Why using eminent domain for liens is a bad idea

A couple of weeks ago, Matt Goldstein and Jenn Ablan had an intriguing story: Mortgage Resolution Partners, a politically well-connected firm in San Francisco, was shopping to municipalities the idea of using eminent domain to restructure mortgages. Then, on Tuesday, Cornell University’s Robert Hockett weighed in, saying that the idea was a compelling one. “To solve a collective action problem, we need a collective agent,” he wrote. “That’s what governments are.”

According to Imran Ghori of the Press-Enterprise in San Bernadino, where the idea seems to be furthest along, Hockett “has been working with Mortgage Resolution Partners” but “said he has no financial interest in the proposal”. I don’t really know what that means, but I think it’s fair to assume that if this happens, Hockett is very well placed to make a lot of money from it. So it’s worth approaching the idea with a skeptical eye.

In principle, I think I can like this idea. On Monday I met with Jorge Newbery of American Homeowner Preservation, whom I’ve written about a few times in the past; his company buys pools of defaulted underwater mortgages from banks, often for just $1 each, and then, having bought the mortgages at massive discounts to par value, can come up with any number of ways to successfully modify the mortgage, nearly all of which involve principal reduction. This is a very successful outcome for nearly everybody involved, but there’s a problem: while Newbery can buy pools of bank-owned mortgages, he can’t buy mortgages which have been securitized. And those mortgages represent the vast majority of defaulted subprime debt.

Newbery started buying pools of mortgages when his original idea didn’t work. That idea was elegant: investors would buy a house in a short sale at the market price, and then lease the home back to the homeowner until the homeowner had the ability to get a mortgage and buy it back at a pre-set price. The idea might have been elegant, but it didn’t work in practice, because the banks wouldn’t play ball: they (and Freddie Mac) simply hated the idea of a homeowner being able to stay in their house after a short sale, and often asked for an affidavit from the buyer saying that the former owner would certainly be kicked out.

The idea from Mortgage Resolution Partners and Robert Hockett basically does an end-run around the banks’ objections: they can’t object to the short sale, because they’re being forced to do the short sale. Clever.

But then things become extremely murky. Here’s Hockett:

Using their traditional eminent domain authority, municipalities can “take” – it’s a constitutional term of art – underwater mortgages from holders for fair market value. They can then write down the loans to just under the values of underlying homes, bringing these back above water. They can finance these takings with moneys supplied by investors, who then are repaid on the refinanced mortgages.

Got that? Me neither. Here’s Goldstein and Ablan, trying to explain the same idea:

Mortgage Resolution Partners would work with local governments to find institutional investors willing to provide tens of billions of dollars to finance the condemnation process to avoid using taxpayer dollars to acquire millions of distressed mortgages.

A local government entity takes title to the loans and pays the original mortgage owner the fair value with the money provided by institutional investors.

Mortgage Resolution Partners works to restructure the loans, enabling stressed homeowners to reduce their monthly mortgage payments. The restructured loans could then be sold to hedge funds, pension funds and other institutional investors with the proceeds paying back the outside financiers.

The key here — which is spelled out in much more detail in Hockett’s 56-page paper on the idea — is that the eminent domain powers are not being used to buy the actual houses in a short sale, as would have been the case under the original AHP scheme. Instead, they’re being used to buy the mortgage. Hockett doesn’t spend any time in his paper or his op-ed explaining why eminent domain should be used to buy mortgages rather than houses, and it’s here, I think, that his plan moves from something which could be a very good idea, to being something which is actually a pretty bad idea.

Here’s how a scheme like this should work. MRP, or a company like it, borrows short-dated money for a term of say three months at very low interest rates. Meanwhile, underwater homeowners in San Bernadino are invited to volunteer for the scheme. Once the money has been raised, it is used to buy those homeowners’ houses at the market rate. The homeowners then buy their houses back from MRP at say a 2% premium to the price paid, using a mortgage given to them either by MRP itself or by some other lender. MRP then repays the short-term loan. MRP’s profits come from that 2% premium, and from its separate mortgage-lending arm; if it wants, it can restrict the houses it buys to only the ones owned by people it would be willing to lend money to.

Under this scheme, the banks or investors who hold the mortgage would receive in return the fair market value of the home in question, just as they would in a short sale. That’s a very reasonable amount to receive for an underwater mortgage, so the banks can’t really complain. MRP would make a modest amount as a middleman and facilitator, and the homeowner would end up with a house mortgaged at its fair market value, rather than at some inflated old purchase price.

But that’s not what Hockett is proposing. Instead, Hockett wants MRP to be able to buy the mortgage, rather than the house. That’s very weird: while it might be legal under eminent-domain law (I have no idea about that), the spirit of the law is very much that the government can buy property, rather than liens. But after talking to Newbery, I understand what MRP is thinking here. His company, AHP, is buying up underwater mortgages for much less than the value of the underlying property — sometimes only 10% or so, and never more than about 25%. Admittedly, all of those mortgages have been in default for some time. But MRP clearly wants to be able to buy mortgages at a deep discount to the value of the home, and then “restructure” the mortgage so that the principal amount is very close to the value of the home. The result could be massive profits for MRP.

In both cases, the homeowner essentially ends up refinancing into a new mortgage with a principal amount just below the value of the home. But in the first case that money is essentially used to pay off the old mortgage holder, while in the second case — the one MRP is proposing — the money goes largely to MRP, the middleman.

What’s more, the market for liens is much more opaque than the market for houses, and as such MRP could probably make a colorable case that fair value for the mortgages it wanted to buy was extremely low. Since MRP would have all the important political relationships, the owners of the mortgage — especially if they’re just distant bondholders somewhere — would have very little ability to contest the valuation, and might end up getting paid much less than a genuinely reasonable price for it.

It seems to me that MRP is not adding a huge amount of value here — certainly nothing commensurate with the amount of money it’s likely to make. The real value is added by the use of eminent domain to buy the liens, and it’s the municipal government, rather than MRP, which has that power. So if anybody makes money from using eminent domain, it should be taxpayers: not some private-sector middleman.

If I represented the municipality of San Bernadino, I would respond to MRP’s proposal by giving them two choices. Either cut the city in to a very large proportion of MRP’s profits on these deals, or else force MRP to buy houses rather than liens. Both of those options seem fair to me. Hockett’s scheme, as it stands, doesn’t.

Posted in housing | 3 Comments

The future of hedge funds

You might have noticed a WSJ story by Juliet Chung today, talking about a new report from Citigroup and leading with the eye-popping number that the amount of money managed by hedge funds could soar to $5 trillion over the next five years. Barry Ritholtz certainly saw it, and responded with derision: “I highly doubt the industry is doubling in size,” he writes, “or that assets will triple.”

My initial reaction, on reading the WSJ story, was exactly the same. But then I thought it might be worth reading the report itself. Finding the report (which you can download in PDF format here) wasn’t easy, since Chung evidently decided that everything we needed to know about the report was contained in her article, and that therefore there was no need to link to it. And if you go to the Citi Prime Finance website, the most recent report there is dated December 2010. But Citi’s crack PR team did send me their press release, which includes a link to the report. And it turns out that the $5 trillion number is taken straight from the headline of the press release; it doesn’t actually appear anywhere in the report at all.

In that sense, this is a replay of the Kauffman report on hedge funds a couple of weeks ago: it’s a very worthwhile report, undermined by a stupid press release desperately trying to sensationalize something quite subtle and interesting.

That said, Barry raises some valid points, many but not all of which are addressed by the report. Firstly, he says, withdrawals from hedge funds have been rising. And that’s true — at least when it comes to the high net worth individuals and family offices who have historically invested in these things. Here’s the chart:


As you can see, individuals and families are basically keeping the amount of money that they invest in hedge funds flat, even after returns, and despite the fact that they have gotten a lot wealthier over the past three years. As a percentage of their total assets, the amount of money these people are investing in hedge funds is definitely falling.

On the other hand, institutional investors are still increasing the amount of money they’re allocating to hedge funds. Not quite as quickly as during the go-go years of 2004-7, when institutions poured $1 trillion into the asset class. But Citi estimates that institutions transferred some $179 billion in total into hedge funds in 2010 and 2011, even as they were recovering from the financial crisis. And I’d agree with Citi here that at the margin institutional investors are more likely to accelerate those flows than they are to reverse them and start withdrawing money. Big institutional investors move slowly, and once they start on a course of action they tend to be committed to it for the long term.

Barry’s second point is that hedge funds have underperformed in recent years. And indeed that helps explain the way that individual investors have soured on the asset class. But institutional flows don’t tend to mirror previous-twelve-month performance in the way that individual investors are wont to do. Institutions tend to determine investment strategies and risk allocations, and then decide how best to position themselves; while hot funds might see inflows and weak funds might see outflows, the total amount of money that institutions allocate to hedge funds is actually very weakly correlated with hedge-fund performance. Here’s the Citi report:

Institutional investors entering the market were looking for risk-adjusted returns and an ability to reduce the volatility of their portfolios. This was a very different mandate from the one sought by high net worth and family office investors— namely, achieving outperformance and high returns on what they considered to be their risk capital.

Thirdly, Barry says that the hedge-fund industry is contracting — which is also true, and also entirely consistent with fewer and much bigger institutional mandates. Here’s one quote from the report:

We only take money from institutional investors and the minimum investment levels are high (passive $50 million, bespoke $500 million). This is due to only wanting “like-minded” investors to be part of the platform in order to reduce the risk of excessive withdrawals by less stable/less long-term investors in case of a market crisis of some sort.

This is the new world of hedge-fund management: setting minimum investment levels so as to deliberately exclude precisely the kind of investors that built up the asset class in the first place. The number of people who can do that, however, is by its nature much smaller than the number of people who have founded a hedge fund. So consolidation and contraction is inevitable. While the Citi report does forecast an increase in the amount of assets under management, it doesn’t for a minute forecast an increase in the number of hedge-fund managers.

“It is not a particularly great time to be a fund manager,” says Barry, and he’s right. But that doesn’t mean that Citi is wrong.

Fourthly, Barry points to the fact that the fund-of-funds industry is doing badly. On this point, the Citi report actually goes further than Barry: it basically says that fund-of-funds were a fad, and that they won’t last much longer. This chart, for one, is striking:


Here’s how the report puts it:

As many investment committees and boards became uncomfortable with the fees they were paying to fund of funds, many institutional investors began making direct allocations to hedge funds. Many of these investors began their direct investing program by again placing a singular allocation with a multi-strategy manager and relying on the CIO of that organization to direct capital across various approaches based on their assessment of market opportunities.

Essentially, as the hedge-fund world consolidates, the functions formerly performed by fund-of-funds managers can now be performed within huge hedge-fund groups. And they won’t charge you extra for the privilege.

Finally, Barry says that investors are getting fed up with high fees — and the question of 2-and-20 is one which is surprisingly ducked by Citi in this otherwise comprehensive 76-page report. While sophisticated risk-allocation strategies are all well and good, at some point one has to ask whether it’s worth paying 2-and-20 to get the level of risk you want, and whether you might not be better off over the long term with less risk optimization and also lower fees. If the hedge fund industry doesn’t grow as much as Citi says it will, the reason will surely be that institutional investors will finally have decided that 2-and-20 is too high a price to pay for what they’re getting.

So if you read the actual report, rather than the press release, it stands up quite well to Barry’s criticisms. But I’m still not completely convinced by it. For instance, the report has a whole section under the headline “Directional Hedge Funds Gain Traction for Their Ability to Dampen Equity Volatility”. It says:

Remember, most institutional investors are focused obsessively on capital protection, as they have limited pools of assets they are managing to meet obligations. For pension funds, these obligations relate to the institution’s need to meet liabilities owed to their members. E and Fs need to fund activities over a long-term period. Sovereign wealth funds need to diversify their account balances. In all these instances, there is an extreme aversion to losing money.

“E and Fs”, by the way, is investments for “endowments and foundations”. And this passage just doesn’t ring true to me. Bond investors focus obsessively on capital protection; long-term institutional investors looking to capture an illiquidity premium, on the other hand, actively want more volatility, if it means that their long-term returns will be higher. If the institutional investors that Citi talked to are focusing on capital protection, I find it hard to believe that they’re going to significantly increase their allocation to hedge funds. Partly because of those fees, and partly because no hedge fund is immune to blowing up. It’s true that hedge funds as a whole lost less money than the stock market did during the plunge of 2008-9. But they still lost money — if they were promising capital protection (something the stock market never promises), then they clearly failed at their job.

Another thing missing from the report is the move from defined-benefit pensions, which create massive pension funds, to defined-contribution 401(k)s and the like, which just create lots of much smaller investors. The sophisticated strategies outlined in this report are all well and good, but they’re out of reach to anybody with a 401(k). As the report notes, the US accounts for 58.5% of all pension fund assets. And if those assets move out of pension funds and into 401(k)s, then they’re significantly less likely to get invested in a hedge fund.

And while the report does foresee an increase in the amount of money that small investors allocate towards things which look a bit like hedge funds, that’s its weakest point. For one thing, there are significant regulatory obstacles in the way. And for another, hedge funds know that catering to small investors carries a lot of risk, even as they generally have to reduce their fees to get at that money. Here’s the chart:


What you’re seeing here is a real rise in the amount of money which belongs to retail investors and is being managed either by hedge funds or by conventional mutual funds offering total-return strategies. The increase of $369 billion over the past 5 years is significant. But it’s also dangerous, as the Citi report highlights:

Several respondents noted that these products were only suitable for strategies using highly liquid products.

There were also concerns that these products would not get the same attention and focus from hedge fund managers as their core funds, since the fee potential was not as great. Many worried that managers would just view these products as an opportunity for asset gathering and that their lack of performance could hurt the brand of the hedge fund industry overall.

So is there a bright future for hedge funds or not? My gut feeling is to split the difference between Barry and the report. Here’s the most interesting chart, for me:


Pension funds, here, are by far the largest pool of money; sovereign wealth funds are smaller, and endowments and foundations are smaller still. Basically, the larger the amount of money you’re managing, the smaller the percentage of that money that you’re investing in hedge funds.

Over time, I suspect that these three lines are likely to start converging — somewhere. And if the convergence point is anywhere north of about 4%, then the total amount of money in hedge funds will go up, just because pension funds are so big. In order for the hedge fund industry’s assets under management to fall, the blue lines in this chart are going to have to stop rising and start falling. And while that’s possible, I don’t think it’s going to happen. Not yet.

So will hedge funds find themselves managing $5 trillion by 2016? No. But will they be managing more money than they are today? Yes, I think they will. And the increase won’t just come from internal returns. It will come from substantial capital inflows, too.

Posted in economics | Tagged | Comments Off

Kermit kontest

The fifth annual* Von Salmon Wine Contest returned to the East Village last night, and this one was the nerdiest yet. Rather than use grape varieties (Pinot Noir, Merlot, Rioja) or region (Beaujolais) as the theme of the contest, we decided to say that entries had to be French reds imported by Kermit Lynch.

This was definitely the highest-quality contest yet: all the wines were really good, and it was very hard to rank them. When Michelle wanted a simple guide to buying good wine in a wine store, I told her many years ago to just turn the bottle around and look for two men in a boat on the back label. And that turns out to have been pretty good advice. (Except, nowadays, not all Kermit Lynch wines have the two-men-in-a-boat etching on the back, sadly.)

I decided to change the scoring mechanism, this year, to the Borda Count. It’s the fairest way of ranking wines in a contest like this: when we were scoring the wines on a 20-point scale, people who gave some wines 2 points and other wines 20 points ended up having much more influence over the final outcome than people who ended up giving scores in a much narrower range.

IMG_0950 We tasted nine wines in all: a small enough number that you could remember them all, go back and forth between them, and generally try to come up with a reasonably sophisticated and informed ranking. But it was hard: they were very good, and very different. Wine F, in particular, stood out: it was weird and funky, in a good way, and a lot of people ranked it as their favorite. But it was also quite heavy and rich, which made it hard for the lighter wines to compete.

We made sure that everybody was well fed: all these wines are designed to be drunk with food, rather than blind on their own. So we had a spectacular lamb stew, as well as great salad, bread, and cheese. The real star of the evening was not any of the wines but rather the chef, Baroness Michelle Von Salmon.

Everybody had to rank their wines from best to worst, on the understanding that even the worst wines were, in this contest, really good. Each wine then got a score: the top-ranking wine got 8 points, the next 7 points, and so on down to the lowest-ranking wine, which got zero points. Finally, when we worked out which wines were which, each person who brought a wine had the score they gave their own wine discarded.

There were ten people scoring the wines — Andrea didn’t bring a wine of her own — which means that each wine got nine scores. The minimum score was zero; the maximum was 9×8=72.

In the end, the scores ranged from 12 to 53. The lowest-scoring wine was a Beaujolais, a Cote de Brouilly from Thivin. It’s a lovely wine, but it was also a lower in alcohol than any of its competitors, and hot wines tend to win blind tastings.

There was a tie for first place, which went to the two wines from the Languedoc-Roussillon. One was a Faugères from Léon Barral; the other was my own entry, the Mas Champart. Both are quite big, at 14% alcohol, but then again so were most of the other wines: both Simon and Lock brought 14.5% wines from the southern Rhone (a Gigondas from Les Pallières and a Chateauneuf du Pape from Domaine la Roquète respectively), and those wines didn’t score nearly as well.

In the bang-for-the-buck stakes, my Mas Champart was the clear winner, with 3.8 points per dollar: not only was it the joint top-ranked wine overall, but it was also the cheapest wine in the contest at $14 per bottle. The most expensive wine, Glenda’s $85 “La Tourtine” Bandol from Tempier, managed just 0.3 points per dollar. That wine, annoyingly, just gives “11-14%” as its alcohol content, so it’s unclear whether its relatively low placement — it got 29 points, for 6th place — can be blamed at all on its ABV. But certainly some of the high-alcohol wines tasted much lighter than others: there’s much more to how heavy a wine drinks than just how hot it is.

As ever, I’ve uploaded the full results, in Excel format; I encourage you to download the file and play around with it. But one thing’s clear: once again, just as happened in the Pinot contest, if you plot price against quality, you end up with a negative correlation. (This time, the calculator spits out a correlation of -0.12.) In other words, if you buy a more expensive wine it’s not likely to be any better, and it might well in fact be worse than the cheaper alternative. At least in a highly-artificial blind-tasting context. Here’s the scatter plot:


G, here, is the Mas Champart; F is the Barral Faugères; H is the Thivin; and C is the Tempier Bandol.

And here are all the wines which got entered, in order A, H, C, I, E, D, B, G, F. The two winners are the two wines on the far right. But really, you can’t go wrong with any of these. Many thanks to everybody who entered, and many congratulations to Jay for winning again.


*Five Six contests in seven years counts as annual, right?

Posted in Not economics | 4 Comments

The hateful Jonathan Franzen

I’m a fan of the New Yorker on Facebook. So I should be able to read the Jonathan Franzen essay about David Foster Wallace and Robinson Crusoe, no? No. Turns out that TNY’s clever gimmick about opening the essay up only to FB fans only lasted a week. And now it’s gone. So that makes me angry at TNY. But not half as angry as I am at Franzen, who visited Robinson Crusoe Island in Chile for this essay. Here’s what he has to say about it:

On Masafuera’s sister island — originally named Masatierra, or Closer to Land, and now called Robinson Crusoe — I had seen the damage wrought by a trio of mainland plant species, maquis and murtilla and blackberry, which have monotonously overrun entire hills and drainages.

[Here, Franzen goes on to a facile metaphor about how "the blackberry on Robinson Crusoe Island was like the conquering novel, yes, but it seemed to me no less like the Internet, that BlackBerry-borne invasive". Ugh. Anyway, back to Franzen's take on the island.]

I felt desperate to escape the islands. Before leaving for Masafuera, I’d already seen Robinson’s two endemic land-bird species, and the prospect of another week there, with no chance of seeing something new, seemed suffocatingly boring…

Although I no longer wanted it, or because I didn’t want it, I had the experience of being truly stranded on an island. I ate the same bad Chilean white bread at every meal, the same nondescript fish served without sauce or seasoning at every lunch and dinner… I hiked over the mountains to a grassland where the island’s annual cattle-branding festival was being held, and I watched the horseback riders drive the village’s herd into a corral. The setting was spectacular — sweeping hills, volcanic peaks, whitecapped ocean — but the hills were denuded and deeply gouged by erosion. Of the hundred-plus cattle, at least ninety were malnourished, the majority of them so skeletal it seemed remarkable that they could even stand up. The herd had historically been a reserve source of protein, and the villagers still enjoyed the ritual of roping and branding, but couldn’t they see what a sad travesty their ritual had become?

All of this is so callous and worthy of unalloyed hatred that I’m pretty sure I’m never going to read anything by Franzen again. According to something he says in the story about Super Bowl XLV, Franzen was on Robinson Crusoe Island on February 3, 2011. Which means he was there less than a year after Robinson Crusoe Island was all but destroyed by the tsunami which followed massive Chilean earthquake of 2010:

A wall of water – possibly nearly 5 metres high – ravaged everything in its way. Within a few minutes, the scene of the adventures of Scottish sailor Alexander Selkirk – marooned on the island from 1704 to 1708, and immortalized in Daniel Defoe’s novel Robinson Crusoe – had been razed to the ground.

“Everything that had been along that three-kilometre stretch just disappeared,” said Fernando Avaria, the first pilot to fly over the area after the disaster. The cemetery, the churches, sports facilities and the area’s only school were reduced to planks of wood and broken glass. The buildings of the local authority simply disappeared. “It was devastating, really out of a horror film,” said Margot Salas, a local who toured the area with Chilean state television cameras almost 24 hours after the disaster. As the sea receded, Robinson Crusoe Island faced a new flood – one of despair. Mud covered everything within three kilometres of the coast.

Sixteen people died; the entire economy of the island was wiped out. If you’re interested in helping, or finding out more, there are good resources here.

It’s into the aftermath of this disaster that Franzen wanders, thinking in his Important Novelist way about how selfish David Foster Wallace turns out to have been. He reaches the island, and he sees the damage wrought — by blackberries. He sees the islanders trying to recover some semblance of their former lives, and sneers at the “sad travesty” of their ritual. He moans about how “nondescript” his food is and how “skeletal” the cattle are, while somehow failing to notice that the reason is that the islanders, recovering from a terrible natural disaster, have nothing left.

As for Franzen, he’s only on the island at all because he has a stupid dream of “running away and being alone” on Masafuera. “Like Selkirk”, he says. But he only manages to hack being alone for the grand total of one night. Like Selkirk, my arse.

Franzen attacks Wallace in this essay, criticizing “the extremes of his own narcissism” and his self-deception. Ha! The extremes of narcissism and self-deception needed to visit Robinson Crusoe Island 11 months after the tsunami and not even notice what had happened make Wallace look like an amateur in such fields. (And if Franzen did notice, but decided to ignore it, that’s even worse.)

I was obviously wrong to give Franzen any benefit of the doubt after the Oprah fiasco: he really is as boorish and narcissistic as he seemed back then. Clearly it’s long past time to ignore everything he does from here on in.

(Update: This seems to be getting a bit of traction, so let me clarify a couple of things. Franzen spent about two weeks on Robinson Crusoe Island — at least that’s how I read the line about him spending “another week there”. The island, pre-tsunami, had a population of just over 600. So Franzen lived for two weeks on a small island, being hosted by a traumatized population. And in the wake of that experience, felt happy to describe their cattle-branding festival as a “sad travesty”. I still can’t work out which would be worse: that he wrote such a thing in full knowledge of the tsunami, or that he somehow contrived to remain ignorant of the devastation despite living in its aftermath for two weeks.)

Posted in Not economics | 15 Comments

American Express blows me a raspberry

My name has been pronounced many weird ways over the years, but never quite like this:

Posted in Not economics | 1 Comment

On Dave Weigel

So I haven’t updated felixsalmon.com in forever, and I feel I’m very late to the Dave Weigel party, having spent most of my day doing other things like watching the World Cup and swimming in the Atlantic. So this goes here, rather than at Reuters:

The bien-pensant consensus surrounding l’affaire Weigel is that it’s wrong he got kicked out of his position blogging for the Washington Post. And that of course is entirely correct. But even many of the people who are on #teamweigel will quickly add that he demonstrated poor judgment in writing what he wrote, and that this should be a lesson to us all.

I don’t think that’s true. Our wired and Twittered world is increasingly blurring the distinction between the personal and the professional, and in such a world honesty is a much greater virtue than mealy-mouthed meekness when it comes to expressing the truth as you see it. Especially in a blogger. People have opinions, and it’s kinda hilarious to see conservatives try to simultaneously complain that Weigel had erroneously been counted as one of their number while at the same time complaining that he wasn’t “objective”.

I do believe that Weigel resigned rather than was fired, and it’s easy to see why he’d want to do that after reading the absolutely horrendous column by their lame, sad toady of an ombudsman today. Weigel is a great talent, and he’ll land somewhere which will be positively encouraging to say in public what he was confined to saying in private while housed at WaPo. He’s a very funny guy, and he should be able to let rip as much as he likes, without then feeling the need to apologize for being who he is.

Meanwhile, a horrible little turd somewhere is gleefully if quietly celebrating his coup (I’m sure it’s a guy) in leaking Weigel’s private correspondence to Fishbowl DC and the Daily Caller. Maybe he’s genuinely disturbed in some way. But, to coin a phrase, this would be a vastly better world to live in if he decided to handle his emotional problems more responsibly, and set himself on fire.

Posted in Not economics | 1 Comment

The story of Petunia

Thanks, Petunia, you were delicious!

Posted in Not economics | 20 Comments

Email from experts

I got an email from one Ed Grebeck this morning, complaining about a post of mine on the subject of CDOs. It started like this:


I teach “Credit Default Swaps 101″ at NYU, a strategist in the global debt markets and an early critic of structured finance and its spillover. Google me.

I published “Why Should Institutions Invest in CDOs, at All ?” In Euromoney in APRIL 2006. See 5 minute video link, done in March 2008.

So I’m surprised that academics at Princeton just now, October 2009, after some $3T + structured finance losses, belatedly argue “[it is not possible to price CDOs...].

As it stands, their work is INCOMPLETE. If it were a thesis, I’d say they failed.

A lot of the email made little sense to me, but there was enough there to pique my interest that I thought I’d look into Mr Grebeck.

As someone who wrote for Euromoney for many years, I have access to their archives: I looked all through the April 2006 issue and couldn’t find Grebeck’s article at all. Indeed, I searched the Euromoney website for him, and couldn’t find it anywhere: he turned up only once, quoted in a column by Edward Chancellor.

As I replied to his email asking him about this, I thought I’d look up his NYU credentials while I was at it. Turns out he’s one of two instructors on one course at NYU’s School of Continuing and Professional Studies — the continuing-education arm of NYU, not the university itself.

Meanwhile, I noticed that the “Euromoney article” was part of his email sig, along with that video:

Ed Grebeck is a global debt market strategist and author of “Why…Invest in CDOs, at All?” [Euromoney, April 2006], a prescient warning of Structured Finance illiquidity, conflicts of interest, flawed pricing models and today’s trillion dollar losses. http://fiscalclinic.com/2009/12/20/ed-grebeck-shared-with-you-his-video-interview-with-riskcenter.aspx?results=1#SurveyResultsChart

Grebeck replied to my email, attaching the article — which, I wasn’t surprised to find, was never published in Euromoney magazine. Instead, it was a chapter of something called the Structured Credit Products Handbook 2006/07, and it was published complete with Grebeck’s photograph, title, email address, and phone number.

I know enough about Euromoney to know how this kind of thing works: they use the power of the Euromoney brand name to sell chapters in these books to anybody willing to write one. Then they try to sell the finished product to the authors, who can try to use their status as a published author to burnish their credentials. None of this has any connection with Euromoney magazine, beyond the parent company.

But what about that article? Was it really prescient? Did it foresee “today’s trillion dollar losses”? Was it even called “Why…Invest in CDOs, at All?”

The actual title is “Why should institutions invest in CDOs, at all?”, and at heart it’s all about relative value: if you’re thinking about buying CDOs, says Grebeck, then maybe you’d get better value out of certain other investments instead, which carry less risk or higher returns.

Certainly Grebeck saw that the ratings on CDOs might be suspect, and that the investment banks structuring them were conflicted. But he nowhere talks about trillion-dollar losses, or any possible losses at all. And the main thesis of his article is that if you’re thinking of buying a CDO, you’d probably be better off — wait for it — buying equity in Ambac instead. Or maybe some other monoline:

Ambac is a relevant CDO comparable because its business model demonstrably works and it, like the other financial guarantors, is really a ‘giant CDO’. Ambac (symbol: ABK) is the best performing monoline financial guaranty insurer, generating a long-term return on equity for investors in excess of 15% per annum — up to May of 2005. Other established guarantors, in business since at least the 1980s, are MBIA (symbol: MBI), FSA and FGIC.

Financial Guarantor portfolios already have the diversification that today’s CDOs try to achieve… Their low risk portfolios permit high leverage, some 75 times, at least, their net worth…

Financial guarantors confront the same agency costs that CDO investors face… However, they have at least 300 dedicated staff, each learned in ‘credit culture’, to underwrite, document and monitor the risk over its term and so protect themselves as active market participants.

I really don’t think that an April 2006 article extolling the virtues of Ambac and MBIA counts as “prescient”. ABK was trading at about $70 back then; today, it’s less than a buck a share. MBIA has similarly fallen from $80 to $4. And the losses that did them in are exactly the losses that Grebeck claims to have so presciently foreseen. Yes, investors in CDOs lost a lot of money. But you would hardly have been better off investing in ABK instead.

After reading the article, it was pretty obvious that I wasn’t going to place much faith in what Grebeck has to say: he seems to be deliberately misleading when it comes to (a) his own credentials, (b) the place that his article was published, and (c) its contents. But then I realized that if he was emailing me, he was surely emailing lots of other journalists as well — people who might not be able to check up on the Euromoney article so easily, and/or people who under pressure of deadlines might be more willing to take him at face value. Should I not somehow give them a heads-up?

At the same time, Grebeck had caused me no harm, beyond the time I spent looking into his credentials: it would be cruel of me to splash his name all over Reuters as some kind of exemplar of spurious expertise. Indeed, Grebeck may indeed know a great deal about CDOs and CDSs and whatnot; I certainly hope that he does, for the sake of his clients. (His day job is running a Stamford consultancy providing “client-directed, confidential, research that extracts value from tomorrow’s opportunities as credit markets change, today”.) He’s just one of many financial professionals trying to make a living in these markets, looking for a bit of good press.

So on the grounds that no one much reads felixsalmon.com any more, I’m putting this note up here. I feel I owe it to myself, just to justify the amount of time I spent on Grebeck today.

Posted in Econoblog | 32 Comments

Umbrellas, cont.

Old friends of mine might remember a question about umbrellas I had back in the 1990s. Has Mark Hurst come up with an answer (page 25)?

Posted in Not economics | 22 Comments

Department of weird banners, Cambridge edition

The University of Cambridge is celebrating its 800th birthday this year, and so all around the town are banners like this one:


The obvious question, of course, is what is the significance of those dates? The 1209 and 2009 dates are obvious. And to find out about the others, the obvious place to look is the website at the bottom of the banner, which has a handy timeline. The problem is that although the timeline includes no fewer than 80 different years between 1209 and 2009 (not including the ones at both ends), only one of them coincides with the seven in-between years on the banner: 1446, which marks the founding of King’s College. So what are the others?

Posted in Not economics | 36 Comments