Overkill on the Profanity Desk

Posted on May 14, 2008 by Felix

Dear NYT,

What the fuck are you doing?

The Gray Lady devotes 1,200 words and four reporters today to covering in mind-numbing detail the fact that a television anchor inadvertently said the word "fuck" live on air. (Of course, being the NYT, it can’t actually print the word, which makes the whole story even sillier.)

How do I know about this story? Well, it’s on the business home page, for starters – and in the NYT Business RSS feed. I do understand that New York is a media town. Even so, somebody’s news judgment is way out of whack here.

Posted in Media | Comments Off on Overkill on the Profanity Desk

IAC: Malone Concedes Defeat

Posted on May 14, 2008 by Felix

Barry Diller, Condé Nast Portfolio cover star, has decisively prevailed in his fight with John Malone, the largest shareholder of the company Diller runs. Malone’s Liberty Media won’t appeal the court decision which went in Diller’s favor in March, has agreed to Diller’s breakup plan, has agreed not to increase its shareholding, and seems to be at peace with its 62% supervoting control of the company being diluted down to a simple 30% stake.

Rarely are such fights settled so unequivocally; one can’t imagine that John Malone is a happy mogul this morning. At this point, I doubt he’ll just passively sit on his 30% stakes in Lending Tree, Ticketmaster, and the like: he’ll want to do some deals with those shareholdings as soon as the economic climate is right.

Posted in Media | Comments Off on IAC: Malone Concedes Defeat

Contemporary Art: As Strong as Ever

Posted on May 14, 2008 by Felix

Bursting art bubble? What bursting art bubble? The Christie’s sale last night looked for all the world as though it was taking place at the height of the party: not only did it bring in a very impressive $348 million, but 70% of the buyers were American.

It also knocked Jeff Koons off his short-lived perch as the most expensive living artist at auction, when Lucian Freud’s Benefits Supervisor Sleeping sold for $33.6 million. It’s a great painting, which will surely stand the test of time much better than Koons’s Hanging Heart.

And it established a precedent for including architecture in art sales: the Kaufmann house in Palm Springs, designed by Richard Neutra, ended up selling for $16.8 million, plus another $2.1 million for the orchard next door where one can find "three cacti that were a present from Frank Lloyd Wright to Mr. Kaufmann on his first visit to the home".

Oh, and for those of you keeping track at home, Richard Prince now has a new auction record: $7.3 million, for a nurse painting.

The artist of the week though is Francis Bacon. An enormous triptych is coming up for sale at Sotheby’s tonight; Christie’s had a smaller one which sold for $28 million. This one sold at Sotheby’s in 2005 for $5.1 million, which corresponds to an annual rate of return of 176%, and a profit for the collectors, Richard and Elizabeth Hedreen, of $20 million in three years. No matter how committed you are to your collection, it’s hard to pass up that kind of money.

Posted in art | Comments Off on Contemporary Art: As Strong as Ever

Extra Credit, Tuesday Edition

Posted on May 13, 2008 by Felix

Libor Set for Overhaul as Credibility Is Doubted

Investors Cool to HPQ-EDS Deal: "HPQ has lost more market cap over the past 24 hours than the total purchase price of EDS."

AT&T price cut could juice iPhone sales: Or, for the opposite view, try this: Apple Squash

Park the Car: Gasoline consumption is down 7% year-on-year.

Conflicted Agents and Platonic Guardians: Interview with Alex Pollock: On the impossibility of an optimal regulatory structure.

The Storm: Katrina’s educational silver lining.

Posted in remainders | Comments Off on Extra Credit, Tuesday Edition

Robert Rauschenberg is Dead

Posted on May 13, 2008 by Felix

Go read Michael Kimmelman’s obituary, it’s one of the best things he’s written.

Kicking around Europe and North Africa with the artist Cy Twombly for a few months after that, he began to collect and assemble objects — bits of rope, stones, sticks, bones — which he showed to a dealer in Rome who exhibited them under the title “scatole contemplative,” or thought boxes. They were shown in Florence, where an outraged critic suggested that Mr. Rauschenberg toss them in the river. The artist thought that sounded like a good idea. So, saving a few scatole for himself and friends, he found a secluded spot on the Arno. “‘I took your advice,” he wrote to the critic.

The ranks of Great American Painters are growing ever thinner. Johns is left, and Twombly; that’s about it, I think.

Posted in art | Comments Off on Robert Rauschenberg is Dead

Bernanke on Bagehot

Posted on May 13, 2008 by Felix

I doubt a week has gone by since last summer during which I haven’t seen some pundit or other trot out Walter Bagehot’s dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.

Ben Bernanke, in a speech today, addressed this criticism directly:

What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot’s dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard–that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot’s principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England’s own finite store of liquid assets. Today, potential limitations on the central bank’s lending capacity are not nearly so pressing an issue as in Bagehot’s time, when the central bank’s ability to provide liquidity was far more tenuous.

I’m no expert on Walter Bagehot, and in fact I admit I’ve never read Lombard Street. But I’ll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot’s penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England’s limited liquidity.

Posted in fiscal and monetary policy | Comments Off on Bernanke on Bagehot

Bernanke: “Powerful and Inventive”

Posted on May 13, 2008 by Felix

Is there some kind of law saying that any long magazine profile of Ben Bernanke must mention Milton Friedman in the opening sentence and the Great Depression in the opening paragraph? First Roger Lowenstein did it, and now Steve Matthews is following suit, for Bloomberg Markets.

You won’t learn a lot from Matthews’ piece that you didn’t learn from Lowenstein, although he does go a bit further, calling Bernanke "the most powerful–and inventive–Federal Reserve chairman in the 95-year history of the central bank". Bernanke comes across very well, largely because the pro-forma attacks on him seem to miss the mark so widely:

Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh, agrees that Bernanke is swatting a fly with a sledgehammer. "In monetary policy, he has not been good," Meltzer, 80, says. "It is a silly policy designed to head off a recession that may come but hasn’t come yet."

Meltzer says the Fed, by ignoring the inflationary potential in its latest rate cuts, is creating the possibility of negative real interest rates. He also says the Fed should never take credit risks, especially to save floundering banks.

When the worst that anybody can say of Bernanke is that he’s "creating the possibility of negative real interest rates," you can rest assured he’s doing OK. (Of course real interest rates are negative. That’s entirely deliberate.) As for the Fed taking credit risks, that’s the "inventive" bit that Matthews is talking about. Just because it hasn’t historically been done doesn’t mean it isn’t a good idea.

(HT: Ritholtz)

Posted in fiscal and monetary policy | Comments Off on Bernanke: “Powerful and Inventive”

Prediction Markets: A Probability is not a Certainty

Posted on May 13, 2008 by Felix

Mark Gongloff has a rather silly attack on prediction markets today. Let’s start at the beginning:

John McCain’s presidential campaign is doomed — at least, if you still believe what political futures markets indicate.

At the Irish electronic exchange Intrade, on which people bet on election outcomes and other events, the futures market suggests Mr. McCain has a 38% chance of becoming the 44th president. In the Iowa Electronic Markets, set up at the University of Iowa, Mr. McCain’s Republican Party gets a 41% chance of winning the popular vote for the White House.

Um, a 40% chance of winning means that McCain is doomed? No, it means he has a pretty good chance of winning, just not better-than-evens.

Then again, six months ago, the Iowa markets gave Barack Obama less than a 30% chance of winning the Democratic nomination.

Well, I guess that if 40% is doomed, then anything less than 30% must mean no chance at all. Did it not occur to Gongloff that six months ago there were three major contenders in the Democratic race? You’d expect Obama to be on or about 30% at that point.

Academic studies suggest these markets are more reliable than opinion polls, but that might be giving the markets too much credit.

No, that would be the conclusion you draw from actually looking at the numbers. Note Gongloff doesn’t point to any flaws in the academic studies.

Intrade futures had John Kerry beating President Bush well into the evening of Election Day 2004. They also said there was a good chance Mr. Obama would top Hillary Clinton in January’s New Hampshire primary, which she won.

The Kerry-Bush election was incredibly close. In the futures market, it just so happened that Kerry was trading above 50% while Bush was trading below 50%. There’s a world of difference between a candidate trading at 55%, say, and a candidate trading at 95% – but Gongloff doesn’t seem able to make that distinction.

What’s more, there’s a huge amount of noise in the final few hours of any election. If you look at Hillary’s New Hampshire numbers over the weeks leading up to the primary, she was the favorite to win all along – and then there was a bunch of crazy volatility at the end.

The people who bought Rudy Giuliani presidential futures had no better insight than the people who bought Yahoo at $100 a share.

True dat. But no one’s claiming otherwise.

Mr. McCain does have a tough row to hoe. But his futures price clearly isn’t the final word on this election.

And, once again, no one’s claiming otherwise. The prediction markets give a good indication of how difficult McCain’s task is. And what they’re saying is that he can win, he has a pretty good chance of winning, but that on balance it’s probably more likely that he’ll lose. Does that seem outlandish to you? It doesn’t to me.

It’s a bit annoying to see the same meme trotted out over and over again with respect to prediction markets. Every time a prediction-market favorite loses, the likes of Gongloff start crowing: Look! The markets were proved wrong!

But let’s say there are ten elections, in each of which there’s a 60% favorite. Run them all, and you’d expect four of them to go against the favorite. Indeed, if the favorite won in all ten elections, that would be a much greater mark against prediction markets than if the favorite lost in a few of them. It’s not a hard concept to grasp – so why do so many pundits fail to get it?

Posted in prediction markets | Comments Off on Prediction Markets: A Probability is not a Certainty

Let Them Eat Bear

Posted on May 13, 2008 by Felix

Now that’s what I call a power lunch:

Federal Reserve Chairman Ben S. Bernanke lunched on March 11 with a Who’s Who of Wall Street leaders, including JPMorgan Chase & Co.’s Jamie Dimon, three days before the central bank rescued Bear Stearns Cos. from bankruptcy.

Other guests included Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein, Lehman Brothers Holdings Inc. CEO Richard Fuld, Morgan Stanley President James Gorman, Citigroup Inc.’s Robert Rubin, Blackstone Group CEO Stephen Schwarzman and Merrill Lynch & Co. CEO John Thain. Alan Schwartz, the CEO of Bear Stearns, was not listed among the attendees.

Also on the guest list: Tim Geithner (natch, since he was hosting), Stone Point Capital LLC Chairman Stephen Friedman, Citadel Investment Group LLC CEO Kenneth Griffin, American Express Co. CEO Kenneth Chenault, Duquesne Capital Management LLC CEO Stanley Druckenmiller and Caxton Associates LLC Chairman Bruce Kovner. Plus two executive vice presidents at the New York Fed: William Dudley, head of open market operations, and Terrence Checki, who oversees emerging markets and international affairs.

I wonder when/whether Schwartz found out he hadn’t been invited. At that point he must have known the gig was up.

But Schwartz isn’t the only interesting absence. There’s also no one from any foreign bank: Credit Suisse, UBS, Deutsche – they’re all big players on Wall Street, but none of them got on the guest list. So much for global markets.

(HT: Carney)

Posted in banking, fiscal and monetary policy, regulation | Comments Off on Let Them Eat Bear

How to Burst the Rice Bubble

Posted on May 13, 2008 by Felix

Tom Slayton and Peter Timmer have an excellent brief out on which does much more than just explain why rice is so expensive right now: it also comes up with an elegant way of bringing the price down quite dramatically and in so doing save millions of people from potential starvation.

Because of its WTO commitments under the Uruguay Round Agreement, Japan imports a

substantial amount of medium-grain rice from the U.S. and long-grain rice from Thailand and

Vietnam… But

under WTO rules, the government cannot re-export the rice, except in relatively limited quantities as grant aid. So the Japanese government simply stores its imported rice until the

quality deteriorates to the point that it is suitable only as livestock feed and sells it to domestic

livestock operators…

Japan currently has over 1.5 million tons of this rice in storage… Most of this

rice is in good condition, and is incurring large storage charges. Japan would be very happy to

dispose of this rice to the world market, but it cannot do so without U.S. acquiescence.

Rice at more than $1000 a ton – that’s up from $375 per ton at the end of 2007 – constitutes a major humanitarian crisis. And although the Burma cyclone has hit global rice production, Slayton and Timmer do a good job of demonstrating that a lot of the price rise is speculative rather than based on fundamentals. If Japan was able to sell its 1.5 million ton rice hoard, the bubble in rice prices would likely burst, with the concomitant saving of an enormous number of lives. Let’s do this, people.

Posted in commodities | Comments Off on How to Burst the Rice Bubble

How to Curb CEO Pay

Posted on May 13, 2008 by Felix

John Cassidy has got me thinking on executive pay. Cassidy is angry at the sums paid to CEOs, and he’s urging us all to "go ahead and get mad" in an attempt to curb the worst excesses. It’s not the biggest issue facing corporate America right now, but that’s no reason not to address it.

Cassidy zeroes in on CEOs’ contracts as a large part of the problem: they basically make it impossible for CEOs to be fired, which means that when they’re replaced they generally leave with an extremely generous departure package.

Cassidy uses Stan O’Neal as his Exhibit A: he was allowed to leave with $130 million in unvested options, because the board couldn’t fire him for cause. I find this example not entirely compelling, because those options were essentially past pay. The board might have had reason to want to unpay him some of that money, but clawing back previously-awarded compensation is a pretty drastic thing to do.

Here’s my bright idea: rather than awarding options, boards should extend enormous low-interest or even interest-free loans to their CEOs, on the condition that all the money be used to buy the company’s stock. The fiction of options, of course, is that they have no value if they’re awarded with a strike price where the market price for the stock is – that’s how companies find it so easy to award so many of them. My idea also costs the company very little, but it does give the CEO much more downside exposure than any options grant does.

If Stan O’Neal had received an interest-free loan to buy Merrill stock on an annual basis, people wouldn’t worry so much about how much he got paid each year or how difficult his contract made it to fire him. When he left, he’d have to repay the loan, and the value of that stock wouldn’t come close to covering the amount of money he needed to do that.

Of course, it wouldn’t work out like that. As Cassidy notes, boards have been well and truly captured by their CEOs, and so they’d probably end up just forgiving the loan instead. But at least that way, when they were hauled up before Congress, they couldn’t say, as the head of Merrill’s compensation committee did, that they had no choice in the matter.

Posted in pay | Comments Off on How to Curb CEO Pay

Was the Hamptons Property Bubble Speculative?

Posted on May 13, 2008 by Felix

Richard Florida thinks the Hamptons property market is about to crash:

It’s clear as a bell that the tremendous run-up in housing prices in places like the Hamptons, Miami, Naples, Florida, or other similar high-end vacation spots had little to do with demand. We’re talking speculation pure and simple. My research on real estate prices shows that local wages make up about a fifth of local income in Naples, compared to around 90 percent in Silicon Valley. What drove prices in these markets was "outsiders," certainly – outsiders trying to make real killings on flips and speculation. With these speculative gains wiped out and virtually no mortgage market for high-end loans to speak of, real estate values in these places have a long, long way to fall.

I have a feeling that if he’s right, he’ll be right for the wrong reasons. Yes, property prices in the Hamptons might well fall. But the run-up in prices there wasn’t speculative, and any fall in prices will also be based on fundamentals.

Florida’s insight about the relation between real estate prices and local wages is an important one, but although it might be useful if you’re looking at Miami condos, it’s much less useful in the Hamptons, where locals haven’t been price-setters for decades.

What drove up prices in the Hamptons was not speculators looking to "make real killings on flips". The Hamptons real-estate market might have been overheated in terms of price, but it was never very hot in terms of volume. Quite the opposite: the high prices were largely a function of the severe lack of supply in the market.

There’s a difference between a speculative bubble and a virtuous cycle. In the former, people buy just because they think they’ll make money by doing so, and I really don’t think that was happening in the Hamptons. In the latter, a lot of rich and successful New Yorkers buy places in the Hamptons, making the area that much more desirable. That increases demand for houses, which increases the price of houses, which in turn makes the Hamptons seem even more exclusive and desired as a place to buy, and so on and so forth.

In such an atmosphere it’s easy for social climbers to overstretch and to buy houses they can’t afford. During the credit boom, no one noticed when that happened, because it was easy to borrow money to make your mortgage payments. Now, credit’s much tighter, and those mortgage payments are being missed – hence the uptick in lis pendens proceedings which somehow managed to get splashed all over the front page of the NY Post.

The future direction of Hamptons property prices will be driven by exactly the same dynamic as that which drove the past direction of Hamptons property prices: the degree to which people want to buy homes there. Splashing out on a big Hamptons house is still a way of signalling to the world that you’ve arrived – John Paulson, who knows a thing or two about falling property markets, just bought a Southampton compound for $41.3 million.

And as Florida notes, the Hamptons houses in lis pendens aren’t underwater: they’re mostly listed for more than the amount outstanding on the mortgage. The Hamptons are like Manhattan: there are many more people who want to live there than there are places to live. That’s what keeps prices at silly levels. If a few people end up having to sell their houses, there’s no shortage of people lined up to take their place. The only question is the price those people are willing to pay. Yes, it might be lower than it was at the height of the boom. But the people who bought back then weren’t looking to flip, they were just overstretching, in a very American manner.

Posted in housing | Comments Off on Was the Hamptons Property Bubble Speculative?

Annals of Port Authority Incompetence, Goldman Sachs Edition

Posted on May 13, 2008 by Felix

Is there one single aspect of the World Trade Center rebuilding project that the Port Authority of New York and New Jersey hasn’t managed to utterly bollocks up? The latest news: New York State, 50% shareholder in PANYNJ, looks like it’s going to have to pay Goldman Sachs $320 million because there’s no way that construction work is going to be able to get done on time.

Goldman insisted on the penalties because it’s building a new headquarters next door, and it didn’t want to move in to a building site. It’s now in negotiations with the state:

“From our discussions with Goldman Sachs,” said Avi Schick, president of the Empire State Development Corporation, “it is clear that the bank is more focused on ensuring an appropriate workplace environment for its employees than on collecting penalties from the city or the state.”

Goldman’s big mistake here, of course, was believing that just because rational economic actors respond to incentives, New York State would as well. Ha!

Goldman itself is extremely good at responding to incentives. Its continued presence in Lower Manhattan is crucial for the future of the district as a financial center, and it managed to squeeze $1.65 billion in tax-free Liberty Bonds out of George Pataki after essentially holding him to ransom and threatening to move to Midtown or – worse – New Jersey. That was enough to keep Goldman downtown, although senior management still had misgivings about moving to the Vesey Street site, which is not only quite far from the subway but also right next door to the never-ending saga that is the reconstruction of the WTC. And as anybody who works at Merrill Lynch will tell you, since 9/11 that side of West Street has not been the most pleasant or accessible place to work.

Now, Goldman is entitled to a few hundred million dollars – which is nice, but not really what they wanted. What they wanted was to move into a world-class headquarters building surrounded by world-class infrastructure, and that looks very much like it’s not going to happen on time, if it’s going to happen at all. (That ferry from the end of Vesey Street over towards the Goldman building in Jersey City? I’ll believe it when I see it.)

For the hundredth time, I’m sure that Mike Bloomberg and Dan Doctoroff are rolling their eyes and regretting that the city never managed to swap the land under LaGuardia and JFK airports for the WTC site. The PANYNJ really has no business running this gig, as it has proven time and time again. It’s even managed to make New York City look like a paragon of efficiency and dynamism. But then again, that’s pretty much what everybody knew would happen: all those low expectations are being met in full.

Posted in architecture, cities | Comments Off on Annals of Port Authority Incompetence, Goldman Sachs Edition

The Brazilian Economic Miracle

Posted on May 13, 2008 by Felix

There’s really nothing new in Matt Moffett’s front-pager on Brazil in today’s WSJ, but it’s worth a read anyway, especially if you haven’t been following the Brazil story very closely.

My favorite phrase in the piece comes from the president of Fiat in Latin America, who describes the country’s recent economic success as "a bottom-up economic shock". Brazil’s socialist president is writing monthly checks to the poor, and that money is trickling up and helping to create a massive new middle class:

A recent study by the local office of the French research firm Ipsos found that since 2005 more than 20 million people had entered the middle class, defined here as families with monthly income of around $635. The percentage of middle-class Brazilians has grown to 46% from 34%.

Moffett’s story does mention Brazil’s weaknesses, too, but even those are in a weird way fuel for hope. Yes, Brazil’s 15-year-olds aren’t as well educated as their Russian counterparts – but there are many more of them, and Brazil has much more of a future, demographically speaking, than Russia does. Yes, reforms in Brazil move at a glacial pace, but that means that anything which has been achieved – and there are many items on that list – is here to stay.

Obviously Brazil has had more than its fair share of luck: the commodity boom, especially in iron and soy, has served it very well indeed. But it has also leveraged that luck adroitly – Brazil’s agricultural scientists are the best in the world and have made the most of rising prices.

I’m also impressed that Moffett didn’t do the obvious thing for any WSJ reporter and use the soaring Brazilian stock market as a proxy for economic success. But checking it right now, I see that the Bovespa is trading over 70,000 – a number almost unimaginable for someone like me who’s been following Brazil for years. It’s doubled in the past 18 months, and it was below 10,000 back in 2002. Who needs high-flying tech stocks when you can buy Brazilian banks and mining companies instead?

Posted in emerging markets | Comments Off on The Brazilian Economic Miracle

Moving Towards Exchange-Traded Credit Default Swaps

Posted on May 13, 2008 by Felix

Ken Griffin wants to move to a system of exchange-traded credit default swaps:

Mr. Griffin wants the government to require the use of exchanges and clearing houses for credit default swaps and derivatives.

That way, instead of investment banks playing matchmaker between parties, an exchange will do it with strict rules in place, eliminating billions of dollars in exposure and creating more transparency.

“It’s not sexy, but it’s simple, it’s cost forward, its straightforward, and it’s what we should have done after 1998,” referring to the collapse of Long-Term Capital Management, a big hedge fund. He added that it “is a very sad commentary on where we are from a regulatory perspective” that such a move hasn’t happened already.

Of course, most big investment banks would hate such a plan, he acknowledged by telephone last week. “The investment banks and commercial banks benefit from the lack of transparency because they are the intermediary,” he said.

It’s a great idea, and I’m all in favor. For one thing, it would cut out the inter-dealer brokers, who cost a huge amount of money, leaving more for everybody else.

What are the obstacles? I don’t think it’s opposition from the big investment banks – the answer there is to simply get them to set up the new CDS exchange, which could well be worth billions within a couple of years.

There are big problems surrounding the whole issue of counterparty risk. The idea behind an exchange is that if A wants to buy a derivative, he can look at bids from B and from C and take the one quoted at a lower price. That’s then the market-clearing price for that contract, and the price can be made public for anybody else who wants to mark their positions to market.

With a CDS, however, A might prefer to do business with C even if C’s price is higher, if A has worries about B’s reliability as a counterparty.

These problems should not be insurmountable, and indeed a CDS exchange might be able to add a lot of value to the CDS market if the exchange itself somehow licensed its members and guaranteed their obligations. The cost of that counterparty insurance, it seems to me, shouldn’t be more than the amount of money currently skimmed off by the inter-dealer brokers.

The difficulty, of course, is how do we get there from here. Griffin blames the US regulators for not having done this already, but it’s not obvious whether they’re really the ones to do it. Then again, if the regulators don’t force the issue, there’s a good chance it’ll never happen.

Posted in derivatives | Comments Off on Moving Towards Exchange-Traded Credit Default Swaps

Extra Credit, Monday Edition

Posted on May 12, 2008 by Felix

Calling oil wrong: Futures prices bear no relation to future prices.

Let’s not write the Fed a blank check: Why not? Isn’t that precisely what a central bank should have?

So much for the efficient markets hypothesis: Bad results, rising share price: Today it’s MBIA’s turn.

Hold the Presses: Rupert Outbid! "We’re sure the folks at Cablevision know what they’re in for: just think how they’ve elevated professional sports in New York City."

Buying Chanel (All of It): Would cost at least $10 billion, and possibly as much as $15 billion.

Hail Emily Oster! If at first you don’t succeed, change your mind.

Banshou: Blogging the search for a job in the City.

What Does an Appraiser Do? When a pointy-head (Steven Levitt) meets the real world, house-appraising edition.

Ethical finance standards must be restored: Says Evelyn de Rothschild.

Posted in remainders | Comments Off on Extra Credit, Monday Edition

Why do Universities Have Tax-Exempt Endowments?

Posted on May 12, 2008 by Felix

The debate over the proposed tax on Harvard’s endowment continues, with my favorite contribution coming from one of Brad DeLong’s commenters:

Harvard is an investment bank with a mom-and-pop non-profit enterprise attached to it for tax purposes.

It’s a good point: what would happen if Goldman Sachs decided to buy back all its shares, start up a small university in Boston, and declare itself an endowment?

DeLong’s point is more substantive, and concentrates on universities as providers of educational services: by that light, Harvard has been much less successful than, say, the University of California. John Gapper concentrates more on universities as centers of "research expertise and prestige", which is all well and good but isn’t quite as obviously reason to exempt them from taxes.

And this argument of Gapper’s just doesn’t work for me at all:

The reality is that Harvard and the other universities contribute an enormous amount to Boston and Massachusetts and it is not as if they are squirreling their money away in Swiss bank accounts. Eventually, it will flow back to benefit the institution.

My problem with the Harvard endowment is that to all intents and purposes it is squirreling its money away in a (very high-yielding) Swiss bank account, and that only a tiny proportion of it ever flows back to benefit the institution. Gapper’s argument is far too trickle-down in feeling for my liking: you can oppose any tax on the basis that the money "will flow back" eventually.

Still, at least Gapper attempts some kind of a coherent argument. The Boston Globe, by contrast, simply denounces the plan as "economic suicide" and leaves it at that, spending the rest of the editorial doing no more than enumerating all the wonderful things that Boston’s universities do. Well yes – and I’m sure that the sponsors of the proposed bill envisage those universities doing just as many wonderful things in future. The question is whether the tax would drive the universities out of Massachussetts: my feeling is that it would have to be a lot bigger than 2.5% for that to happen. After all lots of people are happy paying a 2% tax on their wealth: they’re called hedge-fund investors, and they pay a 20% performance fee on top.

Overall, I’m struck by the weakness of the arguments against this proposed tax. That doesn’t mean that the tax is a good idea, of course, but it maybe does mean that the existence of tax-exempt university endowments is probably more of a historical curiosity than an educational necessity.

Update: See also Jim Manzi.

Posted in education | 6 Comments

Disclosures: The Long/Short Dual Standard

Posted on May 12, 2008 by Felix

In Jesse Eisinger’s column this month, he makes an interesting observation about David Einhorn in particular, and short-sellers in general:

Whenever a short-seller criticizes a company, the firm and the media go out of their way to disclose that the critic stands to gain financially. This is proper. Often, however, the disclosure serves to undermine the messenger and distract from the issues.

I asked Jesse why he thought such disclosures played such a central role. After all, Eliot Spitzer forced investment banks to disclose when they have a business relationship with the companies their analysts are rating – and all those disclosures are greeted with an enormous yawn, and generally ignored.

The answer, said Jesse, is that there’s a world of difference between a disclosure that you’re long and a disclosure that you’re short. Investment-banking analysts tend to be biased to the long side: the corporate clients that the bank wants to attract are the same companies that the analysts are rating. Short-sellers, of course, are biased to the short side: since they’re short the stock, they want it to go down whether it deserves to fall or not.

Now for some reason shorting "provokes a visceral reaction" – that’s how Jesse puts it, anyway. It seems somehow un-American, and short-sellers are never treated as heroes in the way that other successful capitalists are. Indeed, they’re often vilified.

It’s silly, of course. If you want to buy a stock, you’re going to have a huge amount of difficulty doing so unless you can find someone willing to sell it to you. That person might not be selling short, but the effect of the sale on the stock price is the same either way. You can’t have buyers without sellers, and any market requires both in equal numbers.

But it’s worth noting that the media are at fault here too. Yes, as Jesse, says, they properly disclose the fact that hedge-fund managers criticizing a company tend to be short that company. But they don’t generally bother with repeating the disclosures found in analysts’ reports, that the investment bank in question makes a lot of money by serving the company in question. If they did, perhaps the public would start treating longs with as much suspicion as they do shorts. And that would be a good thing.

Posted in stocks | Comments Off on Disclosures: The Long/Short Dual Standard

ExpressJet’s Cashflows, Part 2

Posted on May 12, 2008 by Felix

I spoke to ExpressJet’s investor-relations chief Kristy Nicholas today, in the wake of my blog entry last week about the company. She helped clarify a couple of issues:

Firstly, the 100% holdback on credit-card income isn’t nearly as damaging to ExpressJet as an increase to 50% was to Frontier. ExpressJet says it’s likely to have $18 million tied up in credit-card holdbacks on any given day in 2008; that’s not chump change, but it’s still only about 1% of the company’s 2007 revenue of $1.7 billion. Most of ExpressJet’s business is contract flying, mainly for Continental, and none of that business is affected by holdbacks.

Secondly, all of ExpressJet’s auction-rate securities are backed by student loans, and they’re all triple-A rated, for what that’s worth. The company did take an $8.7 million charge against its portfolio of auction-rate securities, because when it asked some investment banks to bid on its portfolio, that was the number that came back. But so far ExpressJet has not realized any losses on its $65 million ARS portfolio, and Nicholas said that she’s started to see "a little bit of traction in the last week or two," with some auctions starting to succeed again.

In the meantime, the student-loan-backed ARSs are paying very high rates of interest, on the order of 18-20%, in stark contrast to some municipal ARSs which have much lower maximum interest rates. As and when the auctions start clearing again, ExpressJet will of course sell (or not roll over) its holdings. But so long as the market remains locked up, the company is getting a healthy income on its unfortunately-illiquid investment.

None of this means that ExpressJet is out of the woods, by any means. My personal feeling is that the share price is being held up by takeover hopes more than anything else, and that the credit-card companies have good reason to be very worried about ExpressJet’s counterparty risk. But give Nicholas points for imaginative spin, at least: "You hope to see your holdback percentage go up," she told me, "because that means you’re selling more tickets." Nice try.

Posted in stocks | Comments Off on ExpressJet’s Cashflows, Part 2

Has Tim Geithner Been Captured by Wall Street?

Posted on May 12, 2008 by Felix

Gary Weiss has a long profile of Tim Geithner in the June issue of Portfolio, and although he does give Geithner’s side of the story, he gives a lot of space to some very harsh criticisms of the New York Fed chief.

In a nutshell, Weiss accuses Geither of having been captured by those he would regulate, and of working for Wall Street rather than Main Street, especially when he helped to orchestrate the acquisition of Bear Stearns by JP Morgan:

It has become something of a Wall Street parlor game to try to figure out why Geithner got as involved as he did in the Bear mess and whether he was had by crafty bankers. Geithner insists that the Bear deal benefited the public and not just the other big banks, who stood to gain from their competitor’s going out of business…

Questions linger as to whether Geithner, who’s supposed to represent the public interest, ended up with the best possible deal. He’s an experienced negotiator, having wrangled with foreign powers during his days at Treasury, but some critics contend that he may have been outmatched by Jamie Dimon, J.P. Morgan’s chief executive, and Alan Schwartz, Bear’s C.E.O.

"Misgivings about the deal," says Weiss,

"are hard to ignore". Maybe so – but I think it’s also easy to overstate the case that Geithner should have stood up more to Wall Street.

Weiss does a reasonably good job of laying out the first best defense against such accusations – that the risks of doing nothing were so enormous that Geithner was forced to act. Once you’ve accepted that, everything else is niggling: did the Fed use too much of its own balance sheet? Could Geithner have designed a different kind of bailout? The answers to those questions are unknowable, and in any case don’t change the fact that Geithner averted something which could have been truly disastrous.

But the fact is that the accusations themselves are a little incoherent. In what way could Geithner have been "outmatched" by Alan Schwartz, when he forced Bear Stearns to be sold for a peppercorn, wiping out its executives’ enormous equity holdings? If anybody was bailed out, it was Bear’s bondholders and its counterparties, not its executives.

And I think it’s simply false to say that Bear Stearns’ competitors "stood to gain" from Bear going out of business: the collapse of one investment bank is bad news for all of the others, since it forces a 360-degree reevaluation of counterparty risk. Weiss makes great play of the fact that Geithner is heavily influenced by Goldman alumni such as Gerry Corrigan and John Thain (not to mention Hank Paulson) – but the biggest winner in the Bear Stearns deal was Jamie Dimon. And a victorious JP Morgan is a much bigger competitive threat to Goldman Sachs and Merrill Lynch than Bear Stearns ever was.

Weiss is right that the New York Fed is a creature of Wall Street, but that’s what it’s meant to be. If you want a sense of perspective, and you’re worried that Wall Street has too much influence over the Fed, then you should be looking not to Geithner to rectify that state of affairs but rather to Ben Bernanke – a man whose name, tellingly, appears only in passing in Weiss’s piece.

Posted in regulation | Comments Off on Has Tim Geithner Been Captured by Wall Street?

Barry Diller: Not Dead Yet

Posted on May 12, 2008 by Felix

Duff McDonald has a piece on Barry Diller in the June issue of Portfolio. I asked him what he thought of the mogul, after following him through a long and painful trial with John Malone. It seems there might yet be life in the old dog yet:

FS: Barry Diller might have won the court battle with John Malone, but he’s also conceded defeat on a big-picture level: he’s breaking up his company, IAC, into five pieces, of which he will control only one. Is this the end of Barry Diller, new-media mogul?

DM: Not yet. If he gets his way, he’s actually shaking off all the non-new-media assets, such as HSN, Interval, and Ticketmaster, as well as the albatross LendingTree. What’s left? All new media. So it’s not the end. But it’s pretty much his last shot at new media glory. If this one doesn’t take, then he will go down with a new media track record like many others: smart enough to catch the first wave and at a serious loss for good ideas since. Even the guys from Pets.com could say something like that.

FS: Diller’s already decided to reinvent ask.com as a niche site targeted at middle-aged women, and his new-media future seems wan. What has happened to the aggressive and charismatic dealmaker of old? Why is he giving up valuable properties which he might otherwise be able to sell as part of an attempt to catch the next wave? After reading your article, it certainly seems as though Diller is on his back foot — and that’s without a possible appeal from John Malone of the legal decision which presently sits in Diller’s favor. Also, Diller’s 66 years old, and has made more money than he’ll ever be able to spend. Does he still have the fire or the hunger to go on the offensive and fight to build something great again?

DM: They talked about people calling Ask a niche site, and pointed to the $$ it brings in. I’m not sure conceding defeat to Google is an indication of failure. It is an indication that you are everyone who isn’t Google. And he’s not "giving up" the other properties. He’s loading them with debt and spinning them off, keeping the cash with so-called "new IAC." So he’s milking them one last time, capitalizing them like their peers, and stocking new IAC’s war chest with coin. And then he’s going to try and be a content provider of Web 2.0 and beyond. You’re right, there’s no clear path here, and no reason to think he’ll succeed, save for the fact that he has done so before. Would I buy the stock? Probably not. Would I short it? Definitely not. So while I think there are better ways to take a bet on the web, I certainly wouldn’t bet against him. Perhaps that’s the point of the piece. Despite all odds, he’s still here. And doesn’t seem to be slowing down. (Seriously. He doesn’t.)

Posted in Media | Comments Off on Barry Diller: Not Dead Yet

Beware Skidmarks

Posted on May 12, 2008 by Felix

A pair of sentences I’m sure Dan Ariely never thought he’d write (they appear in a blog entry about the uses of branding):

I can’t just try to make myself feel better by imagining that I’m wearing Ferrari underwear. I have to actually wear them in order to make myself feel better.

Posted in intellectual property | 1 Comment

False Positives at Blogger

Posted on May 12, 2008 by Felix

What’s going on with Blogger? Both Yves Smith and Brad DeLong have run into problems of late, and I have a nasty feeling that it’s an unloved orphan stepchild within Google, and that it’s likely to continue to deteriorate further and lose market share to nicer, cleaner, friendlier alternatives like WordPress and Tumblr.

At the end of April, Naked Capitalism had some nasty tech woes: Google/Blogger determined somehow that the blog was a spam blog, prevented Yves Smith from posting any new entries, and made it very difficult for her to persuade them in a timely fashion that the blog was for real. The weirdness there was twofold: on the one hand Google owns Feedburner, and the number of Feedburner subscriptions alone should have been an indication that the blog was not spam. And what’s more, Google was happy keeping the site up; it merely prevented the posting of any new entries. If the blog was spam, it’s far from clear what such actions would achieve.

Now, Brad DeLong is being prevented from even viewing Abu Muqawama, on the grounds that he "looks similar to automated requests from a computer virus or spyware application". (Maybe he hadn’t had enough of his morning coffee that day, or maybe he’d had too much?)

False positives are always a problem in any attempt to fight spambots and viruses and the like, but the Blogger/Google response seems far too heavy-handed to me. It’s increasingly hard to prove you’re a human these days, but they shouldn’t make it impossible.

For what it’s worth, this is the official statement I got from a Google spokesperson when I asked them about Yves Smith’s Blogger troubles:

We think blog spam is a serious problem and we have spam detection software to try to eliminate it. We’re aware that false-positive matches sometimes happen, and when they do, we have a process in place so that we can quickly review a blog that has been marked as spam. If we determine that the blog is not spam, we work to quickly restore the blog. We’re always innovating to improve our products and services and are working on making this process even better in the future.

As for FeedBurner, we have a lot of ideas for how to incorporate other content authority signals into blog spam detection, but we don’t have anything specific to announce at this time.

I guess it’s inevitable that when a company grows to be as big as Google now is, it will revert to this kind of overlawyered corporate-speak. Is that evil? Maybe not, but it’s a step in the wrong direction.

Posted in technology | Comments Off on False Positives at Blogger

Why Citi Can’t Be a Global Universal Bank

Posted on May 12, 2008 by Felix

Vikram Pandit still needs to do some work on the Vision Thing, I think. His big idea, as unveiled on Friday? Citigroup is – wait for it – a "global universal bank". At this point, he’s perilously close to a tautology masquerading as a strategy.

"Global universal bank," as a concept, is not entirely meaningless, however. It’s just impossible to achieve.

A universal bank is a soup-to-nuts operation, something which provides banking services to everybody from cash-poor individuals to huge multinational corporations. And there are a few national universal banks: Deutsche Bank in Germany, for instance, or UBS in Switzerland. Even Citigroup can be considered a national universal bank in Mexico.

But in the US, there aren’t any universal banks. If you just got back from the Berkshire Hathaway AGM, for instance, you might have noticed that there is no Citibank in Omaha. Look down the ten largest corporations in the US, according to Fortune, and one of them is Citi; of the other nine, four are in places without a Citibank. And that’s not just because some of them are based in obscure places like Bentonville, Arkansas; huge cities like Detroit and Seattle have no Citibank.

If you can’t even be a universal bank in the US, it’s a bit silly to suppose that you can be a universal bank globally. Besides, Pandit is considering selling off Citibank Germany – how can you be a global universal bank without retail operations in Germany? But then again, Citibank doesn’t even have much in the way of a retail presence in the UK, either: it never seems to be able to make up its mind whether it actually wants to do retail banking in much of the world. Poland, yes; Mexico, yes – but those two were by acquisition. And when Citi did have a strong organically-grown local presence, like it did in Paraguay, it sold most of its branches to ABN Amro.

In order to come close to being a global universal bank, Citi would have to grow a lot – probably by an order of magnitude. And long before it got there, its regulators would step in to stop it getting any bigger. But in any case, it’s shrinking. It needs to work out what it’s going to concentrate on, and do that very well. And deciding that it wants to be a "global universal bank" is not a useful way of doing that.

Update: A couple of good comments over at Seeking Alpha. First this, from Syndicat:

Citi is not even a statewide institution. In 2006 Citi sold its upstate banks to M&T, effectively leaving Buffalo and Rochester, the #2 and #3 cities in New York State.

And then this from Corossis:

I don’t think you need to be in every big US city to be considered ‘universal’. To me, it just means that you have enough retail operations to be substantially consumer deposit-funded.

If Corossis is right, then a universal bank is basically just a corporate bank with a relatively low-cost funding base of checking accounts. Try telling that to HSBC.

Posted in banking | Comments Off on Why Citi Can’t Be a Global Universal Bank

Blogonomics: FT Alphaville

Posted on May 11, 2008 by Felix

FT Alphaville is hiring, and I took the opportunity to ask its fearless leader, Paul Murphy, a few questions about the FT’s flagship blog operation and the way that bloggers are treated at the pink ‘un. Here are his answers:

How big is the Alphaville team?

Currently four, of which three are in London (myself, Sam Jones, Helen Thomas) and one in Tokyo (Gwen Robinson, who is primarily concerned with putting together our 6am Cut email). Beyond that we pull Neil Hume in each day from the FT’s market reporting team to produce Markets Live. We also have occasional stints from Stacy-Marie Ishmael, for which we are very grateful. She’s currently blogging from Trinidad & Tobago, giving us content during the latter part of the US working day.

The near/medium term ambition is to double the regular size of the team — adding to it not only in London, but also developing coverage out of NY and HK.

How many of the Alphaville bloggers had a blog before they joined

Alphaville? How much of an advantage would someone applying for this

job have if they already had a vaguely financial blog, compared to

someone who didn’t?

Both Stacy-Marie and Sam Jones blogged independently before joining. Helen was an FT.com staff reporter, Gwen an editor from the Comment pages — while I was a complete newcomer to all things web-ish. (The Guardian, where i was financial editor, is only now trying to integrate its web and paper operations.)

The advantage of having previous experience as a blogger? Huge. Getting people to drop the journalistic straightjacket of newspaper reporting is the first challenge. Getting writers to understand that they are part of a conversation, that they can be light and funny, and short and quick, and all the usual cliches. It is important to remember here that the whole idea of professional blogging is much less advanced in the UK than in the US. So we don’t expect new hirings to have experience — but we do expect them to understand the genre.

Does the job pay the same as an equivalently-qualified FT reporter?

Yes, the same as a regular FT reporter, depending on age/experience/skills etc. At the FT we do not draw any division between newspaper and online work. If anything, the premium lies with those on the blogging / interactive side because of the relative rarity of the skills.

Posted in blogonomics | Comments Off on Blogonomics: FT Alphaville