payments. On the other hand, if you have a 15-year $240,000 mortgage at 4%, your monthly payment is $1,775 — basically exactly the same — while your total mortgage payments, over the life of the loan, plunge to just $319,544. (For all these calculations I am as ever indebted to this wonderful mortgage calculator.) Your monthly payments stay the same; your aggregate payments fall by 50%. And your total interest payments fall by a whopping 80%.

If we can save homeowners 80% on their mortgage-interest bill, while still making a profit and while helping to stabilize the housing market at the same time, well, that’s a no-brainer. I don’t know whether this plan is going to get any traction. But it should.

COMMENT

Revisiting this article as I am looking to buy another home. Its interesting to see the way the market has turned a corner and interest rates are climbing. I know many that hunkered down in their ‘underwater’ dwellings, choosing instead to ride out the waves and remodel! Personally I chose to rework my garage, inspired by sites like http://www.houzz.com, http://www.hgtv.com/topics/garage/index. com/index.html?layout=desktop, http://www.garageremodelguides.com.

Of course, my garage doesn’t resemble Tony Stark’s but I was able to remodel and get more use from the space. It provided a modest value increase and proved cathartic.

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Why Argentina’s likely to beat Elliott Associates

Felix Salmon
Jul 25, 2012 15:06 UTC

There were lines out the door of 500 Pearl Street on Monday afternoon, as a surprisingly large crowd of jurists and hedgies and bankers and wonks — and even a few journalists — filed into the Ceremonial Coutroom of the Second Circuit Court of Appeals for an hour-long hearing about two sentences in old Argentine bond documentation. The case is huge in the world of sovereign debt, arguably the biggest that world has ever seen. And it was no surprise to see Treasury’s lawyer get up in front of the judges to make his case that they should overturn Thomas Griesa’s lower-court decision, which seeks to force Argentina to pay off its holdout bond creditors.

If you want some extremely smart analysis of what happened at the hearing, I’d point you to two pieces: Anna Gelpern’s, at Credit Slips, and Vladimir Werning’s, for JP Morgan. The two of them take different routes to arrive at much the same conclusion: although Argentina’s lawyer, Jonathan Blackman, got beaten up much more than Ted Olson, who was representing Elliott Associates, ultimately the chances are that Argentina will prevail.

If nothing else, the hearings made it clear that a decision to uphold Griesa, and to find in favor of Elliott, would have such enormous consequences, not only for Argentina but for the entire world of sovereign debt, that I can’t imagine it wouldn’t be appealed all the way to the Supreme Court. (Where, interestingly, Antonin Scalia wrote one of the more important precedents for this case, in Argentine litigation dating back to 1992.)

One key precedent that the Second Circuit would set, were it to find in favor of Elliott, would be a significant weakening of the Foreign Sovereign Immunities Act (FSIA). Sovereigns have sovereign immunity, and can basically do what they like, and all sovereign bondholders know this — but in order to uphold Griesa’s order, the New York court would essentially be constraining what Argentina can do with its own foreign exchange. Everybody in the court agreed that Argentina’s foreign reserves are immune from attachment, but if the order were upheld, then Argentina would find itself in one of two states. If it continued to pay existing bondholders who tendered into its bond exchange, it would have to pay holdout bondholders as well. Alternatively, if it continued to refuse to pay holdout bondholders, it would be barred from paying holders of the new bonds at the same time.

Under the FSIA — and the US government made this argument reasonably forcefully on Monday — it’s really hard to make the case that the US can or should force Argentina’s hand in either case: it can’t compel Argentina to pay holdout bondholders, and it can’t restrain Argentina from paying other bondholders. Which means that no matter what the pari passu clause means, the FSIA presents a formidable roadblock to Elliott Associates, and one which the Second Circuit is likely to be reluctant to dismantle. The way that one judge, Reena Raggi, put it, if Argentina was determined not to pay its holdouts, it could do anything it wanted with its money — even spend it on hookers and blow, if it wanted — except pay its other bondholders. And as Gelpern notes, the FSIA “does not provide for sliding scale immunities”.

What’s more, upholding Griesa’s decision would have significant waterfall effects: it would hit not only Argentina, but a lot of private-sector institutions in New York as well, not least Bank of New York, which is the trustee for Argentina’s new bondholders. Olson made it very clear that if the order was upheld, and Argentina kept on trying to pay its new bondholders while stiff-arming its holdouts, then Elliott would go after Bank of New York for “aiding and abetting” Argentina in flouting the order.

That would put Bank of New York in a very invidious position. On the one hand, it acts as a trustee for the new bondholders, and if it is given a coupon payment by Argentina, then that coupon payment belongs to the bondholders. BoNY has to pass the coupon payment on to them. On the other hand, if it does so, it might well be found in contempt of court. The Second Circuit is going to have to think long and hard about what exactly it would expect BoNY to do in such a situation — not least because that subsidiary case is very likely to come up in front of them if they find in favor of Elliott here.

Finding in favor of Argentina, then, is the easy way out, and as a result the appeals court is likely to hold its nose and find in favor of a defendant whom they really don’t like. That might explain why the justices were so hard on Argentina during oral argument: if they’re going to find in the country’s favor in their decision, they really ought to at least make the country’s lawyer squirm a bit in person. It’s — almost literally — the least they can do.

COMMENT

Argentina would like you to believe that this case has “enormous consequences” and “significant waterfall effects”, but the reality is far more prosaic.

The problem for the Kirchner regime is that their tactics and goals are incompatible with their bond agreements. The regime would like to simply walk away from its obligations to bondholders who were unwilling to accept the biggest “haircut” in history, but that doesn’t work when your bond agreements have strong pari passu language combined with a lack of collective action clauses (CACs).

The appellate panel is unlikely to be fooled by claims of Argentina and the assistant US attorney that the sky will fall if the panel upholds the district court. Virtually all New York-law governed sovereign bonds now contain CACs, and more importantly Argentina remains an aberration among sovereigns in dodging judgments that it has more than ample means to pay. The circumstances of this case will not be repeated.

The panel should also have no problem finding that Argentina breached its obligations. Years ago Argentina itself asserted that pari passu would be breached if a law was enacted to differentiate among creditors – and the regime then did exactly that.

Invoking the FSIA in this situation is the reddest of herrings. Argentina comprehensively waived immunity under its bond agreements, and US courts have well-recognized powers within the FSIA to order equitable relief. The specific performance ordered by Judge Griesa places no restraints upon Argentina’s assets, especially those outside his court’s jurisdiction. The FSIA does not grant immunities, it restricts them, and as Judge Raggi rightly observed, the lower court’s order has nothing to do with the FSIA’s limited immunities as to execution.

MrRFox and realist50 are undoubtedly correct that the order presents no special difficulties for BoNY. The great mystery of course is what Argentina will do, and its counsel declined to answer that question.

If a foreign sovereign enjoys the benefits of US capital markets but then disdains the judicial system on which they are built, should that sovereign still enjoy unencumbered use of the US payment system? Of course not.

Posted by anoldbanker | Report as abusive

Counterparties: Imposing pay cuts on unions

Ben Walsh
Jul 24, 2012 22:14 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

ArcelorMittal, US Steel and Caterpillar each want to push labor costs lower — and that might well mean pay cuts, even for unionized workers. It’s all part of a trend that even the most well-organized unions haven’t been able to alter: “Wage and salary income… has fallen steadily from close to 55% of GDP in the early 1970s to less than 45% today”, writes Edward Alden.

According to documents reviewed by the WSJ, ArcelorMittal is offering union workers a 36% pay cut and the elimination of retiree healthcare benefits for new workers. US Steel is likely pushing for cuts as well, although a similar specifics aren’t available. And Caterpillar is living up to its reputation for hard bargaining with labor, asking 780 workers to take a six-year pay and pension freeze.

In response, workers at Caterpillar went on strike. That, however, is a measure that has lost its former force:

Labor experts say that leverage has shifted to owners, who are increasingly willing to close unprofitable operations or bring in replacement workers… ”The strike is a weapon of the past,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass.

If that’s the case, Robert Bruno, a labor relations professor at the University of Illinois, wonders “how can you counter a powerful multinational in this economy?” Eduardo Porter thinks the answer to that question is to move beyond “organizing work site by work site… Instead of negotiating for their members only, unions might do better pulling for better wages and conditions for all workers”. Acting globally, as Felix has advocated before, would be a good start to implementing Porter’s idea. Unite Here appears to agree: The union is calling for a global boycott of Hyatt Hotels. – Ben Walsh

On to today’s links:

EU Mess
Mario Draghi’s secret weapon: the ECB’s “risk control framework” – Forbes
Geithner: Euro crisis has caused “huge, really remarkable levels of deprivation” – Charlie Rose
Moody’s downgrades German outlook to negative – WSJ

Politicking
The pointless debt ceiling standoff cost the US $1.3 billion – GAO

‘Liebor’
The Libor investigation now involves more than a dozen traders at nine banks – WSJ
Don’t look back: Barclays to formally review its “current” culture and practices – Reuters

Hackgate
Rebekah Brooks and Andy Coulson to be charged with phone hacking – Guardian

Terrible
Patients routinely abused at for-profit brain injury treatment center – Bloomberg

New Normal
The winners and losers of the last three years’ “global political obsession with austerity policies” – Huffington Post

Data Points
Women are “more than 1/2 of the work force in the financial industry but are chief executives at fewer than 3% of US financial companies” – NYT

JPMorgan
The strange price surges that inflated JPMorgan’s controversial trades – Bloomberg

Wonks
Tett: Welcome to the new age of “disaster economics” – FT

Oxpeckers
Effusive coverage of Kazakhstan, brought to you by Kazakhstan – The Atlantic

Odd Couples
Driving enthusiasts: surprising supporters of high-speed rail – Motor Trend

Adding Value
Most share buybacks haven’t “added much value for remaining shareholders” – Credit Suisse

 

COMMENT

MrFox, that kind of shows how much CS cares about its shareholders.

Posted by KenG_CA | Report as abusive

Jumping to conclusions, Malcom Gladwell edition

Felix Salmon
Jul 24, 2012 21:01 UTC

Back in 2009, when Andrew Ross Sorkin wrote Too Big To Fail, Moe Tkacik picked up on one particular anecdote: that Joe Gregory, who “loved being the in-house philosopher-king” at Lehman Brothers, was prone to handing out copies of Malcom Gladwell’s Blink to employees, and “had even hired the author to lecture employees on trusting their instincts when making difficult decisions”. Then Joe Weisenthal, reading Tkacik’s post, immediately reblogged it under the very TBI headline “GUILTY: Malcolm Gladwell Caused Lehman To Fail”.

Now, in a classic case of history repeating itself, we find a new book — this time Frank Partnoy’s Waitreprising the same Gladwell-Lehman story.* Indeed, it’s in some ways the whole reason that Wait was written. Here’s Partnoy talking to Smithsonian’s Megan Gambino:

What made you want to take a closer look at the timing of decisions?

I interviewed a number of former senior executives at Lehman Brothers and discovered a remarkable story. Lehman Brothers had arranged for a decision-making class in the fall of 2005 for its senior executives. It brought four dozen executives to the Palace Hotel on Madison Avenue and brought in leading decision researchers, including Max Bazerman from Harvard and Mahzarin Banaji, a well-known psychologist. For the capstone lecture, they brought in Malcolm Gladwell, who had just published Blink, a book that speaks to the benefits of making instantaneous decisions and that Gladwell sums up as “a book about those first two seconds.” Lehman’s president Joe Gregory embraced this notion of going with your gut and deciding quickly, and he passed copies of Blink out on the trading floor.

The executives took this class and then hurriedly marched back to their headquarters and proceeded to make the worst snap decisions in the history of financial markets. I wanted to explore what was wrong with that lesson and to create something that would be the course that Wall Street should have taken and hopefully will take.

This time, it was Andrew Sullivan filling the role formerly played by Joe Weisenthal. His headline in The Daily Beast: “Did Malcolm Gladwell Cause The Recession?”

After seeing this all play out twice, I thought it was maybe time to ask Malcom Gladwell whether he caused Lehman to fail. Alternatively, did he merely cause the greatest recession in living memory? He replied:

First, Blink was not a book about the benefits of making instantaneous decisions. It was a book examining the power of instantaneous decisions–and a good half of the book (the last half) is devoted to all the ways that snap judgements can go awry. (The last two chapters, for example, are about how gut reactions caused the Diallo shooting and how gut reactions resulted in women being discriminated against in orchestras). The talk I gave to Lehman was along those lines: it was a talk, arising out of the book, about the “fragility” of gut decisions–and about how if they are to be useful they have to be defended against bias and corruption. Of the many journalists who have reported on that talk, you are the first to actually ask me what I spoke about. The others, I suppose, just made an instantaneous decision about what I must have said.

Put aside the lesson about media memes, and what you have here is a classic case of arrogance trumping knowledge. Check out the wonderful Wikipedia list of cognitive biases, and you’ll find dozens of reasons why it’s quite possibly a very bad idea to trust your gut. But people like Joe Gregory, no matter how much they know about such things, and no matter how astutely they can recognize them in others, still insist that they are very good at overcoming such biases themselves.

In reality, of course, they’re not. If you make decisions quickly, you will make bad decisions a lot of the time, no matter how many times you read Gladwell’s book. Grown-ups think about important decisions, and take time over them. That’s certainly the lesson of Portnoy’s book. But, it turns out, that’s exactly what Gladwell told Lehman, too.

Update: Portnoy emails to clarify that the Gladwell-Lehman story is not actually in Wait, although he was indeed inspired by it. He also writes:

Your last paragraph is dead on.  I’ve always described WAIT as a “friendly amendment” to BLINK, though I guess it’s inevitable that some people will misread (or not read) my book in the same way some misread Gladwell’s.

COMMENT

I’m expecting to see a ‘Counterparties’ entry like this –

“Malcom Gladwell makes the (rookie) mistake of showing-up in a Felix Salmon thread – Reuters”

Posted by MrRFox | Report as abusive

Why Americans don’t have offshore bank accounts

Felix Salmon
Jul 24, 2012 14:40 UTC

Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar. His initial conceit is reminiscent of Dennis Berman’s attempts to set himself up as a pre-IPO Facebook investor, only without the deceit:

Earlier this month, I decided to see how hard it would be to set up my own offshore bank account. I figured it would be pretty difficult, because I’m not rich and don’t have a team of tax lawyers to oversee my money and because the E.U. and U.S. governments have been cracking down on tax havens by imposing stricter tax-sharing requirements.

You know how this is going to end: Davidson ends up concluding, in the first of his “deep thoughts this week”, that “it takes 10 minutes to open an offshore account”. But, by his own account, that isn’t really true. He did end up talking on the phone — surely for more than 10 minutes — to someone who said that in return for $1,500 or so, he could set up a Belizean company with a bank account in Singapore. It’s not at all clear whether Davidson actually ended up creating the Belizean company or its Singaporean bank account, although it is clear that in addition to the phone call, Davidson had to get notarized copies of his passport, driver’s license, “and some other identity documents”, and then email them to A&P Intertrust, a company in Canada.

More to the point, Davidson didn’t incur any of the really big expenses involved in setting up an offshore account, most of which come in the form of legal and accounting advice. As Davidson writes:

Setting up an account may be easy, but managing one is expensive. Following the law requires a team of lawyers and accountants to carefully monitor tax laws in dozens of countries and maintain accounts that stay on the safe side of confusing rules. It’s not really worth the cost for anyone other than wealthy investors looking to put aside money, tax-free, for future generations. Or for large multinationals who prefer to centralize their global cash-flow stream in a place that doesn’t tax corporations or require a lot of financial reporting. Why would a huge company like G.E. want to pay U.S. taxes every time its Spanish subsidiary sells parts to a company in Belarus when it could avoid them by incorporating offshore?

This is entirely true. If you’re a US citizen and you intend to spend your money in the US at some point, there’s very little reason to set up an offshore account. And even if you’re saving for your heirs, if they end up spending the money in the US, then they’ll probably have to pay full income tax on any money they bring in from overseas. What’s more, given demographic and fiscal realities, the income tax they pay might be significantly higher than it is today.

So why would Adam Davidson or anybody else ever want an offshore bank account? He cites laws saying that information about the owners of such accounts is not public and is would not be available even to the Belizean or Singaporean governments. And he talks about how difficult it would be for the IRS to investigate such arrangements. All of which is a polite way of saying that if you intend to break the law, there’s a good chance that you won’t get caught. (Although, tell that to the thousands of Americans who held money in Swiss accounts at UBS, and then saw their details handed over to the IRS.)

The IRS also doesn’t really need to be able to investigate all those bank accounts directly, most of the time: all they need to do is ask the account holder directly. If Adam Davidson were ever audited by the IRS, they would ask him for a list of all of his offshore accounts — and if he had any sense at all, he would give it to them.

While it’s true that people are more likely to break the law if they think they won’t get caught, there’s no way that changing US law is going to alter that. The attraction of offshore accounts isn’t a function of US law, really, so much as it’s a function of the fact that such accounts are opaque to US tax authorities. And it’s really hard for the US Congress to unilaterally pass a law which suddenly allows the IRS just as much access to an account in Singapore as they have to an account in Des Moines.

Still, they’re trying, with something called the Foreign Account Tax Compliance Act, which puts a lot of transparency responsibilities onto any foreign financial firm with American account holders. And weirdly, Davidson isn’t a fan of the act:

The move is very unpopular among foreign banks, governments and Americans living abroad, but the more complex rules could actually mean more business for offshore centers. By the time Fatca is in full force, in 2017, truly wealthy individuals and corporations will almost certainly have used their resources to find more intricate loopholes.

Instead, he says:

My colleagues at NPR’s “Planet Money” recently polled several economists of all political stripes and found that while they disagreed on the right level of taxation, they generally agreed that the overly complex taxation of rich people and corporations was disastrous. It all but guarantees that those people and companies will spend an inordinate amount of money figuring out how to game the system rather than come up with new ideas that improve the economy. Economists generally agree that the best tax system would be simple and strict, offering little incentive to lobby for loopholes. The big problem, of course, is that many of the people and corporations with the most influence over Congress don’t want it that way.

And this is where I get very confused, since it’s not at all clear what Davidson is calling for here. The third of Davidson’s “deep thoughts” is that “it would be better if the rules were simpler” — but how would it be better? By those lights, today’s rules are better than the rules which are going to be in force in 2017, just because they’re simpler. And it seems to me, at least when it comes to US individuals, that we already have a simple system. You have to pay taxes on your global income, including investment income, wherever those investments are in the world.

As a result, by all accounts, Americans have much less money in offshore bank accounts than citizens of most other countries. Reliable data on such things is impossible to come by, of course, but all of the numbers in Davidson’s piece are trying to measure a total amount in offshore centers, rather than the amount that can credibly be considered to be American in some way.

And while it’s true that American companies have a lot of money offshore, substantially all of those companies are multinational, and they would have to have many international bank accounts no matter what the rules said.

As far as US individuals are concerned, no one has yet demonstrated to me that there’s some kind of pandemic of rich people opening offshore accounts. In England, where I come from, it’s reasonably commonplace for individuals to have bank accounts in Jersey. And in Germany, likewise, lots of middle-class families keep money in Luxembourg or Liechtenstein. But in the US, by contrast, I see no day-to-day indication that offshore accounts are a remotely common tax-avoidance strategy.

Insofar as there is a problem, it seems to me, the problem is with tax collection and enforcement, rather than with the complexity of US tax legislation. Yes, the US tax code is ridiculously complex, and riddled with loopholes which ought to be abolished. But I think it’s actually pretty good when it comes to individuals’ offshore assets. And it’s only going to get better as Fatca comes in to force.

COMMENT

If you had 9500 in 10 different banks, the IRS wouldn’t ever know. Banks do not report under 10,000 even if they are under FATCAT rules.

Or.. just keep your 50,000 in a safe deposit box. Problem solved.

Posted by MarkDonners | Report as abusive
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