April 2007 Archives

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Giving Muckraking a Good Name

Don't worry, this blog isn't about to turn into Consumerist. (Not that that would be such a bad thing, necessarily.) But this footage of Chase leaving its customers' information – names, account numbers, social security numbers, loan applications, you name it – in the trash outside its Manhattan branches is just too scary not to share. It's not impartial: the video comes from Chase Trash, which is a blog run by the Service Employeees International Union. So treat with as much of a pinch of salt as you think it deserves. But I'm shaken by it, I must say.

(Via Gothamist)

Posted by Felix at 23:31 EST | Comments (0)

In Which I Envy Brad DeLong's Lunch

I always thought the center of the universe was the corner of Broadway and Houston, in Manhattan. I was wrong. If you're an economist, at least, the center of the universe would seem to have been found at the corner of College and Bancroft, in Berkeley, at noon Pacific Time today.

On the one hand, one aspires to being a part of lunchtime conversations such as this one; on the other hand, one would be so intimidated that one would probably be far too scared to even open one's mouth. Maybe there are reasons to study economics after all.

"So if Britain with its structural trade surpluses could run up net foreign assets equal to twenty months' GDP by 1913, could the U.S. run up a net foreign liability balance equal to twenty months' GDP by 2023?"
"By symmetry, that would mean that the rest of the world would have to play the role of pre-World War I Britain. Yes, it could happen."
"And somebody would have to play the role of pre-World War I Argentina. Would that be the U.S?"
"Usually in international finance the role of Argentina is played by Argentina."

Posted by Felix at 23:04 EST | Comments (0)

Will a Carbon Tax Reduce Developing-Country Emissions?

Greg Mankiw reckons he knows what Larry Summers's Big Idea is: a carbon tax. The two of them are old Harvard buddies, so I daresay Mankiw is right. I am a bit puzzled, though, given this, from Summers's column:

The most serious problem with the Kyoto framework is that it is unlikely to generate substantial changes in developing country policies. As my Indian hosts explained on a recent visit, developing country policymakers are not likely to accept binding targets on their energy use or greenhouse gas emissions that fall way short on a per-capita basis of emissions levels in the industrial world.
Nor is it reasonable to expect them on the basis of dubious projections of economic trends and future technological developments to commit to energy use goals that fall short of patterns observed in the rich countries.
The truth about climate change policy is that developing countries are where most of the future action has to be. They will account for 75 per cent of the increase in emissions over the next quarter century and are now making the infrastructure investments that will shape their future economies.

A carbon tax is a hard enough sell when it's one country implementing it; an international carbon tax would be a political non-starter. So how does Summers reckon that a carbon tax would "generate substantial changes in developing country policies"? I guess we'll just have to wait and see.

Posted by Felix at 19:59 EST | Comments (0)

David Lereah, Not Quite RIP

So, farewell then, David Lereah.
"Why the Real Estate Boom Will Not Bust".
That was your book.
"Dow 36,000" was another.
Sorry, that was James Glassman.

In an ideal world, the National Association of Realtors (NAR) would have kicked its chief economist overboard for losing all credibility with anybody. In reality, I think that he's actually taking a step up in the world: he's becoming "chairman and partner" of an unspecified new enterprise being started by NAR partner Move Inc.

There's never any justice.

(Via)

Posted by Felix at 18:44 EST | Comments (0)

Finance Ministry vs Central Bank

Central bank independence is all well and good. But even if a finance minister has no control over his country's central bank whatsoever, it's still shocking to see him criticize the central bankers in public. Especially when the finance minister in question is Agustín Carstens, minister of economy in Mexico and former deputy managing director of the IMF.

Carstens has come out and said that Banxico's rate hike last week was premature – something which might well be true, but which is hardly going to reassure foreign investors that Mexico's fiscal-policy authorities are working hand-in-glove with its monetary-policy authorities.

Carstens is a very good economist, and a very powerful man, but he, like David Bonderman, might benefit from some PR coaching. Bob Rubin never criticized Alan Greenspan, and Hank Paulson would never criticize Ben Bernanke – not in public. This is exactly the same.

Posted by Felix at 17:52 EST | Comments (0)

Carlyle Group Tops Private Equity Table

Did you know there was a magazine called Private Equity International? Of course there is, and of course it's making headlines with that favorite trope of all magazines: a list. Of the world 50 largest private-equity companies. And the winner is... Carlyle Group! Applause, please for David Rubenstein and his co-founders: finally they've managed to overtake Kohlberg Kravis Roberts, at least by one metric.

I like the metric, actually: total funds raised over the past five years. Keeps people on their toes, doesn't let them coast along on money raised back in the 1980s. But really its's a four-way tie for first place, with Goldman Sachs and Blackstone Group joining the list of shops who've raised $30 billion, give or take, since 2002.

Just remember, on a 2-and-20 basis, $30 billion of assets under management gives you $600 million a year before you make a single penny in profit. If you return 40% a year, as some of these shops do, then your income rises to $3 billion. Per year. Mostly taxed at the 15% capital gains rate. Nice work if you can get it.

Posted by Felix at 17:16 EST | Comments (0)

Ken Griffin vs John D Rockefeller

I'm not sure what to make of Andrew Samwick's defense of Kenneth Griffin, against the deprecations of Paul Krugman. Krugman's point is that Griffin makes more, as a multiple of average earnings, than even John D Rockefeller made in 1894. Samwick's defense is that Griffin is not a monopolist, and is "confident, contrarian, and accurate". He concludes:

I spend a lot of time around college students. I spend a lot of my energy trying to get them to display those three characteristics. Krugman seems to think that one "Kenneth Griffin" is overvalued at 4.5 "John D. Rockefellers." On the contrary, I think it's a buy.

I'm not sure that Krugman considers Griffin overvalued, per se. It's just that if you're making over a billion dollars a year, you can certainly afford to pay more in the way of taxes than someone scraping by on a few hundred thousand. In reality, however, Griffin pays less in taxes than the upper-middle classes, not more. In other words, the question isn't how smart or valuable Griffin is – it's whether society has any interest in him keeping more of his income than people much poorer than himself.

I'd also like to point out that if you compare the net worth of Griffin and Rockefeller, I daresay that Rockefeller would still come out comfortably on top. Income is a lot, but it isn't everything.

Posted by Felix at 12:58 EST | Comments (0)

BofA Threatens to Sue ABN for Three Gazillion Dollars

If Barclays' John Varley does end up winning ABN Amro, he won't be able to say that he won the bank fair and square. His poison pill just got even more poisonous: Patrick Hosking in London reports today that Bank of America will sue ABN Amro for $220 billion if it doesn't get Chicago's LaSalle bank.

Of course, that number is so huge as to be meaningless, although Dana Cimilluca helpfully tells us it's "the equivalent of the gross domestic product of Greece". Has BofA hired Roy Pearson as a lawyer?

Posted by Felix at 11:35 EST | Comments (0)

Rereading Swiss Profits in Dollar Terms

Even as US banks are making record profits, the Big Two Swiss banks, UBS and Credit Suisse, seem to be headed for more lackluster results:

Analysts expect net profit at UBS to drop by 3 percent to 3.4 billion Swiss francs ($2.82 billion), and for Credit Suisse also to clock in 3 percent weaker at 2.5 billion francs.

Before you rush to sell, however, remember what the dollar has done over that time. At the beginning of April 2006, a Swiss franc was worth 76.9 cents. At the beginning of April 2007, the same Swiss franc was worth 82.3 cents.

Let's say that UBS profits fall from 3.5 billion Swiss francs in the first quarter of 2006, to 3.4 billion Swiss francs in the first quarter of 2007. Converting into dollars, that's $2.69 billion a year ago, and $2.80 billion today. An increase of 4%, as opposed to a decrease of 3%. So it all comes down to what currency you're using.

Posted by Felix at 11:11 EST | Comments (0)

Larry Summers on Cap-and-Trade

Larry Summers has problems with a cap-and-trade approach to reducing carbon emissions. He leaves us dangling with a promise that next month (his FT column comes out monthly) he will reveal a better alternative. But without knowing what that better alternative is, it's worth looking at his reasons for mistrusting a cap-and-trade approach.

1. A cap-and-trade approach, while binding in theory, might not be in practice.
   This is a danger, but I'm not too worried about it. Summers uses the example of the Maastricht Treaty, which broke down when it became obvious that some countries wouldn't meet the targets. But in the case of Maastricht, there wasn't a strong constituency which would lose a lot of money if the targets were allowed to lapse. A cap-and-trade system creates a whole infrastructure of exchanges and traders who are financially invested in those caps – not to mention the polluters who spend a lot of money on buying emissions rights, or who make a lot of money by cutting their emissions and selling their rights. Once that infrastructure is in place, there will be huge pressure to make sure the caps stay in place, not only from environmentally-aware voters, but also from large companies.
2. "The limited impact of Kyoto is evinced by the fact that carbon permits are now selling in the range of a negligible one euro a ton."
   It might be true that Kyoto has had a limited impact: this is reason to expand it. But it's emphatically not the case that low carbon prices are a sign that Kyoto isn't working. To the contrary, low carbon prices are what you would expect if carbon caps worked very well, and people found cheap and effective ways to reduce their carbon emissions. The reason that carbon prices are low in Europe today is because a lot of coal-fired plants went offline much more quickly than people had expected. That's good news. Carbon permits further in the future are much more expensive. Things are generally working as one would hope and expect, and what errors have been made in the past, surrounding estimates of existing pollution levels, can be fixed in the future.
3. "Carbon markets are invitations to engage in pork-barrel corporate subsidy politics on a massive scale."
   A common criticism, but a false one. If I'm a big polluter and I get allocated a hugely valuable store of emission rights, how am I supposed to be able to monetize those rights? The only way to do so is by stopping polluting – basically, I'd have to close down my plant. What Summers fails to realize here is that the assets that get handed out under a cap-and-trade scheme are offset by even bigger liabilities: no one gets more emission rights than they actually pollute. Under cap-and-trade, everybody starts off "short", even if the rights are allocated rather than auctioned.
4. "While in principle emission permits could be auctioned, in practice they are always allocated administratively."
   We're in the very, very early days of cap-and-trade: this kind of generalization is impossible to make with a straight face.
5. "The clean development mechanism has resulted in substantial payments for emissions reductions that would have occurred anyway or could have been achieved at negligible cost. There is even reason to think that certain industrial gas emissions may have been increased so that credit could be claimed for their abatement."
   I haven't heard the latter claim: I'd like to see Summers's evidence for it. But certainly a cap-and-trade scheme can and should be refined in order to give credits to early adopters, and to make it hard to game the system. On the other hand, the whole point of the cap-and-trade scheme is that it incentivizes people to do low-cost emissions reductions. If it achieves that, then so much the better.
6. "The most serious problem with the Kyoto framework is that it is unlikely to generate substantial changes in developing country policies... The truth about climate change policy is that developing countries are where most of the future action has to be."
   What's certain is that developing countries won't do anything unless and until the developed countries take the lead on this issue. What's more, a good global system of offsets, where developed-country polluters can claim credit for emissions reductions in the developing world, would solve some if not all of these problems. In any case, unless Summers can reveal next month a scheme which the developing world is sure to sign on to (probability: 0%), it's surely a good idea to get moving now where at least it's possible to make a start on these issues.

I do look forward to what Summers proposes next month, although it can't be a good sign that he admits at the outset that emissions reductions will be lower under his scheme, at least in the short term, than they would be under a cap-and-trade system. As a general rule, I think it's a good idea to do as much as we can, as soon as we can. "It won't solve everything, therefore we shouldn't do anything" is just a silly argument.

Posted by Felix at 10:37 EST | Comments (0)

Apple Needs Principles

Joe Nocera today is "Weighing Jobs's Role in a Scandal". (The column is behind the NYT firewall, sorry.) He goes into a lot of detail about the history of the executive compensation of Steve Jobs, although he doesn't mention the fact that, in hindsight, the decisions that Jobs made ended up costing him a couple of billion dollars. I know, your heart bleeds.

Nocera dwells on the fact that Jobs is ultimately responsible for the backdating that went on at Apple, yet will probably get away with it – unlike his former CFO, Fred Anderson, who recently settled with the SEC for $3.5 million.

With all the finger-pointing, it is difficult to parse whether Mr. Anderson, a wealthy, widely respected figure in Silicon Valley, did something deserving of government sanction. What is clear, however, is that Mr. Jobs does not deserve the free ride he’s been getting from the Apple board, the company’s investors and government regulators.
I am not saying Mr. Jobs committed a crime. What I am saying is that it is pretty obvious by now that he was extremely involved in both of the options grants that have become such problems.

Once again, we run into the problem with a rules-based rather than a principles-based approach to regulation. Because any rules violation must be punished, Fred Anderson ends up having to cough up $3.5 million, basically for succumbing to the famous Steve Jobs Reality Distortion Field. Meanwhile, because no one can work out what kind of rule Jobs broke, he's considered to be getting a "free ride".

Under a more sensible principles-based approach, the SEC would be charged not with punishing problems but with solving them. It could crack down hard on people who deliberately backdated options in order to maximize their own remuneration while minimizing their tax bill – something which happened a lot. It could crack down less hard on companies like Apple, where the backdating by all accounts seems to be much more of a case of cock-up than conspiracy. And it could crack down a little bit on individuals such as Steve Jobs, who, even if he didn't do anything illegal, did show a disregard for the proprieties of running a publicly-traded corporation.

Posted by Felix at 17:09 EST | Comments (0)

John Adams at Carnegie Hall

Last night was great: Michelle and I went to an ACO celebration of John Adams's 60th birthday at Carnegie Hall, with the composer conducting three of his own works. The second half was a positively blistering and wonderful performance with Leila Josefowicz of the Violin Concerto – that girl can play! Tickets were cheap, for Carnegie: they ranged from $16 to $43, and our seats right in the front row (once a Prommer...) were $35 apiece.

And yet the hall was far, far from being sold out, the presence of a lot of the composer's friends notwithstanding. I don't think this is a problem with Adams, or with contemporary music; I do think it's a problem with Carnegie Hall. I get lots of mail from them telling me what's happening in May 2008, and there are lots of concerts coming up which look great but which don't go on sale for months. (Unless you buy a subscription.) But when individual tickets do go on sale, Carnegie never seems to let me know.

Posted by Felix at 12:59 EST | Comments (1)

More Eye-Popping Executive Compensation

Here's one for the executive-compensation annals. I know you're getting bored of the subject, but bear with me here. This time, the company is Rocky Mountain Fudge, and the easily-overlooked SEC filing is its 8K, filed on April 16. The president and CEO who's resigning "for personal reasons" is Ronald Moulton. But he's not exactly retiring: he's staying on as a "consultant". You want the juicy details?

Ronald Moulton’s agreement is for a term of three years and will be automatically renewed for an additional three years, unless otherwise terminated by Mr. Moulton or the company by giving 15 days written notice prior to the renewal date. Mr. Moulton will provide consulting services related to the production and marketing of our products and will act as an advisor to our management. Mr. Moulton will be compensated at the rate of $20.00 per hour for his services and be reimbursed for expenses related to his services.

Yep, you read that right. $20 per hour. That and a gold star from Michelle Leder.

Posted by Felix at 17:56 EST | Comments (0)

Hedge Fund Managers Aren't Hated For Their Money

Politics of envy? What politics of envy?

As Andrew Leonard notes today, both John Edwards and Hillary Clinton were given the softest of softballs last night, when asked about hedge funds in the Democratic debate.

Edwards completely flubbed the answer ("You know, I've been all over the country, organizing workers into unions and raising the minimum wage, and also working at a poverty center at the University of North Carolina"), and Clinton wasn't much better ("What we've got to do here is get back to having a Democratic president who will set the rules, so that we can continue to build our economy, we can inspire and incentivize people to take those risks, but we begin to repair the damage that has been done by this president and Republican Congress.")

Meanwhile, the likes of Marc Lasry, a hedge fund manager who himself says that he makes an "obscene" amount of money, seem to think that hedge funds have an "image problem". Reports DealBook:

It’s easy for regulation-minded politicians to make their case by simply ticking off numbers. Just this week, Institutional Investor’s Alpha Magazine estimated that three hedge fund managers — James H. Simons of Renaissance Capital, Kenneth C. Griffin of Citadel Investment Group and ESL’s Edward S. Lampert — surpassed $1 billion in earnings last year.

Evidently, it really isn't easy for politicians to make that case. As Matt Cooper points out, presidential candidates might be something of a special case, since they're going to be trying to raise a lot of money from hedge-fund managers. But even so, the vast majority of the impetus behind calls for hedge-fund regulation is coming from dry-minded technocrats like Tim Geithner, and not from tub-thumping populist politicians.

There are good reasons to regulate hedge funds, and there are also good reasons not to. Up until now, the debate has remained at a high level, where it belongs. But any complaints from hedge-fund managers about the politics of envy risk turning into self-fulfilling prophecies. As we've seen, there's no sign of such rhetoric thus far.

Posted by Felix at 17:43 EST | Comments (0)

RBS Goes Hostile

It was inevitable, really. Fred Goodwin's RBS has now announced that it is going to make a hostile takeover bid for ABN Amro, in concert with its partners Fortis and Santander. ABN was clearly never negotiating in good faith with Goodwin's group, so now he's going straight to the shareholders, 68% of whom, at ABN's annual meeting, voted in favor of a motion implicitly siding with the Scots.

Off the top of my head, I can't think of any other banker who's ever made a major hostile takeover bid: Goodwin does seem to be made of stern stuff. The battle lines are now drawn: Goodwin and ABN's shareholders, on the one hand, versus ABN CEO Rijkman Groenink and Barclays CEO John Varley, on the other. Where ABN's unions and the Dutch central bank come down is likely to be crucial.

Posted by Felix at 16:25 EST | Comments (0)

When Analysts Don't Talk to Management

Roddy Boyd has news today of an analyst at Banc of America Securities, Frank Pinkerton, who dares to rate companies without meeting with corporate management.

Boyd's take seems to be that this is a cost-cutting measure: BofA gets to rate more companies since its analysts aren't tied up in meetings. And it's probably the case that, ceteris paribus, an analyst who doesn't talk to management adds less value than an analyst who does talk to management.

But it's also worth asking who these analysts are really serving. Boyd talks to one money manager and one hedge fund manager, neither of whom think much of what Pinkerton is doing. But my guess is that neither of them would pay much attention to Pinkerton's research even if he did talk to management. Rather, Pinkerton's research is likely to get read much more by BofA's individual retail clients – the kind of people for whom his market knowledge and expertise has a lot of value when it's applied on a stock-by-stock basis like this.

Money managers have been complaining for years that they don't get much value out of sell-side research. There are two responses to this: the posher sell-side banks, without a retail network, are cutting back on their printed research and getting their analysts to spend more time on the phone, one-on-one, with important clients. Meanwhile, the second-tier firms, like BofA, will start targeting their research much more at their retail clients. Both responses make sense.

Posted by Felix at 14:52 EST | Comments (0)

Everyone's a Currency Strategist Now

Investing used to be so easy. You'd find an asset class you liked, and buy it, and then, if you were right, it would go up, and you'd make money.

Not any longer. The problem is that the hot attractive asset class, it would seem, is now foreign stocks. The $2.1 billion Waddell Advisors Asset Strategy Fund, for instance, has just 25 percent of its holdings in US equities.

If you're a dollar investor who's bought foreign stocks over the past couple of years, you're smiling right now. Not only have those stocks increased in value in local-currency terms, but the dollar has weakened at the same time, turbo-charging your returns.

The problem is that you're not only a stock picker any more: you're layering FX risk on top of stock-price risk. When both move in your direction, as has been the case of late, you're happy. But now you have two ways of losing money, not just one: either your foreign stocks can go down in value, or the dollar can go up in value. Investing is a more dangerous game, these days.

Posted by Felix at 12:02 EST | Comments (0)

The Beginning of the End of Imported Bottled Water

One of the ironies of the Milken conference was that in front of dozens of panelists talking about climate change and the need to reduce our carbon emissions were prominently-displayed bottles of Fiji water, one of the conference's sponsors. Fiji water, of course, is an environmental absurdity, one liter of which, according to Pablo Päster, "consumes nearly 27 liters of water, nearly a kilogram of fossil fuels, and generates more than a pound of carbon dioxide emissions".

So it's good news that, as Dan Gross reports in Slate, high-end Californian restaurants are now making their own water, rather than offering foreign brands. Doing so is not only more environmentally friendly, and much cheaper, it also means much purer water. Spring water stored in plastic bottles, such as Fiji, will see rises in the concentration of DEHP, an endocrine-disrupting phthalate and a probable human carcinogen. Which isn't necessarily unsafe, but is still something to think about.

If this development catches on, it might be bad for the bottled-water manufacturers and distributors, but it will be good for people making reverse-osmosis charcoal filtering systems and the like. Imported bottled water was always a silly trend, and it will be good to see the end of it.

Posted by Felix at 11:28 EST | Comments (0)

The End of Balanced Budgets

Briefly, during the Clinton-Rubin years, politicians not only talked about balancing the budget; they also actually did it. Those days are now over. No Republican president has shown any inclination whatsoever towards balanced budgets: the allure of further tax cuts is always too great. And now the consensus among Democrats, too, is very much that balancing the budget is overrated.

Paul Krugman had an influential column last December in which he said that, for political rather than economic reasons, the Democrats shouldn't bother balancing the budget. Now, a series of economists is coming out and saying that even in economic terms balancing the budget involves more costs than benefits. Mark Thoma cites Bradford Plumer in The New Republic quoting Joe Stiglitz as saying that it's OK to raise deficits if you're spending money on worthwhile causes such as climate change. Thoma agrees:

The benefits from using tax dollars for things such as health care, infrastructure, or other important objectives provides benefits that exceed the costs from increasing taxes, including any reduction in output. Thus, when the economy is in a state where there are highly beneficial government projects waiting in the wings and taxes that can be increased without causing substantial costs, i.e. if the benefits exceed the costs, then deficits should not be an obstacle to putting those projects in place.

Kash Mansori is almost convinced, although he does wonder whether there might be a causal connection between high structural budget deficits, on the one hand, and low investment spending by US businesses, on the other. Companies are returning money to shareholders now because they don't know what kind of tax rates might apply in the future: after all, borrowing money is essentially the same thing as raising future taxes.

Still, budget deficits are here to stay, it would seem. George W Bush is likely to end up spending the best part of a trillion dollars on the Iraq war, all told, without much if any visible negative effects on the economy. So spending, per se, isn't the problem.

Posted by Felix at 11:00 EST | Comments (0)

Macro News Doesn't Always Move Markets

Further adventures in intraday stock-market reporting: the AP has a story this morning headlined "Stocks Fall After Weak GDP Report". The second graf gives us the GDP figure: +1.3%, which is indeed weak. And then the fifth graf gives us the stock-market reaction:

The Dow Jones industrial average fell 5.37, or 0.04 percent, to 13,099.81. The Dow surpassed 13,000 for the first time Wednesday and eked out another gain Thursday that nudged it to its 36th record close since October.

If the Dow had risen by 0.04%, would the headline say "Stocks Rise After Weak GDP Report"?

Posted by Felix at 10:28 EST | Comments (0)

Self-Defeating Industries

Andrew Samwick has a great post up explaining why trucking companies should welcome a $21 congestion charge in Manhattan:

Clayton Boyce, a spokesman for the American Trucking Association, a national industry group, told The Associated Press, “It will be a real problem for operations for trucking companies and shippers, including all the retailers in Manhattan, which is substantial.”
“And all the people who get FedEx and UPS deliveries will have problems and will bear extra expense, so we definitely see problems with it,” he said.
It's time to give Mr. Boyce a refresher course in microeconomics. Start by considering what his answer might have been last week to the question, "What is the biggest problem your industry faces in providing excellent service to lower Manhattan?" Based on what I've seen on those streets, my answer would have been "congestion." So the mayor has proposed to tax the thing that has been encumbering the trucking industry, and its spokesman is complaining because his clients will need to pay the tax in proportion to the congestion they cause.
Think of it by the numbers. How many packages are on the typical FedEx truck in Manhattan? If it were 210, then the extra expense would be a dime per package. That's trivial. How does $21 compare to the total value of each truck's cargo in a given day? It has to be tiny. And look at what the FedEx truck drivers get in return--fewer passenger cars clogging up the city streets where they need to make pickups and deliveries. They waste less time and less gas. It doesn't take much abatement of that wasted time and gas to make back the $21 per truck. The trucking industry should be this proposal's biggest supporters.

Should be, yes. But won't be. I'm reminded of something Burton Richter said at the Milken conference:

Our auto industry in the US has been on a suicide course for many yars. They resist new technology. We have to push the US auto industry into doing the right thing, because I don't believe they're going to do it on their own.

Sometimes, industries do behave in a manner which fails to maximize their own profits, even when doing so would have other, ancillary benefits as well. When that happens, a bit of government regulation can go quite a long way.

Posted by Felix at 14:59 EST | Comments (0)

Why a Carbon Tax Can't Replicate a Cap-and-Trade System

Greg Mankiw, one of the leading proponents of a carbon tax, claims to be agnostic about the carbon tax vs cap-and-trade debate, at least if carbon credits under a cap-and-trade system were auctioned rather than freely allocated:

Of course, selling emission allowances under a cap-and-trade system makes the system equivalent to a comparably-sized Pigovian tax.

Mankiw is surely wrong here: the "of course" guarantees that, even if he's right on substance. It's conceivable that an auction-based cap-and-trade system might end up being equivalent to a comparably-sized carbon tax. But it's hard to know that ex ante, and it's certainly not obvious.

The biggest difference, of course, is that even if government revenues are the same under both systems, total carbon emissions are not. In a cap-and-trade system, emissions are capped. That's the whole point. (And it's why "safety valves" are a very bad idea.) There's no cap on emissions under a carbon-tax system.

Also worth reading, in Mankiw's comments, a case for why a cap-and-trade system actually involves less bureaucracy and overhead than a carbon tax:

You've yet to establish that a system that requires bureaurcracy, invoicing, billing, and payment processing every year (and all run by the federal government) is as cheap as a system that only requires costs when caps are transacted or people are looking for caps to purchase (whether you choose the initial purchase or not), all run by the private sector.
I also happen to suspect that you could make a case for lower enforcement costs under caps too (if random checks are feasible) versus a system where you must measure *every single participant* to bill them correctly.

Posted by Felix at 14:31 EST | Comments (0)

Auto Datapoint of the Day

Value of Harman International Industries Inc., which makes car-stereo systems: $8 billion.

Value of Ford Motor Co., which makes cars: $15 billion.

Posted by Felix at 13:42 EST | Comments (0)

Dow 13,000. Yawn.

Should one be angered or simply amused by all the coverage of the Dow 13,000 "milestone", less than two months after the market "crashed"? (That was Tuesday, February 27, in case you've forgotten.)

Every time something like this happens, cynical hacks like myself start pointing out that intraday market movements don't matter. We make ourselves feel better by venting about how the Dow is an index, not an average; about how the move from 12,000 to 13,000 is only a move of 8.3%; about how the stock market is not a particularly useful proxy for overall economic health or anything else; and so on and so forth. But of course we're preaching to the converted, and the great mass of news consumers continues to cheer on the stock market like it's some kind of sporting event.

Maybe the problem is that I don't own enough stocks. If I had some skin in the game, I'd care more, right? So, can somebody give me some Dow or S&P 500 index funds as a birthday present? I'll treasure them, I promise!

Posted by Felix at 13:30 EST | Comments (0)

Milken Conference Post-Mortem

Three days is definitely the maximum length of time that anyone can fully engage with a high-intensity conference such as the Milken shindig which finished yesterday. I'm about to get on a plane back to New York, so blogging will be light today. But I do think it's worth taking a step back and looking at the conference as a whole, rather than, say, the potential for converting carbon dioxide into methanol. (Although if someone can point me to a link explaining how that process could work in practice, in terms a non-chemist can understand, I'd be very grateful.)

The Milken conference is probably unparalleled outside Davos for the ability it affords to observe in their natural habitat the market movers after whom this blog is named. It's on the record, but it doesn't feel on-the-record, which is a great credit to the organizers. As a result, people do commit news, partly on purpose but also just by dint of how they answer questions.

There's an interesting tension at the conference: on the one hand, filled as it is with financiers and billionaires, it does tend to lean right. On the other hand, it focuses on liberal causes such as poverty alleviation, primary education, and global climate change. The tension is nearly always resolved in the same way: the best way to address all of these issues, it would seem, is by using market forces and financial innovation.

I think that rich liberals find it very easy to adopt such a stance – there's no need to feel guilty about one's wealth if wealth creation itself is an important tool in poverty reduction and whatnot. So it can be refreshing to see unreconstructed right-wingers like Roger Ailes and Steve Forbes call bullshit on some of the rote liberal pieties. On the other hand, it can also be depressing to see an audience of thousands clearly siding with Bill Frist rather than Arianna Huffington on the subject of whether the US government should be allowed to negotiate the price it pays for prescription drugs. Arianna has the stronger argument, but Frist has a trump card: private sector good, public sector bad. And that plays very well in an audience of capitalists.

Alphaville picks up on the same feeling, reporting from the private equity panel:

Turning to the tax treatment of buyout groups, [David Rubenstein, of the Carlyle Group] sounded a rather menacing note. Responding to the fact that Congress is examining whether to hike the tax rate applied to carried interest, he declared:
“Every partnership in the US is governed by the same capital gains tax rules…If Congress tries to carve us out and tax us differently I think we will have people doing things that aren’t very desirable.”
Whatever can he mean?

What he means is, quite simply, "I don't want to pay higher taxes". And that's a sentiment which goes down very well here.

Posted by Felix at 13:09 EST | Comments (0)

When Banks Move Headquarters

If Barclays ends up losing ABN Amro to the consortium headed by RBS, one thing that CEO John Varley might be quite happy about will be the prospect of not having to move to Amsterdam.

Amsterdam is a pleasant city, to be sure – but it's hardly the center of the financial universe. London is.

London's only rival as a financial capital is New York. But just as Barclays is saying that it wants to move to Amsterdam, JP Morgan Chase is claiming that it might consider moving to Stamford. OK, the distance from London to Amsterdam – 221 miles – is bigger than the distance from New York to Stamford, which is just 32 miles. But at least Amsterdam is home to some big banks. There are big banks with presences in Stamford, but none with headquarters there.

I'm skeptical that JP Morgan is really serious about this whole Stamford thing – for one thing, I certainly wouldn't want to be the person charged with telling David Rockefeller the news. Really, it's just an attempt to squeeze tax breaks out of the city and state of New York, which is a bit cheap considering the amount of money that JP Morgan is making these days.

The real story here is that Chase wants the same kind of deal that Goldman Sachs got to build its new headquarters on West Street. But that wasn't the result of Goldman being underhand, it was the result of utter incompetence on the part of George Pataki, who vetoed Goldman's plans before changing his mind. That kind of thing tends only to happen once.

Posted by Felix at 19:53 EST | Comments (0)

Subprime Mess: Small, by Dot-Com Standards

Quote of the day comes from Mike Milken, comparing the magnitude of the subprime mess to that of the dot-com crash:

Intel stock went down $100 billion in one day. If this is a $200 billion problem, it's not all that big, especially considering how much bigger the markets are now than they were in 2000.

It's a point worth remembering. The total amount of subprime originations in 2006 was $421 billion. Even if 20% of them get into trouble, that's only $85 billion or so. Add in a few more from 2005, and some Alt-A and prime mortgages on top, and you still have a number which is akin to the amount that a single company can fall in value on the stock market in a single day.

Posted by Felix at 19:30 EST | Comments (0)

Return of the Mac

Apple came out with some spectacular results today, which must help mitigate the pain that CEO Steve Jobs still feels from the backdating charges against his former employees.

The results came as a surprise to me, because nothing much new happened, Apple-wise, this quarter. Sure, it announced the long-awaited iPhone, but hasn't made any money off it yet. And iPod sales have finally reached some kind of plateau, now that everybody has one and that most of the growth in sales is coming at the low, Shuffle, end.

But none of that mattered, it would seem, because salvation came from a most surprising source – the Mac. Macs have been something of an afterthought in many analysts' minds of late, but they're surging ahead now, and accounted for 56% of total quarterly revenue, with sales up 36% year-on-year. More impressive still, Mac notebook sales were up 79% year-on-year: we'll probably have to wait for Leopard, the new version of Apple's operating system, before we see a big spike in desktop sales.

There was also 79% year-on-year growth in Macs sold in Apple stores, most of which were sold to people who'd never bought a Mac before.

If iPods have market saturation, Macs still have a minuscule market share and could grow that substantially. Vista has generally been considered a disappointment, and Leopard, when it does get released, might well come with all manner of clever touch-screen technologies along the lines of those seen on the iPhone. There's lots of excitement surrounding the phone, of course. But I think the Mac could turn out to be just as big a story.

Posted by Felix at 19:11 EST | Comments (0)

How To Monetize Your Brands

Over the past 20 years, the value of the stock market has soared, even as the assets of its compenent companies have grown much less quickly. If you work in the intellectual-property world, this is something you see in a different way: you see that as much as 80% of the value of the S&P 500 is made up of something known as "intangible assets", such as patents, brands, copyrights, trademarks, and the like.

Now the problem is that it's all but impossible to put a dollar value on these intangible assets. You can put a dollar value on tangible assets, and then subtract tangible assets from total enterprise value to get the value of intangible assets. But if you walk into a bank brandishing a trademark or a patent, you're not going to find it very easy to take out a loan against it.

Slowly, that's changing. At a panel today I learned about this fascinating story in BusinessWeek, talking about the financial engineering going on deep in the bowels of Sears. (By the way, does anybody know how to find a byline on a BusinessWeek story? I'd love to credit the author.) Sears is owned by financier extraordinaire Eddie Lampert, and he's done something rather interesting: he's transferred ownership of the brands Kenmore, Craftsman, and DieHard to a Sears subsidiary in the Bahamas. Sears then pays its subsidiary royalty fees to license those brands. And the subsidiary, in turn, has securitized those royalty fees, creating $1.8 billion in bonds. The only thing which hasn't happened – yet – is the actual public sale of the bonds, which still reside deep in the Sears accounting empire.

All of this looks for all the world like money going around in circles. But in fact it's much more profound than that, because Moody's rated the bonds – and it gave them an investment-grade rating of Baa2, four notches better than Sears' junk rating of Ba1.

It's worth noting that bondholders have no right to the intellectual property in question: they have a right only to an income stream from Sears, which you might think would be rated the same as any other income stream from Sears. But evidently Moody's determined that a company will nearly always pay for the right to use its brands, even if it has defaulted on its own bondholders.

We're at the beginning, it would seem, of a world where companies can begin to unlock the value in their brands. At the moment, if you want to buy Coca-Cola the brand, say, the only way you can do that is by buying Coca-Cola the company. Eddie Lampert, as well as the people behind the new Intellectual Asset Finance Society, would like to change that.

Posted by Felix at 18:24 EST | Comments (0)

Cap-and-Trade: Can it Work for Water Rights?

If a cap-and-trade system works for sulfur and for carbon, it should be able to work for water, too.

Here in California, as everybody knows, there is a serious water shortage – and, at the same time, there's a huge amount of water-intensive agriculture. Recently, I went on holiday with a woman who grows rice, of all things, in California. The amount of water involved is crazy, and not only because of the amount it takes to grow the rice in the first place. Because of California's clean-air laws, you can't burn off the stubble once you've harvested the rice each season. So what do the rice farmers do? They drown it in water, and wait for it to rot.

Richard Sandor, at a panel on financial innovation today, gave another example of wastefulness, this time from New Mexico: alfalfa farming, which uses hundreds of acre feet of water to create $250,000 of alfalfa. (One acre foot of water is roughly the annual water consumption of the average US household.) Meanwhile, in Albuquerque, there's an Intel factory which uses the same amount of water and creates hundreds of millions of dollars in payroll alone.

The arbitrage is obvious. Alfalfa farming is subsidised directly; it's also subsidized indirectly through the natural gas which is used to dry it. And then, on top of all that, it uses up ridiculous amounts of valuable water. It would be better for all concerned, including the alfalfa farmers, if they could simply trade their water-usage rights on an open market, to people who value water at much more than a few dollars per acre foot.

Posted by Felix at 14:31 EST | Comments (0)

RBS-ABN-Barclays: Things Get Complicated

Hostile takeover bids are all but unheard-of in the baking industry. But RBS's hostile bid for ABN Amro is not only impressive for its rarity, it's also impressive for its sheer complexity.

For one thing, there are three banks bidding: RBS, Santander, and Fortis. For another thing, they've said that they're going to be able to come up with $50 billion in cash – and it's far from obvious how they're going to be able to raise that kind of money.

And then there's the whole added complication of the BofA bid for LaSalle. The bid does have a go-shop provision, which means that RBS can simply try to outbid BofA for the US bank. But RBS has said that it's not interested in just buying LaSalle; it's interested in all of ABN Amro. And there's the rub, since it's far from clear that the LaSalle sale can be called off unless there's a higher bid for that particular unit.

RBS doesn't want to break its bid up into a bid for LaSalle on the one hand, and a bid for the rest of ABN Amro, on the other. Why? Because an RBS bid for LaSalle would actually increase the value of Barclays' bid for ABN Amro, much of which is essentially being funded through the sale of LaSalle. By bidding for LaSalle, RBS would be handing ammunition to its competitor.

RBS CEO Fred Goodwin is one of the few individuals who has been through a bidding war for a bank in the past, when he bought England's NatWest. This deal is much bigger, and much more complex. But if anybody can navigate the complexities, Goodwin probably can. ABN Amro's shareholders will be cheering him on.

Posted by Felix at 14:11 EST | Comments (0)

Private Equity Quotables

A few quotes from the private equity panel:

David Rubenstein, of Carlyle Group:

"If you're a top quartile large buyout fund, you're doing better than anything else you can legally do with your money."

"Public-to-private deals are a relatively small part of what we do. 98% of what we buy are private companies, or are subsidiaries of public companies. The day-to-day work of what private equity is doing is buying private companies and keeping them private."

"It was said when Goldman went public that that was the top of the market, and it's gone up 4 times since then. I wouldn't be surprised if all the major private equity firms were public 4 or 5 years from now. The principal concern is whether we are going to favor the public shareholder over the private investor. It's too easy to say that you always will favor your private investor over your public shareholder."

Thomas Lee, of Thomas H Lee Capital:

"When the economy goes bad, defaults will spike up from the 1% level up into the 9% level."

"First Boston was the only public brokerage firm for 40 years. Many people believed that brokerages couldn't and shouldn't go public. But it really proved to be the way to go, the way to get the permanent capital."

David Bonderman, of Texas Pacific Group:

"Typically when you want to raise money and can't, it's a great time to be investing. What's unusual about the current cycle is that it's been a great time for both."

"Bigger companies are trading more cheaply than smaller companies, which is quite unusual. The p/e ratios of the 50 largest US firms have declined by about 70% over the past 5 years."

"At the moment, no matter how well we're doing with a company, we must sell. The difference between Warren Buffett and Steve Schwarzman is that Warren Buffett never needs to pay taxes, because he never needs to sell anything."

"It's a sure sign that the end is nigh when a quarter or a third of the graduating class of Harvard Business School wants to work in private equity. It is the flavor of the month. And it will continue as long as the salaries that we are prepared to pay people are unreasonably high."

Leon Black, of Apollo Advisors:

"Going public is a great retention tool and a magnet for new talent. It's good to have a currency. If a number of large firms go public, they'll use that currency to acquire mid-size niche firms to fill in and make them much stronger firms. It may be more efficient to buy a very good boutique using that currency, rather than build. Clearly it's a nice thing to monetize these cashflows, but nobody's selling more than 10% of their firm, and they're locking themselves up for 5-7 years. I wouldn't count those chickens from a personal point of view.
The real negative is being public, being in the fishbowl. It's having any small shareholder sue you for whatever. I'm not sure any of us needs that."

"Do you really think I'm going to tell everyone at this table and everyone in this room where I think the great opportunities are?"

Posted by Felix at 2:03 EST | Comments (0)

Buy Canada!

Maria Bartiromo did a great job moderating a panel of private-equity billionaires this afternoon. Every so often she'd try to get some investment advice out of them, with little luck. Leon Black of Apollo Advisors made a good point: there's a world of difference between passively buying a stock in the hope that it will go up, and actively buying a company with the intent of shaking it up and making it better. If you don't have a few billion dollars to spend, it's not clear that getting investment advice from a private-equity principal will do you any good at all.

But when faced with a question of which country he was most bullish about, Thomas Lee of Thomas H Lee Capital actually gave a real answer – and not an obvious one, either. After two days of hearing the "China and India" mantra to the point of meaninglessness, most of the audience expected either one or the other. But instead Lee pulled a name out of left field: Canada.

It's all about the price of oil, you see. With oil in the $60s, it becomes economic to extract oil from Canada's tar sands and shale. Which means that Canada's oil reserves have effectively increased tenfold overnight, and Canada now has the second-largest oil reserves in the world. What's more, Canada is a country, like Norway, which might actually be able to use its oil wealth sensibly, rather than coming down with a bad case of Dutch disease.

The Canadians do tend to be something of an afterthought in big international conferences, overshadowed as they are by the US. But their currency and their economy are strong, no one hates them, and they have no problems at all with corrupt judges or untrustworthy property laws. If you do want to start taking advice from a private-equity guy, Canada might not be such a bad place to start.

Posted by Felix at 1:50 EST | Comments (0)

A Third PATH Station to Rise at the WTC Site

I've been following the goings on at the World Trade Center site very closely for over five years now, but there was a lot in Larry Silverstein's presentation today which was news to me, including one spectacular cock-up. It turns out that the land underneath the current temporary PATH station needs to be excavated. But the permanent PATH station – which was originally scheduled to open at the end of 2006 – won't be remotely ready in time. So the Port Authority of New York and New Jersey is going to have to build a second temporary PATH station, up near 7 WTC, to replace the first temporary PATH station, which itself cost $323 million.

Now, I'm not someone to take everything that Larry Silverstein says at face value. He claims, for instance, that he will start construction on new towers by Richard Rogers and Fumihiko Maki in January, start on his Norman Foster tower in July, and have all those three towers plus David Childs' Freedom Tower finished by 2012. I'll believe it when I see it. But something like the second PATH station – you really couldn't make it up.

I also took the opportunity to ask Larry about the size of trading floors. The new Goldman Sachs building is apparently going to have floors of 72,000 square feet, while Silverstein's towers will have nine 54,000 square-foot trading floors between them, all with their own dedicated elevators for SEC compliance reasons. Silverstein's original 7 World Trade Center was home to what was at the time the legendary Salomon Brothers trading floor – but it turns out that was a relative minnow, at 47,000 square feet.

Posted by Felix at 21:59 EST | Comments (0)

Euphemism Watch

My favorite financial euphemism is the one for "doing nothing" – "preserving optionality". But Tanta's found one which is almost as good, today:

"Getting stuck with a home you can't sell" – "Promoting intergenerational wealth".

Posted by Felix at 19:54 EST | Comments (0)

When Emerging Markets Change

If you're a fund manager invested in emerging-market equities, chances are you're obsessed with the MSCI Emerging Markets index. The index doubles as the very definition of which countries count as "emerging markets", and which have "graduated" to developed-country status. Portugal graduated in 1998, Greece in 2001.

Which countries will graduate next? That's actually an easy question. The answer is Israel, Taiwan, and Korea. The tough question is when they will graduate. Because when they do, the index will change – a lot. In fact, it will lose fully one third of its market capitalization overnight.

In other words, if you buy any fund which benchmarks the MSCI-EM, right now you have a lot of exposure to these three rich countries. It might not be long, however, before you find yourself with much more exposure to the likes of Argentina, Hungary, and Peru. Just a friendly warning.

Posted by Felix at 19:34 EST | Comments (0)

The Silver Lining to Banking Crises

Why is the mortgage market so much more efficient in the US than in any other country? Because far more of it is securitized than in any other country. Precious few banks have either the capital or the inclination to hold onto their home loans: they're much happier farming them out in the bond market to institutional investors. In turn, that means that borrowers can get lower rates, and risk is dispersed to those parts of the financial markets which most want it.

But why is the market in mortgage-backed securities so much more advanced in the US than it is in any other country? That one's more interesting: it's basically because of the savings-and-loan crisis of the 1980s. When the edifice of S&Ls came crashing down, there was simply no capital to extend to homebuyers, and the capital markets had to get involved.

A liquidity crunch in the banking system, in other words, is something of a prerequisite for an efficient housing market. No one's expecting an MBS market in China any time soon, because the banks are awash in liquidity and want all those home loans on their books. In Mexico, by contrast, the tequila crisis of 1994-5 set the stage for a reasonably large and efficient MBS market today.

Obviously, you need more than just illiquid banks to have a well-developed MBS market. You need strong legal institutions, and you need a well-developed domestic yield curve too. (India, for example, might have the former, but it doesn't really have the latter.)

It also helps if your economy is open to outside investment. In Mexico, domestic pension funds buy the overwhelming majority of senior MBS tranches, but they're so risk-averse that they shy away from the riskier mezzanine tranches. That all gets sold abroad – often to foreign hedge funds.

Prosperity is closely linked to homeownership. But to get there, the occasional banking crisis might not be such a bad thing after all.

Posted by Felix at 19:05 EST | Comments (0)

Nuclear Proliferation Keeps Rupert Murdoch Up At Night

It's been a very hectic day at the conference here – hence the paucity of postings on this blog – but I'll try to do some catching up now, and I'll start with a quote from the one and only Rupert Murdoch, who was on a panel at lunch. Rupert is not a man who's worried about what he calls "alleged global warming". He's not worried about demographics and health-care costs. But he is worried:

I wouldn't discount at all the danger of nuclear proliferation, and if Iran gets away with it, there will be half a dozen others and will all end in disaster for us all.

A nuclear holocaust, of course, is the ultimate black swan. How does one go about trying to minimize its probability? With difficulty, and with lots of hard work. But Murdoch's own industry can help. Mass media can result in cultural convergence – just ask any Frenchman about the number of US movies playing at his local multiplex. The world's terrorist hotspots also happen to be areas which haven't been touched by Fox movies or Page Three girls. Which is probably, net-net, just as well. But I still hold out some hope for humanity, once it's really connected.

Posted by Felix at 18:46 EST | Comments (0)

The Effects of Illegal Workers on Productivity

Peter Orszag of the CBO made a number of interesting points this morning. He's a fiscally conservative, left-leaning economist, and I'm sure that he would agree with Dean Baker on many, many things. But on one of Baker's top talking points, there seems to be a big difference. Baker is worried about the recent sharp decline in productivity growth; Orszag isn't.

Orszag takes a line close to that of the Economist, pointing out that "a lot of the downtick in productivity growth seems to be related to the fact that employment is still stable in the construction sector while income has declined." Baker doesn't like that line of argument:

This is a sector that relies heavily on undocumented workers. The article suggests that firms are reluctant to lay people off and therefore are "hoarding" workers in the face of the housing downturn. That is behavior that you would expect to see in a heavily unionized sector. It is more likely that many of the undocumented workers never showed up on the payrolls during the upturn, so there is no job loss recorded when they stop being employed during the downturn.

The thing is, you have to be consistent. Baker's quite right that in the construction industry, illegal workers tend to be the first to lose their jobs. That keeps official employment figures high, and with income in the sector falling, productivity numbers are sure to look atrocious.

But if you take into account the effects of illegal workers on productivity now, in the downturn, then you also need to take into account the effects of illegal workers on productivity during the construction boom. It could well be, in fact, that a large amount of the recorded productivity gains over the past few years was in fact attributable to large increases in the number of illegal workers in the construction industry.

The question is whether the fall in productivity is a temporary thing, which will be corrected when the other shoe drops in the construction industry, or whether it's something more serious. Maybe in fact it's the rise in productivity during the construction boom which we should be taking a second look at.

Posted by Felix at 12:27 EST | Comments (0)

How Derivatives Caused the Property Boom

Sitting on the property panel with Bob Toll was Steven Green, of Greenstreet Partners. He had a very good explanation for the run-up in US property values in recent years: financial derivatives.

"People always told you that there was no liquidity in real estate," said Green. "And now the financial derivatives market has created that liquidity, and it's changed the market permanently."

As a result, there has been a huge inflow of institutional money, both public and private, into a market which has historically been dominated by individuals and families. Whenever that happens, there's a big one-off increase in prices. And this time around, there was probably even some overshoot. "I don't think we've seen dramatic reductions in prices yet," said Green. "And I say yet because I think we will see them."

Either way, the property market has been changed for good. "We've seen properties with higher vacancies and lower cashflows which are trading at higher prices, all driven by the financial markets," Green said.

Hedge funds make very different calculations from old-school property magnates, and the latter might indeed be an endangered species.

Posted by Felix at 21:49 EST | Comments (0)

Bob Toll on US Housing

Pity anybody with the misfortune of sitting on a panel with Toll Brothers CEO Bob Toll. Speaking to a packed audience, Toll was on form, especially with his whistle-stop tour of the entire US, talking about markets which are doing really well (New York City, Connecticut, Washington DC) and those which are in the pits (Boston, suburban New Jersey, Phoenix, Las Vegas, Michigan – and, of course, Florida.)

In other words, you can't just throw a dart and make money in the property markets these days, as you could at pretty much any point over the past 10 years. But Toll is still constructive over the long term: "Right now we've got a demand problem, but generally, we've got a supply problem," he says. "You're going to come to see housing represent 45-50% of household income, as it does in Europe, rather than the 35% we see here. But I don't know when."

Other Toll observations which rang true:

• The rise in urban residential real-estate is not a speculative bubble, but rather demographic: "a desire for urban living". 35-year-olds are choosing to raise a family in an urban setting now, whereas 15 years ago they would always move to the suburbs.
• Even as Americans get older, they have no desire for smaller houses: retired couples want more space, not less, after the kids leave home.
• There's still no desire for green houses. "We tried to experiment with selling energy-efficient homes, and completely flopped compared to selling more moldings," says Toll. Even something as simple as a day-night thermostat doesn't sell when compared to, say, a gold ceiling rose for the chandelier. Energy efficiency might be the low-hanging fruit when it comes to reducing US carbon emissions, but there's no indication at all that Americans want to pick it.

Posted by Felix at 21:03 EST | Comments (0)

Immigration Datapoint of the Day

From Carlyle Group's Robert Grady:

Look at all the technology companies which have been backed by venture capital – the kind of companies which have driven US growth over the past 30 years or more. It turns out that 40% of them were started by foreign-born nationals, including the likes of Intel, Yahoo, Sun, and eBay. And, of course, Google.

And yet we're still placing ridiculous restrictions on obtaining the H and J visas that most of these people came into the country on. Idiotic.

Posted by Felix at 20:41 EST | Comments (0)

Will The US Adopt Principle-Based Regulation?

You expect to hear about "regime harmonization with Europe" when the subject is something that Europe has a lot of and the US has none of – carbon trading, for example. But today we heard it from Michael Oxley, on the subject of something the US has a lot of and Europe has much less of: capital-markets regulation.

Capital markets are subject to globalization just like the steel industry in his home state of Ohio, said Oxley today – and that means that the well-established American way of doing things just might have to change. "I predict that you will see, for the first time, probably, American regulators moving towards a principles-based approach," said Oxley, who's now vice chairman of Nasdaq.

Harvard's Hal Scott, a lawyer, wondered whether such a move might be harder on this side of the pond. "If the FSA promulgates a rule, they interpret it as well," said Scott of the UK regulator. "Whereas if the SEC promulgates a rule, it's the court who interprets it."

Scott answered his own question, however, by quoting Sam DiPiazza, the CEO of PriceWaterhouse, who says he prefers principles to rules, even in court.The reason has everything to do with the thicket of regulations which presently encumbers anybody working in the capital markets: any given action is subject to any number of rules, and that means that an auditor or any other market participant can be accused of not following rule 6 even if he followed rule 1. On the other hand, if he can more simply say "I followed the principle," that would help him even if he had to do so in front of a judge rather than a regulator.

In general, a principles-based approach has regulators which, when faced with a problem, seek to solve it. A rules-based approach, on the other hand, has regulators which, when faced with a problem, seek to punish it. I definitely get the impression that the SEC often doesn't think it's solved a problem unless there's a settlement involved. A move away from that attitude and towards something more constructive would certainly start helping mitigate fear of the US regulatory system.

Posted by Felix at 20:28 EST | Comments (1)

Why Can't Small Companies Go Public These Days?

There's been no shortage of Important Discussion recently on the subject of what a panel this afternoon grandly called America’s Global Competitiveness. Up on stage were Hal Scott, of the Committee on Capital Markets Regulation, and Arthur Culvahouse, of the even more grandly-named Commission on the Regulation of US Capital Markets in the 21st Century. Naturally, they talked of McKinsey's Bloomberg-Schumer report (pdf) as well. What made the panel more interesting than most was the presence of Michael Oxley himself, architect of the loathed Sarbanes-Oxley Act. But the star of the show was actually the Carlyle Group's Robert Grady, who seemed to mainly be wearing his hat as chairman of the National Venture Capital Association.

Grady was reasonably polite about Sarbox: It's not the act in general that he doesn't like, just its section 404. What he and the panel were much less happy about was the rise in what you might call lawyer-related expenses. Venture capitalists used to be able to exit into the stock market even when the companies concerned had tiny market caps: when Intel went public the entire company was worth just $53 million, and when Cisco went public it was worth only about $250 million. "None of those three deals would be doable today, bc there's too much friction in the small-cap offering process," said Grady.

It turns out that the quantity of IPOs these days isn't just low in relation to the boom years of the late 90s. It's also low in relation to the bust years of the early 90s. Nowadays, the overwhelming majority of venture-capital exits are in the cost-heavy M&A market, which says a lot about the cost of exiting into the public stock market.

In any case, says Grady, if you're a small-cap stock listed on the Nasdaq market, you might as well be a private company for all the public coverage you get. Fully 60% of the companies listed on Nasdaq have either zero or one analyst covering them, which means that those stocks simply don't have most of the advantages of being public.

Grady has many non-Sarbox targets he blames for this state of affairs: stock-market decimalization removed Nasdaq broker-dealers' profits and therefore their incentive to provide stock coverage; Eliot Spitzer's research settlement also took analysts out of the sell-side and into the world of hedge funds.

I'm not sure that it's a lack of research coverage that is preventing small companies from going public. Maybe much of the reason is simply that they're worth more if sold privately. But there's no doubt that regulatory and compliance costs would make any company think twice about a US listing.

Posted by Felix at 20:11 EST | Comments (0)

New York Congestion Pricing: On the Way

It's a day late, but I have to link to the hugely important speech by Michael Bloomberg in which he announced that New York City was going to introduce an $8 weekday congestion charge. The way that Bloomberg was speaking, the congestion charge is all but a done deal – and what's more, it has federal backing! Reports the NYT:

The city said yesterday that it intended to seek state approval for a three-year test of congestion pricing and would need to spend $225 million to buy and install traffic-recording equipment. Officials said the city and state could jointly apply for grants from the United States Department of Transportation to cover those costs.
“The federal government really does want to be helpful,” Mr. Bloomberg said, in a rare departure from his prepared text.

Sarah Goodyear has the Streetsblog roundup, which shows how deeply-felt this issue is:

During the standing ovation that capped things off, one woman was heard shouting, "Bloomberg for President!"
"What, you want another Republican?" her companion asked her.
"I don't care what the label is," she said. "I'd vote for him."

And support is coming even from unlikely places:

The Nassau County executive, Thomas R. Suozzi, who has many constituents who commute by car to Manhattan, also was enthusiastic. “People’s first reaction is they don’t want to pay,” he said. “But getting them to switch to mass transit benefits us all.”

When a Nassau County executive supports a Republican's congestion pricing plan, I think that's a sign that it's an idea whose time has come.

Posted by Felix at 16:48 EST | Comments (0)

Hedge Funds: Just Misunderstood?

Meme of the day is whether all the current calls for hedge-fund regulation come not because these funds pose some enormous systemic risk, but rather because they're simply not understood.

Alphaville today has a report from Crestmont Research devoted to "dispelling myths" about hedge funds – and astonishingly, most of those myths seem to be negative.

Meanwhile, here in LA, the panel on hedge fund regulation spent very little time indeed on the question of whether hedge funds did, indeed, need to be regulated. Of course not, was the consensus: hedge funds are much less risky than any individual stock, and anybody can buy stocks. Besides, hedge funds aren't as leveraged as they used to be back in the bad old days of LTCM, and in any case those prime brokers (Bear Stearns was mentioned by name) are keeping a very close eye on their hedge-fund clients and are effectively performing the oversight function themselves.

It was also noted, fairly enough, that the huge number of hedge funds which do equity investing pose little if any systemic risk – it's really only the credit funds which the likes of Tim Geithner and Jean-Claude Trichet are worried about.

And the US government seems to be on board with this conclusion – Christopher Cox, Hank Paulson, and Ben Bernanke seem to have come to the same conclusion that Bob Rubin, Alan Greenspan, and Art Levitt came to back in 1999 – that not regulating hedge funds is OK. Of course, no one knows what the 50 state attorneys general think about such things.

The real problem, according to Mark Lasry of Avenue Capital Group (assets under management: $13 billion), is that he makes too much money, and that no one really understands how he does so. Because hedge funds are barred from advertising, they're necessarily secretive, and therefore people assume the worst: when Lasry first set up his fund 10 years ago and told his father how much money he made that year, his father headed straight to his local synagogue, on the grounds that anybody making that kind of coin had to be doing something illegal.

I don't buy it, myself. Calls for hedge-fund regulation don't come out of the politics of envy: they come from people like Geithner who are paid to worry about systemic risks. It's true that many, indeed most, hedge funds pose no systemic risk at all. But that's not the point. If you knew which funds were risky, you could cut off the risk right there. The problem is that we don't. And that in a world where investors care much more about return than they do about risk, someone should be worrying and regulating.

Posted by Felix at 14:57 EST | Comments (0)

Carbon Emissions: Regulation Versus Cap-and-Trade

John Kerry kicked off the conference at a panel on the politics of global climate change. The panel was a study in contrast: five cap-and-trade wonks talking about the niceties of auction versus allocation, and John Kerry, who knows all those niceties as well as anybody, insisting on bringing the conversation back to the effects of climate change on species and cities and people.

In his opening remarks, indeed, Kerry said that he wanted to ban TXU (you know, the energy company in the process of being bought by Blackstone KKR and Texas Pacific) from building any coal-fired plants in the United States which don't capture or sequester carbon. "Why? Because China is about to build one or two plants a week, and that means Katie bar the door on this issue."

Of course, that kind of thinking flies directly in the face of the kind of thinking behind cap-and-trade (and Kerry himself has a cap-and-trade bill in Congress). Under a cap-and-trade system, TXU should be allowed to build as many coal-fired plants as it likes, assuming it buys the right to build those plants in the open market. And it should, essentially, be able to capture and sequester carbon in China to offset its own emissions in Texas.

But Kerry is a realist, and he knows that for the time being, no cap-and-trade system will exist in the US. So he's regulating for the time being.

Posted by Felix at 13:18 EST | Comments (0)

First Thoughts on the Barclays-ABN Deal

A couple of quick thoughts about the news that Barclays has agreed to buy ABN Amro for $90 billion. (I'm in LA for the Milken Institute Global Conference, which is quite exciting, but does mean I have a bit less time for keeping on top of this kind of development.)

1. This is clearly a victory for Barclays CEO John Varley. A few days ago his bid was a presumed failure, and his bank a takeover target. Now he's going to be running one of the biggest banks in the world.
2. Don't believe everything you read in the press. We were told over and over again that Barclays couldn't justify paying more than €35 per share for ABN Amro; in fact, it's paying €36.25.
3. This is clearly a victory for Bank of America CEO Ken Lewis, who managed to keep his name out of all the speculation, only to turn up as the provider of $21 billion in exchange for ABN Amro's US operation LaSalle Bank, and throwing something of a spanner into the works insofar as any rival bid is concerned.
4. Don't believe everything you read in the press. We were told over and over again that Bank of America, despite wanting LaSalle, wasn't allowed to buy it because that would take it over the 10% cap on US deposits. So much for conventional wisdom – it looks as though BofA is just going to do the deal first, and worry about the regulatory implications second. A bit like the Citibank-Travelers merger.
5. Might Barclays hold on to ABN's jewel, Brazil's Banco Real? We all thought that if Barclays won, it would sell Banco Real to help raise cash – but now that cash seems to be coming from Bank of America instead.
6. All that said, ABN isn't sold yet. But it's going to be hard for rivals to come up with a package which can convincingly beat this one, which is all sewn up with a very nice BofA ribbon on top. It looks for the time being as though ABN Amro's CEO Rijkman Groenink has saved his bank from the clutches of Fortis, and I'm sure that he's very happy about that.

Posted by Felix at 11:06 EST | Comments (0)

On the road

I had a glorious 35th birthday in Chicago on Saturday. The weather was absolutely perfect all weekend: bright and sunny without being too hot – great for architecture tours, bike riding along the lakefront, or just wandering around.

Not that just wandering around is a particularly Chicago thing to do, it would seem. It's not a walking city, really, and it's hard to get lost there – lord knows there are more than enough skyscrapers by which to orient yourself. The streets are big and wide and don't have a lot of street life – I didn't see a single street vendor, or sidewalk cafe. Presumably because of the bitter winters and hot summers, everything seems to happen indoors. And there seemed to be very little in the way of shops or restaurants outside their own designated corridors.

I'm hardly an expert on Chicago, of course – but I did like it enough that I'm definitely going back. I don't think I'll be staying at the W Lakeshore again, though. In fact, I'm not sure I ever want to stay in a self-consciously hip hotel ever again: I haven't liked the other trendy hotels I've stayed in, either. I think that now I'm 35, I'm officially old and boring – Groove Armada and purple lighting in the elevators just doesn't do anything for me.

Right now, I'm in the Hyatt Regency Century Plaza in Beverly Hills, and although I've only just got here, it seems much more my cup of tea. Good in a big, old-fashioned sort of way. Michelle and I had a less-than-fabulous experience at the Park Hyatt restaurant in Chicago, but their Gerhard Richter was fabulous, and in general I think I like the understated-luxury aesthetic.

As of tomorrow morning, I'm attending the Milken Institute Global Conference, and I'm quite excited about it. I'll be blogging it over at marketmovers.org – do come over and say hi!

Posted by Felix at 10:56 EST | Comments (3)

Google: More Cash Than It Knows What To Do With

It's a good day to be Eric Schmidt: Google's earnings once again beat expectations, and even beat expectations that they would beat expectations, and the stock opened up $20 at $491 a share. Then news came out that Goldman Sachs had upped its price target on GOOG to $620. Even with earnings of $3.18 per share per quarter, that's still a p/e of 50, give or take.

When your stock is that strong, cash is cheap. My colleague Russ Mitchell wonders whether Google might have overpaid when it bid $3.1 billion for DoubleClick. I daresay that if Google was any normal company, the answer would be yes. But Google needs things to do with its cash, since returning it to shareholders would barely have any effect on the stock price.

Snapping up DoubleClick mainly to keep it out of the hands of Microsoft might be as good a use as any for the lakes of liquidity in Mountain View. Remember, Google's earning $1 billion a quarter these days. What else is it going to do with the money?

Posted by Felix at 13:31 EST | Comments (0)

Ryan Changes his Mind About Treasury Job

To lose one undersecretary of international affairs could be considered a misfortune; to lose two – especially when #2 hasn't even started in the job yet – looks suspiciously like carelessness.

Tim Adams, the incumbent undersecretary, announced [pdf] his resignation in February, saying – honest – that he wanted to spend more time with his family. (Jack Shafer has everything you need to know about that old chestnut.)

His replacement was to be Timothy Ryan, but he, too, seems to have discovered "personal reasons" why he doesn't want the job.

It's a hard job, and it's largely thankless, and the Treasury secretary himself, Hank Paulson, seems to have taken personal control of the juiciest part of it, which is China. But Ryan knew all that going in.

Adams has just one week left at Treasury, and Clay Lowery, his deputy, looks set to step in until a more permanent replacement can be found. Up until now, the position has been an oasis of competence within the Bush administration. With luck, Paulson will be able to find someone good who's willing to do the job, despite the fact that if the Democrats win the White House in 2008, the new appointee will be unemployed come January 2009.

Posted by Felix at 11:40 EST | Comments (0)

Ashraf Ghani for World Bank President?

Gabriel Rozenberg has a startling article in the Times today saying not only that the White House was "drawing up a list of candidates to succeed" the embattled Paul Wolfowitz, but that "most prominent on the list" is Ashraf Ghani.

The US has historically jealously guarded its customary right to appoint a US citizen to lead the Bank. Appointing Ghani, an Afghan citizen, would be a glorious breath of fresh air, at least in terms of dismantling anachronisitic conventions at the Bretton Woods institutions.

Of course, an article in the Times of London doesn't quite carry the same weight as an article in the US press – Rozenberg gives no indication who his sources are, or how reliable they might be. But the odds of a Wolfowitz ouster are certainly higher today in the wake of yesterday's board meeting. And given how disastrous the appointment of a Bush crony was last time around, maybe this time the White House might be more inclined to do something a bit more constructive.

(Via)

Posted by Felix at 9:07 EST | Comments (0)

"For a $10m Loan, it's not Worth Sending Someone to a Meeting"

Quote of the day comes from billionaire investor Wilbur Ross:

We syndicated a loan for one of our companies recently, and I noticed that one of the hedge funds had bought it, bought a small piece, a $10m piece, but never came to any of the due diligence meetings. So I called the fellow who runs the hedge fund, because I know him, and said: thank you for participating, but I was surprised nobody came for diligence. He said: for a $10m loan, it is not worth sending someone to a meeting.

The really shocking thing here is not that the hedge fund in question thinks so little about a $10 million investment. Rather, it's that they passed up the opportunity to get some inside information on Ross's company!

Posted by Felix at 8:48 EST | Comments (0)

New York to get Congestion-Pricing Plan

Finally!

I'm sure that the grin on the face of Aaron Naparstek and other Streetsblog authors is going to be very hard to wipe off today, in the wake of news that mayor Michael Bloomberg has decided to stick his neck out and advocate for a New York City congestion charge.

The details will emerge on Sunday, but according to the NYT, this morning, the call for a congestion charge will be combined, sensibly, with many other proposals in a far-reaching project with the rather cumbersome name of PlaNYC.

As the population of New York continues to grow, and as the cost of traffic congestion (last estimated at $13 billion per year) continues to rise, doing nothing is simply not an option. Congestion pricing is never popular before it is introduced. But if the experience in London and Stockholm is any guide, people will learn to love it – just as they learned to love New York's smoking ban – once they see how much better the city becomes as a result.

Posted by Felix at 8:29 EST | Comments (0)

Bank Shareholders vs Bank Clients

Investment banks are conflicted, according to Jenny Anderson today. They get large fees from advising private-equity shops, while at the same time they're raising their own private-equity funds to compete with them. The consequences can be unpleasant:

The bank has an obligation to the investors in its fund to get the best deal, and that can often be different from the obligation they have to shareholders, which is to make sure that [it] maintains its franchise of offering chief executives the best possible advice — that is, advice free of motives from a bank on the prowl for deals.
There was a time when banks were advisers. Then they advised and financed. Now they advise, finance, invest. Logic would suggest that if the banks truly had their clients’ interests at heart, the banks would stick to advising and financing, hardly low-fee businesses.

Well, it depends on what you mean by "low". The fees that banks charge are high if you look at them on an absolute level: millions of dollars per deal, hourly rates in the quadruple figures. On the other hand, if you compare fee income to all the other income that a bank such as Goldman Sachs brings in, it's tiny. No one can make billions of dollars a quarter on fee income alone.

Banks have shareholders, is the problem, and shareholders want earnings growth, and pure fee-based investment banking is simply not a business where banks can increase their earnings quarter after quarter. It's possible for small advisory boutiques to sit on the financing and investing sidelines – and some very old and venerable names such as NM Rothschild do just that. But they tend not to be publicly-listed companies. If you submit to the tyranny of the shareholder, then your clients will necessarily always come second.

Posted by Felix at 7:51 EST | Comments (0)

The Emerging Markets Grow Up

Trade association meetings are interesting things. If you're the International Swaps and Derivatives Association, you hosted a huge general meeting this week in Boston, complete with worthy speeches from the likes of Jean-Claude Trichet about the systemic risks of credit derivatives.

On the other hand, if you're EMTA, the trade association for the emerging markets, your spring forum this year was a much more intimate event. The reason is that in emerging markets, it would seem, there really isn't anything to worry about. Which is weird, considering that prices are even higher than they were a couple of years ago, when everybody was very worried about frothiness and overvaluation in the markets.

But the world is very different now, and it's no longer a place where the classical concept of what "emerging markets" are even makes sense. For the past couple of decades, emerging markets were first and foremost sovereign debt markets – big developing countries such as Brazil, Mexico and Argentina would borrow billions of dollars from US and European banks and bondholders, who in turn would worry about whether or not they were likely to default.

Today, there's only one big sovereign borrower in the world, and it's the USA. Brazil and its ilk have become not debtors but creditors, ramping up their foreign reserves – which means buying Treasury bonds, which means lending money to Uncle Sam.

There are still default worries in the emerging markets, but they're confined to places like Ecuador and Venezuela, where a default is likely to have few if any systemic consequences. (If Argentina can default on $100 billion of debt and cause barely a ripple in the international capital markets, Ecuador should be able to default on $6 billion with the rest of the markets barely noticing.)

Meanwhile, emerging-market corporate debt and equity issuance is soaring, and of course some of those corporations will themselves default. But most are still under-leveraged, and in any case corporate defaults are almost never a source of serious concern to people who don't hold the bonds in question.

Jim Barrineau of AllianceBernstein told the EMTA meeting that "in five years, emerging markets is not going to be an asset class; it's going to be a subset of global investing". Certainly the trading ideas of yesteryear, where fund managers and sell-side analysts would rattle off a list of countries where you could buy the bonds and make a fortune, were nowhere to be seen. Instead, investors are reduced to relative-value plays: betting that the spread between Colombia and Mexico will narrow, for instance, or that the spread between Russia and Ukraine will widen.

There's also an interest in buying default protection on names such as Mexico and Venezuela, which is certainly cheap. That kind of play might be able to make a lot of money if the oil sector in those countries underperforms, which is likely. But the thing about buying default protection is that even if it is cheap, it has a negative carry, which means that if the CDS price rises only a little bit, then you still lose money.

Emerging markets used to be an exciting, wild-west asset class. It now trades a long way through US high-yield debt, and is fast converging on US investment-grade spreads. In other words, it's becoming boring. Which is great for the economies concerned, but does engender no little nostalgia at gatherings such as the one yesterday.

Posted by Felix at 7:17 EST | Comments (0)

New Union to Have 3.4 Million Members

And you thought Wal-Mart was big, with its 1.8 million employees. Check this out:

The United Steelworkers announced yesterday that it would seek to merge with two large British unions, Amicus and the Transport and General Workers Union, in a move that would form the first trans-Atlantic labor group.
Gathered at a convention in Ottawa, the leaders of the three unions said that they would seek to negotiate a merger within 12 months, with the combined union expected to have more than 2.6 million members...
Including retirees, the merged union would represent 3.4 million members in the United States, Canada, Britain and Ireland.

Wow. This makes sense, of course: in order to face up to union-busters with millions of employees, it helps if the unions have millions of members.

Quote of the day comes from Derek Simpson, the general secretary of Amicus: “The only beneficiaries of globalization are the exploiters of working people, and the only way working people can resist this is to band together.”

Of course, we capitalist running dogs would not agree with him on that front: globalization has benefitted workers around the world, although it's true that benefits to the 3.4 million members of the new combined union have been much lower than the costs.

The really good news is that the union leaders are making noises about representing oppressed workers from Colombia to India. If they eventually start getting some developing-country members, then maybe they'll understand that what's good for a lot of their poorest members will entail costs for a few of the richer ones. It's a trade-off, to be sure, but it's also a positive-sum game. The biggest task facing the new union will be to help manage globalization and bring its benefits to labor around the world, rather than to rail against it in a knee-jerk manner.

Posted by Felix at 15:41 EST | Comments (0)

Third Time Lucky for MetroPCS

You could have been forgiven a sense of déja vu, or a believe-it-when-I-see-it attitude, when you heard that MetroPCS was going public. After all, the company tried once, in 1996, failed to raise any of the expected $153 million, and went bankrupt. Then it tried again, in 2004, failed to raise any of the expected $528 million, and ended up with nothing more than a lot of accounting-related egg on its face.

But now, finally, gloriously, MetroPCS has raised an eye-popping $1.15 billion, pricing its IPO at $23 a share, well above expectations. The stock was last seen at $27.30 and rising. And it's not for lack of diffiulties at the company, either:

Leap Wireless International Inc., which also offers prepaid phone plans, has filed a patent lawsuit against MetroPCS seeking damages and a court order preventing the company from using disputed technology. If Leap is successful, MetroPCS may be forced to redesign its network.
The U.S. Department of Justice is informally investigating MetroPCS's delays in upgrading wireless networks in Dallas and Detroit, the company said in a regulatory filing.

This is the biggest IPO of the year so far, and although it will certainly be eclipsed by the Blackstone deal, it will also get much less press than the Fortress deal, which raised a mere $634 million. Mobile phones aren't as sexy as hedge funds, although they can be plenty lucrative: just ask Carlos Slim.

Here's a quick quiz for anybody who thinks they've been following the markets: what was the biggest IPO of 2007 before MetroPCS? Hint: It wasn't Fortress. In fact, chance are you never even noticed it.

Posted by Felix at 15:20 EST | Comments (0)

Hedge Funds to Help Prevent a Market Implosion

Alphaville has been looking at the latest hedge-fund inflow numbers: investors poured $60 billion into the asset class just in the first three months of this year. That compares to $126.5 billion in all of 2005, which was itself a record. But are the record inflows a sign that the world's most sophisticated investors are worried about a market crash?

One mildly ominous sign for the market at large - there’s more money being bet on increasing numbers of companies hitting trouble. Funds which deal in the securities of distressed companies saw inflows of $7.5bn during the quarter - an increase of 10.7 per cent in the total assets devoted to that strategy.

I find that news more reassuring than ominous. The more money there is in distressed-asset funds, the less far those assets fall before they're snapped up by those selfsame funds. Once upon a time, distressed debt was debt which was trading at 10 or 20 cents on the dollar; today, it's debt trading at 80 or 90 or even sometimes 95 cents on the dollar. Distressed-asset funds reduce market volatility, and act as an all-important source of bids when most investors want to sell. Hedge funds aren't always a source of risk and volatility, you know.

Posted by Felix at 14:59 EST | Comments (0)

Why a Cap-And-Trade System Beats a Carbon Tax

The International Emissions Trading Association, or IETA, had its board meeting in Lower Manhattan today, and decided to spend an hour or so afterwards answering questions from journalists. I was one of them, and I found the meeting very helpful. In fact, it might have finally tipped me away from carbon taxes and towards a cap-and-trade system in terms of which would best minimize carbon emissions.

To get a good idea of how and why a cap-and-trade system could and should work, the best backgrounder I know is this one, from the Milken Institute. It's particularly good on the crucial details: any such system should be as wide-ranging as possible; be as internationally fungible as possible; should allow offsets from non-participating countries such as China and India; and should not have any price caps on emissions.

And after spending some time with the IETA board today, I do think that they will be very good in terms of being a useful resource for US legislators: they're much more than a pressure group including some of the world's biggest polluters. In fact, they include a lot of companies such as Ecosecurities and DNV which have every incentive to maximize mandated reductions in carbon emissions.

What the Milken Institute report does not do is lay out clearly the case for a cap-and-trade system as opposed to a simple carbon tax. There will always be a place for some carbon taxes: even in the EU, the prime example of an area where carbon trading is already happening, only half of total European emissions are covered by the cap-and-trade system. The rest should be taxed.

But if you want to be certain about reducing carbon emissions, and you want to do it in the most economically efficient way possible, then cap-and-trade is the way to go. The certainty comes with the "cap" part: you limit total carbon emissions to some number lower than present carbon emissions, and as a result total emissions are forced to fall. (This is where the EU system got off to a bad start, by the way: legislators were unclear on the acutal level of carbon emissions, and set the cap too high. Better transparency and reporting should solve that problem.)

The efficiency comes with the "trade" part. Let's say you have two power plants, each emitting 100 tons of carbon per hour. The first can reduce its emissions by 20 tons at a cost of $5 per ton, and the second can reduce its emissions by only 10 tons, at a cost of $30 per ton. Clearly the efficient thing to do is to make the former reduction rather than the latter, with the owner of the second plant paying the owner of the first plant to offset the first owner's extra costs. That kind of thing happens much less under a carbon-tax regime, where the incentive for the first owner to maximize his carbon reductions is limited, if only because he's still paying 80% of the carbon tax anyway.

If you look at the Carbon Tax Center's reasons for preferring a tax to a cap-and-trade system, they're not quite as convincing as they look at first glance. There's no real reason to believe that energy prices will be more volatile under a cap-and-trade system than they are already. It's geopolitics which sets energy prices, not regulatory regimes.

It's also not true that a cap-and-trade system is harder to implement than a carbon tax. There are many cap-and-trade bills already making their way through Congress, while prospects for a carbon tax are dim indeed.

As for a cap-and-trade system offering opportunities for energy companies and other polluters to make money, that's the whole point. A market-based mechanism which gives companies a profit incentive to reduce emissions is likely to be more effective than a tax which will hit them hard anyway.

Finally, the Carbon Tax Center talks about all the good that could come from the government revenues associated with a carbon tax. Well, the government can also get revenues from a cap-and-trade system, if it auctions some part of the carbon rights rather than allocating them freely to polluters.

The Carbon Tax Center admiringly quotes Holman Jenkins saying that cap-and-trade limits would give polluters, for free, "a property right worth billions." The fact is that insofar as such polluters get a new asset, they also get a new liability, which is the cost under the new system of their present emissions. If the goal is to reduce emissions, then a cap-and-trade system is a very good way of achieving that end.

Posted by Felix at 14:41 EST | Comments (0)

The Microsoft Giveaway: Less Than Meets the Eye

"Microsoft Gets On the Next Billion Bandwagon" is the headline – but is this announcement something to get excited about, or is it a half-assed attempt by Microsoft to prevent itself from sliding into irrelevance in the developing world?

First, it must be said that Bill Gates individually has a genuine commitment to global poverty reduction, which is entirely selfless and admirable. It is also quite right and proper that his commmitment to the developing world is expressed through his personal foundation, rather than through the company he founded. Microsoft's purpose is to make money for its shareholders; development activities belong to the Gates Foundation.

Here's what Orlando Ayala, Microsoft's point man on this project, told Reuters: "This is not a philanthropic effort, this is a business." He's quite right about that. Because if it was a philanthropic effort, it would look very, very different:

• The software would be free, rather than costing $3. What's the point of the nominal price? It does nothing for Microsoft's bottom line, and at the margin discourages people from using Windows rather than open-source software, which is free.
• In fact, the software would be open-source, rather than buggy old Windows software which is not well supported, which has whopping great security holes, and which won't improve over time.
• And actually the attempt to use "information communications technology" to help the world's poorest, in the words of Asian Development Bank vice president Larry Greenwood, would concentrate not on computers but rather on phones.

With any luck, all of these things will happen. Which would be good for the base of the pyramid, less good for Microsoft.

Posted by Felix at 10:44 EST | Comments (0)

The Fannie & Freddie Bailout: Less Than Meets the Eye

"Fannie and Freddie Offer Relief" is the headline – but is this relief real, or is it little more than taking an aspirin while losing a limb? For a coherent answer to that question, don't go to the press. The problem there is that journalists (a) think that anything new is necessarily important, and (b) don't generally understand the arcana of the market in mortgage-backed securities.

Instead, go to the blogs. Specifically, go to the incomparable Tanta, over at Calculated Risk, who has the details, including, helpfully, a link to the original source: Freddie's press release.

The main thing to note, as Tanta says, is that the market in subprime loans was $450 billion last year alone. The injection of $20 billion over a period of two to five years is not going to make a huge amount of difference. As we saw on Monday, there is a pretty liquid market in subprime loans already – and, crucially, in the subprime loans which have already been originated, rather than hypothetical subprime loans which may or may not help out borrowers in future.

The idea behind the F&F announcement is that there are borrowers burdened with toxic subprime mortgages who will, soon, face nasty resets, driving their repayment costs through the roof. Fannie and Freddie are saying that they will buy securities based not on those toxic mortgages, but rather on new, less toxic mortgages which will be used to refinance the original ones.

Nowhere, however, is any mention made of what will happen with the enormous prepayment penalites which make such refinancings extremely expensive for borrowers.

And the whole reason why many subprime borrowers are getting into trouble is that they took out loans with low initial teaser rates because those low initial rates are all that they could afford. If they're now being offered loans with more realistic interest rates, it's far from clear that will actually help.

To put it another way: the problem is not predatory lending, where banks offer loans at sky-high interest rates to mugs who don't know any better. The problem is that people are buying houses they can't afford, thanks to mortgages with ridiculously low interest rates. (At least for the first year or so.) And a new mortgage can't solve that problem.

There is some good news in yesterday's announcements, but it doesn't have much to do with the headline $20 billion figure. What Fannie and Freddie announced yesterday is important rather because it finally creates an official criterion for what constitutes a good subprime mortgage. Banks love to write loans which conform to F&F's standards, and now they can do that in the subprime market. That will go a long way to reducing the amount of dodgy mortgages being written – although of course underwriting standards have already tightened up an enormous amount since last year.

In the meantime, though, individuals facing foreclosure today, or people who live in a house they can't afford, should take little comfort from the headlines. None of this is going to help them in the slightest.

Posted by Felix at 10:21 EST | Comments (0)

The Downside of M&A: Monopolies

When the purchase of Sallie Mae by a private-equity consortium was announced, I thought it was a "risky bet," predicated on the current political firestorm over student lending going away.

Steven Pearlstein has a different take: it's simply an attempt at building a monopoly, seeing as how Sallie Mae and two of its buyers, JP Morgan Chase and Bank of America, between them have as much as 40% of the college loan business.

Tom Joyce, Sallie Mae's spokesman, claims there will be no antitrust problem because the two banks and Sallie would continue to run their college lending businesses separately, competing vigorously...
Joyce stepped on his own story line when he told my colleague David Hilzenrath that the deal would enable Sallie to sell its products, such as its tax-free college savings plans, through Bank of America and J.P. Morgan branches...
Call me cynical, but it doesn't sound like these "competitors" are going to launch price wars against one another anytime soon.
Perhaps the most telling piece of evidence is the 50 percent premium the banks and their partners are willing to pay for a company even before they know how the Democratic Congress is going to change the federal student loan program, as it is inclined to do. As analyst Matt Snowling of Friedman Billings, Ramsey put it, there's no way to justify the $60 per share offer without assuming the benefits of integrating the three college-lending operations. For the banks, he reckons, buying Sallie was a "defensive move" -- in other words, a way to foreclose competition.

Monopolies are popping up in industries across the board, it would seem. Pearlstein reports that researchers recently "asked 100 of the country's top antitrust lawyers whether mergers between firms in the same industry are more likely to be approved than they were a decade ago. On a scale of 1 to 5, with 5 being "significantly more favorable," the average score was 4.9."

Monopolies are bad for the economy, they are a classic example of a market failure, and, with few exceptions, they should not be allowed. The problem is that monopolies are usually also politically powerful, and they can often pull strings to get their way. And politicians rarely get any political benefit from fighting against a proposed merger.

(Via Thoma)

Posted by Felix at 16:10 EST | Comments (0)

Towards Universal Telephone Access

How best to increase wealth and decrease poverty at the base of the pyramid? One really easy way to do that would be to give everybody access to a telephone. Already we're almost there: a new paper by Charles Kenny and Rym Keremane estimates the world's mobile footprint covered 86% of the world's population, and 76% of Africa's, in 2004.

How much would it cost to bring those numbers up to 100%? Kenny and Keremane reckon it could be done for a total sum of $5.7 billion, most of which could be supplied by taxing existing providers – the total external subsidy needed would be just $1.8 billion. And fully 87% of that $1.8 billion would be invested in Africa.

Also worth a read is an entirely separate paper from the same Charles Kenny, entitled "Is Africa A Failure?". Kenny's answer is that actually it isn't. Africa's growth rate has been pretty steady, it turns out – and there might well be good structural reasons why it's very hard to boost it. What's more, Africa has done pretty well with the money it does have:

Former President of Tanzania Julius Nyerere sums up his country’s successes in elements of this broader agenda: “The British Empire left us a country with 85 percent illiterates, two engineers and twelve doctors. When I left office, we had nine per cent illiterates and thousands of engineers and doctors.”...
Turning to literacy rates, Africa has again been fast catching up with the near-universal literacy of high income countries, with literacy in the Sub-Saharan region increasing from 28 to 61 percent of the population over the 1970-99 period. The region has achieved these successes while its population (partly as a result) has increased more than threefold –Africa has many more people who are enjoying a better quality of life.
What underlies these impressive statistics is the region’s unprecedented performance in improving the quality of living standards at low levels of income. Compare Africa to Nineteenth Century Europe: in Nigeria in 1995, GDP per head was $1,118. That puts it about equal with Finland’s GDP in 1870 ($1,107). But look at education: Nigeria had a literacy rate of 57 percent, compared to Finland’s 10 percent rate in 1870. Or life expectancy: Nigeria’s 1995 life expectancy was 51 years. This figure is higher than any country in Europe in 1870, --better than the UK, which had an income per capita in 1870 approximately three times Nigeria’s 1995 figure. This is an especially impressive performance given both Africa’s largely tropical climate which fosters communicable disease rates far higher than those in Europe, and the recent advent of AIDS.

Kenny concludes that "realism tempered with humility is likely to improve the quality of life of the people of Africa" – just because we're richer than most Africans doesn't mean we know better than they do how to improve their lives.

Posted by Felix at 15:41 EST | Comments (3)

The $2,500 Car

Remember that $5 trillion at the base of the pyramid that I was talking about on Monday? Only 50 of the world's 63,000 multinationals might be interested, but India's Tata would seem to be one of them. Tyler Cowen today finds stories in BusinessWeek and at Productivity Press about Tata's new car, which will sell for just $2,500 when it hits the streets in 2008. (No new car in the US retails for less than $10,000.)

And add Renault-Nissan's Carlos Ghosn to the list of executives excited about the base of the pyramid: BusinessWeek reports that he, too, is looking to build a sub-$3,000 car.

Posted by Felix at 14:38 EST | Comments (0)

When Homeowners Who Can Pay, Don't Pay

In the world of credit, there are two key variables which determine how risky an asset is. The first is the creditor's ability to pay – in order to gauge that you look at income, assets, that kind of thing. The second is much harder to gauge: the creditor's willingness to pay. Just because someone can pay a debt, doesn't mean he will.

Today real-estate blog Calculated Risk is worrying about credit problems among prime home loans. Not subprime, not alt-A, but prime: the borrowers with the very best credit. "As housing prices fall," says the anonymous blogger, "more problems will most likely emerge."

He's right, but I'm not sure about the degree to which this is a function of the looser underwriting cited in the WSJ article he's blogging about. Underwriting can only really concern itself with ability to pay, and these borrowers are the very definition of prime credits. The problem, as I see it, lies rather with their willingness to pay.

When I was house-hunting in 2005, I had drinks with a senior Wall Street analyst who even back then was worried about frothiness in the property market. He advised me to put down the smallest downpayment I could get away with, and take out the biggest-possible mortgage. If house prices went up I was golden, while if house prices went down I'd lose only my small downpayment and stick the bank with the rest.

Now, legally, mortgages don't work like that. If I borrow money to buy a house, I'm obliged to repay that money, whatever happens to the value of the home, and even if I sell it at a loss. Sometimes, a bank will accept a "short sale", for less than the outstanding amount of the mortgage, and write off the rest of the loan. But often, the bank won't. The sale proceeds are applied to the mortgage balance, and whatever's left remains an obligation of the (former) homeowner, and is just as real a debt as anything they're carrying on their credit cards.

That's the way the bank sees it, anyway. Homeowners often don't see it that way at all. They think that they shared the price of the home with the bank, and that they're sharing the risk of the home dropping in value with the bank, too. If they lose their home or they sell it after it has dropped in value, they're not likely to happily pay the bank everything it's owed.

And when homeowners start thinking like that, default rates rise.

Much of the time, these are people who could, if they had to, raise the money to make their mortgage payments in full and on time. They are prime credits, after all. But homeownership is an emotionally fraught thing, and people don't always do the legally right thing if they're in the process of losing hundreds of thousands of dollars. That's where the big risk with prime mortgages comes from. And I'm not sure that you can really blame the underwriters for it. After all, it's one thing to make big mortgage payments in order to pay off a house. It's another thing entirely to make mortgage payments after the house has already been sold.

Posted by Felix at 13:28 EST | Comments (0)

Can Wolfowitz Just Resign Already?

When Jim Wolfensohn was leaving the World Bank and speculation was rife as to who would succeed him, worldbankpresident.org was everybody's favorite one-stop shop for news and rumors.

Now, of course, there's even more World Bank President gossip going around than there was back in 2005. So the blog has been gloriously resuscitated with everything you ever wanted to know about Paul Wolfowitz, Shaha Riza, the long list of people calling for Wolfowitz's ouster, and the much shorter list of Wolfowtiz defenders.

This story is about much more than pay hikes, or even Riza's 2003 job in Iraq, which seemingly was obtained for her by Wolfowitz. Indeed, Alex Wilks has more than ten reasons why Wolfowitz should go. Which doesn't, of course, mean that he will.

Posted by Felix at 11:29 EST | Comments (0)

Why the Size of the Derivatives Market is Cause for Worry

Steve Waldman has a really great post on derivatives, which clearly and compellingly sets out the Case for Worry.

The gist is that in a $300 trillion derivatives market, there's bound to be a lot of counterparty risk somewhere. And given how the market is set up, one major counterparty failure could set off a nasty global chain reaction, with serious systemic consequences.

Another way of looking at it: what is that $300 trillion made up of? Let's say that everything is double-counted, and that you can somehow carve it up ito +$150 trillion of positions on one side and -$150 trillion of positions on the other. Then in theory the two add up to zero, and there's no risk. But in the real world, when you take sums as mind-bogglingly enormous as $150 trillion and try to add them up, you'll never be perfectly accurate, and there's likely to be a tiny error in there somewhere. Let's say that tiny error nets out at one tenth of one percent of the total. Well, that tiny error is now a whopping great $300 billion risk.

Posted by Felix at 10:54 EST | Comments (0)

The BlackBerry is Closed

The Great BlackBerry Outage of 2007 continues, it would seem, and I'm sure that Steve Jobs has a smile on his face right now, since his iPhone can use any wifi network to send and receive emails. The irony is that Jobs, given the choice, has always opted for closed, proprietary sytems over open ones. But I'm sure that right now Research In Motion is wondering whether they might not have tied up their network a bit too tightly.

Best comment of the day, over at MarketBeat: "First good night’s sleep since I got the damn thing. I might just experiment with the off switch some time."

Posted by Felix at 10:00 EST | Comments (0)

Credit Where Credit Is Due

On Monday, Citigroup announced earnings down 11%. Part of that was due to high interest rates:

The performance of Citigroup’s global consumer businesses was more disappointing, dragged down by weaker credit quality and a tough interest rate environment. Profit in its United States consumer division fell 12 percent, to 1.77 billion, in the first quarter with every major business posting declines.

Today, JP Morgan annouced earnings up 55%. Part of that was due to low interest rates:

Chairman and Chief Executive Jamie Dimon said in a statement that the results were helped by record earnings at J.P. Morgan's investment-bank, asset-management and commercial-banking operations. He added private-equity gains "were also very strong," and that the company saw "some benefit from the generally favorable credit environment, which we do not expect to continue indefinitely."

Who to believe, here? In a word, Dimon. Without detracting anything from his very impressive results, rates are low and credit is easy. It's true that commercial banks, which borrow short (by taking deposits) and lend long, do have a hard time when the yield curve is flat or inverted, as it is now. But the problems facing Citi CEO Chuck Prince are much bigger than the shape of the yield curve.

Posted by Felix at 9:15 EST | Comments (0)

Derivatives: Eisinger Responds

As promised, here's Jesse Eisinger's response to my earlier blog entry on derivatives. It's a good one, too, so I'll let him have the last word.

My first blog entry on Portfolio! So exciting.

First of all, I think we agree on much here. Derivatives are mostly used as a form of insurance. (As an aside, the derivatives industry doesn’t like the comparison to insurance, because insurers typically are heavily regulated and required to hold minimum amounts of capital against their policies. Derivatives traders are not. Hmm.) The industry types prefer the words “hedging” or “protection.”

These instruments are, I agree, used mainly to smooth cash flows, make markets more predictable and spread risk from those who are vulnerable (say, farmers) to those who want it or can handle it better (commodity speculators).

And I will concede a bit of First-Issue-of-Big-Glossy-Magazine fear-mongering in referring to nominal figures when talking about the size of the markets. The headline of my column uses the $300 trillion amount for the whole derivatives market. In the column, I refer to the $26 trillion amount for the notional amount outstanding in the credit default swaps market. They are the real nominal figures but they are a bit hyperbolic. I disagree they are meaningless. They show how much the derivatives markets have grown, for one. Answer: a lot. These are the fastest growing markets in the world.

But there are some inherent concerns about derivatives. One is that they are a form of leverage. Anyone can write a credit default swap on Felix Salmon Fisheries Corp., take a fee, and be on the hook for some big sum in the event that Felix goes belly up. (Groan.)

Maybe the writer can handle the risk and maybe not. You think that “most derivatives” are not “speculative” investments. Oh really? How do you know? What’s the breakdown of prudent hedging compared with speculative? You don’t know. I don’t. No one knows how much leverage there is and how much speculation there is.

What we do know is that the derivatives markets are large, liquid, for sophisticated investors, and are largely off the radar screen. That is pretty much the platonic ideal of a natural environment for speculation. Now speculation has a bad connotation, but it’s not inherently bad. Some of the speculation transfers risk properly. If the speculators are taking risks that they can handle, that is. Amaranth couldn’t handle the risks, but the fallout was minimal. Long-Term Capital Management couldn’t either – but the
fallout was hardly minimal and the fund needed a massive bailout.

The question becomes whether the users are accounting properly for how much exposure they have and whether they are doing proper due diligence on their counterparties. Warren Buffett writes that the accounting can be screwy and that both sides of derivatives trades can immediately book paper profits. I’ll trust him on that.

Are derivatives being valued properly? Gen Re wasn’t the most cutting edge derivatives player but they were a financially savvy group of guys. They didn’t value some of their instruments correctly. Maybe they are the exception, but I doubt it.

The sophisticated institutions supposedly have good risk controls that should prevent similar problems, but do they? Amaranth and LTCM were widely viewed as having top-class risk controls. That doesn’t give me much faith in risk controls, especially in a crisis.

Does that mean we are going to have a crash? I don’t know. I agree that it’s a zero sum game in theory and that they cannot wipe out wealth of non-participants per se. But their prices are derived from securities. If the securities markets sneeze, you say the derivatives markets are the tissues; I say they might be the virus. That's where the worry about systemic risk comes in; if the gains are concentrated in a very small number of players but the losses hit a big bank, look out.

And the concept of a crash doesn’t simply mean wealth-destruction. These markets can crash in a very real way: They can go away. There are relatively few major derivatives dealers; in a panic, they won’t pick up their phones. It’s conceivable that one day investors will wake up and the CDS market or some part of the collateralized debt obligation market or something else won’t be open for business – as the subprime mortgage originators essentially found a few weeks ago. (Obviously, this is a matter of price. Things settled down in subprime and now the subprime window is open. But mortgages are being packaged and sold at a discount, rather than a premium.)

So what do we have? We have relatively new markets that are wildly popular with risk-hungry investors, growing like weeds, haven’t been tested in a crisis, and have the potential to increase leverage dramatically. Furthermore, mostly derivative transactions aren’t transparent to other market participants or the regulators.

And Felix says, What, Me Worry?

Posted by Felix at 17:57 EST | Comments (0)

Tax Tall People!

Tall people have many advantages in life, and not just when attending rock concerts. They earn more money, they're more likely to become president, they can take stairs two at a time when they're in a hurry. It's not fair. We should tax them!

Seriously. N Gregory Mankiw, A.B., Ph.D., Robert M. Beren Professor of Economics at Harvard University, former chairman of the Council of Economic Advisers, has written a paper which argues that we should do exactly that, or at least that we should if we believe in the Nobel-Prize-winning optimal-taxation ideas of William Vickrey and James Mirrlees.

Our calculations show that a utilitarian social planner should levy a sizeable tax on height. A tall person making $75,000 should pay about $4,500 more in taxes than a short person making the same income.

To which Arnold Kling responds:

At first glance, this seems silly. On further reflection, it also seems silly.

Me? Well, I'm biased. I'm six foot two.

Posted by Felix at 16:57 EST | Comments (0)

How Risky is the Derivatives Market?

Are you scared by the $300 trillion derivatives market? Jesse Eisinger is. Since his piece in Portfolio came out, Jesse and I have talked about it at some length; he ended up telling me to write a blog entry which he can respond to. Watch this space for Jesse's reply!

So. Is the derivatives market scary? In a word, no. That $300 trillion number – a good five or six times gross world product – is meaningless. It includes untold numbers of contracts which cancelled each other out years ago, and it's based on something called "notional amount" which is vastly larger than the actual sums of money changing hands. An interest-rate swap, for example, might pay out the difference between a fixed rate of 6% and a floating rate of 5%. On a notional $1 million swap, the total payment is just $10,000 per year.

What's more, that payment is probably being used to hedge some other kind of interest-rate risk elsewhere. Most derivatives are not a speculative investment, but are in fact part of an attempt to smooth cashflows and make unpredictable markets more predictable. If you're an airline, for instance, you'd much rather lock in your fuel prices than be subject to the kind of price volaitility that jet fuel has undergone in recent years. And if you're an equities investor, you can use derivatives to protect you from any stock-market crash.

The fact that derivatives are global is a good thing. Jesse quotes the CEO of General Re as saying that "a financial crisis is likely to be a global event, not a local event, and derivatives will probably help make that happen.” To which I say: great! A problem shared is a problem halved.

It's worth remembering, here, that the derivatives market can't crash, in the way that the stock market or bond market can. It's a zero-sum game where for every loser there's a winner. Theoretically, the net amount of wealth tied up in derivatives is zero, which means that no wealth can be destroyed by a market event. In practice, says Jesse, there are some derivatives trades in which both counterparties mark a profit to market. That seems weird to me, but in any case the total amount of wealth at risk is confined to such aberrant valuation procedures within sophisticated financial institutions. If you have money in a pension fund, you're worried about securities markets crashing. You really don't have any worries at all about valuation risk in the derivatives market.

The great thing about derivatives is that short of a major investment bank failing, there's very little systemic risk involved with them. Investors such as Robert Citron or Brian Hunter can and do blow up now and then. But all those concentrated losses simply reflect gains elsewhere in the system. And as for the investment banks, they're subject to exactly the kind of regulations which Jesse claims are needed.

Yes, derivatives are difficult to value, and can end up giving an unwary investor nasty losses. But they perform much more good than harm, in areas from agriculture to catasrophe insurance. The risks are entirely theoretical; the benefits are very real.

Posted by Felix at 16:03 EST | Comments (0)

How Selfish is Robert Rubin?

Robert Kuttner has nothing nice to say about Robert Rubin, and that makes Brad DeLong angry. I think DeLong is right, here. Kuttner does seem to be saying, in DeLong's words, that "Rubin is a devious, self-interested plutocrat" – whereas in fact Rubin is a straightforward and transparent plutocrat who raised taxes on his own class (the rich) and who also engineered economic and financial policies which made his own class even richer.

First and foremost, Rubin is a fiscal hawk, and he wanted to increase government revenues in order to balance the budget. You can do that the hard way – by raising taxes – or you can do that the really hard way, by raising taxes in such a way as to encourage growth, thereby increasing not only the tax rate that the rich pay, but also the income on which they are paying taxes. Rubin chose the second path, with great economic and fiscal success. Yes, he made a lot of money as a consequence. That's a good thing. It meant that he, and thousands like him, paid even more in taxes.

Posted by Felix at 15:15 EST | Comments (0)

Arguments Over Carbon Emissions

Comment of the day comes from 99, on the subject of climate change:

No one really seems to be worried about people in the Indo-Gangetic Plain today. Why should we worry about what will happen to them decades in the future?

This is a twist on the Bjorn Lomborg argument. If we're worried about poor people today, we should do something about poor people today – help them get water, education, healthcare, that sort of thing. All of which would have a much more certain and much more immediate beneficial effect than spending the same amount of money on reducing global carbon emissions for the sake of poor people a century hence.

Of course, there are multiple reasons above and beyond poverty reduction to reduce carbon emissions. Which is why Sir Nicholas Stern said at a discussion last week that it's a good idea not to go into too much detail why we should reduce carbon emissions. He used the example of the Declaration: "We hold these truths to be self-evident," wrote Thomas Jefferson, because if you don't give any reasons why, no one can take issue with your argument. Similarly with carbon emissions: best to ride on the consensus which has now evolved that they should be curtailed, rather than get into long arguments about why they should be curtailed.

Posted by Felix at 10:56 EST | Comments (0)

Playing the Carry Trade

On the day when the carry trade has driven the pound over the $2 mark, the Financial Times looks at its spiritual home: Japan. In Japan, household financial decisions are generally made by the wife, which is why investment banks around the world like to talk about "Mrs Watanabe" as the archetypal Japanese retail investor. And Mrs Watanabe has done very well of late, investing in high-yielding currencies such as the Australian dollar.

The idea behind the carry trade is simple: you take (or borrow) money in a low-yielding country, such as Japan or Switzerland, and then invest that money in a high-yielding country, such as Britain, Iceland, or Brazil. This is a strategy, as the FT notes, which normally works until it doesn't:

The further these positions are stretched, the sharper will be the snap back when something panics the markets. The last serious unwinding of yen carry trade positions, in 1998, drove the yen up almost 30 per cent against the dollar in two months.

You don't even need to go as far back as 1998: Just last year, the Icelandic krona plunged literally overnight, wiping out hundreds of millions of dollars in carry-trade gains. But the risk of FX volatility certainly doesn't seem to have stopped Mrs Watanabe from buying bonds which pay out in Aussie dollars – and making a lot of money by doing so.

If this kind of investment seems attractive to you, it's possible, but not easy for a US investor to play. On the other hand, if markets revert to mean, as many long-term investors believe they do, then maybe that's just as well.

Posted by Felix at 10:21 EST | Comments (0)

Congress Eyes Hedge-Fund Tax Loophole

A couple of weeks ago, the New York Times ran an editorial excoriating the way in which private-equity billionaires pay lower tax rates than working stiffs. The leader was based on a paper by Victor Fleischer, who explains the loophole in great detail: in a nutshell, income can very easily be converted into something called "carry", which is treated as capital gains for tax purposes.

Today, the other shoe drops, thanks to Jenny Anderson, again in the NYT. While US savers are generally allowed to save no more than $20,000 tax-free per year, she says, hedge-fund managers can keep tens or hundreds of millions of dollars in income without paying any tax on it for years. The trick is to keep it in an offshore fund, and pay tax only when the money is finally repatriated:

A hedge fund manager makes $10 million in fees and defers it for five years, earning a return of 10 percent a year. When he pays taxes at the end, he walks away with $10.5 million. Another manager who makes the same $10 million pays his taxes immediately. He still earns 10 percent on what’s left, but over the same period he accumulates just $8.9 million.

Remember that Americans pay tax on their global income: just because they're technically earning this money offshore doesn't mean they shouldn't pay tax on it.

Given the manner in which private-equity principals and hedge-fund managers are becoming elided in the public eye, there's a good chance that if Congress attacks either of these tax breaks, it will attack both of them. Which will be easy money for the US fisc.

Posted by Felix at 9:58 EST | Comments (0)

£1 = $2

Those of us with a vaguely transatlantic bent have been mentally doubling UK prices (or halving US ones) for some time, but now it's official: the British pound is worth more than $2. British tourists are sending up quiet thanks to the latest UK inflation report, which hit 3.1% in March, outside the Bank of England's target band, making a rate hike very likely. That, and the perenially-popular carry trade:

"The sky's the limit for sterling," Simon Derrick, chief currency strategist at Bank of New York, said in London. "It's a favorite for investors because of the rate differential."...
"Sterling is going to keep on rising," said Steven Bell, who manages GLC Ltd.'s so-called global macro hedge fund. "We have very high interest rates here in the U.K. and an attractive macro background. I think $2.10 is the level that the pound will settle at."

This is also good news for US companies doing a lot of business in the UK – the big financial-services firms spring to mind.

Posted by Felix at 9:35 EST | Comments (0)

The $5 Trillion at the Base of the Pyramid

It's easy to see long-tail distributions at the top end, where hedge-fund managers make $2 billion per year and apartments sell for $200 million. Luxury goods manufacturers and many others are chasing that market, which is partly responsible for the continued surge in New York City real estate. But there's a long tail at the other end of the spectrum as well.

PSDBlog points out that the bottom 80% of humanity, living on an average of $700 per year, has about $1.7 trillion to spend each year, while, to use another metric, the 4 billion people living on less than $3,000 per annum represent a $5 trillion market. That's big by any measure.

And yet, we're told, "only 50 or so multinational companies (there are 63,000 worldwide) have tried to penetrate the base of the pyramid". Obviously, this isn't the kind of long tail that can be tapped by setting up a website – although m-commerce and m-banking are growing very fast in many emerging markets.

All the same, the way to make real money is to zig while everybody else zags. So for an interesting long-tail play, it might be worth thinking not about houses which sell for $200 million, but rather about houses which sell for $2,000.

Posted by Felix at 16:04 EST | Comments (0)

Quantifying Subprime Losses

Next time you see anything about subprime "carnage" or references to "high-risk loans", remember this. Fremont General has agreed to sell $2.9 billion of subprime home loans at a net loss of $100 million. The agreement is the second such deal that Freemont has made: in the first, it sold $4 billion of subprime loans for a loss of $140 million.

In both cases, the loss is roughly 3.5%. Now I know that bond markets are risk-averse, but in anybody's book a loss of 3.5% is hardly the end of the world. In fact, Fremont shares are up 25% in trading today, as investors realize that the company does not, after all, risk being wiped out by the "subprime meltdown".

Note: These are real loans, going for real money – billions of dollars. As such, they're a much better indication of the health of the subprime market than the ABX "index", which in fact does not reflect the price of underlying securities at all, but is rather a traded contract and a volatility super-magnet.

Posted by Felix at 14:50 EST | Comments (0)

SEC Official: Insider Trading Makes for Efficient Markets

The prize for candid technocrat of the week goes to Erik Sirri, the director of the SEC's division of market regulation, speaking on Thursday at a conference hosted by Vanderbilt University's Financial Markets Research Center. The subject is insider trading in the credit default swap (CDS) market – something which certainly exists, but which happens to not be illegal, the way the US regulatory system is set up. CDSs aren't securities, you see, and so if you trade them you can't be violating securities laws.

In any case, Sirri came out and said what everybody in the markets knows but nobody wants to admit: "In a world of important pricing efficiency, you want insiders trading because the price will be more efficient. That is as it should be."

Sirri then went on to explain that insider-trading laws should still exist, for the purpose of investor protection. But he added that he thought it "very important" that credit default swaps be traded – something which won't happen if the tradable contracts fall under insider-trading regulations while the present bilateral contracts don't.

Alexander Campbell points out that the problem lies with the ridiculously complex way in which financial markets are regulated in the US:

Thanks to the fragmented nature of the US financial regulatory system, CDS abuse could fall through the cracks.

Does fall through the cracks, more like. Whether that's a bad thing depends really on whether you'd rather have efficient markets or investor protections, in a world where "investor protections" are rapidly becoming little more than full-employment devices for tort lawyers.

Posted by Felix at 13:06 EST | Comments (0)

The H1-B Fiasco

The NYT had an interesting one-two punch on the subject of H-1B visas this weekend. Saturday saw a news article by Julia Preston, reporting the chaos at the IRS Bureau of Citizenship and Immigration Services:

Swamped by petitions for work visas from highly educated or skilled foreigners, immigration authorities have conducted a lottery for the first time to determine which ones will be considered, federal officials announced yesterday.

Faced with 123,480 applications over the course of two days for a pool of just 65,000 visas, the BCIS probably had little choice. But the decision didn't go down well:

“The people we need to contribute to our innovation economy are being subjected to a perverse form of ‘Wheel of Fortune,’ ” said Robert Hoffman, vice president for government and public affairs at the Oracle Corporation...
“Many members of the Class of 2007 effectively received deportation orders and lost their post-graduation jobs last week,” said an April 9 editorial in The Harvard Crimson, the student newspaper.

Then, on Sunday, Steve Lohr chimed in with the opposite side of the story, in an "Economic View" column.

While Microsoft may be paying its H-1B visa holders well and recruiting people with hard-to-find talents, other companies have a different agenda. The H-1B visa program, Mr. Hira [Ronil Hira, of the Rochester Institute of Technology] asserts, has become a vehicle for accelerating the pace of offshore outsourcing of computing work, sending more jobs abroad. Holders of H-1B visas, he says, do the on-site work of understanding a client’s needs and specifications — and then most of the software coding is done back in India...
Over the years, the H-1B visa, which allows a person to work in the United States for three years and can be renewed for an additional three, has been used by many people as a steppingstone to becoming a permanent resident. Traditionally, about half of all H-1B holders eventually get green cards, immigration experts say.
Yet the major outsourcing companies, while seeking thousands of H-1B visas, are asking for relative handfuls of green cards, according to government figures.

Lohr is way off base here. For one thing, the green-card argument is just plain weird: if immigrants on temporary work visas turn out to be genuinely temporary immigrants, why is that a bad thing? They pay lots of money into Social Security, and get no benefits in return – a free lunch for the US economy!

And Dean Baker has the more substantive point:

Both Democratic and Republican administrations have worked hard to put manufacturing workers into direct competition with low-paid workers in the developing world. They have also thought it important to put many people in low-paying service sector jobs into direct comeptition with workers from the developing world through immigration policy (e.g. custodians, dishwashers, nannies).
Are we treating our high tech workers unfairly if they face the same competition as textile workers and custodians? Only if we think that people with more education need more protection than people with less education.

For three years after 2001, the H1-B quota was raised by Congress to 195,000 – and even that was too low. That it's now back to 65,000 is a national embarrassment. Compared to most immigrants, holders of H1-Bs are highly educated, pay lots of taxes, and benefit both the economy and their local communities. The cost of educating them has been borne elsewhere, and now they want to give the benefits to the US. As a nation of immigrants, it should be welcoming them with open arms.

Posted by Felix at 12:15 EST | Comments (0)

Power Laws and Luxury Goods

As Chris Anderson knows, once you start thinking in terms of power laws you start seeing them everywhere. But it's worth drawing a distinction between power laws as a meme and power laws as something mathematically well-defined.

After posting a piece on power laws in the housing market, I got an email from one of my more devoted readers (OK, my father) asking if I had the vaguest notion what I was talking about:

I would like to know if there is any statistical basis for the alleged "power law distribution" of house prices in different cities or whether it is just journalese (as in "exponential" which is one of the most misused words around).

Good question. And the answer is, frankly, "just journalese". Specifically, I would never try to discern the distinction between a power-law distribution and a lognormal distribution – when I use the term "power law", I basically mean "something with a much longer and fatter tail than your standard Gaussian bell-curve distribution".

Let's get away from housing and think about luxury goods. And let's look at the tail -- specifically, at the top 1% of the market. (Either the market in general, or any market in particular, such as wristwatches, for example.) Now look at the top 1% of that top 1%.

If your distribution is Gaussian, there isn't an enormous amount of difference between the top 0.01% and the top 1%. It's there, but the top 0.01% won't be more than two or three times as expensive as the top 1% generally. But if you have a power-law distribution going on, then the top 0.01% will be vastly more expensive, maybe 100 times more expensive, than the top 1% generally. If you have a lognormal distribution, then you'll be somewhere in between.

The power-law thesis is that many parts of the world are moving away from normal distributions and towards distributions which look much more like lognormal or power-law distributions. Check out Merrill Lynch, which has just launched a luxury-goods "LifeStyle Index", a "tradable certificate" which tracks the earnings of the luxury-goods sector.

The performance of the index has been back-tested from January 2000 against the major broad benchmarks for the global consumer discretionary sector, namely the MSCI World Consumer Discretionary index. The average outperformance of the index versus its benchmark currently stands at almost 8 percent despite a similar volatility and a dividend yield that is 20 percent higher on average. This performance illustrates the theoretical efficacy of the index together with the inherent value of brand names associated with luxury goods and lifestyle stocks.

In other words, this index is a bet that the rich will continue to get richer, and that as and when they do so, they're likely to splurge on ostentatious displays of wealth from established brand-names.

Not a stupid bet to make, although of course if the stock market is already pricing in those future earnings gains, Merrill's index isn't going to continue to outperform.

Posted by Felix at 10:05 EST | Comments (0)

Tom Wolfe and the New Vulgarians

Tom Wolfe is on form, and writing about hedge-fund managers. Apparently they're "even coarser and ruder than their predecessors could have ever imagined being," but you knew that.

Only Tom Wolfe would accept such an assignment and then, as far as I can tell, never talk to a single hedge-fund manager – instead talking to the old money which is disgusted by the vulgarity of the new. And then write a piece with passages of sheer genius:

He suddenly turned his head away from her. Something had caught his eye. “Nice voz. Tiffany, right?”
It took her a moment to realize he meant “vase,” the vase on a little table in the entry gallery. Why he had pronounced it the French way she couldn’t imagine. She answered in a toneless voice, “No, I don’t think so.” In fact, it was older and considerably more precious than a Tif-fany, but she hadn’t the faintest desire to prolong the conversation with any discussion of the higher ceramics.

The article works as a series of high-finance blind items: which hedge-fund manager got pwned by a teenage hockey player from Port Chester – and a girl, to boot? Which other hedge-fund manager clipped a six-figure check to the first page of a private-school application, thereby guaranteeing his rejection? Which hedge-fund manager's wife insisted on their child being borne by a surrogate mother, to save her "personal-trainer-sculpted boy-with-breasts body" from the physical consequences of childbirth?

The article also works as a rather more subtle indictment of those who would consider a seat on the board of the New York Public Library the highest attainment of humankind, or who shudder at the very thought of people "who hold meetings with their shirttails hanging outside their jeans, like college boys".

Sometimes, the war between the old millionaires and the new billionaires is one of those fights you really want both sides to lose. But then you realize that if it didn't exist, Tom Wolfe couldn't write about it. And that really would be a shame.

(By the way, does Merrill Lynch really have a 41-story building in Times Square? And, does Annie Leibowitz's photo of Tom Wolfe at the top of the article remind you of the photo which became the drawing at the top of this column? Ach, never mind.)

Posted by Felix at 2:41 EST | Comments (4)

ABN's Groenink Watches an Era's End Approach

ABN Amro CEO Rijkman Groenink is not getting a lot of sleep right now. He has 48 hours to do a deal he never really wanted to do in the first place, or else see his bank broken up, reduced to little more than a financial-services footnote.

The modern world has finally caught up, it would seem, with what the Wall Street Journal describes as "the bank, one of Europe's aristocratic firms with roots dating to 1824." Arrayed against Groenink and his arranged marriage with the just-as-aristocratic John Varley of Barclays are some decidedly new-world names, chief among them Fred Goodwin of RBS, Emilio Botin of Santander, and Christopher Hohn of The Children's Investment Fund.

Rather than a friendly merger with an established name like Barclays, Groenink faces the prospect of seeing his Dutch assets – the crown jewel of ABN Amro's holdings – being sold to Fortis, of all banks. Fortis, an expensive name from some brand factory, has no history except for being the product of multiple mergers of entities with names like N.V. AMEV, VSB, AG Group, ASLK-CGER, and SNCI-NMKN. You can feel the Groenink shudder from across the Atlantic.

It's not that old-school aristocratic financial institutions can't survive in today's cutthroat world: look at UBS, for instance. But ABN Amro has been a disappointment for many years now. Groenink is surely praying that Varley manages to pull the trigger, or that Fortis will run into trouble with the regulators. But he also knows that, sooner rather than later, his bank will get sold to whoever can offer his shareholders the most money. Which might be a little vulgar, but is also perfectly old-fashioned in its own way.

Posted by Felix at 1:30 EST | Comments (0)

Sallie Forth to a BB Rating

If you bought the rumor on Friday that Sallie Mae was about to go private, you're feeling pretty smug this morning. Sure, SLM shares closed at $46.76 on Friday, up almost 15% on the day. But now it turns out that Christopher Flowers and his consortium are willing to pay $60 for them, valuing the student lender at $25 billion.

There are echoes of the TXU buyout here: both companies are in politically fraught and unpopular industries, and private equity is stepping up where public shareholders have proved themselves fearful. (Sallie Mae was trading at $55 per share last summer.)

Flowers, along with fellow-bidders JP Morgan Chase, Bank of America, and Friedman Fleischer & Lowe, is making a long-term bet on Sallie Mae and trusting that the political firestorm in New York and Washington will blow over sooner or later.

Flowers is probably right, but it's a risky bet all the same. Sallie Mae makes a lot of money by lending money to students and then getting Uncle Sam to pay it back in the event of default. If the government ever tires of subsidizing the private sector in this way, no amount of "private student loans" – loans made outside the federal guarantee program – are likely to be able to justify the $25 billion price tag.

The most interesting part of the deal, however, is not the politics so much as the financial engineering. Sallie Mae, like most lenders, has relatively little debt, mainly because it feels it needs a rock-solid credit rating in order to minimize its borrowing costs. But all that is about to change now: this deal is being done with $16.5 billion in new debt, which could well bring Sallie Mae all the way down to junk high-yield status.

And where will Sallie find the money to lend out if it has a double-B credit rating? Why, its shareholders, of course: JP Morgan and BofA have promised a credit line of as much as $200 billion if the bond markets prove recalcitrant.

In 1997, Sallie Mae was a government agency with a triple-A rating. Five years later, it was down to single-A. Five years after that, it's likely to be down to BBB at the highest. That's progress, that is.

Posted by Felix at 0:47 EST | Comments (0)

Alice Rawsthorn loves Nick Knight

The NYT is running an article about Nick Knight today, written by Alice Rawsthorn. It's a big sloppy wet kiss of a profile, complete with gushing quotes from Nadja Swarovski, who's not only a major Knight client but who is also the lead advertiser on Knight's website, showstudio.com. Rawsthorn herself can't say enough wonderful things about the site:

In 2000, Knight founded the Web site SHOWstudio as a laboratory where he could experiment with interactive technologies. SHOWstudio has since produced more than 250 projects by Knight and others, placing him at the forefront of developments in 3-D scanning, digital sculpture, interactive film and a raft of other innovations...
Despite the beauty of his still images, SHOWstudio may yet prove to be Knight’s most influential project. He has bankrolled the Web site since 2000, at considerable personal expense. As well as enabling Knight to experiment, it has nurtured a new generation of multimedia stylists, designers and digital artists. When a famous face, like Moss’s, is featured on SHOWstudio, as many as 500,000 people log on in a day.

First, about that 500,000 figure: I don't believe it. Half a million unique visitors in a day? I just don't buy it. But I have a couple of friends at the website, and I'll ask them if it's remotely realistic, or what it's referring to. I guess it's conceivable that if Kate Moss gets naked on the site and it's picked up by the gossip blogs, then traffic might spike. Lord knows sex sells on the internet. But that kind of traffic hardly represents the "new generation of multimedia stylists, designers and digital artists".

And second, don't you think that Rawsthorn, when writing for the New York Times, might have disclosed that she was a founding editor of showstudio.com? This is America, where some people actually care about those kind of journalistic ethics.

Posted by Felix at 17:24 EST | Comments (0)

John Cassidy on the Economics of Climate Change

I'm very interested in the economics of climate change, and it's great that John Cassidy has an article on the subject in the May issue of Portfolio.

But I have to admit that I'm very disappointed in the tone that Cassidy decided to take.

First, the headline – "Learning to Love Global Warming" – is just dreadful. Global warming is not something that we should learn to love, it's something we should learn to fear and try to avoid.

Cassidy then leads off with a story about an unseasonably warm day in New York this past winter:

With the temperature in the low 70s, the garden was thronged with people in T-shirts and shorts. -After looking in astonishment at the pink blossoms that had come out at least two months early, I did a quick cost-benefit analysis of this presumed product of climate change.

I'm not sure who's doing the presuming here: Cassidy knows full well that you can't draw a direct causal relationship between climate change in general and a single warm winter's day in particular. But if you're going to take extreme weather events and calculate their costs and benefits, it's positively dishonest to use a nice day in Brooklyn rather than, say, Hurricane Katrina.

Cassidy then launches into a list of the winners and losers from global climate change. Here's a list of the places he mentions: California's Central Valley, Florida, the Northeast [of the USA, which goes without saying], the Mediterranean, Saint-Tropez, northwestern Europe, Scarborough. Here's some of the places he doesn't mention: Africa. India. Bangladesh.

Any honest accounting of the effects of global climate change has to be, well, global. And there's simply no way that the benefits to Scarborough can offset the costs to the 900 million people living in the Indo-Gangetic Plain, to take just one example of an area which will be devastated by global warming.

Cassidy then quotes Yale's Robert Mendelsohn talking about the effects of mild global warming on countries in the polar region and in mid-latitudes, and concluding that "warming benefits and damages will likely offset each other until warming passes [4.5°F], and even then [the cost] will be far smaller on net than originally thought."

I haven't seen Mendelsohn's sums. But it does seem that he's taking a lot of advantage from the fact that the world's poor, who will bear most of the brunt of global climate change, will also be the hardest hit. If Canada benefits and India is severely damaged, the net effects in terms of GDP might "offset each other", although I doubt it. But that doesn't mean that the outcomes are economically equivalent. After all, India has a lot more potential for future growth than Canada does. And if you take into account the opportunity cost of curtailing India's future growth, I don't think you can be quite as sanguine as Mendelsohn appears to be.

Cassidy does dip his toe into the contentious question of discount rates, setting up Sir Nicholas Stern on the one side and William Nordhaus on the other. That's fair enough, but I don't think it's fair to put John Quiggin in the middle. Quiggin, as any reader of his will know, is very much on Stern's side of the debate.

And although Cassidy does talk about preventing global warming as a useful insurance policy, he does so thusly:

Statistically speaking, it is unlikely that a 40-year-old man will get run over by a bus in a year’s time, but he takes out a policy just in case. Similarly, there may be only a small probability that unchecked growth in emissions would exacerbate global warming, but why take the risk?

No, John, there may not be "only a small probability that unchecked growth in emissions would exacerbate global warming". In fact, there's is a pretty much a 100% probability that unchecked growth in emissions will exacerbate global warming.

Cassidy tells us that he isn't "secretly working for a corporate-funded think tank that churns out skeptical studies on global warming". Maybe he should be, if he keeps on writing stuff like this.

Posted by Felix at 16:27 EST | Comments (0)

DoubleClick Finally Regains its Pre-Crash Valuation

One of the great annoyances about online stock-quote services is that they're really good at providing historical data until a company gets bought. Then, it all disappears.

I've been reading all the press about the "nosebleed price" that Google is paying for DoubleClick, and so I asked myself how it compares to DCLK's valuation at the height of the dotcom bubble.

This is not an easy thing to find out. But a December 1999 article from Smart Money has DCLK trading at $216.50 per share, pre-split; and an August 1998 article from internetnews.com puts DCLK's fully-diluted market capitalization at $696.45 million at a share price of $48.38.

Which means that DoubleClick was worth pretty much exactly $3.1 billion in December 1999 – which is the same price that Google is paying today.

So "nosebleed" might be right. But it's not unprecedented.

Posted by Felix at 15:08 EST | Comments (0)

On that illustration

There's been a bit of interest in the cartoon of me on the Portfolio website, but no one's worked out where it comes from. In fact, the source is my Christmas mitzvah from December 2005, when I drove a Zipcar around Manhattan giving lifts to people who were inconvenienced by the transit strike. What you can't tell, of course, from the line drawing is the fact that my suit is purple...

Posted by Felix at 13:04 EST | Comments (4)

Mel Karmazin, Failure?

One of the ideas behind this blog is that the world of business is full of big egos, and that egos trump economics on a very regular basis. On the other hand, it's rare to find the sitting CEO of a publicly-listed company admitting that the world of big business can often be reduced to a pissing match between two hard-headed individuals. CEOs like to pretend that they're selfless servants of their shareholders, even when everybody knows otherwise.

Unless you're Mel Karmazin, of course. Mel just gave an interview to Portfolio's Nancy Hass where he's only too happy to admit that after merging CBS with Viacom, board meetings were essentially knock-down fights between himself and Sumner Redstone:

You could have sold tickets to those board meetings with you and Sumner.
Oh, they were fun. While I was there the Osbournes were on MTV, and I will tell you, Sumner and I were far, far more interesting to watch.

Yeah, loads of fun, I'm sure. Especially for those long-suffering shareholders.

Of course, Mel could always blame Sumner, back in the day, if the share price fell. He can't do that at his new shop, Sirius, whose shares were last seen trading at $3.08 apiece, half the price they were at the beginning of last year, and down from somewhere north of $80 back during the dot-com boom.

" I like the idea of the report card—the stock price," Mel tells Hass. Does that mean he's officially giving himself an F?

Posted by Felix at 1:24 EST | Comments (0)

The $200 Million Apartment

More evidence that house prices are moving towards a power-law distribution, with the expensive stuff becoming insanely expensive:

Sheikh Hamad, the Foreign Minister of Qatar, recently paid $195 million for a 20,000-square-foot penthouse at One Hyde Park in London.
Put down your calculator. That's $9,800 per square foot.

The Independent has more details on developers Nick and Christian Candy:

Before these penthouses went on the market, it was assumed that the upper price limit for any London home - however luxurious - was £2,000 per square foot. The Candy brothers made £4,000 per square foot their starting price.

It's also worth noting that even after spending $195 million for his flat, Sheikh Hamad – and the owners of two other penthouses which are also rumored to have gone for £100 million apiece – still won't be able to move in until 2009 at the earliest.

London, of course, is even more of a global city than New York, and as someone who hasn't lived in London for 10 years I view these developments with a mixture of pride and incomprehension. I remember the area in question as being posh, to be sure, but in a slightly shabby way: this was back when the hotel next door, today the Mandarin Oriental, was simply the Hyde Park Hotel. Now, it seems, there's nowhere on the planet more upscale.

Posted by Felix at 0:51 EST | Comments (0)

Market Movers

It's live! Up until now, I've been crossposting to felixsalmon.com, but now that portfolio.com has finally been unveiled to the world, you'll have to go there to read most of my finance blogs. You can always get there by going to marketmovers.org, in case you don't want to navigate through the Portfolio home page.

The RSS feed is here; at the moment it's truncated, but I've asked them to change that and serve the full content. In any case, if you subscribe to my "All blog entries" RSS feed or my "Finance and economics" feed, you don't need to do anything: the Portfolio blog entries should be shuffled in there among the (now necessarily much less frequent) felixsalmon.com entries.

Posted by Felix at 20:58 EST | Comments (3)

When Free Isn't Good

Anil Dash has a wonderful piece of contrarian thinking up on his blog -- it's a week old, but it's really timeless.

A little while ago, my friend Michael Sippey, whom I had the pleasure of interviewing the other day, sent me a link to the new Google Voice Local Search...
Now, this new services seems like a good product, and I know I'm supposed to say "Wow, cool! Nice work, Google!" But... my initial response wasn't positive. My gut feeling was "Why the hell aren't they charging for this? That sucks!"

Now, I hate websites which make you pay money. And a constant problem for bloggers is wanting but not being able to point to articles which are hidden behind subscriber firewalls. But Anil's point is a bit more subtle than that:

Having paying customers would help focus the product team... If your product "may not be available at all times and may not work for all users" (as it says on the product's homepage), then either fix it or get yelled at by angry users. Either one is a good option. Don't hide behind a "well, shucks, we said it was beta, and it's free..." excuse. Being accountable to your users makes your product better...
Connecting people via VOIP or sending them an SMS, two of the key features of the new service, cost money. At Google volumes, they cost a lot of money. I want to have a service I can rely on -- which again means I need to invest in it...
Google's made the leap here before, by starting to charge for Google Apps. Even people who use the service for free were reassured by the fact there was a paid version.

Anil also has bad memories of great web products such as MSN Sidewalk which disappeared because they didn't make money. Me, I have bad memories of iname.com, which promised me free mail forwarding for life and then broke its promise.

As a rule, companies which give things away for free care much less about their free products and about their users than do companies who charge. This tax season, if you were given a choice between a free tax-preparation tool and one which cost say $20, which would you choose? Many people, quite sensibly, would choose the latter, just because it cost money.

Nothing makes me happier than services which are cheaper and better than the alternative; free-and-better, is, in theory, the best combination of all. But it still makes sense sometimes for people like Anil to want to pay a bit of money.

Posted by Felix at 18:21 EST | Comments (0)

When Free Isn't Good

Anil Dash has a wonderful piece of contrarian thinking up on his blog – it's actually a week old, but it's really timeless.

A little while ago, my friend Michael Sippey, whom I had the pleasure of interviewing the other day, sent me a link to the new Google Voice Local Search...
Now, this new services seems like a good product, and I know I'm supposed to say "Wow, cool! Nice work, Google!" But... my initial response wasn't positive. My gut feeling was "Why the hell aren't they charging for this? That sucks!"

Now, I hate websites which make you pay money. And a constant problem for bloggers is wanting but not being able to point to articles which are hidden behind subscriber firewalls. But Anil's point is a bit more subtle than that:

Having paying customers would help focus the product team... If your product "may not be available at all times and may not work for all users" (as it says on the product's homepage), then either fix it or get yelled at by angry users. Either one is a good option. Don't hide behind a "well, shucks, we said it was beta, and it's free..." excuse. Being accountable to your users makes your product better...
Connecting people via VOIP or sending them an SMS, two of the key features of the new service, cost money. At Google volumes, they cost a lot of money. I want to have a service I can rely on -- which again means I need to invest in it...
Google's made the leap here before, by starting to charge for Google Apps. Even people who use the service for free were reassured by the fact there was a paid version.

Anil also has bad memories of great web products such as MSN Sidewalk which disappeared because they didn't make money. Me, I have bad memories of iname.com, which promised me free mail forwarding for life and then broke its promise.

As a rule, companies which give things away for free care much less about their free products and about their users than do companies who charge. This tax season, if you were given a choice between a free tax-preparation tool and one which cost say $20, which would you choose? Many people, quite sensibly, would choose the latter, just because it cost money.

Nothing makes me happier than services which are cheaper and better than the alternative; free-and-better, is, in theory, the best combination of all. But it still makes sense sometimes for people like Anil to want to pay a bit of money.

Posted by Felix at 17:21 EST | Comments (1)

FS vs GS in the ES

The only thing better than writing blog entries about how Goldman Sachs should be taken private? Having a journalist from the London Evening Standard phone up a Goldman flack and ask for a response. Genius.

Posted by Felix at 14:54 EST | Comments (0)

Vincent Price for Citigroup CEO?

The New York Post has a wonderfully gossipy piece by Paul Tharp today on who might take over at Citigroup if and when Chuck Prince gets the boot.

Tharp concentrates on the fight between Vikram Pandit and Robert Druskin, which isn't much of a fight yet because Pandit doesn't even work at Citigroup (yet), and because even if he did it's far from clear that he'd actually want the CEO job.

Personally, I'd love to see Druskin get the job. Not because I think he's particularly great at whatever it is that he does, necessarily. But more because Citigroup is considered an Evil Multinational in so many quarters that it would be great to have a man in charge who can literally twirl his mustaches as he plots and plans. Just check out his photo -- definitely the kind of person that Hollywood loves to accessorize with an ankle-length black leather trenchcoat.

Pay no attention to the kindly, avuncular Druskin. It's the mustachioed hatchet-man we want in charge!

Posted by Felix at 14:47 EST | Comments (0)

FS vs GS in the ES

The only thing better than writing blog entries about how Goldman Sachs should be taken private? Having a journalist from the London Evening Standard phone up a Goldman flack and ask for a response. Genius.

Posted by Felix at 13:53 EST | Comments (0)

Vincent Price for Citigroup CEO?

The New York Post has a wonderfully gossipy piece by Paul Tharp today on who might take over at Citigroup if and when Chuck Prince gets the boot.

Tharp concentrates on the fight between Vikram Pandit and Robert Druskin, which isn't much of a fight yet because Pandit doesn't even work at Citigroup (yet), and because even if he did it's far from clear that he'd actually want the CEO job.

Personally, I'd love to see Druskin get the job. Not because I think he's particularly great at whatever it is that he does, necessarily. But more because Citigroup is considered an Evil Multinational in so many quarters that it would be great to have a man in charge who can literally twirl his mustaches as he plots and plans. Just check out his photo -- definitely the kind of person that Hollywood loves to accessorize with an ankle-length black leather trenchcoat.

Pay no attention to the kindly, avuncular Druskin. It's the mustachioed hatchet-man we want in charge!

Posted by Felix at 13:46 EST | Comments (0)

Wolfowitz Must Go

L'affair Wolfowitz has been trickling out for some time now, but today I think it finally reached the point at which Paul Wolfowitz can quite clearly no longer lead the World Bank effectively. When you read the report of the World Bank's ethics committee, it's abundantly clear that Wolfowitz was intimately involved in getting his girlfriend as much money as he possibly could.

Wolfowitz was very upset that he couldn't simply recuse himself from matters concerning his companion, and that instead she was being forced to leave the Bank and work on secondment elsewhere. He then directed the Bank's human resources department "to compensate her for both the lost opportunities related to promotion and the pain, suffering, and damage to her professional reputation that has been involved in her forced departure".

Which is the first we've heard of such pain, suffering, and damage.

What's more, Wolfowitz tried his best to engineer not one but three promotions for his partner, which helps explain how she ended up the best-paid person at the State Department, before even taking into account that her $193,590 salary comes tax-free.

Sebastian Mallaby also points out today that the scandal extends to Wolfowitz's closest aides:

Kevin Kellems, an unremarkable press-officer-cum-aide who had previously worked for Wolfowitz at the Pentagon, pulls down $240,000 tax-free -- the low end of the salary scale for World Bank vice presidents, who typically have PhDs and 25 years of development experience. Robin Cleveland, who also parachuted in with Wolfowitz, gets $250,000 and a free pass from the IRS, far more than her rank justifies. Kellems and Cleveland have contracts that don't expire when Wolfowitz's term is up. They have been granted quasi-tenure.

Wolfowitz's fate now hangs with the Bank's board, and many board members dislike him. However, the US is likely to fight reasonably hard to keep him in place, if only because the convention that the president of the World Bank must always be an American now looks increasingly anachronistic. If and when Wolfowitz leaves, there's a good chance that his successor will not be an American at all.

That said, the Washington Post reports today that "few bank insiders suggested that Wolfowitz's job is in jeopardy". It's possible that Wolfowitz will hang on, an unpopular lame duck. Which would be the worst possible outcome in terms of energizing the Bank's staff to do its vital work of fighting poverty.

Posted by Felix at 11:31 EST | Comments (0)

Wolfowitz Must Go

L'affair Wolfowitz has been trickling out for some time now, but today I think it finally reached the point at which Paul Wolfowitz can quite clearly no longer lead the World Bank effectively. When you read the report of the World Bank's ethics committee, it's abundantly clear that Wolfowitz was intimately involved in getting his girlfriend as much money as he possibly could.

Wolfowitz was very upset that he couldn't simply recuse himself from matters concerning his companion, and that instead she was being forced to leave the Bank and work on secondment elsewhere. He then directed the Bank's human resources department "to compensate her for both the lost opportunities related to promotion and the pain, suffering, and damage to her professional reputation that has been involved in her forced departure".

Which is the first we've heard of such pain, suffering, and damage.

What's more, Wolfowitz tried his best to engineer not one but three promotions for his partner, which helps explain how she ended up the best-paid person at the State Department, before even taking into account that her $193,590 salary comes tax-free.

Sebastian Mallaby also points out today that the scandal extends to Wolfowitz's closest aides:

Kevin Kellems, an unremarkable press-officer-cum-aide who had previously worked for Wolfowitz at the Pentagon, pulls down $240,000 tax-free -- the low end of the salary scale for World Bank vice presidents, who typically have PhDs and 25 years of development experience. Robin Cleveland, who also parachuted in with Wolfowitz, gets $250,000 and a free pass from the IRS, far more than her rank justifies. Kellems and Cleveland have contracts that don't expire when Wolfowitz's term is up. They have been granted quasi-tenure.

Wolfowitz's fate now hangs with the Bank's board, and many board members dislike him. However, the US is likely to fight reasonably hard to keep him in place, if only because the convention that the president of the World Bank must always be an American now looks increasingly anachronistic. If and when Wolfowitz leaves, there's a good chance that his successor will not be an American at all.

That said, the Washington Post reports today that "few bank insiders suggested that Wolfowitz's job is in jeopardy". It's possible that Wolfowitz will hang on, an unpopular lame duck. Which would be the worst possible outcome in terms of energizing the Bank's staff to do its vital work of fighting poverty.

Posted by Felix at 10:30 EST | Comments (3)

There's No Housing Bubble

Chart of the day comes from Deloitte's Carl Steidtmann. You wanna see what a bubble looks like? He'll show you what a bubble looks like.

There's much more where that came from, and of course the comparison isn't really fair: when you consider the amount of leverage that most new homes come burdened with, the return on investment can approach Nasdaq levels. Even so, the chart does put a smile on my face.

Posted by Felix at 16:01 EST | Comments (0)

Pastorini vs Gold Fields: The Plot Thickens

In the FT vs Bloomberg stakes, it's looking increasingly as though the score is 1-0 to the Brits: Bloomberg put out a follow-up article yesterday headlined "Gold Fields Takeover Interest Can't Be Verified", and today's New York Times quotes Bloomberg editor in chief Matthew Winkler as saying that Bloomberg's investigation of "Edward Pastorini," the supposed bidder for Gold Fields, will continue.

But don't count Bloomberg out quite yet. In an interesting factoid which the NYT doesn't seem to have picked up on, Bloomberg is claiming that its information came not from "Pastorini" but from within Gold Fields itself. All very peculiar: Gold Fields is on the record as saying that it has received no such bid, but at the same time Gold Fields executives are leaking the details of the bid to Bloomberg? Something is very smelly here indeed.

Posted by Felix at 15:12 EST | Comments (0)

Mr McDade's Inexplicable Insouciance

Ya gotta love Dan Loeb. Just check out his letter to the board of directors of PDL Biopharma, a biotech company he owns stock in, which is well worth reading in full. Most of it is a full-on broadside directed at PDL's CEO, Mark McDade. Some choice excepts:

It became apparent that the earlier dialogue was a charade intended to stall for time, a tactic we have seen employed many times before by underperforming CEOs. Mr. McDade's inexplicable insouciance towards us... Mr. McDade's management blunders and wasteful spending... McDade's Insincerity and Disorganization... what is truly galling, and what speaks directly to Mr. McDade's lack of character, professionalism, and competence... How can Mr. McDade purport to effectively run a public biotechnology company with a market capitalization of over $2 billion when he cannot even manage his own Microsoft Outlook inbox?... so long as Mr. McDade remains CEO, which we expect will not be much longer, the Company will have no intention of doing the "right thing"... There is no better example of McDade's "empire building" philosophy, pathological selfishness and poor business judgment than his decision to build out PDLI's absurdly large and unnecessary new corporate headquarters (the "Taj Mahal")... Mr. McDade has, from the beginning of this project, apparently been fixated on when his boat slip in the marina adjacent to the new corporate headquarters will be ready... Mr. McDade has made it clear in private that one of the key drivers behind his decision to relocate the Company from Fremont to Redwood City is that the new headquarters location will lead to a far shorter commute... The Company is being treated like McDade's personal science experiment.

The stock market loves this sort of thing just as much as I do, it would seem: PDLI is up 8% today, despite Bloomberg reporting that PDL immediately rebuffed Loeb with a thanks-but-no-thanks letter saying that the company believes in its "current strategy".

Even so, I'm setting the over/under on McDade's ouster at three weeks.

(Via Alphaville)

Posted by Felix at 14:38 EST | Comments (0)

There's No Housing Bubble

Chart of the day comes from Deloitte's Carl Steidtmann. You wanna see what a bubble looks like? He'll show you what a bubble looks like.

There's much more where that came from, and of course the comparison isn't really fair: when you consider the amount of leverage that most new homes come burdened with, the return on investment can approach Nasdaq levels. Even so, the chart does put a smile on my face.

Posted by Felix at 14:38 EST | Comments (7)

Pastorini vs Gold Fields: The Plot Thickens

In the FT vs Bloomberg stakes, it's looking increasingly as though the score is 1-0 to the Brits: Bloomberg put out a follow-up article yesterday headlined "Gold Fields Takeover Interest Can't Be Verified", and today's New York Times quotes Bloomberg editor in chief Matthew Winkler as saying that Bloomberg's investigation of "Edward Pastorini," the supposed bidder for Gold Fields, will continue.

But don't count Bloomberg out quite yet. In an interesting factoid which the NYT doesn't seem to have picked up on, Bloomberg is claiming that its information came not from "Pastorini" but from within Gold Fields itself. All very peculiar: Gold Fields is on the record as saying that it has received no such bid, but at the same time Gold Fields executives are leaking the details of the bid to Bloomberg? Something is very smelly here indeed.

Posted by Felix at 14:12 EST | Comments (0)

Mr McDade's Inexplicable Insouciance

Ya gotta love Dan Loeb. Just check out his letter to the board of directors of PDL Biopharma, a biotech company he owns stock in, which is well worth reading in full. Most of it is a full-on broadside directed at PDL's CEO, Mark McDade. Some choice excepts:

It became apparent that the earlier dialogue was a charade intended to stall for time, a tactic we have seen employed many times before by underperforming CEOs. Mr. McDade's inexplicable insouciance towards us... Mr. McDade's management blunders and wasteful spending... McDade's Insincerity and Disorganization... what is truly galling, and what speaks directly to Mr. McDade's lack of character, professionalism, and competence... How can Mr. McDade purport to effectively run a public biotechnology company with a market capitalization of over $2 billion when he cannot even manage his own Microsoft Outlook inbox?... so long as Mr. McDade remains CEO, which we expect will not be much longer, the Company will have no intention of doing the "right thing"... There is no better example of McDade's "empire building" philosophy, pathological selfishness and poor business judgment than his decision to build out PDLI's absurdly large and unnecessary new corporate headquarters (the "Taj Mahal")... Mr. McDade has, from the beginning of this project, apparently been fixated on when his boat slip in the marina adjacent to the new corporate headquarters will be ready... Mr. McDade has made it clear in private that one of the key drivers behind his decision to relocate the Company from Fremont to Redwood City is that the new headquarters location will lead to a far shorter commute... The Company is being treated like McDade's personal science experiment.

The stock market loves this sort of thing just as much as I do, it would seem: PDLI is up 8% today, despite Bloomberg reporting that PDL immediately rebuffed Loeb with a thanks-but-no-thanks letter saying that the company believes in its "current strategy".

Even so, I'm setting the over/under on McDade's ouster at three weeks.

(Via Alphaville)

Posted by Felix at 13:38 EST | Comments (0)

Goldman Traders Make the Top-Paid List

There was much press a couple of days ago when Trader Monthly announced that the top five earners on its top traders listing all brought home more than $1 billion last year. (Of course, "brought home" is a really stupid way of putting it: in fact, the vast majority of these earnings are reinvested in the traders' hedge funds.)

But who lies beyond the top five? The Guardian today has the whole list. They're giving earnings in pounds, so double all the figures to get the dollar equivalents. Interestingly, no fewer than four Goldman Sachs traders are sprinkled in among the hedge-fund managers, and they all made more money than CEO Lloyd Blankfein.

Raanan Agus, Driss Ben-Brahim, Pierre-Henri Flamand, and Morgan Sze all made between $80 million and $100 million last year, we're told. Meanwhile, former Goldman star Eric Mindich - one of those people who says "I can make more money at my own hedge fund" and goes off to start one - is nowhere to be seen. Maybe Agus, Ben-Brahim, Flamand and Sze would do well to stay where they are.

Posted by Felix at 13:01 EST | Comments (0)

Vonage Back Under Citron's Control

Last year, Vonage founder Jeffrey Citron wanted to take his company public. The problem was, he'd been indicted for securites fraud back in 2003, in a case surrounding his previous company, Datek Securities. So he needed someone else to be CEO, and he alighted on a chap named Mike Snyder.

Well, that didn't last long. Snyder is out, and Citron is now "interim" CEO - we'll see how long that lasts. Vonage, of course, is on the losing side of a nasty patent fight with Verizon at the moment, and has the dubious distinction of being by far the worst-performing IPO of 2006.

The good news is that the announcement seems to have helped the stock rise by a very impressive 10% today; the bad news is that that rise is just 31 cents per share. (By contrast, the stock closed on its opening day at $14.85, down $2.15 from the IPO price.)

For the time being, I'm keeping my Vonage service, which I've had for four years now; the alternatives don't seem to be any better, especially when you take into account Vonage's international phone rates. (Calls to UK landlines are free!) But there's no way I'd go anywhere near the stock, even if I were a stock-picking kinda guy, which I'm not.

Posted by Felix at 12:40 EST | Comments (0)

Goldman Traders Make the Top-Paid List

There was much press a couple of days ago when Trader Monthly announced that the top five earners on its top traders listing all brought home more than $1 billion last year. (Of course, "brought home" is a really stupid way of putting it: in fact, the vast majority of these earnings are reinvested in the traders' hedge funds.)

But who lies beyond the top five? The Guardian today has the whole list. They're giving earnings in pounds, so double all the figures to get the dollar equivalents. Interestingly, no fewer than four Goldman Sachs traders are sprinkled in among the hedge-fund managers, and they all made more money than CEO Lloyd Blankfein.

Raanan Agus, Driss Ben-Brahim, Pierre-Henri Flamand, and Morgan Sze all made between $80 million and $100 million last year, we're told. Meanwhile, former Goldman star Eric Mindich – one of those people who says "I can make more money at my own hedge fund" and goes off to start one – is nowhere to be seen. Maybe Agus, Ben-Brahim, Flamand and Sze would do well to stay where they are.

Posted by Felix at 12:01 EST | Comments (0)

Vonage Back Under Citron's Control

Last year, Vonage founder Jeffrey Citron wanted to take his company public. The problem was, he'd been indicted for securites fraud back in 2003, in a case surrounding his previous company, Datek Securities. So he needed someone else to be CEO, and he alighted on a chap named Mike Snyder.

Well, that didn't last long. Snyder is out, and Citron is now "interim" CEO – we'll see how long that lasts. Vonage, of course, is on the losing side of a nasty patent fight with Verizon at the moment, and has the dubious distinction of being by far the worst-performing IPO of 2006.

The good news is that the announcement seems to have helped the stock rise by a very impressive 10% today; the bad news is that that rise is just 31 cents per share. (By contrast, the stock closed on its opening day at $14.85, down $2.15 from the IPO price.)

For the time being, I'm keeping my Vonage service, which I've had for four years now; the alternatives don't seem to be any better, especially when you take into account Vonage's international phone rates. (Calls to UK landlines are free!) But there's no way I'd go anywhere near the stock, even if I were a stock-picking kinda guy, which I'm not.

Posted by Felix at 11:40 EST | Comments (1)

Stern, Sachs, and Stiglitz on the Economics of Climate Change

If you read my entry from last night, you'll know I went to a discussion on climate change at Columbia yesterday, which was kicked off with a presentation from the man himself, Sir Nicholas Stern of the Stern Review on the Economics of Climate Change.

I managed to ask Stern the question I've been wanting to ask him for a couple months now - and, what's more, I got great answers from both Joseph Stiglitz and Jeffrey Sachs as well. My question was much the same one as that implicit in Charles Kenny's recent paper. If you look at Stern's worst-case scenarios, most of them put the population of the future on a much higher standard of living than the population of the present. So the $400 billion we're (hypothetically) spending today on reducing carbon emissions is being spent so that future generations can be even richer still - the whole thing feels a bit like taking from the poor (us, now) and giving to the rich (our great-grandchildren).

Stern replied first by noting that the $400 billion / 1% of GDP cost is only an estimate. It's entirely possible that the cost could actually be negative, he said: "a Schumpeterian tech-driven burst of growth is possible and even likely from zero-carbon sources of electricity". On the other hand, Sachs noted that the 1% of GDP cost is predicated on our developing a workable and scalable method of capturing and sequestering the carbon output from the coal-fired power stations which are certainly going to be built in huge numbers in India and China. If we don't get the CCS (carbon capture and sequestration) right, then the cost of reducing carbon emissions could easily double, or more. So let's split the difference and say that the 1% of GDP cost is realistic, to be borne mainly but not entirely in the form of higher energy prices.

Stern then said that it's also entirely possible that if we do nothing at all, and carbon emissions continue to rise, then in the next century "we could end up a lot poorer than we are now". His models show a 50% chance of global temperatures rising by more than 5 degrees Celsius in the business-as-usual case; when global temperatures were 5 degrees lower than they are now, we were in the last Ice Age and most of Europe was under a mile of ice. That sort of temperature change would be catastrophic on many levels and would transform the planet in very, very negative ways. But Stern did agree that under his models, "most of the time we're better off". So, he says, "you discount for that". An expenditure today is only worthwhile, under his model, if it causes a disproportionate increase in future wealth.

And then came the barrage of very good reasons why it makes sense to spend money today for the benefit of future generations.

First, from Stern: climate change is a stock-and-flow problem. We need to decrease the flow of carbon into the atmosphere now, in order to reduce the stock of carbon in the atmosphere in future. Once it's there, you can't take it out - in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible. Once coral reefs die, glaciers melt, and cities drown, they're gone forever, and no amount of future wealth can make up for that.

He put this idea in economic terms a few minutes later: think of the world as being made up of two types of capital - physical capital and environmental capital. Since the Industrial Revolution, we've been growing our physical capital at the expense of running down our environmental capital. As a result, what you might consider the "exchange rate" between physical capital and environmental capital has already gone up: we value our environment much more highly now, in real dollar terms, than we did a couple of generations ago. If we continue to grow our physical capital at the expense of our environmental capital, that exchange rate will continue to rise - and even if we're wealthier in money terms in future, we'll find that the cost of that wealth, in terms of spent environmental capital, will be seen to have been excessive. Environmental capital might be expensive now, but it will also never again be cheaper than it is today - so we have an imperative to start using physical capital to invest in it.

Sachs had another take. There's no reason, he said, that spending $400 billion now means that we should reduce our consumption by $400 billion. Economically speaking, you can get exactly the same effect if you reduce your savings by $400 billion. Savings, of course, are the capital that we pass on to future generations in order to help them grow their wealth. "The future would rather have abatement capital than non-abatement capital," he said, adding that you can finance expenditure out of savings rather than consumption through the application of fiscal policy. (I think that this means we just borrow the money.)

"We are stewards of the future," said Sachs - future generations aren't around to speak to us, so we have to act on their behalf. "And they want less capital and a better climate."

Then Stiglitz stepped in, to introduce the distinction between social return and financial return. Not everything, he said, could be measured with GDP-per-capita figures.

And finally, my own answer to my own question, which is that the $400 billion cost will not be borne by all present citizens equally - it will be borne much more by the rich, who are the major consumers of energy. If you compare the wealth of the rich today to the wealth of future generations in general tomorrow, then the increase looks much smaller.

Posted by Felix at 11:39 EST | Comments (0)

Stern, Sachs, and Stiglitz on the Economics of Climate Change

If you read my entry from last night, you'll know I went to a discussion on climate change at Columbia yesterday, which was kicked off with a presentation from the man himself, Sir Nicholas Stern of the Stern Review on the Economics of Climate Change.

I managed to ask Stern the question I've been wanting to ask him for a couple months now – and, what's more, I got great answers from both Joseph Stiglitz and Jeffrey Sachs as well. My question was much the same one as that implicit in Charles Kenny's recent paper. If you look at Stern's worst-case scenarios, most of them put the population of the future on a much higher standard of living than the population of the present. So the $400 billion we're (hypothetically) spending today on reducing carbon emissions is being spent so that future generations can be even richer still – the whole thing feels a bit like taking from the poor (us, now) and giving to the rich (our great-grandchildren).

Stern replied first by noting that the $400 billion / 1% of GDP cost is only an estimate. It's entirely possible that the cost could actually be negative, he said: "a Schumpeterian tech-driven burst of growth is possible and even likely from zero-carbon sources of electricity". On the other hand, Sachs noted that the 1% of GDP cost is predicated on our developing a workable and scalable method of capturing and sequestering the carbon output from the coal-fired power stations which are certainly going to be built in huge numbers in India and China. If we don't get the CCS (carbon capture and sequestration) right, then the cost of reducing carbon emissions could easily double, or more. So let's split the difference and say that the 1% of GDP cost is realistic, to be borne mainly but not entirely in the form of higher energy prices.

Stern then said that it's also entirely possible that if we do nothing at all, and carbon emissions continue to rise, then in the next century "we could end up a lot poorer than we are now". His models show a 50% chance of global temperatures rising by more than 5 degrees Celsius in the business-as-usual case; when global temperatures were 5 degrees lower than they are now, we were in the last Ice Age and most of Europe was under a mile of ice. That sort of temperature change would be catastrophic on many levels and would transform the planet in very, very negative ways. But Stern did agree that under his models, "most of the time we're better off". So, he says, "you discount for that". An expenditure today is only worthwhile, under his model, if it causes a disproportionate increase in future wealth.

And then came the barrage of very good reasons why it makes sense to spend money today for the benefit of future generations.

First, from Stern: climate change is a stock-and-flow problem. We need to decrease the flow of carbon into the atmosphere now, in order to reduce the stock of carbon in the atmosphere in future. Once it's there, you can't take it out – in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible. Once coral reefs die, glaciers melt, and cities drown, they're gone forever, and no amount of future wealth can make up for that.

He put this idea in economic terms a few minutes later: think of the world as being made up of two types of capital – physical capital and environmental capital. Since the Industrial Revolution, we've been growing our physical capital at the expense of running down our environmental capital. As a result, what you might consider the "exchange rate" between physical capital and environmental capital has already gone up: we value our environment much more highly now, in real dollar terms, than we did a couple of generations ago. If we continue to grow our physical capital at the expense of our environmental capital, that exchange rate will continue to rise – and even if we're wealthier in money terms in future, we'll find that the cost of that wealth, in terms of spent environmental capital, will be seen to have been excessive. Environmental capital might be expensive now, but it will also never again be cheaper than it is today – so we have an imperative to start using physical capital to invest in it.

Sachs had another take. There's no reason, he said, that spending $400 billion now means that we should reduce our consumption by $400 billion. Economically speaking, you can get exactly the same effect if you reduce your savings by $400 billion. Savings, of course, are the capital that we pass on to future generations in order to help them grow their wealth. "The future would rather have abatement capital than non-abatement capital," he said, adding that you can finance expenditure out of savings rather than consumption through the application of fiscal policy. (I think that this means we just borrow the money.)

"We are stewards of the future," said Sachs – future generations aren't around to speak to us, so we have to act on their behalf. "And they want less capital and a better climate."

Then Stiglitz stepped in, to introduce the distinction between social return and financial return. Not everything, he said, could be measured with GDP-per-capita figures.

And finally, my own answer to my own question, which is that the $400 billion cost will not be borne by all present citizens equally – it will be borne much more by the rich, who are the major consumers of energy. If you compare the wealth of the rich today to the wealth of future generations in general tomorrow, then the increase looks much smaller.

Posted by Felix at 10:36 EST | Comments (3)

Why New York City Property Is Only Going Up

Let me stick my neck out on the future direction of housing prices in the US. I think that we're in the middle of a mildly chaotic move from a pretty flat price distribution to one which looks much more like a power law. Or, to put it another way, housing inequality is on the increase. The whole concept of an "average" or "median" house is going to become useless, because people are increasingly not paying for the house so much as they're paying for its location. Specifically, New York City is a unique property market, which can and will continue to appreciate even if the rest of the US sees a significant slowdown.

In the first quarter of this year, the New York City housing market boomed even as the rest of the country saw some nasty falls in house prices. And I suspect that the same trend might continue for quite a while. Partly, that's because precious few Manhattan homeowners have subprime mortgages. But on a much larger scale, it's because New York is one of a handful of global cities which are the winners in the location stakes. The set of things you buy when you buy an apartment here can't be measured in square feet.

At 11:18am this morning, I got an email which told me that the Committee on Global Thought at Columbia University was having a discussion about the economics of climate change. The discussants? Jeff Sachs, Joe Stiglitz, and Nick Stern. Said discussion was happening at 4pm, and was free and open to the public. Of course, I went. I was even fortunate enough to be able to put to Stern directly my single biggest question/problem on the subject of climate change. He gave a great answer - and then Sachs answered the question too, and then Stiglitz gave his answer, and then Stern came back and added to his answer. (I'll blog it in a minute.) It was a wonderful moment, and I thank New York City for it.

After the event, I bumped into a friend of mine who I hadn't seen in a while, and we had an impromptu couple of bottles of wine between four of us at a cafe on the Upper West Side - her, me, and two very interesting scientists. I also got caught up on her cousin, who I'd lost track of, and who, it so happens, is arriving in New York tomorrow for a week.

The climate change event took place one week to the day after I went out for lunch with Nassim Nicholas Taleb, and had a fascinating and wide-ranging conversation with him. In between, I went to the movies, discovered a cool underground club in Dumbo, had a long conversation about transfiguration with a chap called Victor from Malta, hosted an impromptu barbecue where my friend Amy met my upstairs neighbor Dan, looked after a dog named Coco for a few days, went to a Mozart opera directed by a South African artist, and suffered a hard drive failure which was made much easier to bear by the fact that the Apple Store is in easy walking distance. This morning, before heading uptown to the Columbia event, I helped Dan and Amy move the couch he's been trying to get rid of for ages into the back of a pickup truck belonging to another friend.

On the subway uptown, I listened to Decasia on my iPod, while reading Nick Paumgarten's article about commuting in the New Yorker:

"I was shocked to find how robust a predictor of social isolation commuting is," Robert Putnam, a Harvard political scientist, told me. (Putnam wrote the best-seller "Bowling Alone," about the disintegration of American civic life.) "There's a simple rule of thumb: Every ten minutes of commuting results in ten per cent fewer social connections. Commuting is connected to social isolation, which causes unhappiness."

I have a wonderful job: blogging is something I can and will do from anywhere, and my commute literally couldn't be any shorter, since I work from home. On its face, it's quite a lonely lifestyle: I can very easily get up in the morning and never leave the house or have any visitors all day. I have no colleagues to gossip with over the water cooler, and I'm not paying a premium to live near my work. Given the economics of commuting, as laid out by Paumgarten, I should be jumping at the opportunity to sell my convenient-for-a-commuter place in Manhattan and move out to some bucolic rural town.

But of course I can't imagine living anywhere other than Manhattan, because it's unique in so many ways. Everything I've done over the past week is just as much a function of where I live as it is a function of who I am. And I'm pretty sure I would never have got my blogging gigs, first at RGE and then at Portfolio, had I lived anywhere else. Robert Putnam is right, it would seem: the density and vibrancy of New York forces social connections onto people whether they like it or not. And it's impossible to replicate.

Anybody can build a suburban McMansion; if it has a lot of square feet, and money is cheap, then it might well sell for a lot of money. On the other hand, if demand for space goes down, or money gets more expensive, then the value of large homes in the suburbs is certain to fall. New York is different. When people buy here, they're buying something you can't get anywhere else. If you want to live in one suburb, you might well make do with another suburb. But if you want to live in New York, nowhere else will do.

And because New York is a global town, demand for property here is global as well. Every time the dollar falls, New York property becomes that much more appealing to millions of Europeans and Asians who have visited and dreamed of living here: it's not even expensive, by London or Hong Kong standards.

I wouldn't be at all surprised were someone to tell me that Sachs, Stiglitz and Stern were all having dinner tonight with Bill Clinton, maybe at the house of Mike Bloomberg or George Soros. It's the kind of thing which happens in New York - and in precious few other places. Davos, maybe, once a year. As such people move to New York, other such people follow them here, in a self-perpetuating virtuous cycle.

Taleb says, in his latest book, that there's no particular reason why New York rose and Baltimore fell. But now it has happened, it can't be stopped. Baltimore will never again be a leading global city. And - I feel comfortable in saying - New York will never again (not in the next few decades, anyway) be a crime-addled drug den like it was in the 1980s. The road from there to here was not foreseeable. But the road ahead is clear: New York City is pulling away from the pack, and the bigger a lead it takes, the faster it goes.

Posted by Felix at 1:48 EST | Comments (0)

Why New York City Property Is Only Going Up

Let me stick my neck out on the future direction of housing prices in the US. I think that we're in the middle of a mildly chaotic move from a pretty flat price distribution to one which looks much more like a power law. Or, to put it another way, housing inequality is on the increase. The whole concept of an "average" or "median" house is going to become useless, because people are increasingly not paying for the house so much as they're paying for its location. Specifically, New York City is a unique property market, which can and will continue to appreciate even if the rest of the US sees a significant slowdown.

In the first quarter of this year, the New York City housing market boomed even as the rest of the country saw some nasty falls in house prices. And I suspect that the same trend might continue for quite a while. Partly, that's because precious few Manhattan homeowners have subprime mortgages. But on a much larger scale, it's because New York is one of a handful of global cities which are the winners in the location stakes. The set of things you buy when you buy an apartment here can't be measured in square feet.

At 11:18am this morning, I got an email which told me that the Committee on Global Thought at Columbia University was having a discussion about the economics of climate change. The discussants? Jeff Sachs, Joe Stiglitz, and Nick Stern. Said discussion was happening at 4pm, and was free and open to the public. Of course, I went. I was even fortunate enough to be able to put to Stern directly my single biggest question/problem on the subject of climate change. He gave a great answer – and then Sachs answered the question too, and then Stiglitz gave his answer, and then Stern came back and added to his answer. (I'll blog it in a minute.) It was a wonderful moment, and I thank New York City for it.

After the event, I bumped into a friend of mine who I hadn't seen in a while, and we had an impromptu couple of bottles of wine between four of us at a cafe on the Upper West Side – her, me, and two very interesting scientists. I also got caught up on her cousin, who I'd lost track of, and who, it so happens, is arriving in New York tomorrow for a week.

The climate change event took place one week to the day after I went out for lunch with Nassim Nicholas Taleb, and had a fascinating and wide-ranging conversation with him. In between, I went to the movies, discovered a cool underground club in Dumbo, had a long conversation about transfiguration with a chap called Victor from Malta, hosted an impromptu barbecue where my friend Amy met my upstairs neighbor Dan, looked after a dog named Coco for a few days, went to a Mozart opera directed by a South African artist, and suffered a hard drive failure which was made much easier to bear by the fact that the Apple Store is in easy walking distance. This morning, before heading uptown to the Columbia event, I helped Dan and Amy move the couch he's been trying to get rid of for ages into the back of a pickup truck belonging to another friend.

On the subway uptown, I listened to Decasia on my iPod, while reading Nick Paumgarten's article about commuting in the New Yorker:

"I was shocked to find how robust a predictor of social isolation commuting is," Robert Putnam, a Harvard political scientist, told me. (Putnam wrote the best-seller "Bowling Alone," about the disintegration of American civic life.) "There's a simple rule of thumb: Every ten minutes of commuting results in ten per cent fewer social connections. Commuting is connected to social isolation, which causes unhappiness."

I have a wonderful job: blogging is something I can and will do from anywhere, and my commute literally couldn't be any shorter, since I work from home. On its face, it's quite a lonely lifestyle: I can very easily get up in the morning and never leave the house or have any visitors all day. I have no colleagues to gossip with over the water cooler, and I'm not paying a premium to live near my work. Given the economics of commuting, as laid out by Paumgarten, I should be jumping at the opportunity to sell my convenient-for-a-commuter place in Manhattan and move out to some bucolic rural town.

But of course I can't imagine living anywhere other than Manhattan, because it's unique in so many ways. Everything I've done over the past week is just as much a function of where I live as it is a function of who I am. And I'm pretty sure I would never have got my blogging gigs, first at RGE and then at Portfolio, had I lived anywhere else. Robert Putnam is right, it would seem: the density and vibrancy of New York forces social connections onto people whether they like it or not. And it's impossible to replicate.

Anybody can build a suburban McMansion; if it has a lot of square feet, and money is cheap, then it might well sell for a lot of money. On the other hand, if demand for space goes down, or money gets more expensive, then the value of large homes in the suburbs is certain to fall. New York is different. When people buy here, they're buying something you can't get anywhere else. If you want to live in one suburb, you might well make do with another suburb. But if you want to live in New York, nowhere else will do.

And because New York is a global town, demand for property here is global as well. Every time the dollar falls, New York property becomes that much more appealing to millions of Europeans and Asians who have visited and dreamed of living here: it's not even expensive, by London or Hong Kong standards.

I wouldn't be at all surprised were someone to tell me that Sachs, Stiglitz and Stern were all having dinner tonight with Bill Clinton, maybe at the house of Mike Bloomberg or George Soros. It's the kind of thing which happens in New York – and in precious few other places. Davos, maybe, once a year. As such people move to New York, other such people follow them here, in a self-perpetuating virtuous cycle.

Taleb says, in his latest book, that there's no particular reason why New York rose and Baltimore fell. But now it has happened, it can't be stopped. Baltimore will never again be a leading global city. And – I feel comfortable in saying – New York will never again (not in the next few decades, anyway) be a crime-addled drug den like it was in the 1980s. The road from there to here was not foreseeable. But the road ahead is clear: New York City is pulling away from the pack, and the bigger a lead it takes, the faster it goes.

Posted by Felix at 23:48 EST | Comments (7)

Pay Scale, fine dining edition

There are few stories as popular as the ones ogling the multimillion-dollar paychecks of the business and finance honchos who eat at swanky New York eateries such as Balthazar and Telepan. I wonder what those masters of the universe would think if they knew that the reservationist at Balthazar makes $12 an hour, or that the waiters at Telepan not only earn just $4.60 an hour, but the managers take a "huge portion" of their tips as well. Just askin'.

(Via Eater)

Posted by Felix at 22:56 EST | Comments (0)

Pay Scale, fine dining edition

There are few stories as popular as the ones ogling the multimillion-dollar paychecks of the business and finance honchos who eat at swanky New York eateries such as Balthazar and Telepan. I wonder what those masters of the universe would think if they knew that the reservationist at Balthazar makes $12 an hour, or that the waiters at Telepan not only earn just $4.60 an hour, but the managers take a "huge portion" of their tips as well. Just askin'.

(Via Eater)

Posted by Felix at 21:55 EST | Comments (2)

How home prices can be steady even if median home prices fall

The lead headline on CNNMoney.com right now is "Home prices headed for historic drop": we're told this will be "the first annual decline in nearly 40 years of tracking."

The headline comes in response to news from the National Association of Realtors: while it thought in February that 2007 prices would rise by 1.2%, apparently it thinks now that they will fall by 0.7%. Apparently all the pain will be concentrated in a few markets:

The group estimates that about three-quarters of the markets nationwide could still see a narrow increase in median sales prices during 2007, but that those gains will be outweighed by the declines in the markets that saw big gains in sales and prices during the record sales years of 2004 and 2005.

This surprises me, since the data I've been looking at shows the biggest declines in more depressed, industrial areas such as Michigan and Ohio. But this doesn't surprise me at all:

The group's forecast sees an even bigger slowdown in the new home market, as it is forecasting new-home sales will come in at 904,000 this year, down 13 percent from the 1.05 million sold last year.

There's no doubt that new-home construction is slowing down. But couldn't that alone explain a large part of the median-price drop? Reader Glen Lineberry emails me:

Everyone assumes this means that houses are selling for less. Isn't an equally logical explanation, given all the media coverage of the housing slump and mortgage problems, that people are simply buying less expensive houses? Wouldn't that also shift the median price, if people decided they could live without an additional bedroom, or weren't willing to pay the freight for someone else's kitchen renovation?

Now, instead of "less expensive houses," just try reading "fewer brand-new McMansions". It's a well-known fact that the average new-home size has been growing steadily for years, and positively booming of late. So if those new homes bear the brunt of the slowdown, and are sold in much lower numbers, that could do nasty things to the median sales price even if any given existing home doesn't fall in value at all. The new homes don't even need to be sold at a lower price, there just needs to be fewer sales.

For even more fun 'n' frolics, check out CNN Money's list of the 100 largest housing markets in the US, complete with forecasts for how those housing markets will do over the next 12 months. The forecasts were obtained by rolling dice from Fiserve Lending Solutions. Apparently McAllen Texas is in for a big boom, San Francisco will see a modest uptick, New York City will fall by almost 4%, and poor old Phoenix, home of Glen Lineberry, will see a 5.5% collapse. Not that Lineberry is particularly worried:

The growth here is just beyond belief. More than 60,000 new housing starts in 2006. It's down to half that this year, but that's still the third highest number on record.
A massive light-rail project is underway, to open December 2008, and both ASU and the UA Medical School are building new campuses in downtown Phoenix, so we're seeing a return to central parts of the city. Lots of infill projects, from single-family homes to condo and apartment complexes, are springing up and median prices are firm or slightly higher.
It's in the giant tract developments on the outskirts of the city -- often an hour's drive from downtown and the airport -- that houses aren't selling. The builders are holding inventory, investors who'd put down small deposits have walked away, and the only way for a seller to compete is on price.
In the more central neighborhoods, it takes a little longer to sell, but houses offered at last year's prices are selling. When you remember that prices here went up 25% last year, and doubled over the last three years, that's no so bad.

Posted by Felix at 14:13 EST | Comments (0)

FT vs Bloomberg

Ooh, this is juicy! The FT's Alphaville blog has come out and declared that one of Bloomberg's biggest stories today is a hoax.

The story, headlined "Gold Fields May Receive Bid From Pastorini-Led Group," is very long, very detailed, and has helped drive up shares in Gold Fields by 11% in one day.

Whether or not the Pastorini of the headline even exists is far from obvious. As Bloomberg's Stewart Bailey concedes in his story,

Pastorini's name didn't appear in a search under U.S. Securities and Exchange filings. There was no trace of his name in a Google search. He declined to name his previous employers or provide details of his track record.

But Bailey does quote a lot of people in his story, all of whom at least implicitly are taking his story seriously.

One way or another, it seems, either the FT or Bloomberg is going to end up with a certain amount of egg on its face.

Posted by Felix at 13:33 EST | Comments (0)

How home prices can be steady even if median home prices fall

The lead headline on CNNMoney.com right now is "Home prices headed for historic drop": we're told this will be "the first annual decline in nearly 40 years of tracking."

The headline comes in response to news from the National Association of Realtors: while it thought in February that 2007 prices would rise by 1.2%, apparently it thinks now that they will fall by 0.7%. Apparently all the pain will be concentrated in a few markets:

The group estimates that about three-quarters of the markets nationwide could still see a narrow increase in median sales prices during 2007, but that those gains will be outweighed by the declines in the markets that saw big gains in sales and prices during the record sales years of 2004 and 2005.

This surprises me, since the data I've been looking at shows the biggest declines in more depressed, industrial areas such as Michigan and Ohio. But this doesn't surprise me at all:

The group's forecast sees an even bigger slowdown in the new home market, as it is forecasting new-home sales will come in at 904,000 this year, down 13 percent from the 1.05 million sold last year.

There's no doubt that new-home construction is slowing down. But couldn't that alone explain a large part of the median-price drop? Reader Glen Lineberry emails me:

Everyone assumes this means that houses are selling for less. Isn't an equally logical explanation, given all the media coverage of the housing slump and mortgage problems, that people are simply buying less expensive houses? Wouldn't that also shift the median price, if people decided they could live without an additional bedroom, or weren't willing to pay the freight for someone else's kitchen renovation?

Now, instead of "less expensive houses," just try reading "fewer brand-new McMansions". It's a well-known fact that the average new-home size has been growing steadily for years, and positively booming of late. So if those new homes bear the brunt of the slowdown, and are sold in much lower numbers, that could do nasty things to the median sales price even if any given existing home doesn't fall in value at all. The new homes don't even need to be sold at a lower price, there just needs to be fewer sales.

For even more fun 'n' frolics, check out CNN Money's list of the 100 largest housing markets in the US, complete with forecasts for how those housing markets will do over the next 12 months. The forecasts were obtained by rolling dice from Fiserve Lending Solutions. Apparently McAllen Texas is in for a big boom, San Francisco will see a modest uptick, New York City will fall by almost 4%, and poor old Phoenix, home of Glen Lineberry, will see a 5.5% collapse. Not that Lineberry is particularly worried:

The growth here is just beyond belief. More than 60,000 new housing starts in 2006. It's down to half that this year, but that's still the third highest number on record.
A massive light-rail project is underway, to open December 2008, and both ASU and the UA Medical School are building new campuses in downtown Phoenix, so we're seeing a return to central parts of the city. Lots of infill projects, from single-family homes to condo and apartment complexes, are springing up and median prices are firm or slightly higher.
It's in the giant tract developments on the outskirts of the city -- often an hour's drive from downtown and the airport -- that houses aren't selling. The builders are holding inventory, investors who'd put down small deposits have walked away, and the only way for a seller to compete is on price.
In the more central neighborhoods, it takes a little longer to sell, but houses offered at last year's prices are selling. When you remember that prices here went up 25% last year, and doubled over the last three years, that's no so bad.

Posted by Felix at 13:13 EST | Comments (2)

FT vs Bloomberg

Ooh, this is juicy! The FT's Alphaville blog has come out and declared that one of Bloomberg's biggest stories today is a hoax.

The story, headlined "Gold Fields May Receive Bid From Pastorini-Led Group," is very long, very detailed, and has helped drive up shares in Gold Fields by 11% in one day.

Whether or not the Pastorini of the headline even exists is far from obvious. As Bloomberg's Stewart Bailey concedes in his story,

Pastorini's name didn't appear in a search under U.S. Securities and Exchange filings. There was no trace of his name in a Google search. He declined to name his previous employers or provide details of his track record.

But Bailey does quote a lot of people in his story, all of whom at least implicitly are taking his story seriously.

One way or another, it seems, either the FT or Bloomberg is going to end up with a certain amount of egg on its face.

Posted by Felix at 12:32 EST | Comments (2)

Kerkorian: Out of the running for Chrysler?

Bloomberg's Doron Levin gets off a nice one-liner at Kirk Kerkorian today, and his bid for Chrysler - which, as you'll recall, is contingent on the United Auto Workers taking on a huge chunk of Chrysler's liabilities and risk. The bid, he says,

is a bit like proposing a manned mission to Pluto, subject to the invention of a spaceship that can traverse the solar system.

Certainly the noises coming out of Frankfurt and Detroit are unlikely to bolster Kerkorian's spirits. Dana Cimilluca points us to an article by Tim Higgins in the Detroit Free Press, saying that both DaimlerChrysler and its unions can't stand the idea of selling to Kerkorian:

Canadian Auto Workers President Buzz Hargrove said he opposes the Tracinda offer.
"I am not interested in Kerkorian's style. His whole history has been to make money by taking advantage of throwing a lot of people out of work," Hargrove said. "He's the guy I am totally opposed to."

Of course, the Canadian Auto Workers aren't going to be particularly influential in this deal, but with Frankfurt analysts saying that Kerkorian "is the last person on Earth [DaimlerChrysler] would be willing to sit down and negotiate with," and Kerkorian being kept out of meetings between DaimlerChrysler and its bidders this week, the odds of Kerkorian winning this battle would seem to be slim-to-nonexistent.

Posted by Felix at 12:26 EST | Comments (0)

Kerkorian: Out of the running for Chrysler?

Bloomberg's Doron Levin gets off a nice one-liner at Kirk Kerkorian today, and his bid for Chrysler – which, as you'll recall, is contingent on the United Auto Workers taking on a huge chunk of Chrysler's liabilities and risk. The bid, he says,

is a bit like proposing a manned mission to Pluto, subject to the invention of a spaceship that can traverse the solar system.

Certainly the noises coming out of Frankfurt and Detroit are unlikely to bolster Kerkorian's spirits. Dana Cimilluca points us to an article by Tim Higgins in the Detroit Free Press, saying that both DaimlerChrysler and its unions can't stand the idea of selling to Kerkorian:

Canadian Auto Workers President Buzz Hargrove said he opposes the Tracinda offer.
"I am not interested in Kerkorian's style. His whole history has been to make money by taking advantage of throwing a lot of people out of work," Hargrove said. "He's the guy I am totally opposed to."

Of course, the Canadian Auto Workers aren't going to be particularly influential in this deal, but with Frankfurt analysts saying that Kerkorian "is the last person on Earth [DaimlerChrysler] would be willing to sit down and negotiate with," and Kerkorian being kept out of meetings between DaimlerChrysler and its bidders this week, the odds of Kerkorian winning this battle would seem to be slim-to-nonexistent.

Posted by Felix at 11:26 EST | Comments (0)

Citigroup layoff math

To read all the press about the Citigroup layoff plan of late, it seems there are two main planks: first, fire about 17,000 people. Then take another 10,000 jobs or so, and move them out of New York to cheaper parts of the US, or move them out of the US entirely to cheaper parts of the world. Finally, take some untold number of extra people - in the tens of thousands - and simply don't replace them when they leave for whatever reason.

But take another look at the story now that the announcement has actually been made:

Roughly 8 percent of Citigroup's 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts. About 1,600 jobs will be eliminated in New York City, where Citigroup currently has 27,000 employees.

If 8% of the total workforce is affected altogether, and if New York City is the most high-priced location, then one would expect much more than 8% of New York City's employees to be affected.

In fact, however, it seems that Citigroup's New York payrolls will only fall by 6% - which is less than the corporate average.

Is there less to this story than meets the eye? If payrolls aren't being slashed in New York, it's not clear where they are being slashed. Maybe in places like Tampa, Florida, where Citi has a big office with 3,000 people servicing Latin America; or in O'Fallon, Missouri, where CitiMortgage employs 4,750 people. If those places are hit more severely than New York, then maybe some of the rhetoric about cutting where costs are highest will sound a little hollow.

Posted by Felix at 10:46 EST | Comments (0)

The NYT's rent vs buy calculations

David Leonhardt's Economix column has finally been promoted from the front of the Business section to the main front page! Congratulations to him. And the subject matter is dear to my own heart: rent vs buy calculations. In fact, by far the best thing about the article is the online rent vs buy calculator - bookmark it, and use it whenever you or your friends are thinking of buying a place. It's great.

Given his space constraints, one can forgive Leonhardt not going into gruesome detail about all the different variables which go into such calculations. But I would still take issue with a large chunk of how his story is framed.

To read the article, the main variable in determining whether or not you should rent or buy is the amount by which property prices are going to rise in future. Most of the calculations hold everything else constant, and then wonder how many years it will take you to break even given different rates of property-price increase.

But spend a bit of time fiddling around with the calculator, and you realize it's not nearly as simple as that. For instance, the NYT's calculations have a default rate of rent increase of just 4% per year. That seems low to me, given the fact that rent increases haven't remotely kept up with price increases in most of the country. If the two come closer into line with each other, some of that might come from prices going down - but a large chunk of it might come from rents going up. It's hard in the rent vs buy calculator to account for the risk that your rent will suddenly go up by 15% next year.

There are lots of other variables you'll probably want to change, too, like your marginal tax rate (the NYT assumes it's only 20%); the upfront costs of renting, in terms of broker's fee and whatnot (NYT assumes zero, and, it seems, also assumes that renters won't move house any more frequently than owners); and the inflation rate - which has a surprisingly large effect on the rent vs buy curve, for reasons I don't fully understand.

There are three main points I'd make which Leonhardt ignores. The first is that he assumes you have your entire down payment sitting around in a brokerage account compounding at 5% per annum for as long as you have your place. I don't think that's entirely realistic - check out my blog on buying as a commitment device for much more along such lines.

The second point is that when you look at the y-axis, your potential downside is pretty small compared to your potential upside. What the rent vs buy calculator can't do is assign various probabilities to various outcomes and then come up with a net expected return. If it could, buying would become more attractive because of the small chance of a big windfall.

Finally, it's worth noting that the maximum downside is normally pretty much equal to the combined buying and selling costs of owning. The NYT assumes that the cost of buying a house is 4% of the purchase price, and that the cost of selling a house is 6% of the purchase price. When you add those two up, they account for essentially all of the advantage that renting has over buying.

In other words, take your eyes off the house-price appreciation at the exclusion of everything else, and definitely ask yourself what might happen if, for example, the internet helps drive selling costs down to 2% from 6%.

Posted by Felix at 10:13 EST | Comments (0)

Citigroup layoff math

To read all the press about the Citigroup layoff plan of late, it seems there are two main planks: first, fire about 17,000 people. Then take another 10,000 jobs or so, and move them out of New York to cheaper parts of the US, or move them out of the US entirely to cheaper parts of the world. Finally, take some untold number of extra people – in the tens of thousands – and simply don't replace them when they leave for whatever reason.

But take another look at the story now that the announcement has actually been made:

Roughly 8 percent of Citigroup’s 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts. About 1,600 jobs will be eliminated in New York City, where Citigroup currently has 27,000 employees.

If 8% of the total workforce is affected altogether, and if New York City is the most high-priced location, then one would expect much more than 8% of New York City's employees to be affected.

In fact, however, it seems that Citigroup's New York payrolls will only fall by 6% – which is less than the corporate average.

Is there less to this story than meets the eye? If payrolls aren't being slashed in New York, it's not clear where they are being slashed. Maybe in places like Tampa, Florida, where Citi has a big office with 3,000 people servicing Latin America; or in O'Fallon, Missouri, where CitiMortgage employs 4,750 people. If those places are hit more severely than New York, then maybe some of the rhetoric about cutting where costs are highest will sound a little hollow.

Posted by Felix at 9:45 EST | Comments (4)

The NYT's rent vs buy calculations

David Leonhardt's Economix column has finally been promoted from the front of the Business section to the main front page! Congratulations to him. And the subject matter is dear to my own heart: rent vs buy calculations. In fact, by far the best thing about the article is the online rent vs buy calculator – bookmark it, and use it whenever you or your friends are thinking of buying a place. It's great.

Given his space constraints, one can forgive Leonhardt not going into gruesome detail about all the different variables which go into such calculations. But I would still take issue with a large chunk of how his story is framed.

To read the article, the main variable in determining whether or not you should rent or buy is the amount by which property prices are going to rise in future. Most of the calculations hold everything else constant, and then wonder how many years it will take you to break even given different rates of property-price increase.

But spend a bit of time fiddling around with the calculator, and you realize it's not nearly as simple as that. For instance, the NYT's calculations have a default rate of rent increase of just 4% per year. That seems low to me, given the fact that rent increases haven't remotely kept up with price increases in most of the country. If the two come closer into line with each other, some of that might come from prices going down – but a large chunk of it might come from rents going up. It's hard in the rent vs buy calculator to account for the risk that your rent will suddenly go up by 15% next year.

There are lots of other variables you'll probably want to change, too, like your marginal tax rate (the NYT assumes it's only 20%); the upfront costs of renting, in terms of broker's fee and whatnot (NYT assumes zero, and, it seems, also assumes that renters won't move house any more frequently than owners); and the inflation rate – which has a surprisingly large effect on the rent vs buy curve, for reasons I don't fully understand.

There are three main points I'd make which Leonhardt ignores. The first is that he assumes you have your entire down payment sitting around in a brokerage account compounding at 5% per annum for as long as you have your place. I don't think that's entirely realistic – check out my blog on buying as a commitment device for much more along such lines.

The second point is that when you look at the y-axis, your potential downside is pretty small compared to your potential upside. What the rent vs buy calculator can't do is assign various probabilities to various outcomes and then come up with a net expected return. If it could, buying would become more attractive because of the small chance of a big windfall.

Finally, it's worth noting that the maximum downside is normally pretty much equal to the combined buying and selling costs of owning. The NYT assumes that the cost of buying a house is 4% of the purchase price, and that the cost of selling a house is 6% of the purchase price. When you add those two up, they account for essentially all of the advantage that renting has over buying.

In other words, take your eyes off the house-price appreciation at the exclusion of everything else, and definitely ask yourself what might happen if, for example, the internet helps drive selling costs down to 2% from 6%.

Posted by Felix at 8:58 EST | Comments (7)

Mike Bloomberg earns $1 billion a year

Add Michael Bloomberg to the billion-dollar-a-year club. DealBook reports that Fortune's Carol Loomis has had an inside look at the books, and found 2006 profits of $1.5 billion on revenues of $4.7 billion. Given that Bloomberg personally owns more than two-thirds of the company, his share of the profits would seem to be in the ten-digit range.

Which makes the following all the weirder:

Fortune speculates that Mr. Bloomberg might instead try to leverage up the company to pull out some cash, a scenario that would become more likely should he decide to run for president, which a number of people have reportedly urged him to do.
As for Mr. Bloomberg's stake, Ms. Loomis writes:

One sticky fact about the $13 billion or so: Right now it's in the company, not handy if Mike were soon to decide he needed cash for a campaign or philanthropy. So how to create liquidity? The probable answer is debt. Mike may not as yet have taken any on, but a source close to the company says he surely will.

Both political campaigns and philanthropic contributions can certainly consume a lot of cash. But $1 billion a year? Even by today's presidential campaign standards, it would be mind-boggling if anybody spent more than that. So why can't Bloomberg just continue to campaign and donate using cashflow rather than debt?

Posted by Felix at 19:30 EST | Comments (0)

Mike Bloomberg earns $1 billion a year

Add Michael Bloomberg to the billion-dollar-a-year club. DealBook reports that Fortune's Carol Loomis has had an inside look at the books, and found 2006 profits of $1.5 billion on revenues of $4.7 billion. Given that Bloomberg personally owns more than two-thirds of the company, his share of the profits would seem to be in the ten-digit range.

Which makes the following all the weirder:

Fortune speculates that Mr. Bloomberg might instead try to leverage up the company to pull out some cash, a scenario that would become more likely should he decide to run for president, which a number of people have reportedly urged him to do.
As for Mr. Bloomberg’s stake, Ms. Loomis writes:

One sticky fact about the $13 billion or so: Right now it’s in the company, not handy if Mike were soon to decide he needed cash for a campaign or philanthropy. So how to create liquidity? The probable answer is debt. Mike may not as yet have taken any on, but a source close to the company says he surely will.

Both political campaigns and philanthropic contributions can certainly consume a lot of cash. But $1 billion a year? Even by today's presidential campaign standards, it would be mind-boggling if anybody spent more than that. So why can't Bloomberg just continue to campaign and donate using cashflow rather than debt?

Posted by Felix at 18:30 EST | Comments (1)

Get Paid to Drive an Electric Car!

One reason why energy traders can make $2 billion in a year is that energy prices are crazy, crazy things - they often behave more like hotel rooms than like normal assets like stocks or bonds or 2-bedroom apartments. Back in October, for instance, the spot price for natural gas in Britain was briefly negative.

The problem is that it's really, really hard to store electricity - which is the main reason why electricity, at least if you're a reasonably large consumer of it, costs a lot more during the day than it does at night. What consumers and electricity companies both need is a massive network of electricity storage devices, from which electricity could be drawn down during periods of high demand.

Now, electricity storage devices are better known as batteries. But batteries don't generally connect to the mains - unless they're in electric cars! Now we're getting somewhere:

A utility's electric meter spinning backwards, pulling power from souped-up batteries in a modified Prius, drew Silicon Valley leaders to a Sunnyvale, CA parking lot today.
At an event put on by the Silicon Valley Leadership Group at the headquarters of chipmaker AMD, local utility Pacific Gas and Electric (PG&E) gave what it called the first-ever Vehicle-to-Grid (V2G) public technology demonstration.
The plan: drivers, who charged their vehicles at night when power was cheap, could commute by day, plug their vehicles in at their destinations, and receive rebates if the power grid needed electricity at time of peak demand and pulled power from their batteries.

This is a really good idea - David Neubert calls it "Electricity 2.0" - although it won't happen in reality until well into the next decade. And it might even help smooth out energy costs so that we consumers get lower prices and people like John Arnold have to make do on a couple of hundred million a year.

Posted by Felix at 17:35 EST | Comments (0)

Get Paid to Drive an Electric Car!

One reason why energy traders can make $2 billion in a year is that energy prices are crazy, crazy things – they often behave more like hotel rooms than like normal assets like stocks or bonds or 2-bedroom apartments. Back in October, for instance, the spot price for natural gas in Britain was briefly negative.

The problem is that it's really, really hard to store electricity – which is the main reason why electricity, at least if you're a reasonably large consumer of it, costs a lot more during the day than it does at night. What consumers and electricity companies both need is a massive network of electricity storage devices, from which electricity could be drawn down during periods of high demand.

Now, electricity storage devices are better known as batteries. But batteries don't generally connect to the mains – unless they're in electric cars! Now we're getting somewhere:

A utility's electric meter spinning backwards, pulling power from souped-up batteries in a modified Prius, drew Silicon Valley leaders to a Sunnyvale, CA parking lot today.
At an event put on by the Silicon Valley Leadership Group at the headquarters of chipmaker AMD, local utility Pacific Gas and Electric (PG&E) gave what it called the first-ever Vehicle-to-Grid (V2G) public technology demonstration.
The plan: drivers, who charged their vehicles at night when power was cheap, could commute by day, plug their vehicles in at their destinations, and receive rebates if the power grid needed electricity at time of peak demand and pulled power from their batteries.

This is a really good idea – David Neubert calls it "Electricity 2.0" – although it won't happen in reality until well into the next decade. And it might even help smooth out energy costs so that we consumers get lower prices and people like John Arnold have to make do on a couple of hundred million a year.

Posted by Felix at 16:35 EST | Comments (0)

Why did Mexico's peso fall today?

It's not often that currency moves have an obvious explanation. But every so often, you can apply the laws of supply and demand to FX. For instance, when Citigroup announced that it was buying Mexico's Banamex for $12 billion, the Mexican peso rose because of all the money expected to flow into the country. Today, the flows are the other way around: Mexico's Cemex is buying Rinker, which is mainly based in the US, for $15 billion. So one would expect the peso to fall.

Or, you know, you could just blame the housing market:

April 10 (Bloomberg) -- Mexico's peso fell the most since March 13 on concerns a housing-led slump in the U.S. will curtail dollar flows.
Subprime mortgage defaults may temper U.S. economic expansion, a Bloomberg survey of economists today showed. The U.S. buys about 80 percent of Mexican exports.

Now, I'm not saying that the peso fell because Cemex is buying Rinker. I think all such attempts at causal reasoning are silly, and in any case we know very little about how much of the acquisition price is going to come out of Mexico. But I am saying that if you're going to insist on some kind of reason for the fall in the peso, the Rinker announcement has to be much more compelling than a bunch of old news about the US housing market.

Posted by Felix at 14:17 EST | Comments (0)

Kentridge vs Grindhouse

I went to see William Kentridge's production of the Magic Flute at BAM last night, and boy was it disappointing. It's not that I have anything against Kentridge: I think he's a great artist, and I reckon his next production, of Shostakovich's Nose, might be excellent. (He could be really good designing sets for Lulu, say, or The Turn of the Screw.) But the Flute? Let's just say that a black-and-white Magic Flute is as wrong in practice as it sounds in theory.

I don't seem to have a lot of luck with opera at BAM. The cast last night was woefully underpowered, the pace that the conductor set was positively glacial, and there wasn't a hint of joy or happiness all night. It takes a lot to screw up the Flute, but this team managed it – they even put Papageno in a beige suit, ferchrissakes! When Monostatos recoils from Papageno, thinking him the devil, it makes no sense at all.

And although Kentridge's white-on-black drawings are beautiful, I still can't forgive him for including footage of hunters killing a rhino in the middle of the opera for no obvious reason. The Flute is meant to be upbeat, but everything about this production made it depressing.

If you want a hugely enjoyable three hours, go see Grindhouse instead. It's had a slightly disappointing run at the box office so far, probably because The Kids These Days don't want to see movies about movies. But it's more than worth it for the car chase alone, which is truly one of the greatest of all time. The Magic Flute was Grindhouse-style popular entertainment of its day. Julie Taymor understands that; William Kentridge, I'm afraid, with his ominous symbolism, doesn't.

Posted by Felix at 14:16 EST | Comments (0)

Barney Frank declares war on... securities?

It was probably inevitable, but that doesn't make it any less depressing. Barney Frank has now come out and said that investors in mortgage-backed bonds should be liable for the underlying loans.

"More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds "provided liquidity without responsibility."...
Lenders this decade have increasingly relied on mortgage-backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted.
By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. "There should be a decrease" in the money available for subprime mortgages, he said.

Um, Earth to Barney? There already has been a whopping great decrease in the money available for subprime mortgages. Apparently subprime MBSs are now trading at 550 basis points over Libor, up from 150bp over in early February. What you want to happen? Has already happened - without any legislation at all!

Barney seems incapable of understanding that sometimes markets can self-correct without any help at all from Washington. Underwriting standards have tightened up. The most egregrious lenders with the worst track records have gone out of business. The mortgage market is now pretty much where it ought to be, having overshot in the direction of too much liquidity about a year or so ago. We've made our mistakes, we've paid for them, and the worry now is not that there's going to be too much liquidity but rather that there's going to be too little.

Frank's not going into much detail about what his proposed legislation is going to look like. But anything which penalizes bondholders is a really bad idea. The existence of the MBS market has made the US mortgage market much more efficient than any other mortgage market in the world. That's a good thing. Let's not break it.

Posted by Felix at 13:53 EST | Comments (0)

When income is measured in billions

It's not easy to become a billionaire - making a billion dollars over the course of just one lifetime. On the other hand, if you're a hedge-fund manager, it seems that making a billion dollars over the course of just one year is entirely doable. Indeed, according to Trader Monthly, Centaurus Energy's John Arnold made as much as $2 billion last year.

My favorite part of the Trader Monthly listings is that they bucket income in increments of half a billion dollars: Arnold made between $1.5 billion and $2 billion, as did James Simons, while Eddie Lampert, Boone Pickens, and Steven Cohen all made between $1 billion and $1.5 billion.

Arnold is still only 33 years old, and in the space of one year he has become dynastically wealthy to the point where he couldn't spend all his money if he tried. So what's he going to do for the rest of his life? The depressing but most likely answer is that he's going to try to make even more money. Which is one reason why John Arnold made $2 billion last year, and you didn't.

Posted by Felix at 13:33 EST | Comments (0)

How Blogging Can Send You Round The Bend

Or, How A Throwaway Blog Entry Can Sap Your Will To Live... it all started with one of those silly little articles the WSJ runs in its Career Journal section, this one headlined "How Blogging Can Help You Get a New Job". It got picked up by Barry Ritholtz, which gave it some semblance of relevance, so I thought I'd point out that the big headline on page B7 of the paper WSJ was actually "How Blogging on the Web Can Help You Get a New Job". Yeah. Blogging on the Web. Which struck me because Steven Weisman of the NYT today had this to say about Paul Wolfowitz:

The highly unusual message sent out by Mr. Wolfowitz, a former deputy defense secretary who was appointed to the bank presidency by President Bush, came after weeks of discussions, both within the bank and, following an article about the subject in The Washington Post, elsewhere around Washington and in the world of Internet blogs.

If you're a blogger, two=trend, and so I had myself a nice little throwaway blog entry there. So I tried to scan the WSJ page, and the scanner kept on crashing Photoshop. So I took a digital photo of the WSJ page, and tried to upload that to my computer, but halfway through the upload my external hard drive stopped responding. And so I've spent roughly the last 90 minutes trying to troubleshoot my HD problems, to no avail, and I'm now reduced to hoping that if I take it into the shop they will at least be able to back it up for me somehow.

Now, realistically, none of this had anything to do with my blog entry - it just so happened that the photo which seemingly broke the hard drive was a photo I wanted for my blog. But I'm blaming the blog anyway, because blaming the HD itself (a Western Digital MyBook, since you ask, which I bought because it was meant to be much more reliable than most external hard drives) is so boring.

Posted by Felix at 13:19 EST | Comments (0)

Why did Mexico's peso fall today?

It's not often that currency moves have an obvious explanation. But every so often, you can apply the laws of supply and demand to FX. For instance, when Citigroup announced that it was buying Mexico's Banamex for $12 billion, the Mexican peso rose because of all the money expected to flow into the country. Today, the flows are the other way around: Mexico's Cemex is buying Rinker, which is mainly based in the US, for $15 billion. So one would expect the peso to fall.

Or, you know, you could just blame the housing market:

April 10 (Bloomberg) -- Mexico's peso fell the most since March 13 on concerns a housing-led slump in the U.S. will curtail dollar flows.
Subprime mortgage defaults may temper U.S. economic expansion, a Bloomberg survey of economists today showed. The U.S. buys about 80 percent of Mexican exports.

Now, I'm not saying that the peso fell because Cemex is buying Rinker. I think all such attempts at causal reasoning are silly, and in any case we know very little about how much of the acquisition price is going to come out of Mexico. But I am saying that if you're going to insist on some kind of reason for the fall in the peso, the Rinker announcement has to be much more compelling than a bunch of old news about the US housing market.

Posted by Felix at 13:17 EST | Comments (0)

Barney Frank declares war on... securities?

It was probably inevitable, but that doesn't make it any less depressing. Barney Frank has now come out and said that investors in mortgage-backed bonds should be liable for the underlying loans.

"More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds "provided liquidity without responsibility."...
Lenders this decade have increasingly relied on mortgage-backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted.
By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. "There should be a decrease" in the money available for subprime mortgages, he said.

Um, Earth to Barney? There already has been a whopping great decrease in the money available for subprime mortgages. Apparently subprime MBSs are now trading at 550 basis points over Libor, up from 150bp over in early February. What you want to happen? Has already happened – without any legislation at all!

Barney seems incapable of understanding that sometimes markets can self-correct without any help at all from Washington. Underwriting standards have tightened up. The most egregrious lenders with the worst track records have gone out of business. The mortgage market is now pretty much where it ought to be, having overshot in the direction of too much liquidity about a year or so ago. We've made our mistakes, we've paid for them, and the worry now is not that there's going to be too much liquidity but rather that there's going to be too little.

Frank's not going into much detail about what his proposed legislation is going to look like. But anything which penalizes bondholders is a really bad idea. The existence of the MBS market has made the US mortgage market much more efficient than any other mortgage market in the world. That's a good thing. Let's not break it.

Posted by Felix at 12:53 EST | Comments (3)

When income is measured in billions

It's not easy to become a billionaire – making a billion dollars over the course of just one lifetime. On the other hand, if you're a hedge-fund manager, it seems that making a billion dollars over the course of just one year is entirely doable. Indeed, according to Trader Monthly, Centaurus Energy's John Arnold made as much as $2 billion last year.

My favorite part of the Trader Monthly listings is that they bucket income in increments of half a billion dollars: Arnold made between $1.5 billion and $2 billion, as did James Simons, while Eddie Lampert, Boone Pickens, and Steven Cohen all made between $1 billion and $1.5 billion.

Arnold is still only 33 years old, and in the space of one year he has become dynastically wealthy to the point where he couldn't spend all his money if he tried. So what's he going to do for the rest of his life? The depressing but most likely answer is that he's going to try to make even more money. Which is one reason why John Arnold made $2 billion last year, and you didn't.

Posted by Felix at 12:33 EST | Comments (0)

How Blogging Can Send You Round The Bend

Or, How A Throwaway Blog Entry Can Sap Your Will To Live... it all started with one of those silly little articles the WSJ runs in its Career Journal section, this one headlined "How Blogging Can Help You Get a New Job". It got picked up by Barry Ritholtz, which gave it some semblance of relevance, so I thought I'd point out that the big headline on page B7 of the paper WSJ was actually "How Blogging on the Web Can Help You Get a New Job". Yeah. Blogging on the Web. Which struck me because Steven Weisman of the NYT today had this to say about Paul Wolfowitz:

The highly unusual message sent out by Mr. Wolfowitz, a former deputy defense secretary who was appointed to the bank presidency by President Bush, came after weeks of discussions, both within the bank and, following an article about the subject in The Washington Post, elsewhere around Washington and in the world of Internet blogs.

If you're a blogger, two=trend, and so I had myself a nice little throwaway blog entry there. So I tried to scan the WSJ page, and the scanner kept on crashing Photoshop. So I took a digital photo of the WSJ page, and tried to upload that to my computer, but halfway through the upload my external hard drive stopped responding. And so I've spent roughly the last 90 minutes trying to troubleshoot my HD problems, to no avail, and I'm now reduced to hoping that if I take it into the shop they will at least be able to back it up for me somehow.

Now, realistically, none of this had anything to do with my blog entry – it just so happened that the photo which seemingly broke the hard drive was a photo I wanted for my blog. But I'm blaming the blog anyway, because blaming the HD itself (a Western Digital MyBook, since you ask, which I bought because it was meant to be much more reliable than most external hard drives) is so boring.

Posted by Felix at 12:18 EST | Comments (0)

ABN Amro speculation heats up

Merrill Lynch announced last month that it was severely restricting the distribution of its research to journalists. How's that working out for them? Well, Alphaville today has got its hands on Merrill's latest ABN Amro report, and is happy to give us the juicy details.

The problem with the Barclays bid for ABN Amro, as we all know by now, is that Barclays can't offer the savings that other suitors, such as RBS, might be able to find. So where's Barclays' comparative advantage? Maybe it's financial and regulatory. Here's Merrill's John-Paul Crutchley:

We find it interesting that the only formal announcement from Barclays, other than the confirmation that discussions are occurring was to announce that the Head Office and Lead Regulator would be Netherlands based. We are aware that Netherlands corporate law allows for differing classes of equity. This might give Barclays a financing option which may not be available to other bidders who are less willing to either relocate their domicile or submit themselves to a Netherlands based regulator.

The idea is that Barclays would pay for ABN using a new class of non-voting, fixed-dividend shares. This gives more upside to Barclays shareholders, and more certainty as to price for ABN shareholders.

And while we're in the world of speculation, Alphaville also offers this:

Investment bankers believe, for example, that RBS could afford to pay more for ABN, if it then sold the bank's Brazilian operations to another lender, such as Spain's Santander.

ABN's Brazilian operations are the only part of the bank showing any growth, so any buyer might be loath to sell them. But RBS has no strategic interest in Brazil, and there's surely no shortage of potential buyers for Banco Real. Santander is only one: another obvious candidate would be Citigroup, which has proclaimed an interest in a big Brazil acquisition for years.

Posted by Felix at 11:35 EST | Comments (0)

Could Goldman Sachs be a private-equity target?

John Carney and Thorold Barker agree: Goldman might be a glorified hedge fund, but it sure ain't valued like one. (If you can't get past the FT subscription firewall, there's a decent summary here.) Carney's solution? Goldman should spin off its trading business. That would solve at a stroke any number of conflicts of interest, as well as do wonders to the valuation of the whole.

Barker doesn't go quite as far as Carney, but he does reckon that more transparency from Goldman on where its profits are coming from could mean the bank's multiples moving up towards the kind of levels seen at Fortress and Blackstone.

Let me throw in my own idea: Blackstone, or KKR, or Silver Lake, or someone along those lines, should just buy Goldman already. People have been talking about the first $100 billion private-equity deal for some time now - and this could be it. Goldman is a great PE target: an undervalued company with highly-paid managers who historically have hated the idea of a public listing, with all the disclosure requirements associated with it.

Goldman's market capitalization right now is in the region of $85 billion. Any buyer would obviously have to pay a significant premium over that sum. But in theory, there's no reason why it shouldn't happen. And maybe under new management Goldman's funds will do even better.

Posted by Felix at 11:06 EST | Comments (0)

Cemex sees the finish line in $15.3 billion Rinker takeover

It's taken five months, and the fat lady (a/k/a Sydney-based Perpetual Investments) hasn't sung quite yet, but it very much looks as though Mexican cement company Cemex has finally snagged Rinker. Cemex is arguably the best-run company in Latin America, and has been growing through acquisitions for decades - it knows how to play this game. But this was a tough one, mainly because Rinker is headquartered and listed in Australia. Rinker's operations are primarily in the US, and so Cemex is valuing the company in US dollars. But the Australian dollar is so strong these days - it just hit a 17-year high - that any price in US dollars seems underwhelming in Aussie terms.

But the deal seems to be all but done, and the markets like it: Cemex's shares are up, and Rinker's shares are trading below the Cemex offer price, which means that no one expects a better offer to come along. Count this as a triumph for Cemex CEO Lorenzo Zambrano, who's paying a sum substantially lower than Rinker was trading at last year.

Posted by Felix at 10:44 EST | Comments (0)

ABN Amro speculation heats up

Merrill Lynch announced last month that it was severely restricting the distribution of its research to journalists. How's that working out for them? Well, Alphaville today has got its hands on Merrill's latest ABN Amro report, and is happy to give us the juicy details.

The problem with the Barclays bid for ABN Amro, as we all know by now, is that Barclays can't offer the savings that other suitors, such as RBS, might be able to find. So where's Barclays' comparative advantage? Maybe it's financial and regulatory. Here's Merrill's John-Paul Crutchley:

We find it interesting that the only formal announcement from Barclays, other than the confirmation that discussions are occurring was to announce that the Head Office and Lead Regulator would be Netherlands based. We are aware that Netherlands corporate law allows for differing classes of equity. This might give Barclays a financing option which may not be available to other bidders who are less willing to either relocate their domicile or submit themselves to a Netherlands based regulator.

The idea is that Barclays would pay for ABN using a new class of non-voting, fixed-dividend shares. This gives more upside to Barclays shareholders, and more certainty as to price for ABN shareholders.

And while we're in the world of speculation, Alphaville also offers this:

Investment bankers believe, for example, that RBS could afford to pay more for ABN, if it then sold the bank’s Brazilian operations to another lender, such as Spain’s Santander.

ABN's Brazilian operations are the only part of the bank showing any growth, so any buyer might be loath to sell them. But RBS has no strategic interest in Brazil, and there's surely no shortage of potential buyers for Banco Real. Santander is only one: another obvious candidate would be Citigroup, which has proclaimed an interest in a big Brazil acquisition for years.

Posted by Felix at 10:35 EST | Comments (0)

Anything PE shops can do, pension funds can do better

Index funds are a smarter bet than mutual funds for retail investors, just because their fees are lower. So why do big institutional investors invest in private-equity companies which charge enormous fees, and which in turn hire investment banks which charge their own enormous fees, rather than simply buying companies themselves?

Ontario Teachers Pension Plan seems to have decided that enough is enough - and has decided it's going to make its own bid for BCE (a/k/a Bell Canada). Private-equity shops such as Providence Equity Partners might be invited to join the buyout party, but then again so are real-money investors such as Caisse de Depot et Placement du Quebec and the Canada Pension Plan Investment Board, according to the NYT.

This is very much a welcome development: it shows that institutional investors are beginning to realize that their own investing skills have a pretty good chance of outperforming any PE or hedge fund, once those enormous fees are taken into account. (Hedge funds do generate alpha; they just pay nearly all of it to themselves in the form of fees.) So whether or not the BCE takeover ever happens, an important precedent has already been set. Pension funds can be in deals from the beginning, rather than being brought in at the end to provide that last chunk of equity finance.

Posted by Felix at 10:22 EST | Comments (0)

Could Goldman Sachs be a private-equity target?

John Carney and Thorold Barker agree: Goldman might be a glorified hedge fund, but it sure ain't valued like one. (If you can't get past the FT subscription firewall, there's a decent summary here.) Carney's solution? Goldman should spin off its trading business. That would solve at a stroke any number of conflicts of interest, as well as do wonders to the valuation of the whole.

Barker doesn't go quite as far as Carney, but he does reckon that more transparency from Goldman on where its profits are coming from could mean the bank's multiples moving up towards the kind of levels seen at Fortress and Blackstone.

Let me throw in my own idea: Blackstone, or KKR, or Silver Lake, or someone along those lines, should just buy Goldman already. People have been talking about the first $100 billion private-equity deal for some time now – and this could be it. Goldman is a great PE target: an undervalued company with highly-paid managers who historically have hated the idea of a public listing, with all the disclosure requirements associated with it.

Goldman's market capitalization right now is in the region of $85 billion. Any buyer would obviously have to pay a significant premium over that sum. But in theory, there's no reason why it shouldn't happen. And maybe under new management Goldman's funds will do even better.

Posted by Felix at 10:06 EST | Comments (0)

Illegal immigrants are good for the US economy

Gordon Hanson is causing quite a stir with his study for the Council on Foreign Relations entitled "The Economic Logic of Illegal Immigration". (Press release, WSJ op-ed, abstract, paper.) Economically speaking, he concludes, there's really very little reason to believe that legal immigration is preferable to illegal immigration - and illegal immigration has a small but positive net economic effect.

To the extent that the US spends a lot of money keeping illegal immigrants out of the country, that's likely to damage the economy as a whole. Much better to deal with security concerns in other ways, such as licensing global temp agencies who could fill US jobs with employees from anywhere.

Clearly, the present system of temporary work visas isn't, well, working - this year's quota of H-1Bs, for highly-skilled immigrants, "sold out" in a matter of hours. What's more, the number of visas is necessarily larger than the number of legal immigrants, since many legal immigrants end up with three or more temporary visas while working here. Much smarter, says Hanson, to let legal immigrants switch jobs much more easily, and also to give them a path to citizenship.

Of course, the chances of anybody in Congress taking up Hanson's cry are slim to nonexistent - but with any luck his paper can help move the debate in the right direction.

Posted by Felix at 9:56 EST | Comments (0)

Cemex sees the finish line in $15.3 billion Rinker takeover

It's taken five months, and the fat lady (a/k/a Sydney-based Perpetual Investments) hasn't sung quite yet, but it very much looks as though Mexican cement company Cemex has finally snagged Rinker. Cemex is arguably the best-run company in Latin America, and has been growing through acquisitions for decades – it knows how to play this game. But this was a tough one, mainly because Rinker is headquartered and listed in Australia. Rinker's operations are primarily in the US, and so Cemex is valuing the company in US dollars. But the Australian dollar is so strong these days – it just hit a 17-year high – that any price in US dollars seems underwhelming in Aussie terms.

But the deal seems to be all but done, and the markets like it: Cemex's shares are up, and Rinker's shares are trading below the Cemex offer price, which means that no one expects a better offer to come along. Count this as a triumph for Cemex CEO Lorenzo Zambrano, who's paying a sum substantially lower than Rinker was trading at last year.

Posted by Felix at 9:44 EST | Comments (0)

Anything PE shops can do, pension funds can do better

Index funds are a smarter bet than mutual funds for retail investors, just because their fees are lower. So why do big institutional investors invest in private-equity companies which charge enormous fees, and which in turn hire investment banks which charge their own enormous fees, rather than simply buying companies themselves?

Ontario Teachers Pension Plan seems to have decided that enough is enough – and has decided it's going to make its own bid for BCE (a/k/a Bell Canada). Private-equity shops such as Providence Equity Partners might be invited to join the buyout party, but then again so are real-money investors such as Caisse de Dépôt et Placement du Québec and the Canada Pension Plan Investment Board, according to the NYT.

This is very much a welcome development: it shows that institutional investors are beginning to realize that their own investing skills have a pretty good chance of outperforming any PE or hedge fund, once those enormous fees are taken into account. (Hedge funds do generate alpha; they just pay nearly all of it to themselves in the form of fees.) So whether or not the BCE takeover ever happens, an important precedent has already been set. Pension funds can be in deals from the beginning, rather than being brought in at the end to provide that last chunk of equity finance.

Posted by Felix at 9:21 EST | Comments (2)

Illegal immigrants are good for the US economy

Gordon Hanson is causing quite a stir with his study for the Council on Foreign Relations entitled "The Economic Logic of Illegal Immigration". (Press release, WSJ op-ed, abstract, paper.) Economically speaking, he concludes, there's really very little reason to believe that legal immigration is preferable to illegal immigration – and illegal immigration has a small but positive net economic effect.

To the extent that the US spends a lot of money keeping illegal immigrants out of the country, that's likely to damage the economy as a whole. Much better to deal with security concerns in other ways, such as licensing global temp agencies who could fill US jobs with employees from anywhere.

Clearly, the present system of temporary work visas isn't, well, working – this year's quota of H-1Bs, for highly-skilled immigrants, "sold out" in a matter of hours. What's more, the number of visas is necessarily larger than the number of legal immigrants, since many legal immigrants end up with three or more temporary visas while working here. Much smarter, says Hanson, to let legal immigrants switch jobs much more easily, and also to give them a path to citizenship.

Of course, the chances of anybody in Congress taking up Hanson's cry are slim to nonexistent – but with any luck his paper can help move the debate in the right direction.

Posted by Felix at 8:50 EST | Comments (56)

Monday remainders

Brad Setser notes that Brazil just issued a new 10-year bond at 122bp over Treasuries. "I remember when..." he writes - I'll finish the sentence for him - "Brazil was at 2,400bp over Treasuries". The official JP Morgan Brazil index now stands at 164bp over.

Chase wants its borrowers to pony up $295 plus $5.42 per month for the privilege of paying down their mortgage more quickly. "Only a bank would figure out a way to charge you for something you can do yourself and make you think it's a smart decision!"

The NYT's flash-based executive compensation chart, nicking its look-and-feel from Gapminder.

Jeff Sachs is giving this year's Reith lectures.

The going rate for Joshua Bell, playing sans name recognition? $32.17, in 43 minutes.

Cassandra Wolos on junk charts in the NYT (Via)

Greg Clayman's luggage was lost by JetBlue, and he discovered that they don't track bags.

Posted by Felix at 16:10 EST | Comments (0)

Monday remainders

Brad Setser notes that Brazil just issued a new 10-year bond at 122bp over Treasuries. "I remember when..." he writes – I'll finish the sentence for him – "Brazil was at 2,400bp over Treasuries". The official JP Morgan Brazil index now stands at 164bp over.

Chase wants its borrowers to pony up $295 plus $5.42 per month for the privilege of paying down their mortgage more quickly. "Only a bank would figure out a way to charge you for something you can do yourself and make you think it’s a smart decision!"

The NYT's flash-based executive compensation chart, nicking its look-and-feel from Gapminder.

Jeff Sachs is giving this year's Reith lectures.

The going rate for Joshua Bell, playing sans name recognition? $32.17, in 43 minutes.

Cassandra Wolos on junk charts in the NYT (Via)

Greg Clayman's luggage was lost by JetBlue, and he discovered that they don't track bags.

Posted by Felix at 15:07 EST | Comments (1)

How does zero-cost default protection work?

Via Alea, a Reuters story about a new Citigroup product where you can apparently buy default protection at zero initial cost, paying only if and when the defaults start happening. There's just enough information in the article for it to be intriguing, but not quite enough for it to make sense.

I understand that if the defaults happen, then the cost of protection is higher than it would have been if you'd bought it up-front. But at that point you don't care - you'll happily pay a lot of money to protect yourself against a certain default. Can someone explain to me how this product works? Can you really buy protection and yet pay absolutely nothing if nobody defaults?

Posted by Felix at 14:55 EST | Comments (0)

Lose money on your house, get a monster tax bill!

Gretchen Morgenson had another dreadful column this weekend: the housing "nightmare grows darker," according to the headline, but Morgenson adduces not a single piece of evidence to that effect.

If Morgenson wanted to find real reasons for worry, as opposed to inchoate doom-mongering, she could have done a lot worse than reading Bill Bischoff's Smart Money article on the taxes people owe when they sell their homes.

In the olden days, things were simple. You took out a mortgage to buy a house, and then when you sold your house it had either gone up in value or it hadn't. If it had, then you made money on the sale, which was a taxable capital gain. If it hadn't, then you didn't have a capital gain, and didn't have to pay any tax.

Nowadays, thanks to the rise in home-equity extraction, things are very different.

Say you paid $260,000 for a home that you can now sell for a net sale price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property. For tax purposes, you'll have a $40,000 gain if you sell, because the sale price exceeds your tax basis in the home ($300,000 sale price - $260,000 basis = $40,000 gain). The IRS doesn't care that you're still $50,000 in the red after the sale ($350,000 of debt vs. the $300,000 sale price). The bottom line is you can have a tax gain without actually having any cash to show for it.

Alternatively, what happens if your mortgage company forgives some of the debt you owe them? It's not good news from a tax perspective: any money written off by your creditors is "debt discharge income", which has to be reported as income on your tax return.

Let's say you buy a house with zero money down for $250,000, you sell it for $200,000, and you find another $10,000 to settle up with the mortgage company. For tax purposes, you've just made $40,000 in income - which you need to pay tax on. Ouch.

There's a lot of muttering in Washington about legislation to reign in predatory subprime lenders. (And yes, you'd be right in thinking that that horse bolted long ago.) Much more useful would be legislation to reduce the income-tax consequences of short sales.

Posted by Felix at 14:26 EST | Comments (0)

How does zero-cost default protection work?

Via Alea, a Reuters story about a new Citigroup product where you can apparently buy default protection at zero initial cost, paying only if and when the defaults start happening. There's just enough information in the article for it to be intriguing, but not quite enough for it to make sense.

I understand that if the defaults happen, then the cost of protection is higher than it would have been if you'd bought it up-front. But at that point you don't care – you'll happily pay a lot of money to protect yourself against a certain default. Can someone explain to me how this product works? Can you really buy protection and yet pay absolutely nothing if nobody defaults?

Posted by Felix at 13:55 EST | Comments (1)

Lose money on your house, get a monster tax bill!

Gretchen Morgenson had another dreadful column this weekend: the housing "nightmare grows darker," according to the headline, but Morgenson adduces not a single piece of evidence to that effect.

If Morgenson wanted to find real reasons for worry, as opposed to inchoate doom-mongering, she could have done a lot worse than reading Bill Bischoff's Smart Money article on the taxes people owe when they sell their homes.

In the olden days, things were simple. You took out a mortgage to buy a house, and then when you sold your house it had either gone up in value or it hadn't. If it had, then you made money on the sale, which was a taxable capital gain. If it hadn't, then you didn't have a capital gain, and didn't have to pay any tax.

Nowadays, thanks to the rise in home-equity extraction, things are very different.

Say you paid $260,000 for a home that you can now sell for a net sale price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property. For tax purposes, you'll have a $40,000 gain if you sell, because the sale price exceeds your tax basis in the home ($300,000 sale price - $260,000 basis = $40,000 gain). The IRS doesn't care that you're still $50,000 in the red after the sale ($350,000 of debt vs. the $300,000 sale price). The bottom line is you can have a tax gain without actually having any cash to show for it.

Alternatively, what happens if your mortgage company forgives some of the debt you owe them? It's not good news from a tax perspective: any money written off by your creditors is "debt discharge income", which has to be reported as income on your tax return.

Let's say you buy a house with zero money down for $250,000, you sell it for $200,000, and you find another $10,000 to settle up with the mortgage company. For tax purposes, you've just made $40,000 in income – which you need to pay tax on. Ouch.

There's a lot of muttering in Washington about legislation to reign in predatory subprime lenders. (And yes, you'd be right in thinking that that horse bolted long ago.) Much more useful would be legislation to reduce the income-tax consequences of short sales.

Posted by Felix at 13:26 EST | Comments (2)

Zell doesn't get the web

Employees at Tribune are now the main owners of Tribune, thanks to Sam Zell's innovative ways with ESOPs. Their problem is that although they own the company, they don't control it: Zell does. And so they have to simply cross their fingers and hope that he knows what he's doing.

Judging by comments reported by the Washington Post on Saturday, however, he doesn't.

It's time for newspapers to stop giving away their stories to popular search engines such as Google, according to Samuel Zell, the real estate magnate whose bid for Tribune Co. was accepted this week.
In conversations before and after a speech Zell delivered Thursday night at Stanford Law School in Palo Alto, Calif., the billionaire said newspapers could not economically sustain the practice of allowing their articles, photos and other content to be used free by other Internet news aggregators.
"If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be?" Zell said during the question period after his speech. "Not very."
Newspapers have allowed Google to use their articles in exchange for a small cut of advertising revenue, but search engines also help to distribute their content to wider online audiences.

This is all pretty much garbage, as Jason Calacanis, among others, has done a very good job in pointing out. For one thing, the Washington Post is simply wrong when it talks about Google giving newspapers "a small cut of advertising revenue" - that's not possible, since Google News doesn't have any advertising.

Which also helps to answer Zell's question. If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be? It would be just as profitable as it is today. And Google doesn't steal their content any more than it steals anybody else's content: Google indexes their content, which is something else entirely.

I have a rule of thumb for judging any kind of regularly-updated website which is being run on a for-profit basis. If your business plan looks like this, then it's doomed:

People who want information will come to my site, where they will search for that information and find it, or otherwise be directed to it.

That's simply not how people use the internet. There are maybe one or two websites which fit that bill: Wikipedia and IMDB spring to mind. But I suspect that even they get an enormous amount of their traffic from Google, because they have such a high Page Rank. Wikipedia's traffic really started skyrocketing when Wikipedia started becoming the top search result for hundreds of thousands of Google searches.

If Zell wants to make money online, he has to embrace Google, not fight it.

Posted by Felix at 12:06 EST | Comments (0)

In defense of socially responsible investing

Joe Nocera is not a fan of socially responsible investing, or SRI:

My problem is that socially responsible investing oversimplifies the world, and in so doing distorts reality. It allows investors to believe that their money is only being invested in "good companies," and they take foolish comfort in that belief. Rare is the company, after all, that is either all good or all bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray.

Nocera does perform the useful service of pointing out that the main SRI screening company, KLD, has vastly insufficient resources for the job it's trying to do:

KLD is a small firm that constructs socially responsible indexes, including the Domini 400. Its 40-member staff includes about two dozen researchers who supposedly dig into companies and decide which should be included in its indexes -- and which should be excluded. Its biggest index, the KLD Broad Market Social Index, uses the Russell 3000 as its universe, which it has whittled down to 2,050 companies it deems acceptable...
Two dozen researchers are monitoring 3,000 companies -- and writing in-depth reports? How is that even possible? It's not. Mr. Kinder told me that the employees almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself. That hardly seems like enough to make a decision on whether a company is good or bad.

But his conclusion goes way too far:

It would be nice if we could invest our money only in companies that had terrific human rights record, fabulous environmental values and wonderful compassionate cultures.
Too bad it's impossible.

Let's be very clear, here, about what KLD is doing: it's taking the Russell 3000 as a starting point, and then removing roughly one-third of the most egregious companies. If you don't want to invest in companies that kill people, like arms manufacturers or tobacco firms, then KLD's index is a great place to start. But at no point is anybody at KLD or anywhere else saying that all 2,050 of the firms on their list have "terrific human rights record, fabulous environmental values and wonderful compassionate cultures."

There are funds which seek only to invest in companies which make the world a better place, in firms which have great environmental records, and so on. Such funds have no interest in whether BP or ExxonMobil is a more ethical investment: they would never invest in either. And they also have no interest in Nocera's other example, Nike vs Reebok, for the same reason.

It seems Nocera is judging "negative" funds - those which exclude the worst companies - by the standards of "positive" funds - those which include only the best companies. That's unfair. There are many flavors of SRI, and investors can and should be able to choose between them. Why does Nocera seemingly believe in denying investors that choice?

Posted by Felix at 11:45 EST | Comments (0)

Let's have more bank consolidation

Dan Gross is writing about bank branches in Slate. It seems that in current boom times, the number of branches is expanding even as the number of banks is contracting:

According to the Federal Reserve, even as the number of banking companies falls each year, the number of branches rises steadily.

At the same time, in bust times, the number of branches is likely to contract even as the number of banks... contracts:

When the banking business goes south, or if the economy slips into recession , branches, with their high fixed costs, quickly become a liability. In 1993, for example, the number of bank branches fell by nearly 1,000, according to the Federal Reserve. In 2000, a net 1,859 branches were closed. (The number of branches didn't regain the 1999 peak until 2002.) Indeed, the ability to save money by shuttering overlapping branch networks is one of the factors that helps drive bank mergers during periods of sluggish economic growth.

The main conclusion to draw from all this is that the number of banks in the US is going to continue to fall, no matter what happens to the economy. That is actually a good thing: the US has too many small banks, which consume vast amounts of regulatory time and energy to no particularly useful end. Indeed, the various regulators (FDIC, OCC, Treasury, Federal Reserve, etc) are likely, at the margin, to constrain the actions of the big banks because they're worried about giving similar freedoms to small banks, and want to keep a flat competitive playing field.

In other words, let's have more bank consolidation. Quite clearly, reducing the number of banks has no adverse impact on the number of bank branches.

Posted by Felix at 11:22 EST | Comments (0)

Zell doesn't get the web

Employees at Tribune are now the main owners of Tribune, thanks to Sam Zell's innovative ways with ESOPs. Their problem is that although they own the company, they don't control it: Zell does. And so they have to simply cross their fingers and hope that he knows what he's doing.

Judging by comments reported by the Washington Post on Saturday, however, he doesn't.

It's time for newspapers to stop giving away their stories to popular search engines such as Google, according to Samuel Zell, the real estate magnate whose bid for Tribune Co. was accepted this week.
In conversations before and after a speech Zell delivered Thursday night at Stanford Law School in Palo Alto, Calif., the billionaire said newspapers could not economically sustain the practice of allowing their articles, photos and other content to be used free by other Internet news aggregators.
"If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be?" Zell said during the question period after his speech. "Not very."
Newspapers have allowed Google to use their articles in exchange for a small cut of advertising revenue, but search engines also help to distribute their content to wider online audiences.

This is all pretty much garbage, as Jason Calacanis, among others, has done a very good job in pointing out. For one thing, the Washington Post is simply wrong when it talks about Google giving newspapers "a small cut of advertising revenue" – that's not possible, since Google News doesn't have any advertising.

Which also helps to answer Zell's question. If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be? It would be just as profitable as it is today. And Google doesn't steal their content any more than it steals anybody else's content: Google indexes their content, which is something else entirely.

I have a rule of thumb for judging any kind of regularly-updated website which is being run on a for-profit basis. If your business plan looks like this, then it's doomed:

People who want information will come to my site, where they will search for that information and find it, or otherwise be directed to it.

That's simply not how people use the internet. There are maybe one or two websites which fit that bill: Wikipedia and IMDB spring to mind. But I suspect that even they get an enormous amount of their traffic from Google, because they have such a high Page Rank. Wikipedia's traffic really started skyrocketing when Wikipedia started becoming the top search result for hundreds of thousands of Google searches.

If Zell wants to make money online, he has to embrace Google, not fight it.

Posted by Felix at 11:06 EST | Comments (1)

Hedge funds get the New York Magazine treatment

New York magazine loves its special issues, and this week it's alighted on hedge funds. The conceit is "Behind the Hedge," which is illustrated with a picture of... a guy behind a hedge. Really. Is there anything new or interesting here? Not that I can see. But if you're looking for contrarian indicators, this issue could be a good sign of the beginning of the end of the hedge-fund craze.

Posted by Felix at 11:04 EST | Comments (0)

In defense of socially responsible investing

Joe Nocera is not a fan of socially responsible investing, or SRI:

My problem is that socially responsible investing oversimplifies the world, and in so doing distorts reality. It allows investors to believe that their money is only being invested in “good companies,” and they take foolish comfort in that belief. Rare is the company, after all, that is either all good or all bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray.

Nocera does perform the useful service of pointing out that the main SRI screening company, KLD, has vastly insufficient resources for the job it's trying to do:

KLD is a small firm that constructs socially responsible indexes, including the Domini 400. Its 40-member staff includes about two dozen researchers who supposedly dig into companies and decide which should be included in its indexes — and which should be excluded. Its biggest index, the KLD Broad Market Social Index, uses the Russell 3000 as its universe, which it has whittled down to 2,050 companies it deems acceptable...
Two dozen researchers are monitoring 3,000 companies — and writing in-depth reports? How is that even possible? It’s not. Mr. Kinder told me that the employees almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself. That hardly seems like enough to make a decision on whether a company is good or bad.

But his conclusion goes way too far:

It would be nice if we could invest our money only in companies that had terrific human rights record, fabulous environmental values and wonderful compassionate cultures.
Too bad it’s impossible.

Let's be very clear, here, about what KLD is doing: it's taking the Russell 3000 as a starting point, and then removing roughly one-third of the most egregious companies. If you don't want to invest in companies that kill people, like arms manufacturers or tobacco firms, then KLD's index is a great place to start. But at no point is anybody at KLD or anywhere else saying that all 2,050 of the firms on their list have "terrific human rights record, fabulous environmental values and wonderful compassionate cultures."

There are funds which seek only to invest in companies which make the world a better place, in firms which have great environmental records, and so on. Such funds have no interest in whether BP or ExxonMobil is a more ethical investment: they would never invest in either. And they also have no interest in Nocera's other example, Nike vs Reebok, for the same reason.

It seems Nocera is judging "negative" funds – those which exclude the worst companies – by the standards of "positive" funds – those which include only the best companies. That's unfair. There are many flavors of SRI, and investors can and should be able to choose between them. Why does Nocera seemingly believe in denying investors that choice?

Posted by Felix at 10:45 EST | Comments (2)

Meme of the week: More debt, less equity

Floyd Norris and Dean Baker and Wcw are all on the case of the good old-fashioned debt arbitrage. As Wcw puts it, either "bonds are overvalued, equities undervalued, or both".

Or, of course, you have to remember the bearish position: equities are overvalued, but bonds are even more overvalued. Which is not very helpful if you're looking for somewhere to invest, but at least makes you feel a little bit better if you don't have any money to invest in the first place.

As a public service, let me explain what all these people are talking about, using a hypothetical company which makes $1 billion of profits every year, which amounts to $1 per share. It pays those profits out in dividends, and the stock price is 15 times earnings, or $15 per share.

Now let's say the company borrows $10.2 billion, at an interest rate of 5% per year, and uses it to buy back its stock at say $17 per share. Now there were 1 billion shares outstanding originally, but the company has bought back 60% of them, which means that the total amount of shares outstanding has dropped to 400 million. It's still making $1 billion per year, but now it needs to repay $510 million per year in interest, so total profits have now dropped to a mere $490 million. It pays those profits out in dividends, and - presto - the dividend has actually risen, to $1.22 per share! That's 20% earnings growth, that is, so the stock price is no longer 15 or even 17 times earnings, but rather 20 times earnings. Which puts it at $24.50.

In other words, it's quite easy, if debt is cheap enough, to raise your earnings per share without raising your total earnings, just by borrowing money. Note that in my example, if the company paid 6% a year on its debt rather than 5% per year, none of the leveraging would work. But at 5%, it can boost the share price by more than 60%.

Posted by Felix at 10:28 EST | Comments (0)

Let's have more bank consolidation

Dan Gross is writing about bank branches in Slate. It seems that in current boom times, the number of branches is expanding even as the number of banks is contracting:

According to the Federal Reserve, even as the number of banking companies falls each year, the number of branches rises steadily.

At the same time, in bust times, the number of branches is likely to contract even as the number of banks... contracts:

When the banking business goes south, or if the economy slips into recession , branches, with their high fixed costs, quickly become a liability. In 1993, for example, the number of bank branches fell by nearly 1,000, according to the Federal Reserve. In 2000, a net 1,859 branches were closed. (The number of branches didn't regain the 1999 peak until 2002.) Indeed, the ability to save money by shuttering overlapping branch networks is one of the factors that helps drive bank mergers during periods of sluggish economic growth.

The main conclusion to draw from all this is that the number of banks in the US is going to continue to fall, no matter what happens to the economy. That is actually a good thing: the US has too many small banks, which consume vast amounts of regulatory time and energy to no particularly useful end. Indeed, the various regulators (FDIC, OCC, Treasury, Federal Reserve, etc) are likely, at the margin, to constrain the actions of the big banks because they're worried about giving similar freedoms to small banks, and want to keep a flat competitive playing field.

In other words, let's have more bank consolidation. Quite clearly, reducing the number of banks has no adverse impact on the number of bank branches.

Posted by Felix at 10:22 EST | Comments (1)

Citi eyes Pandit: Does it still care about retail banking?

Is Citi going to buy Vikram Pandit's hedge fund, Old Lane? According to today's WSJ, yes. The WSJ runs down the list of reasons why such an acquisition would make a lot of sense: Pandit would immediately beef up Citi's alternative-investments arm, which has been headless for a year, and might also make an excellent potential successor for Citi CEO Chuck Prince down the road.

The mooted acquisition price of $600 million doesn't seem ridiculously high for a $4 billion hedge fund: if such a fund makes 2-and-20 and has a 15% return, that would mean income of $200 million in just one year.

If Pandit does pop up at Citi, who would he be up against in the CEO-succession stakes? Here's the WSJ:

If Mr. Pandit joins Citigroup, his arrival could ignite a more vigorous contest among executives who could become potential heirs to Mr. Prince. He could be facing off against Michael Klein and Thomas G. Maheras, co-heads of Citigroup's corporate and investment-banking unit, and Ajay Banga, who runs the international consumer business.

The interesting thing here is that three of the four named potential successors, including Pandit, are investment bankers at heart, even though Citigroup isn't really an investment bank. Which raises one fascinating idea: might Citi, at some point, consider selling or spinning off its retail arm? Its performance certainly hasn't been much to write home about compared to the likes of Wachovia or Bank of America. But without a cheap deposits base, it would be even harder for Citi to succeed in the investment banking business - which these days requires a huge amount of capital.

Posted by Felix at 9:53 EST | Comments (0)

Meme of the week: More debt, less equity

Floyd Norris and Dean Baker and Wcw are all on the case of the good old-fashioned debt arbitrage. As Wcw puts it, either "bonds are overvalued, equities undervalued, or both".

Or, of course, you have to remember the bearish position: equities are overvalued, but bonds are even more overvalued. Which is not very helpful if you're looking for somewhere to invest, but at least makes you feel a little bit better if you don't have any money to invest in the first place.

As a public service, let me explain what all these people are talking about, using a hypothetical company which makes $1 billion of profits every year, which amounts to $1 per share. It pays those profits out in dividends, and the stock price is 15 times earnings, or $15 per share.

Now let's say the company borrows $10.2 billion, at an interest rate of 5% per year, and uses it to buy back its stock at say $17 per share. Now there were 1 billion shares outstanding originally, but the company has bought back 60% of them, which means that the total amount of shares outstanding has dropped to 400 million. It's still making $1 billion per year, but now it needs to repay $510 million per year in interest, so total profits have now dropped to a mere $490 million. It pays those profits out in dividends, and – presto – the dividend has actually risen, to $1.22 per share! That's 20% earnings growth, that is, so the stock price is no longer 15 or even 17 times earnings, but rather 20 times earnings. Which puts it at $24.50.

In other words, it's quite easy, if debt is cheap enough, to raise your earnings per share without raising your total earnings, just by borrowing money. Note that in my example, if the company paid 6% a year on its debt rather than 5% per year, none of the leveraging would work. But at 5%, it can boost the share price by more than 60%.

Posted by Felix at 9:27 EST | Comments (2)

Hedge funds get the New York Magazine treatment

New York magazine loves its special issues, and this week it's alighted on hedge funds. The conceit is "Behind the Hedge," which is illustrated with a picture of... a guy behind a hedge. Really. Is there anything new or interesting here? Not that I can see. But if you're looking for contrarian indicators, this issue could be a good sign of the beginning of the end of the hedge-fund craze.

Posted by Felix at 9:04 EST | Comments (0)

Citi eyes Pandit: Does it still care about retail banking?

Is Citi going to buy Vikram Pandit's hedge fund, Old Lane? According to today's WSJ, yes. The WSJ runs down the list of reasons why such an acquisition would make a lot of sense: Pandit would immediately beef up Citi's alternative-investments arm, which has been headless for a year, and might also make an excellent potential successor for Citi CEO Chuck Prince down the road.

The mooted acquisition price of $600 million doesn't seem ridiculously high for a $4 billion hedge fund: if such a fund makes 2-and-20 and has a 15% return, that would mean income of $200 million in just one year.

If Pandit does pop up at Citi, who would he be up against in the CEO-succession stakes? Here's the WSJ:

If Mr. Pandit joins Citigroup, his arrival could ignite a more vigorous contest among executives who could become potential heirs to Mr. Prince. He could be facing off against Michael Klein and Thomas G. Maheras, co-heads of Citigroup's corporate and investment-banking unit, and Ajay Banga, who runs the international consumer business.

The interesting thing here is that three of the four named potential successors, including Pandit, are investment bankers at heart, even though Citigroup isn't really an investment bank. Which raises one fascinating idea: might Citi, at some point, consider selling or spinning off its retail arm? Its performance certainly hasn't been much to write home about compared to the likes of Wachovia or Bank of America. But without a cheap deposits base, it would be even harder for Citi to succeed in the investment banking business – which these days requires a huge amount of capital.

Posted by Felix at 8:52 EST | Comments (0)

Putting that NYT payrolls chart in perspective

Remember that NYT chart from earlier today? Well, one of my favorite chart-makers, Wcw, or West-Coast Whiner, has helpfully converted it into a line chart, which does kinda put it in perspective. Here's Wcw's chart, with the NYT chart underneath:

As you can see, there is a case to be made that payrolls are falling slowing down on a year-on-year basis, even though they're rising accelerating on a month-on-month basis. But in the grand scheme of things they're actually pretty steady, compared to the wild swings we've seen in the past.

Posted by Felix at 17:56 EST | Comments (2)

Does microcredit work?

Blogs such as MicroCapital and Poverty News Blog are reprinting a Newsweek article by Mac Margolis which is summed up in the standfirst: "Critics put trendy poverty lenders to the test," it says, "and find they're neither a real business nor a real help."

Who are these critics? The main one is Thomas Dichter, a well-known aid-doesn't-work type at the Cato Institute. The others are not clear: is it really a criticism of microfinance to say that most microfinance programs are unprofitable? Many microfinance types would say that their main job is poverty alleviation, not turning a profit, and that they're more than happy to spend grant monies on the poor before trying to set themselves up as a profitable financial institution. I personally sit on the board of a community development credit union (CDCU) in New York - LES Peoples - which isn't "sustainable" unless you count the grants we receive. But we've been receiving them for 20 years, we have assets of almost $20 million, we're the largest CDCU in the country, and we're widely lauded by everyone from Hillary Clinton to Mike Bloomberg. Just because you don't turn an operating profit, doesn't make you a failure. Not by any means.

Margolis also has an interesting way of spinning good news as bad news:

Alex Counts, director of the Grameen Foundation, which is in charge of replicating the Bangladesh-based Grameen Bank around the world, admits that only a tenth of the bank's 7 million clients are "true entrepreneurs" who "started borrowing $100 and are now borrowing $10,000 to $20,000," but says that most are making ends meet.

"Admits"? That Grameen bank has helped only 700,000 clients to move from microloans to loans in the tens of thousands of dollars? If that's failure, let's have more of it!

As for Dichter, Margolis quotes an essay of his entitled "Microfinance Reconsidered," which apparently has been published by the Cato Institute, although I can't find anything of that name on the Cato website. The closest thing I can find is a paper by Dichter called "A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History," which is mainly historical and concentrates solely on the history of finance in developed countries such as the UK, rather than looking at microfinance in the developing world today.

As for the substance of the debate, Margolis is right that there's much more heat than light in all the stuff being written. The big exception, in my view, is a wonderful paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz, which explains why microfinance works, in practice, in places like Bangladesh. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women's labor: a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.

To put it another way, the interest on a microloan isn't really return on capital, it's return on labor. It's just that without a tiny bit of capital, the labor is nascent and can't be tapped. That's why microcredit works.

Posted by Felix at 14:37 EST | Comments (0)

Does microcredit work?

Blogs such as MicroCapital and Poverty News Blog are reprinting a Newsweek article by Mac Margolis which is summed up in the standfirst: "Critics put trendy poverty lenders to the test," it says, "and find they're neither a real business nor a real help."

Who are these critics? The main one is Thomas Dichter, a well-known aid-doesn't-work type at the Cato Institute. The others are not clear: is it really a criticism of microfinance to say that most microfinance programs are unprofitable? Many microfinance types would say that their main job is poverty alleviation, not turning a profit, and that they're more than happy to spend grant monies on the poor before trying to set themselves up as a profitable financial institution. I personally sit on the board of a community development credit union (CDCU) in New York – LES Peoples – which isn't "sustainable" unless you count the grants we receive. But we've been receiving them for 20 years, we have assets of almost $20 million, we're the largest CDCU in the country, and we're widely lauded by everyone from Hillary Clinton to Mike Bloomberg. Just because you don't turn an operating profit, doesn't make you a failure. Not by any means.

Margolis also has an interesting way of spinning good news as bad news:

Alex Counts, director of the Grameen Foundation, which is in charge of replicating the Bangladesh-based Grameen Bank around the world, admits that only a tenth of the bank's 7 million clients are "true entrepreneurs" who "started borrowing $100 and are now borrowing $10,000 to $20,000," but says that most are making ends meet.

"Admits"? That Grameen bank has helped only 700,000 clients to move from microloans to loans in the tens of thousands of dollars? If that's failure, let's have more of it!

As for Dichter, Margolis quotes an essay of his entitled "Microfinance Reconsidered," which apparently has been published by the Cato Institute, although I can't find anything of that name on the Cato website. The closest thing I can find is a paper by Dichter called "A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History," which is mainly historical and concentrates solely on the history of finance in developed countries such as the UK, rather than looking at microfinance in the developing world today.

As for the substance of the debate, Margolis is right that there's much more heat than light in all the stuff being written. The big exception, in my view, is a wonderful paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz, which explains why microfinance works, in practice, in places like Bangladesh. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women's labor: a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.

To put it another way, the interest on a microloan isn't really return on capital, it's return on labor. It's just that without a tiny bit of capital, the labor is nascent and can't be tapped. That's why microcredit works.

Posted by Felix at 13:36 EST | Comments (4)

Are payrolls actually falling?

The NYT has an interesting chart accompanying its payrolls story today. While the text is as upbeat as you'd expect given the excellent figures, and despite the fact that the WSJ is running a story headlined "Economists Wonder if March Is the Peak for 2007 Job Growth", someone on 43rd Street seems to have decided to run a graphic showing payrolls going down.

The chart violates a basic rule of charting, which is that a bar chart like this should be used to show how quantities change from month to month. Looking at the bar chart, you expect the March bar to refer to March figures, the February bar to refer to February figures, and so on. But in fact they refer to a year-on-year differential, which is better displayed with a line chart.

Still, that's a quibble: A line chart would still be going down, even as everybody is talking about the payroll numbers going up. What gives? To be honest, I'm not entirely sure. Year-on-year figures obviate the need for seasonal adjustment, so maybe the real trend is down but is being hidden by the seasonal adjustments. Alternatively maybe the enormous revisions that the BLS has been doing to the time series of late make the year-on-year figures less useful than they otherwise would be.

In any case, it's not immediately clear to me why year-on-year figures should be charted when all of Wall Street concentrates solely on the month-on-month number. If you're going to use these figures, you should at the very least somewhere explain why.

Posted by Felix at 13:35 EST | Comments (0)

Are payrolls actually falling?

The NYT has an interesting chart accompanying its payrolls story today. While the text is as upbeat as you'd expect given the excellent figures, and despite the fact that the WSJ is running a story headlined "Economists Wonder if March Is the Peak for 2007 Job Growth", someone on 43rd Street seems to have decided to run a graphic showing payrolls going down.

The chart violates a basic rule of charting, which is that a bar chart like this should be used to show how quantities change from month to month. Looking at the bar chart, you expect the March bar to refer to March figures, the February bar to refer to February figures, and so on. But in fact they refer to a year-on-year differential, which is better displayed with a line chart.

Still, that's a quibble: A line chart would still be going down, even as everybody is talking about the payroll numbers going up. What gives? To be honest, I'm not entirely sure. Year-on-year figures obviate the need for seasonal adjustment, so maybe the real trend is down but is being hidden by the seasonal adjustments. Alternatively maybe the enormous revisions that the BLS has been doing to the time series of late make the year-on-year figures less useful than they otherwise would be.

In any case, it's not immediately clear to me why year-on-year figures should be charted when all of Wall Street concentrates solely on the month-on-month number. If you're going to use these figures, you should at the very least somewhere explain why.

Posted by Felix at 12:35 EST | Comments (6)

Is the US exploiting its military strength in trade negotiations?

The US knows how it likes its trade negotiations. It's a simple rubric: the US puts its proposal on the table, and its interlocutors accept.

In the Doha round of the WTO talks, as we know, this hasn't worked very well. So the US is signing bilateral preferential trade agreements instead, the latest of which is with South Korea. In turn, these bilateral agreements only serve to weaken the case for global trade agreements. Jagdish Bhagwati says that "the whole world has practically collapsed into bilateralism which is driven by sloppy arguments and failure of leadership by the major powers such as the United States." And Martin Wolf hates these bilateral agreements as well. So why do they happen? Robert Wade has an interesting take on Wolf's blog:

Singapore's prime concern was less with the economics of the agreement than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation, being only too aware of growing sentiment in the US to "bring our troops home", including from East Asia, at the same time as North Korea could explode on its doorstep and China-Taiwan could explode to the south.

In other words, this isn't a trade agreement at all: it's a trade-for-security agreement. One could even, if one was feeling uncharitable, characterize it as the US extorting trade concessions from the East Asians in return for keeping a military presence in the region.

(Via Mark Thoma)

Posted by Felix at 10:49 EST | Comments (0)

Is the US exploiting its military strength in trade negotiations?

The US knows how it likes its trade negotiations. It's a simple rubric: the US puts its proposal on the table, and its interlocutors accept.

In the Doha round of the WTO talks, as we know, this hasn't worked very well. So the US is signing bilateral preferential trade agreements instead, the latest of which is with South Korea. In turn, these bilateral agreements only serve to weaken the case for global trade agreements. Jagdish Bhagwati says that "the whole world has practically collapsed into bilateralism which is driven by sloppy arguments and failure of leadership by the major powers such as the United States." And Martin Wolf hates these bilateral agreements as well. So why do they happen? Robert Wade has an interesting take on Wolf's blog:

Singapore’s prime concern was less with the economics of the agreement than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation, being only too aware of growing sentiment in the US to “bring our troops home”, including from East Asia, at the same time as North Korea could explode on its doorstep and China-Taiwan could explode to the south.

In other words, this isn't a trade agreement at all: it's a trade-for-security agreement. One could even, if one was feeling uncharitable, characterize it as the US extorting trade concessions from the East Asians in return for keeping a military presence in the region.

(Via Mark Thoma)

Posted by Felix at 9:49 EST | Comments (4)

Do you want biofuels, or do you want to feed the hungry?

Tyler Cowen is an economist with a heart. He thinks he knows that protectionism and subsidies are ever and always a Bad Thing, but at the same time he can't bring himself to say anything too bad about tortilla subsidies in Mexico.

My head knows what is right but my heart is torn. Can Mexico can afford the protectionism which keeps local producers going and gives it the world's best and most diverse corn, the world's best tortillas, and supports a major part of its national identity, most of all for its most oppressed and politically sensitive groups? I am emotionally torn and will not proceed with the question any further.

If you're going to have subsidies, in other words, then subsidizing tortilla prices is a really good way to funnel a much-needed good to the poor. (Tortillas account for half of poor Mexicans' calories, and have been rising in price as corn prices soar in hopes of a future built on corn ethanol.)

In the May/June issue of Foreign Affairs, Ford Runge and Benjamin Senauer say quite explicitly that biofuels in general, and corn ethanol in particular, will "exacerbate world hunger".

The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. Filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year.

Meanwhile, the article notes, US corn subsidies were $8.9 billion in 2005 alone. If the US is really serious about moving towards ethanol and biofuels, at the very least it should abolish import restrictions on Brazilian sugar ethanol, which is much cheaper and more efficient than US corn ethanol in any case.

But there is a humanitarian case for taking a second look at the whole issue of biofuels in general. Back to the Foreign Affairs article:

The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.

Posted by Felix at 9:46 EST | Comments (0)

Payrolls: Great!

There's no one around on the stock market to celebrate, but this morning's jobs report was fantastic. (Unless you're Barry Ritholtz, of course, in which case it's "not a big number".) Not only did March payrolls rise by a very strong 180,000, but both February and January were revised upwards as well, and unemployment is now down to 4.4%; economists had actually been expecting it to rise. Hell, there was even a rise in construction employment, although it didn't quite make up for the fall in February.

Bonds are down half a point or so, stock futures are up a little, and Fed fund futures are rapidly giving up any hope of a rate cut.

Standard disclaimer, here: although the monthly payrolls report gets a lot of press and can send markets gyrating wildly, the margin of error is enormous, and sober observers have started using words like "meaningless" and "random". All the same, the bulls have a smile on their faces this morning. Maybe it's because they've been proved right; on the other hand, maybe it's just because a lot of them have the day off.

Posted by Felix at 9:26 EST | Comments (0)

Payrolls: Great!

There's no one around on the stock market to celebrate, but this morning's jobs report was fantastic. (Unless you're Barry Ritholtz, of course, in which case it's "not a big number".) Not only did March payrolls rise by a very strong 180,000, but both February and January were revised upwards as well, and unemployment is now down to 4.4%; economists had actually been expecting it to rise. Hell, there was even a rise in construction employment, although it didn't quite make up for the fall in February.

Bonds are down half a point or so, stock futures are up a little, and Fed fund futures are rapidly giving up any hope of a rate cut.

Standard disclaimer, here: although the monthly payrolls report gets a lot of press and can send markets gyrating wildly, the margin of error is enormous, and sober observers have started using words like "meaningless" and "random". All the same, the bulls have a smile on their faces this morning. Maybe it's because they've been proved right; on the other hand, maybe it's just because a lot of them have the day off.

Posted by Felix at 8:26 EST | Comments (2)

Do you want biofuels, or do you want to feed the hungry?

Tyler Cowen is an economist with a heart. He thinks he knows that protectionism and subsidies are ever and always a Bad Thing, but at the same time he can't bring himself to say anything too bad about tortilla subsidies in Mexico.

My head knows what is right but my heart is torn. Can Mexico can afford the protectionism which keeps local producers going and gives it the world's best and most diverse corn, the world's best tortillas, and supports a major part of its national identity, most of all for its most oppressed and politically sensitive groups? I am emotionally torn and will not proceed with the question any further.

If you're going to have subsidies, in other words, then subsidizing tortilla prices is a really good way to funnel a much-needed good to the poor. (Tortillas account for half of poor Mexicans' calories, and have been rising in price as corn prices soar in hopes of a future built on corn ethanol.)

In the May/June issue of Foreign Affairs, Ford Runge and Benjamin Senauer say quite explicitly that biofuels in general, and corn ethanol in particular, will "exacerbate world hunger".

The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. Filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year.

Meanwhile, the article notes, US corn subsidies were $8.9 billion in 2005 alone. If the US is really serious about moving towards ethanol and biofuels, at the very least it should abolish import restrictions on Brazilian sugar ethanol, which is much cheaper and more efficient than US corn ethanol in any case.

But there is a humanitarian case for taking a second look at the whole issue of biofuels in general. Back to the Foreign Affairs article:

The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.

UPDATE: Andrew Leonard fingers not corn ethanol but Nafta and globalization for the rise in tortilla prices

Posted by Felix at 7:46 EST | Comments (2)

Is Chrysler actually worth more than $0?

Breaking Views analyst Antony Currie has the down-low on the Kirk Kerkorian bid for Chrysler - and if you don''t have access to his ultra-exclusive website, you can get much the same analysis in the comments section of felixsalmon.com for free!

The key thing to bear in mind is Chrysler's unfunded healthcare liabilities, which are currently hovering around the $17 billion mark. As Floyd Norris notes today (also behind a subscriber firewall, sorry), "Kirk Kerkorian is not so much offering to buy Chrysler as he is volunteering to be paid to take it on."

It's here where it starts to make sense for DaimlerChrysler's Dieter Zetsche to choose a union-endorsed bid. As Currie explains,

Kerkorian has made his deal contingent on unions granting concessions. Assume a one-third cut in these worker benefits, a bit more than Ford Motor and General Motors got 18 months ago, and that takes $5.5bn off Daimler's bill. That would still leave Daimler holding some $7bn of Chrysler's bag. But that's significantly less than it's currently stuck with, so the company's shareholders would not be damaged. Moreover, Daimler and Tracinda might even be able to cut that back more by offering the unions an equity stake in Chrysler as part of the deal.

On the other hand, it's early days yet, and it's all but certain that someone else will pop up with a bid to rival Kerkorian's. Currie has one intriguing notion: how about General Motors? If a real bidding war gets under way, Chrysler might even sell for more than $0!

Posted by Felix at 23:15 EST | Comments (0)

Will Goldman Sachs lose money on New Century?

In the wake of New Century's bankruptcy, Robert Lindsay gets his hands on the official list of the company's biggest creditors. At the top of the list is Goldman Sachs, followed by Credit Suisse and a who's-who of other big investment-banking names: Morgan Stanley, Deutsche, BofA, UBS, Lehman, Citigroup. Loan house C-Bass is in the #3 spot.

Most of these creditors have secured loans to New Century, and one of them, Barclays, tells Lindsay that "the vast majority of our exposure to all US sub-prime lenders is fully collateralised and short-term, pending distribution. We do not anticipate any material losses to arise from our exposure to the sector."

There's no indication of how big New Century's obligations are, and my feeling is that by the time the company's assets are sold off, the secured creditors are unlikely to be seriously hurt. But for those of a conspiratorial bent, Lindsay notes that Goldman executive Kathleen Brown "left late last Friday without any explanation". Did she have anything to do with New Century? It's unclear.

(Via)

Posted by Felix at 23:01 EST | Comments (0)

Is Chrysler actually worth more than $0?

Breaking Views analyst Antony Currie has the down-low on the Kirk Kerkorian bid for Chrysler – and if you don''t have access to his ultra-exclusive website, you can get much the same analysis in the comments section of felixsalmon.com for free!

The key thing to bear in mind is Chrysler's unfunded healthcare liabilities, which are currently hovering around the $17 billion mark. As Floyd Norris notes today (also behind a subscriber firewall, sorry), "Kirk Kerkorian is not so much offering to buy Chrysler as he is volunteering to be paid to take it on."

It's here where it starts to make sense for DaimlerChrysler's Dieter Zetsche to choose a union-endorsed bid. As Currie explains,

Kerkorian has made his deal contingent on unions granting concessions. Assume a one-third cut in these worker benefits, a bit more than Ford Motor and General Motors got 18 months ago, and that takes $5.5bn off Daimler's bill. That would still leave Daimler holding some $7bn of Chrysler's bag. But that's significantly less than it's currently stuck with, so the company's shareholders would not be damaged. Moreover, Daimler and Tracinda might even be able to cut that back more by offering the unions an equity stake in Chrysler as part of the deal.

On the other hand, it's early days yet, and it's all but certain that someone else will pop up with a bid to rival Kerkorian's. Currie has one intriguing notion: how about General Motors? If a real bidding war gets under way, Chrysler might even sell for more than $0!

Posted by Felix at 22:15 EST | Comments (1)

Kerkorian's weird bid for Chrysler

Kirk Kerkorian has gone public with a low-ball, $4.5 billion bid for Chrysler. He knows the company well: he had a 10% stake in 1995, when he tried to buy it for $20 billion, and held onto that stake until Chrysler was eventually sold to Daimler for $36 billion. So he's already made $3 billion from Chrysler, and now he's coming back for more.

But why would DaimlerChrysler accept such a low bid, when all the chatter values Chrysler at closer to $8 billion? Kerkorian tugs at the heartstrings in his letter. He tries to paint himself as the "right" ownership, which will "build Chrysler into a robust and lasting, stand-alone entity," and who will make "the necessary investments" in R&D and manufacturing.

All of which might be true. But DaimlerChrysler CEO Deiter Zetsche's foremost obligation is to his shareholders, and he is going to have a devil of a time explaining why it's leaving billions of dollars on the table just because Kirk Kerkorian is a nice guy.

Posted by Felix at 18:28 EST | Comments (0)

Lunch with Nassim Nicholas Taleb

So the lunch with Nassim Nicholas Taleb happened, in a rather pretentious little place on 15th Street, which at least was quiet. I arrived brimming with questions, and left with only a few of them answered, but had a great experience all the same.

I think I'm going to do a more formal Q&A with Taleb when both his book and the first reviews are out - probably by email. But here are a few questions I had going in to the lunch, along with any answers that Taleb gave me, if any. They should at least, give an idea of the kind of questions which get raised by his book.

• Are common economic concepts such as cycles or reversion to mean remotely useful or even meaningful? (I asked Taleb this, and got a general reply about all economics being not only useless but also unethical.)
• What does NNT think of Robin Hanson's blog, Overcoming Bias? (Taleb says he doesn't know it. But he should - there's enormous overlap between the blog and the book. The blogs he likes the most are Arts & Letters Daily and 3 Quarks Daily. He does read newspapers online, but usually through links from these sites. He's not interested in news, per se.)
• The "Black Swan" of the title comes from the idea that you can't confirm a statement like "all swans are white" by observing white swans. Similarly, you can't prove that OJ Simpson is not a murderer by closely observing him all day and seeing him murder nobody. On the other hand, if you give me two paragraphs and tell you they're anagrams of each other, I'm likely to pick a letter at random, probably something uncommon like W or Q or Z, and count its occurrences in each of the paragraphs. If the occurrences match, I'll be more likely to believe you. Is there some kind of real confirmation going on here? Or are all such observations largely meaningless unless and until you've either falsified the claim or proved it outright? (Taleb: Yes, there is some confirmation going on.)
• Housing/property: Would NNT be a buyer or a seller in the current market? (No chance of an answer to that one, despite the fact that Taleb is a good friend of Robert Schiller.)
• NNT's own investments, which he says are mainly in Treasury bills: Why that, rather than overnight cash? (Unasked.)
• NNT calls himself a "skeptical empiricist". Does he think that people he meets think themselves to be skeptical empiricists, but aren't? (Asked. Taleb loves being fooled by randomness, and is not much of a skeptical empiricist in his day-to-day existence. But he certainly is when it comes to investment advice. This led into a broader conversation about skeptics of the past, from Kripke back to Hume and even earlier. Taleb absolutely sees himself in the tradition of the philosopher who destroys epistemic edifices, rather than the philosopher who, after laying out a skeptical position, then tries to overcome it, in the way that Descartes tried to do with his evil demon.)
• NNT draws the distinction between jobs which are scalable - jobs where income can go up a lot without the individual working any harder, such as writing books or trading options - and jobs which are not scalable, such as dentistry or prostitution, where to make more money you basically need to do more work. Taleb has always had scalable jobs, and says that all non-scalable jobs are dull. But what about emergency-room physicians, or homicide detectives, or even magazine journalists? (Taleb conceded this: admitted that, yes, there were non-dull non-scalable jobs. He admires George Soros mainly because Soros is so quick to change his mind or decide that he was wrong about something, and one of the main themes of his book is humility in the face of the fact that we don't really know anything. So it was easy for him to concede the point: despite the fact that Taleb clearly has a very well-developed ego, he isn't wedded to being right.)
• NNT says that Syria and Saudi Arabia are more likely to descend into chaos than Italy is, precisely because there has been so little chaos in those countries of late. He contrasts them with Italy, which is built on chaos, and therefore less at risk of it. So does that mean that other stable countries, such as, say, Sweden, are also at risk of chaos? (Unasked.)
• Warren Buffet - skilled, or lucky, or some combination of the two? And isn't his main business, reinsurance, essentially one big bet against Black Swans? (Taleb said that reinsurers don't make money, although insurers do: insurers live in what he calls Mediocristan, a world where the law of large numbers applies, and the number of car accidents, say, is predictable and therefore can reasonably be insured against. Reinsurers, on the other hand, live in Extremistan, a world with 9/11 and Hurricane Katrina and outbreaks of war and other unforeseeable events - and that's a business Taleb would never want to be in. Ironically, however, he is actually in the business of insuring against Black Swans: that's what the company he's a part-owner of, Empirica, does. As for Buffett, he's made his money not through reinsurance so much as by investing the large amounts of cash which come with owning a reinsurer. Is that luck or skill? Unasked.)
• In Extremistan, the world in which we live, power laws apply where the successful become more successful and the unsuccessful become less successful. We can see this in the housing market right now, where New York City prices are stratospheric and rising, while prices in Detroit are at rock-bottom and falling. A Black Swan could hit New York CIty and hurt prices here. But could a positive Black Swan hit Detroit, and send prices there sharply upwards? (Not asked directly. But Taleb did point out that short-term Black Swans are usually negative, such as Hurricane Katrina or Russia's sudden bond default, while positive Black Swans are usually long term, such as the rise of the internet or even the rise of New York City itself. So if Detroit does become great again, it won't do so overnight: it takes a lot longer to build a house than to destroy one.)
• Black Swans, by definition, are unexpected. But everybody and their mother these days seems to be forecasting or expecting a housing bust, a credit crunch, a disorderly unwinding of global imbalances, or something along those lines. If that happens, and it's so widely expected, does that mean it's not really a Black Swan? Was the equally-forecast popping of the dot-com bubble a Black Swan? (Asked, not really answered.)
• NNT is very rude about the way that finance and economics types measure risk, with things like Value-at-Risk measurements and companies like RiskMetrics. Does that mean that Basel II is actually riskier than Basel I? Does it also mean that the CAPM should be discarded? Is investing money in such a way as to keep up with the S&P 500 with just one-third of its volatility not nearly as impressive an achievement as most financial professionals would have you believe? (Not asked directly, because Taleb was very keen that he hasn't written a finance book. He wants his book to be found in the Philosophy section, not the Finance section, of bookstores, and will volunteer that its genre is "philosophy of history".)
• NNT, in his book emphasizes the "narrative fallacy" and the idiocy of believing that we can really or ever know the cause of any events in the real world. Where does that leave, say, monetary policy? If we can't say that cutting interest rates caused the economy to grow, then what is a central banker to do? (Taleb did inch towards conceding some causality: he said that if a central bank raised interest rates and then there was a recession, you can reasonably claim that the rate hike caused the recession. But he also said that the economic forecasts on which central banks base their actions are worthless, and that even broad economic numbers such as GDP are much less useful than most economists believe.)
• Does NNT buy insurance? (Yes.)

And here's a few other things I learned over the course of the lunch:

• Taleb was a bit mistrustful of Dan Gilbert's book Stumbling on Happiness, which I loved, because he felt that Gilbert spent too much time on the jokes and the artful prose, rather than getting straight to the point. This is true, although I'm not sure it's all that much of a criticism.
• Taleb's first* book, Fooled by Randomness, is now the biggest-selling book published in 2001. This puts into some perspective his anecdotes about a fictional Russian writer named Yevgenia Krasnova, whose first book, A Story of Recursion, is a surprise and runaway global bestseller. Interestingly, her second book, The Loop, is something of a dud.
• Taleb says that options prices didn't actually change much if at all in the wake of the invention of the universally-used Black-Scholes method of pricing option. In other words, Black-Scholes was much less useful than you might think.
• Taleb, for all that he refuses to invest in the stock market and writes books full of rhetoric destroying much that we hold dear, is actually not a bear or a pessimist. " I am convinced that the future of America is rosier than people claim -- I've been hearing about its imminent decline ever since I started reading," he writes at edge.org. " The world is giving us more 'cheap options', and options benefit principally from uncertainty. So I am particularly optimistic about medical cures."
• One thinker who shares Taleb's love of destroying sacred cows is Paul Feyerabend. But Taleb tries to be a bit more humble than Feyerabend, and less of what he calls a "poseur".
• Taleb considers economists, as a group, to be unethical. And most journalists, too. Because they "prolong the narrative fallacy". He was on staff at a university for a while, but quit when he realized that he couldn't stand being in the same faculty as people whose entire courses were based on the narrative fallacy. Now he's pursuing a fellowship which will let him explore his ideas on his own, with a handful of colleagues - but even there he's going to end up with some kind of presence at a high-profile business school. Taleb would love nothing more than to read books and cogitate in his library, maybe travelling the world occasionally. And he hates answering questions about the practical implications of his book: he'd much rather it was treated as pure philosophy. At the same time, he thinks his philosophy has merit precisely because it's relevant to the way we think and lead our lives. It's a delicate balancing act, and I'm not sure that Taleb has quite figured out how to perfect it.

So now we wait: the book is published on April 17, and a lot of reviews should be coming out around that time as well. It'll be fascinating to see what people make of it - and if we're lucky, we might even be able to get some response from Taleb to the reviews on this blog.

*OK, technically not his first book. His real first book was called Dynamic Hedging: Managing Vanilla and Exotic Options, and it's available at Amazon for $63. But FBR was his first book for a general audience.

Posted by Felix at 17:44 EST | Comments (0)

Kerkorian's weird bid for Chrysler

Kirk Kerkorian has gone public with a low-ball, $4.5 billion bid for Chrysler. He knows the company well: he had a 10% stake in 1995, when he tried to buy it for $20 billion, and held onto that stake until Chrysler was eventually sold to Daimler for $36 billion. So he's already made $3 billion from Chrysler, and now he's coming back for more.

But why would DaimlerChrysler accept such a low bid, when all the chatter values Chrysler at closer to $8 billion? Kerkorian tugs at the heartstrings in his letter. He tries to paint himself as the "right" ownership, which will "build Chrysler into a robust and lasting, stand-alone entity," and who will make "the necessary investments" in R&D and manufacturing.

All of which might be true. But DaimlerChrysler CEO Dieter Zetsche's foremost obligation is to his shareholders, and he is going to have a devil of a time explaining why it's leaving billions of dollars on the table just because Kirk Kerkorian is a nice guy.

Posted by Felix at 16:28 EST | Comments (2)

Lunch with Nassim Nicholas Taleb

So the lunch with Nassim Nicholas Taleb happened, in a rather pretentious little place on 15th Street, which at least was quiet. I arrived brimming with questions, and left with only a few of them answered, but had a great experience all the same.

I think I'm going to do a more formal Q&A with Taleb when both his book and the first reviews are out – probably by email. But here are a few questions I had going in to the lunch, along with any answers that Taleb gave me, if any. They should at least, give an idea of the kind of questions which get raised by his book.

• Are common economic concepts such as cycles or reversion to mean remotely useful or even meaningful? (I asked Taleb this, and got a general reply about all economics being not only useless but also unethical.)
• What does NNT think of Robin Hanson's blog, Overcoming Bias? (Taleb says he doesn't know it. But he should – there's enormous overlap between the blog and the book. The blogs he likes the most are Arts & Letters Daily and 3 Quarks Daily. He does read newspapers online, but usually through links from these sites. He's not interested in news, per se.)
• The "Black Swan" of the title comes from the idea that you can't confirm a statement like "all swans are white" by observing white swans. Similarly, you can't prove that OJ Simpson is not a murderer by closely observing him all day and seeing him murder nobody. On the other hand, if you give me two paragraphs and tell you they're anagrams of each other, I'm likely to pick a letter at random, probably something uncommon like W or Q or Z, and count its occurrences in each of the paragraphs. If the occurrences match, I'll be more likely to believe you. Is there some kind of real confirmation going on here? Or are all such observations largely meaningless unless and until you've either falsified the claim or proved it outright? (Taleb: Yes, there is some confirmation going on.)
• Housing/property: Would NNT be a buyer or a seller in the current market? (No chance of an answer to that one, despite the fact that Taleb is a good friend of Robert Schiller.)
• NNT's own investments, which he says are mainly in Treasury bills: Why that, rather than overnight cash? (Unasked.)
• NNT calls himself a "skeptical empiricist". Does he think that people he meets think themselves to be skeptical empiricists, but aren't? (Asked. Taleb loves being fooled by randomness, and is not much of a skeptical empiricist in his day-to-day existence. But he certainly is when it comes to investment advice. This led into a broader conversation about skeptics of the past, from Kripke back to Hume and even earlier. Taleb absolutely sees himself in the tradition of the philosopher who destroys epistemic edifices, rather than the philosopher who, after laying out a skeptical position, then tries to overcome it, in the way that Descartes tried to do with his evil demon.)
• NNT draws the distinction between jobs which are scalable – jobs where income can go up a lot without the individual working any harder, such as writing books or trading options – and jobs which are not scalable, such as dentistry or prostitution, where to make more money you basically need to do more work. Taleb has always had scalable jobs, and says that all non-scalable jobs are dull. But what about emergency-room physicians, or homicide detectives, or even magazine journalists? (Taleb conceded this: admitted that, yes, there were non-dull non-scalable jobs. He admires George Soros mainly because Soros is so quick to change his mind or decide that he was wrong about something, and one of the main themes of his book is humility in the face of the fact that we don't really know anything. So it was easy for him to concede the point: despite the fact that Taleb clearly has a very well-developed ego, he isn't wedded to being right.)
• NNT says that Syria and Saudi Arabia are more likely to descend into chaos than Italy is, precisely because there has been so little chaos in those countries of late. He contrasts them with Italy, which is built on chaos, and therefore less at risk of it. So does that mean that other stable countries, such as, say, Sweden, are also at risk of chaos? (Unasked.)
• Warren Buffet – skilled, or lucky, or some combination of the two? And isn't his main business, reinsurance, essentially one big bet against Black Swans? (Taleb said that reinsurers don't make money, although insurers do: insurers live in what he calls Mediocristan, a world where the law of large numbers applies, and the number of car accidents, say, is predictable and therefore can reasonably be insured against. Reinsurers, on the other hand, live in Extremistan, a world with 9/11 and Hurricane Katrina and outbreaks of war and other unforeseeable events – and that's a business Taleb would never want to be in. Ironically, however, he is actually in the business of insuring against Black Swans: that's what the company he's a part-owner of, Empirica, does. As for Buffett, he's made his money not through reinsurance so much as by investing the large amounts of cash which come with owning a reinsurer. Is that luck or skill? Unasked.)
• In Extremistan, the world in which we live, power laws apply where the successful become more successful and the unsuccessful become less successful. We can see this in the housing market right now, where New York City prices are stratospheric and rising, while prices in Detroit are at rock-bottom and falling. A Black Swan could hit New York CIty and hurt prices here. But could a positive Black Swan hit Detroit, and send prices there sharply upwards? (Not asked directly. But Taleb did point out that short-term Black Swans are usually negative, such as Hurricane Katrina or Russia's sudden bond default, while positive Black Swans are usually long term, such as the rise of the internet or even the rise of New York City itself. So if Detroit does become great again, it won't do so overnight: it takes a lot longer to build a house than to destroy one.)
• Black Swans, by definition, are unexpected. But everybody and their mother these days seems to be forecasting or expecting a housing bust, a credit crunch, a disorderly unwinding of global imbalances, or something along those lines. If that happens, and it's so widely expected, does that mean it's not really a Black Swan? Was the equally-forecast popping of the dot-com bubble a Black Swan? (Asked, not really answered.)
• NNT is very rude about the way that finance and economics types measure risk, with things like Value-at-Risk measurements and companies like RiskMetrics. Does that mean that Basel II is actually riskier than Basel I? Does it also mean that the CAPM should be discarded? Is investing money in such a way as to keep up with the S&P 500 with just one-third of its volatility not nearly as impressive an achievement as most financial professionals would have you believe? (Not asked directly, because Taleb was very keen that he hasn't written a finance book. He wants his book to be found in the Philosophy section, not the Finance section, of bookstores, and will volunteer that its genre is "philosophy of history".)
• NNT, in his book emphasizes the "narrative fallacy" and the idiocy of believing that we can really or ever know the cause of any events in the real world. Where does that leave, say, monetary policy? If we can't say that cutting interest rates caused the economy to grow, then what is a central banker to do? (Taleb did inch towards conceding some causality: he said that if a central bank raised interest rates and then there was a recession, you can reasonably claim that the rate hike caused the recession. But he also said that the economic forecasts on which central banks base their actions are worthless, and that even broad economic numbers such as GDP are much less useful than most economists believe.)
• Does NNT buy insurance? (Yes.)

And here's a few other things I learned over the course of the lunch:

• Taleb was a bit mistrustful of Dan Gilbert's book Stumbling on Happiness, which I loved, because he felt that Gilbert spent too much time on the jokes and the artful prose, rather than getting straight to the point. This is true, although I'm not sure it's all that much of a criticism.
• Taleb's first* book, Fooled by Randomness, is now the biggest-selling book published in 2001. This puts into some perspective his anecdotes about a fictional Russian writer named Yevgenia Krasnova, whose first book, A Story of Recursion, is a surprise and runaway global bestseller. Interestingly, her second book, The Loop, is something of a dud.
• Taleb says that options prices didn't actually change much if at all in the wake of the invention of the universally-used Black-Scholes method of pricing option. In other words, Black-Scholes was much less useful than you might think.
• Taleb, for all that he refuses to invest in the stock market and writes books full of rhetoric destroying much that we hold dear, is actually not a bear or a pessimist. " I am convinced that the future of America is rosier than people claim — I've been hearing about its imminent decline ever since I started reading," he writes at edge.org. " The world is giving us more 'cheap options', and options benefit principally from uncertainty. So I am particularly optimistic about medical cures."
• One thinker who shares Taleb's love of destroying sacred cows is Paul Feyerabend. But Taleb tries to be a bit more humble than Feyerabend, and less of what he calls a "poseur".
• Taleb considers economists, as a group, to be unethical. And most journalists, too. Because they "prolong the narrative fallacy". He was on staff at a university for a while, but quit when he realized that he couldn't stand being in the same faculty as people whose entire courses were based on the narrative fallacy. Now he's pursuing a fellowship which will let him explore his ideas on his own, with a handful of colleagues – but even there he's going to end up with some kind of presence at a high-profile business school. Taleb would love nothing more than to read books and cogitate in his library, maybe travelling the world occasionally. And he hates answering questions about the practical implications of his book: he'd much rather it was treated as pure philosophy. At the same time, he thinks his philosophy has merit precisely because it's relevant to the way we think and lead our lives. It's a delicate balancing act, and I'm not sure that Taleb has quite figured out how to perfect it.

So now we wait: the book is published on April 17, and a lot of reviews should be coming out around that time as well. It'll be fascinating to see what people make of it – and if we're lucky, we might even be able to get some response from Taleb to the reviews on this blog.

*OK, technically not his first book. His real first book was called Dynamic Hedging: Managing Vanilla and Exotic Options, and it's available at Amazon for $63. But FBR was his first book for a general audience.

UPDATE: Taleb emails to clarify a couple of things: First, he wasn't critical of Gilbert, just asking me about Gilbert's style compared to his own. Second, he doesn't sell insurance, but replicates it – its his clients who have the exposure, not himself.

Posted by Felix at 15:34 EST | Comments (12)

Does the SEC understand what a "principles-based approach" to regulation even is?

Marcy Gordon of the AP reports today that the SEC is easing up on some Sarbanes-Oxley regulations, specifically those which "require companies to assess the strength of their internal checks and balances to guard against fraud." She continues:

The framework calls for greater use of an approach based on principles rather than ironclad rules, which is in line with a recommendation of a private-sector group that has been pushing for eased business regulations.
The SEC and the Public Company Accounting Oversight Board have worked for several months to resolve differences over the rules. Some experts and investor advocates complain that the SEC is strong-arming the board to weaken regulatory standards.
Officials of the SEC and the accounting board say they are striking a balance between protecting investors and reducing the financial record-keeping required of companies. The SEC and the oversight board want final rules in place by June so they would apply to audits of all 2007 statements.

Are SEC officials really talking about "striking a balance" - with the clear implication that reducing the burden on regulated companies will necessarily reduce investor protections as well? If so, then clearly they still Don't Get It.

The point of a principles-based approach is that it increases investor protections, if done well, since companies can focus on the stuff that matters, rather than putting all their efforts into running everything past compliance lawyers who care much more about not breaking the rules than they do about doing the right thing.

Posted by Felix at 12:18 EST | Comments (0)

My other car is a Gulfstream V

Good to see Tim Hanrahan of the WSJ in Michelle Leder territory, reading Ford's latest proxy filing:

Chairman William Clay Ford and Chief Executive Alan Mulally were required to use company aircraft for all business and personal air travel for security reasons, and that their families and guests were allowed to accompany them on our aircraft. The company also said that "in order to ease the burden" of Mr. Mulally moving to Dearborn, Mich., and away from his family in Seattle, the compensation committee clarified that his arrangement covers travel by his wife, children and guests on company aircraft for personal reasons without him at company expense, when he requests it. For Mr. Ford, personal use of aircraft totaled $185,232, and was $172,974 for Mr. Mulally.

It gets better: Ford's North America chief Mark Fields managed to rack up a $517,560 private-jet bill in 2006, commuting to Detroit from Florida. Apparently his "security" isn't as important as that of the CEO, however: since January he's been reduced to flying commercial.

Posted by Felix at 12:03 EST | Comments (0)

Should the world worry about a US recession?

"An old cliche holds that when the U.S. economy sneezes, the rest of the world catches a cold," says David Wessel today, reporting on new IMF research which seems to show quite the opposite. "Sometimes," he concludes, "a sneeze isn't contagious."

The problem with the research is that it's the forward-looking bits, like the box on financial contagion by Peter Berezin, which are the most pessimistic when it comes to global spillovers from the US.

Prices for similar assets across countries have become more correlated with increasing financial linkages. In particular, for industrial countries, correlations among stock market indices and bond yields have increased...
There is a clear asymmetry in cross-country asset price correlations, with correlations increasing significantly during bear markets and recessions...
The importance of the United States appears to increase substantially during periods of market stress. For example, correlations across national stock markets are highest when the U.S. stock market is declining... Thus, it would seem that from the standpoint of U.S. investors, the benefits of global diversification tend to decline just when they are needed most...
50 percent of a shock to U.S. equity prices is transmitted to Europe after controlling for common shocks in both regions.

I should imagine that the linkages might be even greater when it comes to the behavior of high-yield debt during the next slowdown. If weakness in the US housing sector spills over into credit in general, it's hard to see how the European debt markets could remain immune, since global liquidity tends to go where the yields are highest. On the other hand, of course, that very movement of liquidity from Europe to high-yield US debt would help to mitigate any domestic US credit crunch.

It's also worth noting that the US remains very far from recession, and all this remains highly theoretical. There's no shortage of doom-mongers who can construct a scenario at the drop of a hat where everything spills over into everything else and the world goes to hell in a handbasket. We're even seeing such bearishness among fund managers now, with the UK's Ken Murray selling half of his equities in anticipation of a US recession and a 20% global stock-market correction. But Murray's total portfolio is tiny: just $350 million, or less than the annual income of some hedge-fund managers.

There are always doom-mongers, and, eventually, they will be proved right. But anybody purporting to know when that's going to be is, frankly, a fool - as those people who sold equities after Alan Greenspan's "irrational exuberance" speech in 1996 found out to their cost.

Posted by Felix at 11:23 EST | Comments (0)

Does the SEC understand what a "principles-based approach" to regulation even is?

Marcy Gordon of the AP reports today that the SEC is easing up on some Sarbanes-Oxley regulations, specifically those which "require companies to assess the strength of their internal checks and balances to guard against fraud." She continues:

The framework calls for greater use of an approach based on principles rather than ironclad rules, which is in line with a recommendation of a private-sector group that has been pushing for eased business regulations.
The SEC and the Public Company Accounting Oversight Board have worked for several months to resolve differences over the rules. Some experts and investor advocates complain that the SEC is strong-arming the board to weaken regulatory standards.
Officials of the SEC and the accounting board say they are striking a balance between protecting investors and reducing the financial record-keeping required of companies. The SEC and the oversight board want final rules in place by June so they would apply to audits of all 2007 statements.

Are SEC officials really talking about "striking a balance" – with the clear implication that reducing the burden on regulated companies will necessarily reduce investor protections as well? If so, then clearly they still Don't Get It.

The point of a principles-based approach is that it increases investor protections, if done well, since companies can focus on the stuff that matters, rather than putting all their efforts into running everything past compliance lawyers who care much more about not breaking the rules than they do about doing the right thing.

Posted by Felix at 11:18 EST | Comments (0)

My other car is a Gulfstream V

Good to see Tim Hanrahan of the WSJ in Michelle Leder territory, reading Ford's latest proxy filing:

Chairman William Clay Ford and Chief Executive Alan Mulally were required to use company aircraft for all business and personal air travel for security reasons, and that their families and guests were allowed to accompany them on our aircraft. The company also said that “in order to ease the burden” of Mr. Mulally moving to Dearborn, Mich., and away from his family in Seattle, the compensation committee clarified that his arrangement covers travel by his wife, children and guests on company aircraft for personal reasons without him at company expense, when he requests it. For Mr. Ford, personal use of aircraft totaled $185,232, and was $172,974 for Mr. Mulally.

It gets better: Ford's North America chief Mark Fields managed to rack up a $517,560 private-jet bill in 2006, commuting to Detroit from Florida. Apparently his "security" isn't as important as that of the CEO, however: since January he's been reduced to flying commercial.

Posted by Felix at 11:02 EST | Comments (0)

Will Goldman Sachs lose money on New Century?

In the wake of New Century's bankruptcy, Robert Lindsay gets his hands on the official list of the company's biggest creditors. At the top of the list is Goldman Sachs, followed by Credit Suisse and a who's-who of other big investment-banking names: Morgan Stanley, Deutsche, BofA, UBS, Lehman, Citigroup. Loan house C-Bass is in the #3 spot.

Most of these creditors have secured loans to New Century, and one of them, Barclays, tells Lindsay that "the vast majority of our exposure to all US sub-prime lenders is fully collateralised and short-term, pending distribution. We do not anticipate any material losses to arise from our exposure to the sector.”

There's no indication of how big New Century's obligations are, and my feeling is that by the time the company's assets are sold off, the secured creditors are unlikely to be seriously hurt. But for those of a conspiratorial bent, Lindsay notes that Goldman executive Kathleen Brown "left late last Friday without any explanation". Did she have anything to do with New Century? It's unclear.

(Via)

Posted by Felix at 10:39 EST | Comments (3)

Should the world worry about a US recession?

"An old cliché holds that when the U.S. economy sneezes, the rest of the world catches a cold," says David Wessel today, reporting on new IMF research which seems to show quite the opposite. "Sometimes," he concludes, "a sneeze isn't contagious."

The problem with the research is that it's the forward-looking bits, like the box on financial contagion by Peter Berezin, which are the most pessimistic when it comes to global spillovers from the US.

Prices for similar assets across countries have become more correlated with increasing financial linkages. In particular, for industrial countries, correlations among stock market indices and bond yields have increased...
There is a clear asymmetry in cross-country asset price correlations, with correlations increasing significantly during bear markets and recessions...
The importance of the United States appears to increase substantially during periods of market stress. For example, correlations across national stock markets are highest when the U.S. stock market is declining... Thus, it would seem that from the standpoint of U.S. investors, the benefits of global diversification tend to decline just when they are needed most...
50 percent of a shock to U.S. equity prices is transmitted to Europe after controlling for common shocks in both regions.

I should imagine that the linkages might be even greater when it comes to the behavior of high-yield debt during the next slowdown. If weakness in the US housing sector spills over into credit in general, it's hard to see how the European debt markets could remain immune, since global liquidity tends to go where the yields are highest. On the other hand, of course, that very movement of liquidity from Europe to high-yield US debt would help to mitigate any domestic US credit crunch.

It's also worth noting that the US remains very far from recession, and all this remains highly theoretical. There's no shortage of doom-mongers who can construct a scenario at the drop of a hat where everything spills over into everything else and the world goes to hell in a handbasket. We're even seeing such bearishness among fund managers now, with the UK's Ken Murray selling half of his equities in anticipation of a US recession and a 20% global stock-market correction. But Murray's total portfolio is tiny: just $350 million, or less than the annual income of some hedge-fund managers.

There are always doom-mongers, and, eventually, they will be proved right. But anybody purporting to know when that's going to be is, frankly, a fool – as those people who sold equities after Alan Greenspan's "irrational exuberance" speech in 1996 found out to their cost.

Posted by Felix at 9:13 EST | Comments (0)

How is the population of the US like a 7th grade dance?

The Creativity Exchange finds this chart from National Geographic, wonderfully described by Mark Thoma as "like a 7th grade dance with the boys huddled together on one side of the room, the girls on the other".

Equally wonderfully, Thoma's commenters are on the case, before you start drawing too many conclusions. Bruce Wilder shows that the numbers involved are tiny:

We are talking about comparatively tiny surpluses: L.A. tops the male surplus list with 40,000 in an area that has a workforce of 6,500,000 and a total population of almost 13,000,000.

And another commenter rips apart the magazine's hilarious description of more females than males being a "plurality":

What is that - something like 49% female, 47% male, 4% other?

Eventually, the chart gets nominated for submission to the Junk Charts blog.

But still, it was fun while it lasted. And there's obviously something going on, even if it's very small.

Posted by Felix at 19:50 EST | Comments (0)

Will Shwarzman wind up buying Chrysler?

Blackstone's Stephen Schwarzman is about to officially become a multigazillionaire, once his company goes public and everybody knows what his stake is worth. But in the public mind, will he really have overtaken Henry Kravis as the ne plus ultra of private-equity honchos? Maybe not. What he really needs is not more money, or more lavish parties; he needs to do something which will connect him to the entire country. You know, like buy Detroit.

Blackstone, it turns out, in concert with Centerbridge, is one of the two main suitors trying to buy Chrysler. The other is auto-parts supplier Magna International - if they become too much of a threat, maybe Schwarzman can buy them, too!

This certainly counts as a distressed sale for Chrysler. Daimler paid $36 billion for the automaker back in 1998, and now will be lucky if it gets $8 billion in this sale. But from the noises that Daimler's shareholders are making, they'd be happy if DaimlerChrysler CEO Dieter Zetsche sold the US arm for a penny.

Posted by Felix at 19:05 EST | Comments (0)

How is the population of the US like a 7th grade dance?

The Creativity Exchange finds this chart from National Geographic, wonderfully described by Mark Thoma as "like a 7th grade dance with the boys huddled together on one side of the room, the girls on the other".

Equally wonderfully, Thoma's commenters are on the case, before you start drawing too many conclusions. Bruce Wilder shows that the numbers involved are tiny:

We are talking about comparatively tiny surpluses: L.A. tops the male surplus list with 40,000 in an area that has a workforce of 6,500,000 and a total population of almost 13,000,000.

And another commenter rips apart the magazine's hilarious description of more females than males being a "plurality":

What is that - something like 49% female, 47% male, 4% other?

Eventually, the chart gets nominated for submission to the Junk Charts blog.

But still, it was fun while it lasted. And there's obviously something going on, even if it's very small.

Posted by Felix at 18:49 EST | Comments (1)

Will Shwarzman wind up buying Chrysler?

Blackstone's Stephen Schwarzman is about to officially become a multigazillionaire, once his company goes public and everybody knows what his stake is worth. But in the public mind, will he really have overtaken Henry Kravis as the ne plus ultra of private-equity honchos? Maybe not. What he really needs is not more money, or more lavish parties; he needs to do something which will connect him to the entire country. You know, like buy Detroit.

Blackstone, it turns out, in concert with Centerbridge, is one of the two main suitors trying to buy Chrysler. The other is auto-parts supplier Magna International – if they become too much of a threat, maybe Schwarzman can buy them, too!

This certainly counts as a distressed sale for Chrysler. Daimler paid $36 billion for the automaker back in 1998, and now will be lucky if it gets $8 billion in this sale. But from the noises that Daimler's shareholders are making, they'd be happy if DaimlerChrysler CEO Dieter Zetsche sold the US arm for a penny.

Posted by Felix at 18:05 EST | Comments (2)

Have the Kirchners taken over Argentina?

American Task Force Argentina is a Washington-based lobbying organization financed by vulture funds, which exists to extract money from the government of Argentina and move it instead to the hedge funds and others who own the country's defaulted debt. They tend to have rather extreme views, and so I generally look forward to a bit of a giggle when I get one of their semi-frequent emails. Today, for example, they pointed my to a piece by Mark Falcoff which has just been posted on the website of the conservative American Enterprise Institute.

Imagine my surprise, then, when Falcoff's piece turned out to be accurate, well-written, and, in fact, a very good guide to where Argentina stands today, under president Nestor Kirchner, and how it got there over the past few years. I've read a lot about Argentina over the years, and very little of this calibre. But there seems to be a weird sentence inserted into the final paragraph:

Argentina's history tends to be cyclical. For the past seventy years or so, the country has bobbed back and forth between crises and recovery, each time convinced that it has finally found a formula for sustained prosperity. Elected governments and military dictatorships, Peronists and anti-Peronists, protectionists and free marketers have each taken their turn at the wheel, each enjoyed a moment of euphoria and mass support, each ultimately suffered discredit and collapse--with some recent presidents forced to depart the government palace by helicopter. Sooner or later the country will have to return to the capital markets and settle accounts with its remaining creditors if it wishes to sustain and improve its present recovery. In the meanwhile, Kirchner rides the high curve of a cycle. He can only hope that his own landing will be softer than that of all his predecessors.

That sentence (the italics are mine) is unrelated to anything that has gone before, and is, in point of fact, not true. Argentina has demonstrated that it's perfectly capable of borrowing money from foreign investors - in fact it does so every month, in both pesos and dollars. It just uses its own capital markets, rather than those of New York or London. So it really has no need "to return to the capital markets", insofar as it hasn't returned already.

As for international bond investors (or, as the IMF likes to call them, "hot money") being necessary for sustained growth - well, I think that the past seventy years or so of Argentine history proves that false, too. Latin America is very good at borrowing far more money than it can reasonably expect to repay, which creates a boom-to-bankrupcty cycle which benefits nobody. Given the real money currently pouring into Argentina for its beef and soy and oil, it shouldn't need to be borrowing more from abroad in any event. In fact, Argentina could almost be seen as following a counter-cyclical fiscal policy, borrowing less when times are good. They should be applauded for this, rather than being told that the only way to improve their present recovery is to borrow even more.

It is true that if Argentina settled with its holdout creditors, that might increase the amount of foreign direct investment in the country. But it's hard to make a compelling case that the increase in FDI would itself justify the up-front cost of paying off the holdouts.

That one sentence aside, however, I can highly recommend Falcoff's piece. Here's one provocative passage:

Unlike Bill Clinton, Kirchner is not particularly charming or charismatic. One wit has remarked that the Argentine president has accomplished the impossible: he has created a cult of personality with no personality at all. His home province is also unlike Arkansas. Santa Cruz has a mere 120,000 residents, but is blessed with huge amounts of oil and gas, of which Kirchner made uninhibited use during his mandate there. In contrast to the U.S. Constitution, the Argentine charter of 1994 makes it possible for the Kirchners--if their popularity endures--to theoretically rule the country for the rest of their lives either by taking turns in four-year terms or by succeeding each other for eight years at a time.

Argentines have always loved strong leaders, from Peron to Menem. Kirchner's only the latest in a long line, and if he can keep control of the economy - a very big if - then he and his wife could be running Argentina more or less indefinitely.

Posted by Felix at 17:16 EST | Comments (0)

Property chart of the day

There are bad charts, and then there are really cool charts. Props to Nigel Holmes, at the New York Observer, for this one:

Just nobody show it to Nouriel Roubini.

Posted by Felix at 16:59 EST | Comments (0)

Property datapoint of the day: 767 Fifth Ave worth $4 billion

John Koblin at the New York Observer today tries to put price tags on New York's most valuable skyscrapers, and certainly comes up with some eye-popping numbers.

The General Motors Building, at 767 Fifth Avenue, is the most valuable building in the world, according to Koblin. Harry and Billy Macklowe purchased it for $1.4 billion in 2003, and it's worth nearly three times that now: $4 billion. For one building. And not even a very good-looking one, either, unless you count the Apple Store's glass cube out front.

And here's another nice flip, should the landlord be in the mood: the even-uglier 200 Park Avenue.

It's huge, it has fantastic views, it's literally connected to Grand Central, and it commands huge rents. It sold in 2005 for a then-record $1.72 billion--but if the current landlord, Tishman Speyer, decided to sell today, it could double that price.

Meanwhile, Rockefeller Center, in toto, is worth $8 billion, give or take. In 1995, it filed for bankruptcy.

You can see why bankers like to lend against this sort of thing. And, also, why Fitch is so worried.

Interestingly, for all that Wall Street is, we're told, the main reason why New York property values are skyrocketing, only one of the buildings on the list is home to a bank. (277 Park, the biggest of JP Morgan's buildings.)

Posted by Felix at 16:23 EST | Comments (0)

Is there any price Macquarie won't pay?

Can you remember a week of late in which Australia's Macquarie didn't buy something? Today, it's a bunch of UK cellphone and TV antennas. Boring, right? Not when you see the price tag: $5 billion. What's more Macquarie is opening itself up to a world of regulatory pain, because after the acquisition it will control 100% of the UK TV broadcast market. Yes, 100%.

What cost a monopoly? Nicole Lee at Breaking Views says that it's "a staggering 19 times last year's ebitda," and notes that "a similar business, France's TDF, went for about 11 times ebitda only last year". Given that earnings growth is going to be unspectacular in what is by any measure a mature market, the valuation looks hard to justify. Then again, this kind of thing seems to be a Macquarie speciality:

The real reason for paying so much is that infrastructure is hot. And Macquarie clearly would rather pay up than tell its investors that prices are too high. Just two weeks ago, its European infrastructure fund paid about 20 times 2006 ebitda for NCP's UK car parks business.

Admittedly, car parks are valued more on the value of their real-estate than on the amount of their earnings. And if Macquarie can get away with owning a monopoly, that could mean extra profits there. But all these deals do smell a little bubblicious, all the same.

P.S. I never did get any clarity on how much Macquarie paid for Giuliani Capital. Does anybody have any ideas on that front?

Posted by Felix at 16:22 EST | Comments (0)

Have the Kirchners taken over Argentina?

American Task Force Argentina is a Washington-based lobbying organization financed by vulture funds, which exists to extract money from the government of Argentina and move it instead to the hedge funds and others who own the country's defaulted debt. They tend to have rather extreme views, and so I generally look forward to a bit of a giggle when I get one of their semi-frequent emails. Today, for example, they pointed my to a piece by Mark Falcoff which has just been posted on the website of the conservative American Enterprise Institute.

Imagine my surprise, then, when Falcoff's piece turned out to be accurate, well-written, and, in fact, a very good guide to where Argentina stands today, under president Nestor Kirchner, and how it got there over the past few years. I've read a lot about Argentina over the years, and very little of this calibre. But there seems to be a weird sentence inserted into the final paragraph:

Argentina's history tends to be cyclical. For the past seventy years or so, the country has bobbed back and forth between crises and recovery, each time convinced that it has finally found a formula for sustained prosperity. Elected governments and military dictatorships, Peronists and anti-Peronists, protectionists and free marketers have each taken their turn at the wheel, each enjoyed a moment of euphoria and mass support, each ultimately suffered discredit and collapse--with some recent presidents forced to depart the government palace by helicopter. Sooner or later the country will have to return to the capital markets and settle accounts with its remaining creditors if it wishes to sustain and improve its present recovery. In the meanwhile, Kirchner rides the high curve of a cycle. He can only hope that his own landing will be softer than that of all his predecessors.

That sentence (the italics are mine) is unrelated to anything that has gone before, and is, in point of fact, not true. Argentina has demonstrated that it's perfectly capable of borrowing money from foreign investors – in fact it does so every month, in both pesos and dollars. It just uses its own capital markets, rather than those of New York or London. So it really has no need "to return to the capital markets", insofar as it hasn't returned already.

As for international bond investors (or, as the IMF likes to call them, "hot money") being necessary for sustained growth – well, I think that the past seventy years or so of Argentine history proves that false, too. Latin America is very good at borrowing far more money than it can reasonably expect to repay, which creates a boom-to-bankrupcty cycle which benefits nobody. Given the real money currently pouring into Argentina for its beef and soy and oil, it shouldn't need to be borrowing more from abroad in any event. In fact, Argentina could almost be seen as following a counter-cyclical fiscal policy, borrowing less when times are good. They should be applauded for this, rather than being told that the only way to improve their present recovery is to borrow even more.

It is true that if Argentina settled with its holdout creditors, that might increase the amount of foreign direct investment in the country. But it's hard to make a compelling case that the increase in FDI would itself justify the up-front cost of paying off the holdouts.

That one sentence aside, however, I can highly recommend Falcoff's piece. Here's one provocative passage:

Unlike Bill Clinton, Kirchner is not particularly charming or charismatic. One wit has remarked that the Argentine president has accomplished the impossible: he has created a cult of personality with no personality at all. His home province is also unlike Arkansas. Santa Cruz has a mere 120,000 residents, but is blessed with huge amounts of oil and gas, of which Kirchner made uninhibited use during his mandate there. In contrast to the U.S. Constitution, the Argentine charter of 1994 makes it possible for the Kirchners--if their popularity endures--to theoretically rule the country for the rest of their lives either by taking turns in four-year terms or by succeeding each other for eight years at a time.

Argentines have always loved strong leaders, from Peron to Menem. Kirchner's only the latest in a long line, and if he can keep control of the economy – a very big if – then he and his wife could be running Argentina more or less indefinitely.

Posted by Felix at 16:14 EST | Comments (2)

Is there any price Macquarie won't pay?

Can you remember a week of late in which Australia's Macquarie didn't buy something? Today, it's a bunch of UK cellphone and TV antennas. Boring, right? Not when you see the price tag: $5 billion. What's more Macquarie is opening itself up to a world of regulatory pain, because after the acquisition it will control 100% of the UK TV broadcast market. Yes, 100%.

What cost a monopoly? Nicole Lee at Breaking Views says that it's "a staggering 19 times last year's ebitda," and notes that "a similar business, France's TDF, went for about 11 times ebitda only last year". Given that earnings growth is going to be unspectacular in what is by any measure a mature market, the valuation looks hard to justify. Then again, this kind of thing seems to be a Macquarie speciality:

The real reason for paying so much is that infrastructure is hot. And Macquarie clearly would rather pay up than tell its investors that prices are too high. Just two weeks ago, its European infrastructure fund paid about 20 times 2006 ebitda for NCP's UK car parks business.

Admittedly, car parks are valued more on the value of their real-estate than on the amount of their earnings. And if Macquarie can get away with owning a monopoly, that could mean extra profits there. But all these deals do smell a little bubblicious, all the same.

P.S. I never did get any clarity on how much Macquarie paid for Giuliani Capital. Does anybody have any ideas on that front?

Posted by Felix at 15:04 EST | Comments (1)

What does it mean for something to be "contained"?

David Gaffen has a cute piece up at Marketbeat today, looking at the number of news stories on the subprime mess which contain the word "contained" or its cognates.

A Dow Jones Factiva search shows that the number of stories mentioning "subprime" and "contained" at the end of last year averaged around 110 or so -- but that more than doubled in February, and jumped to a whopping 981 in March. This is hardly a scientific approach, but could be a measure of the urgency with which pundits have been trying to reassure investors the subprime mess won't spill over.
Those doing the reassuring include portfolio managers such as Evergreen's Walter McCormick, to bigwigs like Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke.

This doesn't reassure Gaffen, and it doesn't reassure me. On the other hand, knee-deep as I am in Nassim Nicholas Taleb right now, I'm inclined to take a more existential view of things. After all, the idea of containment is closely connected to the idea of contagion, which in turn is tightly bound up with the idea of causation.

Sometimes, contagion and causation are easy to see. The Russia crisis caused the Brazil crisis, for instance - the Russia crisis was not contained. At other times, containment is easy to see: Argentina's default caused no more general widening out of credit spreads, and Amaranth's implosion caused no flight of capital out of hedge funds.

But credit spreads are so tight right now that they're bound to widen out at some point. When they do, there will surely be no end of pundits crowing that they were right about the subprime mess "spilling over", and that events are proving that the subprime mess was not "contained". But what if these other debt markets would have widened out anyway, due to entirely fundamental reasons associated with reasonable levels at which to price risk?

I'm pretty sure that what we'll see in practice is credit spreads in general widening out in the wake of the mortgage mess. Or, you could describe the same thing as credit spreads in general widening out in the wake of the French presidential election, or the appointment of Felix Salmon to a blogging gig at Portfolio. Causation is a hard thing to demonstrate - which means that containment, as a concept, has relatively little utility.

Posted by Felix at 14:28 EST | Comments (0)

Waiting for the commercial-property shoe to drop

Will commercial mortgages of the 2007 vintage turn out to be as misguided as residential mortgages in 2006? Fitch Ratings thinks there's a serious risk of that. Does this sound familiar to you?

The phenomenon has granted borrowers easy access to capital and prompted the development of new, more highly leveraged debt structures.
Fitch said properties were also increasingly financed with no money down or even with loans for more than 100 per cent of a property's value as owners borrowed greater amounts upfront to pay interest costs.

Commercial property certainly seems healthy at the moment. But that won't last forever. I'm frankly surprised, given what we've learned about the residential mortgages being written this time last year, that banks haven't tightened up at all on their commercial-property underwriting standards.

Posted by Felix at 14:02 EST | Comments (0)

What does it mean for something to be "contained"?

David Gaffen has a cute piece up at Marketbeat today, looking at the number of news stories on the subprime mess which contain the word "contained" or its cognates.

A Dow Jones Factiva search shows that the number of stories mentioning “subprime” and “contained” at the end of last year averaged around 110 or so — but that more than doubled in February, and jumped to a whopping 981 in March. This is hardly a scientific approach, but could be a measure of the urgency with which pundits have been trying to reassure investors the subprime mess won’t spill over.
Those doing the reassuring include portfolio managers such as Evergreen’s Walter McCormick, to bigwigs like Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke.

This doesn't reassure Gaffen, and it doesn't reassure me. On the other hand, knee-deep as I am in Nassim Nicholas Taleb right now, I'm inclined to take a more existential view of things. After all, the idea of containment is closely connected to the idea of contagion, which in turn is tightly bound up with the idea of causation.

Sometimes, contagion and causation are easy to see. The Russia crisis caused the Brazil crisis, for instance – the Russia crisis was not contained. At other times, containment is easy to see: Argentina's default caused no more general widening out of credit spreads, and Amaranth's implosion caused no flight of capital out of hedge funds.

But credit spreads are so tight right now that they're bound to widen out at some point. When they do, there will surely be no end of pundits crowing that they were right about the subprime mess "spilling over", and that events are proving that the subprime mess was not "contained". But what if these other debt markets would have widened out anyway, due to entirely fundamental reasons associated with reasonable levels at which to price risk?

I'm pretty sure that what we'll see in practice is credit spreads in general widening out in the wake of the mortgage mess. Or, you could describe the same thing as credit spreads in general widening out in the wake of the French presidential election, or the appointment of Felix Salmon to a blogging gig at Portfolio. Causation is a hard thing to demonstrate – which means that containment, as a concept, has relatively little utility.

Posted by Felix at 13:53 EST | Comments (0)

Property datapoint of the day: 767 Fifth Ave worth $4 billion

John Koblin at the New York Observer today tries to put price tags on New York's most valuable skyscrapers, and certainly comes up with some eye-popping numbers.

The General Motors Building, at 767 Fifth Avenue, is the most valuable building in the world, according to Koblin. Harry and Billy Macklowe purchased it for $1.4 billion in 2003, and it’s worth nearly three times that now: $4 billion. For one building. And not even a very good-looking one, either, unless you count the Apple Store's glass cube out front.

And here's another nice flip, should the landlord be in the mood: the even-uglier 200 Park Avenue.

It’s huge, it has fantastic views, it’s literally connected to Grand Central, and it commands huge rents. It sold in 2005 for a then-record $1.72 billion—but if the current landlord, Tishman Speyer, decided to sell today, it could double that price.

Meanwhile, Rockefeller Center, in toto, is worth $8 billion, give or take. In 1995, it filed for bankruptcy.

You can see why bankers like to lend against this sort of thing. And, also, why Fitch is so worried.

Interestingly, for all that Wall Street is, we're told, the main reason why New York property values are skyrocketing, only one of the buildings on the list is home to a bank. (277 Park, the biggest of JP Morgan's buildings.)

UPDATE: As Miss Representation points out in the comments, there is another bank building on the list: Bank of America's as-yet unfinished tower at One Bryant Park, which, we're told, "will easily be more than $3 billion by the time it opens." And I think BofA might have space at another building on the list, 9 W 57th Street, as well.

Posted by Felix at 13:11 EST | Comments (1)

Why do all investment-bank CEOs make $40m?

$40 million seems to be the going rate for an investment-bank CEO these days. Executive compensation expert Graef Crystal has done the math, and finds that the pay for Lloyd Blankfein of Goldman Sachs; Stanley O'Neal of Merrill Lynch; John Mack of Morgan Stanley; Richard Fuld of Lehman Brothers; and James Cayne of Bear Stearns is definitely converging on pretty much the same point, despite a huge amount of disparity in income and sales.

Crystal smells smoke-filled rooms. And it's not just the CEO pay he's unhappy about, either: he notes that Goldman COOs Gary Cohn and Jon Winkelried, as well as CFO David Viniar, are all making well over $40 million as well. He writes:

It's hard enough for shareholders to digest Blankfein earning just under $60 million last year -- even though his company produced a 52 percent total return level. To learn that Blankfein's two top associates earn within a hair of his pay level, must be annoying in the extreme.

I don't buy it. What's annoying is when a CEO, taking credit for and profit from his employees' work, ends up with a vastly disproportionate part of the company's total profits. That's not happening at Goldman, as is evidenced by the small difference in pay between the CEO and his direct reports.

What's more, Crystal fails to mention that by all accounts some Goldman traders took home $100 million bonuses last year, thereby earning significantly more than the CEO. And in fact it's this that I think explains why the CEO pay at investment banks is bunching.

CEOs aren't fungible: if Cayne left Bear, he couldn't start working easily at Goldman. But traders are fungible in that respect, and indeed get poached on a regular basis by investment banks competing against each other. So there's a real market in traders, and top traders anywhere are liable to pull in more than the CEO.

But CEOs have egos, too – and they're unlikely to want to earn significantly less than employees several levels of management down. So if top traders are getting $50 million bonuses, that in itself is likely to explain the $40 million pay packages for CEOs.

Posted by Felix at 13:06 EST | Comments (0)

Waiting for the commercial-property shoe to drop

Will commercial mortgages of the 2007 vintage turn out to be as misguided as residential mortgages in 2006? Fitch Ratings thinks there's a serious risk of that. Does this sound familiar to you?

The phenomenon has granted borrowers easy access to capital and prompted the development of new, more highly leveraged debt structures.
Fitch said properties were also increasingly financed with no money down or even with loans for more than 100 per cent of a property's value as owners borrowed greater amounts upfront to pay interest costs.

Commercial property certainly seems healthy at the moment. But that won't last forever. I'm frankly surprised, given what we've learned about the residential mortgages being written this time last year, that banks haven't tightened up at all on their commercial-property underwriting standards.

Posted by Felix at 13:01 EST | Comments (0)

Why do all investment-bank CEOs make $40m?

$40 million seems to be the going rate for an investment-bank CEO these days. Executive compensation expert Graef Crystal has done the math, and finds that the pay for Lloyd Blankfein of Goldman Sachs; Stanley O'Neal of Merrill Lynch; John Mack of Morgan Stanley; Richard Fuld of Lehman Brothers; and James Cayne of Bear Stearns is definitely converging on pretty much the same point, despite a huge amount of disparity in income and sales.

Crystal smells smoke-filled rooms. And it's not just the CEO pay he's unhappy about, either: he notes that Goldman COOs Gary Cohn and Jon Winkelried, as well as CFO David Viniar, are all making well over $40 million as well. He writes:

It's hard enough for shareholders to digest Blankfein earning just under $60 million last year -- even though his company produced a 52 percent total return level. To learn that Blankfein's two top associates earn within a hair of his pay level, must be annoying in the extreme.

I don't buy it. What's annoying is when a CEO, taking credit for and profit from his employees' work, ends up with a vastly disproportionate part of the company's total profits. That's not happening at Goldman, as is evidenced by the small difference in pay between the CEO and his direct reports.

What's more, Crystal fails to mention that by all accounts some Goldman traders took home $100 million bonuses last year, thereby earning significantly more than the CEO. And in fact it's this that I think explains why the CEO pay at investment banks is bunching.

CEOs aren't fungible: if Cayne left Bear, he couldn't start working easily at Goldman. But traders are fungible in that respect, and indeed get poached on a regular basis by investment banks competing against each other. So there's a real market in traders, and top traders anywhere are liable to pull in more than the CEO.

But CEOs have egos, too – and they're unlikely to want to earn significantly less than employees several levels of management down. So if top traders are getting $50 million bonuses, that in itself is likely to explain the $40 million pay packages for CEOs.

Posted by Felix at 12:41 EST | Comments (0)

DealBook monetizes the takeover boom

Subscribers to the New York Times got an extra section to throw away unread this morning: DealBook, Andrew Ross Sorkin's M&A-obsessed blog, now has a quarterly spin-off on paper. The Spring 2007 section is full of mildly fluffy articles about financial markets, and has cascades of hundred-dollar bills on the front. Money!

Inside, find out about bankers' golf handicaps, or read another write-around and unauthorized profile of Ken Griffin. (Yes, there was one yesterday, too.)

For DealBook the blog, this means its first blog entries with bylines – please let's have them all the time, not just quarterly. And for DealBook the special section, this means full-page ads from companies you've never heard of like MacKenzie Partners and Innisfree, who will help you out when an activist investor starts waging a proxy war against your company. After all, if takeover bids are booming, then the business of defending against takeover bids must be booming too!

Posted by Felix at 12:37 EST | Comments (0)

How good is BofA's Ken Lewis at integrating acquisitions?

Peter Scaturro knows private banking. And when Nationsbank Bank of America bought the company he ran, US Trust, they thought they were buying his private-banking expertise at the same time. Think JP Morgan buying Bank One for Jamie Dimon, or Apple buying NeXT for Steve Jobs.

BofA didn't want Scaturro to run the whole bank, but they did want him to run the private-banking operations. That would actually mean a huge rise in the total assets under management that Scaturro was responsible for: US Trust had a perfectly respectable $93 million, but the private-banking arm of Bank of America had $172 billion, bringing the total up to $265 billion – more than the leading US private bank, JP Morgan, and vastly more than Citi's private bank, which is being run this week by Sallie Krawcheck.

But, it was not to be. Scaturro's now resigned, even before he formally took on his new job. The WSJ has all the gory details: in a nutshell, Scaturro was going to be running the new private bank in name, but not in fact. The real boss was going to be Brian Moynihan, Bank of America's president of Global Wealth and Investment Management, who clashed with Scaturro on everything from ATM fees to computer systems.

Moynihan comes a the BofA culture of economies of scale, while Scaturro was much more comfortable giving highly personalized – and very expensive – service to billionaires:

Bank of America executives, steeped in a more middle-America culture, also looked askance at U.S. Trust's lavish New York headquarters, according to people familiar with U.S. Trust's side of the deal...
Mr. Moynihan's mantra is "scale": Mechanization and a one-size-fits-all product suite has made Bank of America excel in such areas as branch and business banking, where products are commodities and where "customer delight" scores are scrutinized.
Mr. Scaturro, by contrast, preaches "specialized service" to millionaire and billionaire clients who demand constant attention and performance. The company's marketing events include intimate dinners for clients with top authors or politicians, private concerts and cocktail parties at its Manhattan townhouse.
Mr. Moynihan, according to people familiar with meetings held to orchestrate the banks' integration, viewed some of U.S. Trust's marketing events as overly costly and ineffective.
Bank of America, and its predecessor NationsBank, has been among the most aggressive at categorizing its "rich" clients -- from super-rich down to merely rich -- and tailoring services along those lines, which has meant some people accustomed to personal bankers end up steered to toll-free phone numbers for service.
During one integration meeting, Mr. Moynihan's team even suggested charging ATM fees to U.S. Trust clients -- seen as the ultimate insult to pampered customers who entrust millions to their advisers.

The story here will be familiar to anybody in an institution bought by Nationsbank or Bank of America, including many on the investment-banking side of the BofA of old. The Charlotte executives love to make acquisitions of operations where they're weak, but then they have a habit of imposing their own systems on the new company, despite the fact that they bought the new company precisely because its own systems were better. (It's worth remembering that BofA's current private-banking portfolio wasn't grown organically: it, too, was bought in, through acquisitions such as that of FleetBoston.)

BofA CEO Kenneth Lewis says that his main job right now is digesting all the acquisitions that his company has made in recent years. But this latest news seems to indicate that BofA is still refusing to adjust to new cultures, and is still insisting on imposing its own methods on everyone and everything it has bought. Which is unlikely to make the integration process any easier. As the WSJ notes,

Bank of America reached its unprecedented size through more than 20 acquisitions during the 1980s and 1990s. As the bank scurried from one deal to the next, it hemorrhaged customers of companies it had paid dearly to acquire.

Posted by Felix at 12:35 EST | Comments (0)

Putting Blackstone's $4 billion IPO in perspective

Just how big is the Blackstone IPO? Over at DealJournal, Dana Cimilluca calls it "the biggest initial public offering since Google". But in fact it's much bigger than that.

Check out Renaissance Capital's league table of the biggest US IPOs of all time. If Blackstone raises $4 billion, that would put it in 6th place, as the biggest IPO since CIT Group was spun off from Tyco in 2002, almost five years ago. If you exclude spin-offs, then Blackstone will be the second-biggest US IPO ever, and the biggest since UPS went public in 1999. Either way, Blackstone will be much bigger than Google, which raised $1.7 billion, according to Renaissance.

Of course, if you take off your US-centric blinkers, then Blackstone is a veritable minnow compared to China's ICBC, which raised $21.9 billion back in December.

Posted by Felix at 12:02 EST | Comments (0)

Putting Blackstone's $4 billion IPO in perspective

Just how big is the Blackstone IPO? Over at DealJournal, Dana
Cimilluca calls it "the biggest initial public offering since Google".
But in fact it's much bigger than that.

Check out Renaissance Capital's league
table of the biggest US IPOs of all time. If Blackstone raises $4 billion,
that would put it in 6th place, as the biggest IPO since CIT Group was spun
off from Tyco in 2002, almost five years ago. If you exclude spin-offs, then
Blackstone will be the second-biggest US IPO ever, and the biggest since UPS
went public in 1999. Either way, Blackstone will be much bigger than Google,
which raised $1.7 billion, according to Renaissance.

Of course, if you take off your US-centric blinkers, then Blackstone is a veritable
minnow compared to China's ICBC, which raised $21.9 billion back in December.

Posted by Felix at 11:40 EST | Comments (0)

DealBook monetizes the takeover boom

Subscribers to the New York Times got an extra section to throw away unread this morning: DealBook, Andrew Ross Sorkin's M&A-obsessed blog, now has a quarterly spin-off on paper. The Spring 2007 section is full of mildly fluffy articles about financial markets, and has cascades of hundred-dollar bills on the front. Money!

Inside, find out about bankers' golf handicaps, or read another write-around and unauthorized profile of Ken Griffin. (Yes, there was one yesterday, too.)

For DealBook the blog, this means its first blog entries with bylines – please let's have them all the time, not just quarterly. And for DealBook the special section, this