The Greenspan Defense

Have you had enough Alan Greenspan yet? Just in case his interview with Greg Ip today isn’t enough for you, I should also point out his 1,638-word "response to my critics" over at Martin Wolf’s FT.com forum. There are some reasonable points in there, and some unreasonable ones too:

Some argue that adjustable rate mortgage (ARM) originations fueled the bubble. Yet the ARM’s share of total originations is a very weak forecaster of home prices, implying ARMs, although a source of cheap financing, are not a determinant of home prices. If ARMs were not available from 2001 to 2004, home purchases presumably would have been financed with long term debt, which was also very affordable.

This is just another way of saying that low interest rates don’t cause housing bubbles, and it’s silly on its face. ARMs, in terms of monthly mortgage payments, were significantly cheaper than long-term debt – and, more to the point, they were generallyl available to subprime borrowers who wouldn’t never have taken out a long-term mortgage of that magnitude. Borrowers almost never took out mortgages with the intention of defaulting: they needed to think that they could make their monthly payments.

With ARMs, subprime borrowers could make relatively low interest payments for the first one, two, or three years. If they had been forced to take out a 30-year mortgage instead, they could never have made the higher initial interest payments: remember that the yield curve back between 2001 and 2004 was still steep enough that there was a significant difference between 30-year interest rates and 1-year interest rates.

You can get to the same place in a different way, by looking at the magnitude of declines in the housing market. The biggest drops aren’t where house prices rose the most, as you might expect if this was a simple case of a bubble popping. Rather, they’re where there were the most subprime originations. There were no subprime borrowers in Manhattan? The bubble’s still inflating there. House-price purchases were overwhelmingly made by subprime borrowers in California’s Inland Empire? That’s where the price declines have been harshest.

So when Greenspan says he’s not at fault because there were housing bubbles elsewhere in the world as well, he’s missing the point that those bubbles haven’t burst – not in nearly as harmful a manner as the US bubble, anyway. And the reason is that there might have been a housing bubble, but there wasn’t a subprime bubble.

Even if Greenspan’s not responsible for the housing bubble, then, it is fair to blame his low overnight interest rates (if not him personally) for the subprime bubble which was fueled by the fact that subprime borrowers invariably borrowed short on a long-term mortgage.

Still, you can see how Greenspan gets aggrieved by his critics. Just look at how Willem Buiter lays into him in the comments:

By overselling, at home and all over the world, the virtues of American-style transactions-based financial capitalism and light-touch regulation, Mr. Greenspan has done more to harm the cause of decentralised, competitive market-based financial systems based on private ownership, than even Charles Ponzi.

Alan Greenspan’s period as Chairman of the Board of Governors of the Federal Reserve System represents to me the nadir of central banking in advanced economic-financial systems during modern times. While monetary policy was only mildly incompetent, the regulatory failures were horrendous. The US and the world economy will pay the price for Mr Greenspan’s misjudgements and errors for years, perhaps decades, to come.

Yikes!

Posted in fiscal and monetary policy | Comments Off on The Greenspan Defense

Extra Credit, Tuesday Edition

Jobless Rates by Education: Stay In School!

Machiavelli meets the Big Apple:

Ten reasons NYC’s congestion pricing plan went belly up.

I Cahn’t (turn Motorola around)

My Experiment With Incentives: Mike Moffatt used incentives to lose weight. And MSF still gets a donation!

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Which Taleb is Right?

Pablo Triana today wades back in to the Black-Scholes debate, and takes aim at Michael Lewis:

Black-Scholes has been blamed in certain quarters for the subprime crisis. Essentially, the argument is that those blinded by the dictates of the model took too many risks too eagerly (and cheaply)…

In fact, Black-Scholes may not be used that much in the markets to begin with. New research by veteran traders and best-selling authors Nassim Taleb and Espen Haug points in that direction. Clearly, a formula that isn’t used can’t have much of an effect on markets, let alone cause the massacre that began last summer.

This is much the same point as I was making after the Lewis piece came out. But in a comment on that blog entry, Nassim Taleb himself sides with Lewis. So who’s right? Triana’s view of what Taleb is saying, or Taleb’s own view of what Taleb is saying?

I think there might be less conflict here than meets the eye. Taleb’s defense of Lewis’s thesis is basically that Lewis uses the term "Black Scholes" not to refer to the Black-Scholes theorem itself, but rather to portfolio theory more generally, and the CAPM model as a whole. In the narrow sense, then, Triana’s Taleb is right. And in the broader sense, I think that Taleb and Lewis have a bit of work to do if they’re to persuade me that CAPM (and, by extension, Black Scholes) is to blame for the housing bubble, the subprime crisis, and the present credit crunch.

The way I see it, the debt bubble was much more the result of an old-fashioned search for yield than it was the result of a new-fangled search for "alpha". Did bankers and investors fool themselves by plugging low volatility numbers into their models in order to boost their risk-adjusted returns? Undoubtedly. But the connection between those models, on the one hand, and Black-Scholes, on the other, is tenuous at best, as Triana shows. After all, CAPM has been around a long time; it can’t have been that disastrous, given the amount that markets have risen over the course of its existence.

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Credit Card Datapoint of the Day

Visa is truly the global leader in credit cards. It has a market capitalization of $50 billion, and has a total transaction volume of $3.5 trillion per year: it’s worth about 1.4 cents per dollar transacted annually.

Diners Club (remember them?) was just sold by Citigroup for $165 million; it has a transaction volume of $30 billion per year. Which works out at 0.55 cents per dollar transacted annually. Or, to put it another way, Diners Club has 0.86% of Visa’s volume, and only 0.33% of its value.

All of which speaks volumes about Citi’s abilities in the credit-card space. Diners Club more or less invented the credit card, in 1950, and has been part of Citi since 1981. Everybody knows that Citi is good at coming unstuck in investment banking and structured products; it seems that Citi’s not so hot at consumer products either.

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Why it Makes Sense to Give the Fed More Regulatory Powers

Bethany McLean makes a seemingly salient point in the latest Fortune: a year ago, in the Bloomberg-Schumer report, Chuck Schumer was saying that there was too much regulatory red tape on Wall Street. Today, he seems to support Hank Paulson’s attempts to beef up the Fed’s regulatory powers.

In reality, however, there’s no contradiction there. The problem as diagnosed in the Bloomberg-Schumer report was not that regulation was too heavy-handed, but rather that there were too many regulators. If anything, the Paulson plan is entirely in line with the Bloomberg-Schumer plan: make it obvious who the regulator is, and give that regulator broad authority to make sure that financial institutions do what’s right rather than just what fits in the letter of the law. The main difference between now and then, as I see it, is that now there’s a move to increase the number of financial institutions which fall under the Fed’s regulatory umbrella: if you regulate only banks, then you leave unregulated the much larger "shadow banking system", with potentially disastrous effects.

The downside to this idea, as glossed by Alan Greenspan in his interview with Greg Ip today, is that "shady operations could portray their Fed-regulated status as a seal of approval, giving them unearned credibility with customers." I’m far from convinced. Given the amount of harm that the shadow banking system can do, it’s foolish to leave it unregulated on the grounds that people might otherwise trust it more. I mean, it’s not like nobody trusts Goldman Sachs or Pimco, yet both of them are pretty largely unregulated at the moment.

McLean, cheered on by Alan Meckler, also takes the opportunity to bash Sarbanes-Oxley. It "was enacted to restore investor confidence after little hiccups like Enron and WorldCom," she writes. "But the authors missed the bigger problem." Well, yes, but Sarbox wasn’t designed to deal with systemic risks, it was designed to deal with what happens when public companies turn out to be run by criminals.

Where McLean performs a very useful service is in going back to the Bloomberg-Schumer report and noting how blasé it was about the very things which ended up bringing the financial system to its knees. She notes that the authors

…completely missed the opportunity to think critically about where innovation might have gotten ahead of regulation. In today’s harsh light, their blithe attitude seems astonishing. For instance, McKinsey wrote that over-the-counter derivatives "help foster the kind of continuous innovation that contributes heavily to financial services leadership." (Tell that to Bear Stearns.) McKinsey also complained that higher capital requirements for U.S. banks would put them at a "competitive disadvantage." (Hello, Citigroup!)

Who got this kind of thing right? Well, Tim Geithner of the New York Fed, for one. It seems to me that if we’d given him and his Fed colleagues a bit more power earlier on, some (if not all) of the present crisis might have been avoided.

(HT: Wiesenthal)

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The Most Depressing Headline of the Day

Congestion Pricing Plan Is Dead, Assembly Speaker Says

I hope Shelly Silver finds it impossible to show his face in his own district from here on in.

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The Plunging Schwab Bond Funds

As you might have heard, the largest bond fund at Charles Schwab, YieldPlus, is plunging in price. Suffering from massive redemptions, of the vast majority of its assets, it was forced to sell illiquid mortgage-backed securities at distressed fire-sale prices. As a result, the fund cratered from $8.79 at the end of February to $7.17 at the end of March – a fall of more than 18% in one month – and is now trading at just $6.85. That’s a really nasty year-to-date loss of 24% for an ultrashort bond fund which opened the year at $9.01 a share. Here’s what it was meant to do:

Investment Goal and Strategy

Seeks to provide a higher yield, with a higher related risk, than a money market fund, and relatively less risk than a longer-term bond fund.

That’s the kind of fund where you get angry if it breaks the buck: you expect a bit more volatility than in a money market fund, but you don’t expect to lose money outright. And you certainly don’t expect to lose a quarter of your investment.

But what we’re seeing here is, essentially, a run on the bank; if a fund holds illiquid securities in the present market and is forced to sell them, then one can understand how such losses could appear. More puzzling is the drop in Schwab’s Short-Term Bond Market Fund, which, spokesman David Weiskopf tells me, has not been suffering from net redemptions. But it, too, is down sharply, for a fund which is really never meant to fall much in value: it ended February at $10 a share, and ended March at $9.60; it’s since slipped further to $9.51.

The two funds are very different. YieldPlus has much more credit, and much shorter duration; the Short-Term fund, by contrast, is mainly invested in Treasuries and invests in bonds maturing as far out as five years from now.

Nevertheless, the problem, according to Weiskopf, is that there was some overlap in the securities held by the two funds; they were managed by the same person. When YieldPlus was forced to sell its illiquid holdings, the Short-Term fund had to mark to those distressed sales. In other words, the fall in the price of the Short-Term fund reflects unrealized losses, while the fall in the price of the YieldPlus fund reflects realized losses.

Weiskopf tells me that Schwab is working furiously on getting its quarter-end figures together in the next few days, at which point it will be able to release accurate figures on redemptions in the two funds. But given that the redemptions in YieldPlus must stop at some point, if only because there’s precious little left in the fund to redeem, then eventually the Short-Term fund will start marking not to distressed sales but rather to the normal market again.

So if you own shares in the Short-Term Bond Market Fund, it might well be seeing something of a bottom right now, and could bounce back once the selling over at YieldPlus abates. On the other hand, if redemptions start hitting the Short-Term fund as well, then it too could suffer the fate of YieldPlus and go much lower than it is right now. Either way, neither of these two funds is behaving remotely like the safe haven that one expects short-term bond funds to be. And I’m not at all surprised that Schwab is facing class-action suits right now.

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Housing Datapoint of the Day, Schadenfreude Edition

The Mortgage Bankers Association is having difficulties with its mortgage.

(Via Campbell)

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Will Banks Ever Promote Financial Wellness?

There are very few things more stressful than money, whether you don’t have it or whether you do. Money problems destroy relationships every day, and I’m sure that all of my readers can think of quite a few people off the top of their heads who have an incredibly dysfunctional relationship with money and simply don’t or can’t think straight when dollars are involved.

The financial services industry generally does very well by such people. For one thing, they’re the biggest source of profit for consumer-credit companies in general and for credit-card companies in particular. Almost everybody carrying a significant balance on credit cards would be better off with some other kind of debt, and has ended up in their situation largely because they don’t or won’t address their financial problems directly.

With investments, there’s no shortage of brokerages falling over each other to encourage individuals to buy individual stocks, to buy way too many high-fee mutual funds, and to trade in and out of all these things whenever the fancy takes. Naturally, the big winner here, once again, is the financial-services industry rather than the individual in question.

And when it comes to estate planning, many people spend enormous amounts of money and effort desperately trying to structure their bequests so that some predictably profligate heir doesn’t just spend it all at once, with the effect that the inheritance ends up causing more harm than good.

All of these cases have one thing in common, and that’s what the financial services industry is not doing, when it comes to people being, well, human. Amanda Clayman has what she calls "a new model for financial planning":

In clinical work you’re trained never to attack a client’s defense mechanism until you understand what it’s defending. So if, for example, someone is in denial you don’t open with, “Hey! Looks like you’re in denial!” That wouldn’t change the defense and it would probably cost you the client.

In traditional financial planning there is an almost exclusive focus on problem solving. This makes sense – what you’re “buying” is the solution. But the problem solving approach is in some cases the equivalent of attacking the defense mechanism. For those whom financial responsibility is wrapped up in a complex cocoon of emotions, it is impossible to get to the solution until the issues have been unpacked and the resistance reduced.

It’s probably too much to hope that credit card companies will start teaching people how to get a grip on their spending. But I see a gap in the private-banking market, for starters, where one of the most common refrains that bankers hear is related to worries that one’s children will grow up spoiled by money.

Warren Buffett famously intends to leave his heirs "enough money so they can do anything but not enough to do nothing". Which sounds all well and good in theory, until you stop and try to work out exactly how much money that is. In the real world, adjusting the amount of money that you leave your heirs will have precious little effect on how they do or don’t let that money influence the way they live their lives. Rather than trying to precisely calibrate some optimal sum, it would be better to make sure they have a healthy attitude towards money – one in which money is respected, understood, and not feared, and one in which they have really internalized the concept of opportunity cost.

Clayman is writing a book which will help people develop that kind of healthy attitude to money; if people like her started getting jobs at private banks, and were made available to clients for consultations and financial-therapy sessions, that might well be a compelling selling point in what is now a very competitive marketplace for high net worth individuals. And once the rich started availing themselves of such services, perhaps more of the middle classes and the poor might follow suit, with or without the help of non-profits who work in such areas.

But I’m not holding my breath: the financial services industry as a whole has a lot to lose and little to gain from promoting such financial literacy. I’m mildly encouraged by the fact that Citi has hired Jonathan Clements to help educate its "emerging affluent" customers, but I fear he’ll mainly be preaching to the converted. It’s not easy for financial institutions to talk to people who don’t like to talk about money, and it’ll be interesting to see how hard Citi tries to do so.

Posted in personal finance | Comments Off on Will Banks Ever Promote Financial Wellness?

Extra Credit, Monday Edition

A Pro-Foreclosure Bill: The problems with the Senate’s housing bill.

The euro’s rivalry of the dollar does not depend on tipping: Jeff Frankel on why the Fed should be worried.

Fooling Some of the People All of the Time: A Long Short Story: David Einhorn’s latest weapon in his short-selling campaign against Allied Capital? A book.

A RMB that isn’t appreciating cannot be killing you: RMBEUR is just as important as RMBUSD, for Chinese companies trading with Europe. And the yuan isn’t rising against the euro.

Just how much money do sovereign wealth funds have?: The Setser take.

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

Why Microsoft Will Buy Yahoo, A Picture Speaks A Thousand Words Department

07-yang-ballmer-large.jpg

(Via Jack Flack; photo by Jason Lee/Reuters/Landov)

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Eyeball Datapoint of the Day

Did you know that there was a $45 billion eyecare company called Alcon? I had no idea, until I saw that a controlling stake in it was being sold by one big Swiss company to another big Swiss company. On a financial level, it surprises me that shareholders don’t have tagalong rights in this deal – do such things not exist in Switzerland? (Of course, since the sale price is significantly lower than the share price, they’d be unlikely to exercise those rights, but still.)

And on a valuation level, let’s say that the population of the world is 6.6 billion, and let’s exclude the "bottom billion" for the time being as people who are never going to avail themselves of Alcon’s products. That leaves 5.5 billion people, with 11 billion eyeballs between them. Which would mean that Alcon is valued at over $4 per global eyeball. Nice.

Posted in M&A | Comments Off on Eyeball Datapoint of the Day

Why JP Morgan Asked for a Fed Exemption

If JP Morgan Chase was so confident that it will "remain well capitalized" in the wake of the Bear Stearns acquisition, why did it go to the extraordinary length of asking the Fed to exempt it (or at least $400 billion of its newly-acquired assets) from perfectly normal capital-adequacy guidelines? I think maybe part of the answer comes today, with news that Washington Mutual is getting a $5 billion cash infusion from TPG:

WaMu’s latest plan would likely eliminate, at least for now, the potential that the thrift will be acquired by J.P. Morgan Chase & Co. or another large financial institution. J.P. Morgan executives have been poring over WaMu’s books since March and made a preliminary offer, but discussions between the two firms ground to a halt last week, according to a person familiar with the situation.

Clearly talks between JPM and WaMu have been going on since before JPM was asked to gallop to Bear’s rescue – and it would make sense that Jamie Dimon, who held all the aces in the Bear negotiation, would want to be able to have his cake (Bear Stearns) and eat it too (WaMu).

Still, I’m not a fan of this exemption. Probably the Fed had little choice but to grant it, and if you are going to make such exemptions then the one time you could conceivably justify it is during a time of extreme market stress when you’re busy trying to prevent a systemic meltdown. But when you’re dealing with one of the three US commercial-banking behemoths (BofA, Citi, JPMC), the capital-adequacy requirements are crucial, because the moral hazard considerations are always front-and-center.

It’s more or less inconceivable that the Fed would ever allow any of those institutions to default on their debt – which means that there’s trillions of dollars’ worth of obligations outstanding from those three banks alone which carry an implicit US government guarantee. In that situation, it makes sense for capital requirements to be policed much more stringently at JPMC than they are normally – rather than happily loosening them, as happened here.

(HT: Alea)

Posted in banking | 1 Comment

Blogonomics: Breaking News

I’m glad that Jeff Bercovici has fisked the NYT’s silly article on the hazards of blogging, because it means I don’t have to. Instead, I can look past the idiotic central thesis to one of the pieces of supporting evidence:

One of the most competitive categories is blogs about technology developments and news. They are in a vicious 24-hour competition to break company news, reveal new products and expose corporate gaffes…

Speed can be of the essence. If a blogger is beaten by a millisecond, someone else’s post on the subject will bring in the audience, the links and the bigger share of the ad revenue.

I used to work at a newswire, where people really did care when a rival wire beat us by a few seconds. In the financial newswire business, there really is a small number of traders who can make a large amount of money by getting the news just slightly faster than the next guy. But in the blogging world, that simply isn’t the case. It doesn’t make the slightest bit of difference if you’re "beaten by a millisecond," or even if you’re beaten by five minutes. Given the speed with which RSS readers refresh, or the frequency with which sites are crawled by Google News, or the avidity with which even the most zealous blog reader will refresh his favorite blogs’ home pages, a few minutes here or there makes essentially no difference.

Now there are a lot of very competitive guys in the tech-blogging space. Brian Lam, the editor of Gizmodo, even shares with Jason Calacanis, the co-founder of Engadget, a passion for martial arts and for using fights as a metaphor for blogging.

He said he was well equipped for the torture; he used to be a Thai-style boxer.

“I’ve got a background getting punched in the face,” he said. “That’s why I’m good at this job.”

In such a competitive hothouse, it’s entirely predictable that bloggers will care about who got what first. But that doesn’t mean that anybody else will really care – and it certainly doesn’t mean that someone who was a few seconds faster will get the greater number of pageviews. If a big-name blog gets a genuine scoop, that will certainly garner pageviews. But when many different blogs are all presenting more or less the same information at more or less the same time, more or less independently? Then the who-gets-there-first game is pretty much irrelevant, as far as audience-and-links-and-ad-revenue is concerned.

One of the interesting things about the internet as a news medium is that although it’s certainly faster-paced than, say, a daily newspaper, it’s actually significantly slower than television, let alone newswires. As someone without a television, I feel this every time there’s a Fed meeting: while the news of the rate cut, and of the market’s reaction, is pretty much instantaneous on TV, there’s generally a small but significant delay before the rate-cut news appears online, and it’s usually a good 15 minutes before someone armed only with an internet connection can tell how the market reacted.

That said, speed is nearly always overrated, even in the world of newswires. Consider the case of a piece of news which moves the market: wouldn’t you want access to that news a couple of seconds before the other guy? Well, yes, but only if the other guy not only doesn’t know what the news is, but also doesn’t know that there is any news. If there’s a scheduled news event, like an FOMC meeting or an earnings release, then getting to the news a second early doesn’t really help you, since no one is going to trade on the old information when they know that new information is coming any second.

In order to make money from getting news early, then, you need to be completely on the ball, glued to your screen; you need to recognize a market-moving headline when you see it; you need to know exactly which way the market’s going to move (which isn’t always obvious); and you need to be able to hit any open bids or offers very quickly before they get pulled. Yes, it’s possible to make money that way. But it’s not something which happens very often. A good trader generally doesn’t make money from having information that other traders lack; he makes money from trading that information in the knowledge that everybody else has it too.

So when someone tells you about the enormous pressure that bloggers are under to Get There First, just remember that such pressure is entirely self-imposed, and serves very little purpose. There are lots of blogs which do very well out of Getting There Second: Gothamist is a good example. Me, I like to get there the same day, and when something’s more than a couple of days old I often think twice before blogging it. But it’s not something I’m going to have a heart attack over.

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The Hedge Fund Atop a Modeling Agency

According to a study by Stanford psychologist Brian Knutson,

When young men were shown erotic pictures, they were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler.

Which leads to a question from Tyler Cowen:

One question — and perhaps a more direct test of the hypothesis — is whether traders in more sexually integrated firms do in fact behave differently. Or how about companies located next to modeling agencies? I suspect in real social settings the effect washes out, for reasons identified by Freud (among others) some time ago.

As it happens, I have a datapoint when it comes to hedge funds located in the same building as a modeling agency: Gramercy Advisors. It was started as a very small operation by a young trader called Marc Helie, who took some office space above the Elite modeling agency in Gramercy Park. Helie made more noise than money, and was eventually forced out of Gramercy by his partners, who then relocated to Greenwich and became much larger and more successful, while taking fewer risks.

Of course, it’s hard to demonstrate the direction of the causality here: did Helie rent space above Elite because he was a risk-loving dashing young man, or did he take big risks because he rented space above Elite? Either way, however, it was clear that when Helie left the firm, the headquarters would not remain in downtown Manhattan for long.

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A Masterpiece from Murakami

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I went to the Takashi Murakami show at the Brooklyn Museum last night, it’s well worth seeing. For me, the highlight is the painting above, 727-727, which unfortunately just doesn’t work very well in reproduction. In real life, it’s enormous — each of the three panels is 3 meters high (that’s 9’10”, for Americans).

Now Murakami has been painting (or getting his assistants to paint) very large paintings for a very long time, and many of his installations are significantly bigger than this: the scale of this piece is nothing new. But often the size of Murakami’s pieces works only to overwhelm, to bludgeon the viewer with sensory overload. In this case, Murakami creates a complex and stunningly beautiful ground of worked and reworked paint: he mounts his canvas on board, puts on a layer of acrylic paint, sands it down until there’s almost nothing left, puts on another layer, sands that down, and so on and so forth until the end result ends up looking like a cross between a Gerhard Richter squeegee work and an Andy Warhol oxidation painting.

The result isn’t incoherent from afar, as some Murakami paintings can be; instead, it’s one of those paintings which works perfectly at any distance from far across the room all the way up to right against the astonishing surface of the canvas.

The content of the painting could easily fill a very large catalogue essay, from the DOB mascot to the flattened and stylized wave forms and the carefully-applied drips at the right-hand edge: intellectually, this is a very complex work. But it also marks the point at which Murakami starts becoming a bit less conceptualist and more of a pure painter: the colors are gorgeous, the formal structure is extremely strong, and there’s a pitch-perfect interplay between the flattened areas of abstract color and the more representational elements. In short, I feel comfortable calling this a 21st Century masterpiece, maybe the first I’ve seen. And frankly I’m a little annoyed it’s wound up in the collection of Stevie Cohen; I hope and trust he’ll be lending it out a lot, since it really deserves to be on more or less permanent public view.

Posted in Not economics | 14 Comments

Extra Credit, Weekend Edition

The Most Liberal, Conservative, and Independents Sites in America, for Real

Change We Can Believe In: Good and bad currency design.

The Pressure is Building in Iceland

Countrywide Wants To Sell You a House: Many of Countrywide’s new mortgages are now being sold on homes they own through foreclosure.

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Blogonomics: Valleywag Pay Slashed

Jordan Golson can’t be happy: Nick Denton has cut the amount of money he gets per thousand pageviews to $6.50 from $9.75. That’s a 33% pay cut, on a per-pageview basis. What about on an absolute basis?

Well, the pageview rate is set on the basis of the previous quarter’s pageviews. Total Q4 pageviews were 9,132,723, while Q1 pageviews rose 34% to 12,234,604 . The 33% cut matches the 34% rise in pageviews, right? Er, no. If you’re making $6.50 per thousand pageviews, you need to get 50% more pageviews than you did at $9.75, just to keep your income flat. So the reduction in pageview rate is significantly harsher than the rise in pageviews, and there’s an extremely high probability that Valleywag’s writers will make quite a bit less money in Q2 than they did in Q1, even if they maintain the stellar present growth rates. That’s got to hurt.

If one wanted to be charitable to Nick Denton (and, really, who wants to be charitable to Nick Denton) one could say that the Q1 pageview rate built in much less growth than Valleywag ended up showing, and so he went over budget on his Valleywag salaries in Q1, and now he’s just trying to bring them back down to where they were always meant to be.

But the whole point of the pay-per-pageview system is that it incentivizes bloggers to maximize their pageviews. In reality, it seems, if they do that, they only end up being punished. Here’s Henry Farrell:

If employees provide full additional effort at time t, providing a nice bonus for both employer and employee, they have, in effect, revealed the maximum degree of effort that they are able to put into the work. The employer then has an incentive to lower the piecework rate at time t+1 so as to increase her share of overall revenues, while demanding that the employee continue at the previous rate, or be fired. A rational worker will therefore not make full effort at time t, figuring out that he will be screwed over later if he does.

Looks like the Valleywags are learning this lesson the hard way.

Update: I was rushing out of the office when I put up this blog entry on Friday afternoon, and didn’t make things quite as clear or precise as they might have been. So let me clear a few things up.

First, the number of pageviews which Denton actually pays for: it’s not the same as the number of pageviews that the site as a whole receives. But from looking at the stats page you can work out what it is, by adding up the pageviews for Nicholas Carlson, Jordan Golson, Paul Boutin, Jackson West, and Melissa Gira Grant. (Owen Thomas, as "site lead", doesn’t get paid per pageview.)

But the problem is that it’s hard to see how paid-for pageviews grew from Q4 to Q1, because the stats page only goes back to November, not to October. I can tell you what paid-for pageviews were in Q1 though: 4,525,939. Which means that Valleywag’s payroll for Q1 was $44,128, plus whatever Owen Thomas made, on the grounds that it’s safe to assume that all Valleywag’s writers earned out their advances every month.

I don’t know how that number compares with the equivalent figure for Q4, because we don’t know the detailed per-writer breakdown for October, and we also don’t know what the PVR was in Q4. But I think it’s reasonably safe to assume that the ratio between total pageviews and paid-for pageviews stayed roughly constant between Q4 and Q1. Which is why I used the increase in total pageviews to get a number for the growth rate from Q4 to Q1, of 34%.

I’d also like to be a bit more precise about the Q1 earnings of the top Valleywag bloggers, which I talked about on Tuesday. I was using just the top-line figures for Nicholas Carlson and Jordan Golson, but in fact they both appear twice in the list of bloggers. If you add up both of the times they appear, then Carlson received 952,158 pageviews in March and 2,151,840 pageviews in the quarter, for paychecks of $9,283 and $20,980 respectively. Golson received 570,782 pageviews in March, earning $5,565; his earnings reached $13,920 for the quarter, based on 1,427,718 pageviews.

So Carlson’s quarterly earnings averaged out at about $7,000 a month; Golson’s were more like $4,600. If these two writers increase their pageviews by 35% in Q2 compared to Q1, then Carlson’s pay will fall to about $6,300 per month, while Golson’s will fall to about $4,175. Those are significant pay cuts: maybe closer to 10% than 33%, but more than enough to change one’s standard of living for the worse. And remember, that’s assuming that Carlson and Golson increase their quarterly pageviews significantly from the record levels set in Q1. If pageviews simply remain steady at those record levels, then this really is a 33% pay cut.

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Jeff Koons Datapoint of the Day

The most expensive sculpture sold by a living at auction was Jeff Koons’s Hanging Heart, which sold for $23.6 million last year. It was also the most expensive artwork sold by a living artist at auction. The most expensive sculpture ever sold at auction was the Guennol lioness, which sold for $57.2 million last year. The most expensive artwork ever sold by a living artist was probably Jasper Johns’s False Start, which sold to Ken Griffin for $80 million in 2006.

All of which is just to set the scene for a monster $600 million sale of paintings and sculptures from the estate of Ileana Sonnabend. The datapoint which really jumped out at me:

Experts said the cache sold to GPS Partners included Jeff Koons’s 1986 sculpture “Rabbit”, which has been valued in excess of $80 million.

The Jeff Koons rabbit is worth in excess of $80 million?! That’s well over three times his own auction record, and obliterates anything seen in the post-Pop era, with the possible exception of the Damien Hirst skull. Truly the contemporary art bubble has not yet burst.

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Walking Away Without a Foreclosure

Remember youwalkaway.com? The idea there is that you stop making your mortgage payments but you can live in your house for 8 months or more before finally being evicted. Well now Barry Ritholtz has found a couple of articles, in BusinessWeek and the Chicago Tribune, which detail a much less rational behavior: homeowners moving out the minute they get their first nastygram from the bank, before the bank has even decided to foreclose.

What results is particularly gruesome, if the bank doesn’t decide to foreclose: an abandoned house with no obvious owner. But what I don’t understand is why the homeowners move out in the first place, if they don’t have to and nobody’s asking them to.

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Bear Stearns: Why the SEC isn’t to Blame

I’m not a big fan of Floyd Norris’s column today, in which he essentially blames regulators in general, and the SEC in particular, for "letting leverage get so far out of hand" that Bear Stearns collapsed.

We all know that there’s a big regulatory gap when it comes to investment banks – and that’s a gap which Tim Geithner, Hank Paulson and others are trying to fill. So it’s reasonable to complain that no federal regulator was really keeping a close eye on investment banks’ balance sheets. But I think it’s a bit much to jump from there to blaming the SEC for everything which happened.

Yes, the SEC, in the absence of any other regulator, was in charge of regulating Bear Stearns, just as it’s in charge of regulating all other publicly-listed companies. And in fact the SEC did check up on Bear’s capital adequacy on a daily basis. But it’s not the SEC’s job to set those requirements. Asking the SEC to do something which even the BIS finds all but impossible is, I think, unreasonable.

Yet that’s exactly what Norris – and Chris Dodd, for that matter – is doing.

Is it reasonable to regulate the amount of leverage that investment banks are allowed to take on? Of course it is, especially if those banks get access to the Fed’s discount window. But it has to be the Fed which is doing that kind of regulating, not the SEC. And in any case, it’s hard to see what any regulator could have done to prevent the Bear Stearns collapse. If counterparties like Goldman Sachs refuse to do business with another broker-dealer, that bank will go out of business sooner rather than later. No matter how much capital it has, and no matter how little leverage it has.

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Why Did JP Morgan Need the Fed’s Guarantee?

I got a very good question in my inbox last night:

If JP Morgan did cherry pick and dump the riskiest Bear assets on the Fed, then there’s no mistaking the significance of the Fed $29 billion guarantee. If, as JPM claims, they didn’t cherry pick, it seems that the relevance of the Fed guarantee might be very minor in relation to potential losses from the retained riskiest assets. Yet the deal couldn’t be done without the guarantee. Am I missing something?

Any answers? I have to admit I’m stumped.

Update: Thinking about it a bit more, it does occur to me that with JPM paying only in the $1 billion range for all of BSC’s equity, losing the risk associated with a $30 billion bond portfolio could make a significant difference to the purchase price, and possibly bring it up into positive territory. But I’m not even really convincing myself here, especially since JPM is now going to take the first $1 billion of any losses on that portfolio.

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It’s Not the Fault of Hedge Fund Managers That They Make So Much Money

Andrew Clavell gets to the point on the subject of hedge-fund managers:

I don’t begrudge the General Partners their loot one iota. What the academics fail to understand (choose to ignore?) is that the General Partners’ business model is "to raise money at 2+20", not "to deliver alpha". Theirs is a sales job at which they have been particularly proficient.

Clavell’s quite right. Given the choice between falling fees and higher alpha, on the one hand, or rising fees and lower alpha, on the other, hedge-fund managers will always go for the higher fees.

In fact, the alpha is irrelevant, since even the managers themselves don’t really know what it is or whether it exists. Their job is to persuade investors to hand over lots of money, and the best way they’ve found of doing that is to talk about this thing called "alpha". It’s silly to blame hedge-fund managers for the industry’s high fees: the people who deserve most of the blame are the hedge fund investors.

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Adventures With Bear Stearns Stock

Aren’t SEC filings fun? According to this one,

On March 24, 2008, JPMorgan Chase acquired 11,500,000 shares of Common Stock in the open market. The aggregate purchase price of $140,724,350 was paid out of working capital.

That works out at a price of $12.24 per share! Or, to put it another way, a 22.4% premium to JP Morgan’s official bid price.

The following day, Jimmy Cayne sold 5,658,591 shares at $10.84 apiece: his entire stake in the firm.

One wonders why, if JP Morgan wanted to buy up shares in order to maximize the likelihood of the deal going through, they didn’t do so when the stock was in the $4 to $5 range.

One also wonders why Cayne didn’t just sell his stake directly to JPM: both of them would have been better off. Although that might not be legal, I don’t know.

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Which CEO to Blame for Citi’s Woes?

When former Citi CEOs start sniping at each other in the press, you know things can’t be good. Today’s story in the FT is quite astonishing, for the quotes it gets from both John Reed and Sandy Weill:

“The specific merger transaction clearly has to be seen to have been a mistake,” Mr Reed said.

“The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.” …

“Citi’s troubles today are a culmination of a set of problems. There has been a general weakening of the management fabric,” he said. “If the body loses its immune system, you are going to die of something. The core of what was happening was a lack of supervision and structure at the managerial level.” …

Mr Weill rejected Mr Reed’s views and said Citigroup’s model had been a success. “What John and I created in 1998 was a model that worked very well for customers, employees and shareholders,” he said. “What didn’t work was that we had very poor management and management decisions over the past couple of years.” Mr Prince was chief executive during that period.

Interestingly both Reed and Weill blame poor management for Citi’s woes. Given that they were the people charged with managing a financial behemoth the likes of which this country had never seen, one wonders how much either of them blame themselves. Judging by this story, and as one might expect, Weill will never admit his culpability, while Reed is more self-critical.

What about their successors? No one rates Chuck Prince very much, and I suspect that even he reckons he could or should have done better. As for Vikram Pandit, his hiring of old buddies from Morgan Stanley goes to show just how shallow Citi’s managerial bench really was – but it’s also unlikely to work very well. Being an executive at an elite white-shoe investment bank simply doesn’t qualify you for the same job at Citigroup – not unless you have a bunch of commercial bankers working alongside you who know what they’re doing and can help with the institutional knowledge. And it’s not clear that Pandit has that.

The big-picture story, however, is that no one can manage Citi effectively: it’s simply too big. Getting fired was the best thing that happened to Jamie Dimon: right now he’s the savior of the US financial system, whereas if he’d succeeded Weill as planned, he’d be just another whipping boy.

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