Taking Credit Card Imprints: A Key Skill for Prostitutes

John Gapper finds the business angle in the Spitzer story: reading the official complaint, he concludes that "even this sort of business is just that – a business." My favorite bit is this:

During the call, SUWAL and LEWIS discussed the fact that

some of the Emperors Club prostitutes were not properly taking

imprints of the clients’ American Express cards. SUWAL told

LEWIS to ask the prostitutes to fax the imprints, or if that did

not work to scan them and e-mail the imprints, and then send the

originals in the event of a dispute with the clients about the

charge, or if American Express inquired. MARK BRENER, a/k/a"Michael," the defendant, commented in the background that he

thought one of the prostitutes ignored him when he told her how

to fill out the credit card slips.

I’d love to know what normally ends up happening when a client disputes a prostitution-related Amex charge.

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Spitzer’s Legacy on Wall Street

Andrew Leonard mourns a (former) hero:

I cheered him on. He was the unexpected underdog who comes out of nowhere and starts landing one uppercut after another into the chins of a murderer’s row of 800-pound gorillas. We called him, here at Salon, "the most feared man on Wall Street," and we said it with respect. If only we could get someone like him in the White House — maybe then, we’d take care of some real business.

Oh well.

If I needed yet another lesson in why hero worship is always, invariably, a bad and stupid idea, I could not ask for one delivered to me on a bigger silver platter. The stupidity and arrogance implicit in Spitzer’s alleged involvement in a prostitution ring — which he hasn’t yet explicitly admitted to, but most certainly did not deny — betrays not just the trust of his family, but also of those who supported him for fighting the good fight. He’s not the man we thought he was — and in a profoundly depressing way, it somehow makes us a little less than we thought we were, for having bought into his chivalry.

And then, of course, there’s the other side of the coin: Wall Street hated Spitzer, with a vehemence rarely seen in an industry famed for its clubbable bankers.

The truth, as ever, is in the middle. Spitzer went after Wall Street’s bigshots not because he was a saint on a moral mission, but because he was a power-hungry alpha male with (as we now know) the kind of weaknesses which usually bedevil such men. On the other hand, someone needed to remind Wall Street that it did could not shaft its clients with impunity while raking in billion-dollar profits.

Spitzer’s discovery and use of the Martin Act changed the balance of power between the banks and the regulator-politicians for the foreseeable future, and changed it in the right direction. The bully has been brought to his knees, but the banks he bullied are still at least a little bit cowed, and on balance that’s probably no bad thing.

Posted in Politics, regulation | Comments Off on Spitzer’s Legacy on Wall Street

Stocks: Risky, But Tempting

On Friday, I got an email from my friend James:

If you had some $ to invest now, where would you put them? I’m considering going long some equities, but its a nauseating market out there…

in the financials, does Citi or even the crappy CountryWide become a ‘bargain’ at some price…? my gut tells me that with as yet unquantified loan losses, the sector news will get worse before it gets better.

This morning, he’d changed his mind:

Please ignore my request for stock tips!

I think I’ll be staying away from the stock market roller coaster right now, despite the apparent ‘bargains’ to be had.

If you buy stocks when they’re going down, they might be cheap, but they’re almost certainly going to get cheaper before they rebound (if they rebound). Anybody buying equities (or anything other than Treasury bonds, really) in this environment should do so only if they’re perfectly comfortable with losing money in the short-to-medium term on a mark-to-market basis. If you listen to Brad DeLong, or if you look at historical price-to-earnings ratios, there’s a case to be made that stocks in general are reasonably good value right now. But there’s certainly a case to be made that stocks in general are going to be very volatile for the foreseeable future, so people who worry about losing money should go nowhere near them.

If you have that iron stomach, then of course the thing to do is buy index funds. Your stock picks, no matter what they are, are not likely to beat the market. And making a punt on something like Citi or Countrywide is a very risky proposition. Countrywide, especially, is a merger-arb play right now, and when the risk-arbitrage professionals are marking it down to $4.36 a share despite the fact that Bank of America has agreed to pay $7.16 per share, I think it’s worth assuming that they know something you don’t.

Still, everybody loves a bargain. The S&P 500, at 1,277, is almost exactly at the same level it was at two years ago. Could it get cheaper? Sure. But is it a better buy now than it has been for any time in the past 18 months? Undoubtedly.

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Blackstone: Paying Normal Tax Rates

Heidi Moore, liveblogging the Blackstone conference call, picks up on something interesting:

Puglisi tackles taxes. Regulators, are you paying attention?

Here is what he says: “While our tax rates for the full year were approximately 15% for the fourth quarters of 2007 and 2006, our effective tax rates were 31% and 10% respectively. The higher effective tax rate for the fourth quarter of 2007 is attributable to carried interest unrealized losses. Basically, the income that flows up to the partnership levels that are subject to corporate level taxes are our management and transaction fee revenues,and in this fourth quarter, those items accounted for more than 100% of total revenues due to negative performance-base.”

Last year, when lawmakers were aiming squarely at the low taxes paid by private-equity funds, the problem was simple: while they might pay normal tax rates on the "2" part of their 2-and-20 compensation structure, the "20" part was taxed as "carried interest" and therefore only at 15%.

Except in the fourth quarter of 2007, Blackstone lost $170 million, so all its income – and then some – came from its taxed-normally management fee, rather than from its low-tax performance fee.

It seems like now might be a good place to revamp the tax structure for private-equity firms. If their performance is underwater and they’re not getting any performance fees, then a tax hike on those performance fees won’t affect them for the time being. But no, I’m not holding my breath on this one.

(I know it’s more complicated than this, and that I’m eliding two separate issues: the taxation of private equity companies, on the one hand, and the taxation of private-equity general partners, on the other. But if I had my druthers I’d tax them both at normal rates.)

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The Negative Externalities of Index Funds

Steve Waldman doesn’t like it when I defend passive investing. If everybody moved to a passive-investment style, he asks, then where would we be? We need active investors to make efficient markets and set prices. Passive investors, he says quite rightly, are free-riders:

Passive investors pay none of the costs of generating good investment decisions, but enjoy the benefits by free-riding on the work of others…

Advising people to buy index funds rather than select investments is akin to advising people not to vote, since the cost of voting far exceeds any individual benefit. Those who don’t vote get the same government everyone else does, but at lower cost!

Steve goes even further in the comments:

It’s a lot like greenhouse gasses, really. Tallying the aggregate "costs" of active investing is like enumerating the costs of reducing CO2 emissions without figuring in any kind of benefit. Advising people to go passive is like telling people to ignore their carbon footprint, because by doing so you’ll come out ahead of those who conserve (you’ll live in the same world, but bear fewer costs).

Scolding people not to go passive may be a fool’s errand, so long as the individual cost/benefit looks good. But broad encouragement of behavior that has clear (if hard to quantify) external costs as though it were a virtue, because, hey, it won’t cost you anything, strikes me as a bad idea.

Except the amount of active investing has been going up even as the amount of passive investing has been going up. When John Bogle started the Vanguard Group, the amount of active investing was a fraction of what it is today. And in most cases it makes perfect sense for small retail investors to go the passive route anyway, just because those investors don’t have the kind of risk appetite needed to be an active investor.

My feeling is that we’re a very, very long way from the point at which passive investments carry significant negative externalities. Already we’ve reached the point at which active investors front-run index changes and do all manner of year-end index arbitrage, seeking to profit from passive investors’ passivity. All power to them, I say. Passive investors will always underperform the market as a whole by a little bit: they have to pay some management fees, after all. So the market as a whole actually outperforms passive investors. As long as that money’s on the table, I’m not going to lose any sleep about free-riding on hedge funds doing price discovery.

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Microfinance and Small Business: Not in Conflict

James Surowiecki, in this week’s New Yorker, makes a strong case for supporting small and medium-sized enterprises in developing countries. He notes:

In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need…

The problem is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on.

This is a very good and very important point. But I’m puzzled by the way that Surowiecki frames his argument. The headline of his column is "What Microloans Miss," and he spends much more time talking about microlending than he does talking about the "missing middle". Indeed, he sets up small and medium-sized businesses in opposition to microlending:

What poor countries need most, then, is not more microbusinesses…

Microfinance has led us to focus on lending, but it can be hard for young companies to get big purely on bank loans, which consume cash flow that could be reinvested in the business…

Both socially and economically, microloans do a lot of good, working what Boudreaux and Cowen call “Micromagic.” But the overselling of their promise has made us neglect the enterprises that could be real engines of macromagic.

This I think does a great disservice to people who have spent much time and money and effort in an attempt to help build the institutions which can support small and medium-sized enterprises in developing countries. Do those people wish that they had more in the way of resources? Well, yes, that’s only human. But I don’t think that the microfinance pot is top of their list of liquidity sources to raid. If "we" have indeed "neglected" SMEs in the developing world, that’s our fault for not supporting them more over the past few decades. It’s not the fault of people "overselling the promise" of microfinance in the past five years and thereby somehow diverting money and attention from SME-targeted projects.

I see encouraging the growth of SMEs as complementary to the microfinance revolution. The former has to be done in a top-down manner, by building civil institutions capable of supporting minority ownership rights, that kind of thing. The latter happens in a bottom-up way, by giving one microloan out at a time to some of the poorest members of society. There’s no conflict there, and microfinance, although it’s certainly trendy right now, makes for an unconvincing villain.

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Blackstone Datapoint of the Day

Blackstone’s shares fell below the $14 level earlier today, in the wake of a dreadful earnings report showing a net loss of $170 million in the fourth quarter. At $14 a share, it’s worth remembering, it would take a rise of more than 10% just to get back to half the level at which the private-equity shop IPO’ed in June.

If we’re recalling the frothy days surrounding the IPO, it’s maybe worth resuscitating this, too:

From the outside, the Chinese government’s $3 billion purchase of a nonvoting stake in the Blackstone Group might look like a prelude to a broader campaign for control of foreign companies.

But a Chinese official ruled that out in an interview Monday, saying the purchase was simply a way to raise returns on overseas investments…

Hm. That didn’t work out so well, did it?

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Please, China, Sell Your Treasury Notes!

spreads.jpg

One more post on Krugman, if I may, and then I’ll move on. Check out the chart he reproduced on Saturday: it looks very much like it comes from the Economist, but I can’t find the specific article. In any case, it shows the violent volatility in the credit markets, using the spread between Libor and Treasury yields as a proxy.

Tyler Cowen has a lot of questions:

Why markets are self-destructing in this way remains a puzzle; dump on markets all you want but why here and now?…

Is/was the subprime crisis simply a mask for a more general revaluation of the meaning and extent of liquidity? Are such revaluations always so bumpy and so lacking in locally stable iterative processes?

I think in general it’s clear that deleveraging is always going to be more chaotic and bumpy than the overleveraging one sees on the way up. And it’s also clear that the spikes in the chart corrrespond to a series of asset classes being re-rated from "safe and liquid" to, well, not safe and not liquid. First there was the interbank market, then ABCP, then anything wrapped by the monolines, then auction-rate securities, and now the agencies.

The good news is that I think we might now have reached the limit of fixed-income asset classes which can suffer an exodus of investors who thought they were taking no credit risk and no liquidity risk. The bad news, of course, is that the asset classes which have already been hit could get much worse before they get any better. And the arbitrageurs – the hedge funds and others who in an efficient market would be jumping in at this point and snatching up high-yielding ultra-safe instruments – all mark to market and therefore risk getting big margin calls if things continue to get worse. Besides, their own cost of funds these days is pretty high.

It’s probably too much to hope that the US government itself might start embarking on a massive carry trade, issuing two-year notes at 1.5% and investing the proceeds in agency debt. But some of the trillions of dollars currently being held by foreign central banks could definitely come in handy right now. They’re sitting on nice capital gains on their Treasury holdings, thanks to the current flight to liquidity. It would be great if they started dumping those Treasuries and buying the bonds of Fannie and Freddie instead, at least for the time being.

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Blogonomics: Setting the Agenda

Remember the Tim Geithner speech last week? The wires covered it, dutifully enough, but it didn’t get much traction beyond that, outside the wonkier end of the econoblogosphere. What makes me very happy, however, is that the wonkier end of the econoblogosphere turns out to be reasonably influential these days. Paul Krugman saw the speech at Economist’s View, wrote a long blog entry on it, and helped contribute to some pretty high-level debate over the weekend from the likes of Steve Waldman, Yves Smith, and Brad DeLong.

Today, Krugman upgrades his blog entry to fully-fledged NYT column, complete with hat-tip to Calculated Risk and an actual link to Interfluidity (which is more than there is to the Geithner speech). He describes Geithner’s text as "the scariest thing I’ve read recently," and concludes with a call for the government to explicitly guarantee the debt of Fannie Mae and Freddie Mac, which he says "really are too big to fail".

In the April issue of Portfolio, Matt Cooper takes the opposite view, saying that the government should cut free Fannie and Freddie, much as they did Sallie Mae. (I’m not entirely clear how they’re meant to do this; with luck, I’ll have some clarification from Cooper later today.)

I’m quite sure that a lot of these debates are going to play themselves out in the storied news pages of the NYT and the WSJ sooner rather than later. But I think it’s clear that increasingly blogs are getting there first and setting the agenda. Krugman worked this out a long time ago; the concerned public will surely follow. Which is one reason why I think blogs in aggregate are going to continue to grow faster than the internet more generally at least for the next few years.

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Jay Brown, Blog Commenter

Remember how I liked the way that new MBIA CEO Jay Brown writes letters? Well he’s gone one better now, and actually started leaving comments on blogs – or at least a comment on Floyd Norris’s blog. Norris didn’t like the fact that Brown essentially fired Fitch Ratings, and Brown gave him a serious response, explaining that in many ways Fitch was too lax, not too loose:

Fitch’s capital allocation estimate for Public Finance is approximately half that of the other rating agency capital models — and we believe this level of capitalization at the Triple-A level is inappropriate and would pose a serious financial threat to policyholders if a company could obtain such a low grade triple-a rating…

Fitch’s capital model for financial guarantee insurance companies presents severe operational challenges for capital planning and pricing of our product. We need to plan for decades and their model makes it difficult to plan even a year at a time

Brown’s letter is a model of clarity compared to the official MBIA press release, which happily descends into legalese talking about "the Company’s legal entity alignment," and which is generally very hard to understand.

It’s also worth reading Brown’s letter to Fitch, which makes two points that Brown doesn’t feel the need to make in the comment on Norris’s blog: firstly that MBIA doesn’t particularly want to pay for Fitch rating MBIA’s structured products when MBIA has announced a moratorium on writing those products; and secondly that Fitch’s costs are skyrocketing.

We can no longer justify the high

cost of the Fitch Insurer Financial Strength rating. The fee proposal you gave us is

three times the amount you charged in 2005 – a rate of growth well in excess of

similar fees charged by the other major rating agencies.

The overall impression one gets from Brown is that he’s fighting hard, but fighting fairly, on behalf of his company. Should he have fired Fitch? Norris thinks not, and Herb Greenberg, too, thinks the decision was foolish. But there’s no doubt that the way that Brown responds to such criticism is exemplary.

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Blogonomics: Gawker’s Payroll

Jay Rayner has a profile of Nick Denton in the UK Observer, in which we find some interesting numbers:

In January, New York-based Gawker Media racked up nearly a quarter of a billion page views…

The monthly salary is an advance against a payment of $7.50 per 1,000 page views…

Noah Robischon, the managing editor, describes the editorial spend for January, and while it’s keeping to six figures it’s a long way beyond $100,000.

Let’s be generous and say that Denton spent $1 million on editorial advances/salaries in January. At $7.50 per thousand pageviews, that means he’s paying for roughly half of his quarter of a billion pageviews: the other half (such as pageviews of the blogs’ home pages, or pageviews from bloggers who no longer work for Gawker Media) Denton essentially gets for free. Or, to put it another way, his editorial budget is closer to $3.75 per thousand pageviews than it is to $7.50.

There’s a meme going around saying that Gawker Media’s most successful bloggers are pulling down six-figure incomes, which I’m sure is true. Doing the math: at $7.50 per thousand pageviews, you need to get just over a million pageviews per month – excluding visits to your blog’s home page – in order to make that kind of money. Let’s say that half a site’s total pageviews are attributed to individual bloggers, and that there are six bloggers per site. Then for a site to be handing out six-figure incomes to most of its staff, it would need over 12 million pageviews per month. In February, Kotaku got 34 million pageviews – well over double the numbers put up by the Gawker flagship. And Gizmodo got over 60 million pageviews.

Elsewhere in Rayner’s piece he pegs the total size of the Gawker Media payroll at "around 130 people". Using the same six-bloggers-per-site assumption, that puts the editorial side of the Gawker Media operation at 90 people. Pay them $100,000 per year each, and the total editorial budget would be $9 million per year, or $750,000 per month – which sounds quite a lot like Rayner’s characterization.

It’s in Denton’s interest to keep everybody thinking that he pays badly. It makes highly-paid bloggers feel more special, and it keeps expectations low. But if you’re a Gawker Media blogger making five figures, there’s a good chance you’re below average.

(The small print: this is all very back-of-the-envelope stuff, and has a significant margin of error. It’s complicated by the fact that each site has a "site lead" who is not explicitly paid per pageview, and also by the fact that different sites pay different amounts per thousand pageviews. But even if all Gawker’s 130 employees were included in the "editorial spend", and that editorial spend were just $750,000 per month, that still works out at an average salary of $70,000.)

Update: Jay Rayner gives more detail in the comments, saying that "the editorial spend was less than $750,000 in January". If it was $650,000 for 248 million pageviews, that would mean that Denton’s paying $2.62 per thousand pageviews – and implies that bloggers get paid for only one in three pageviews that Denton’s sites receive.

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Active Investing Datapoint of the Day

The cost of active investing: $100 billion per year, according to Kenneth French at Dartmouth University. That’s up from just $7 billion in 1980, you can see why Wall Street has made so much money in the interim. In his annual letter this year, Warren Buffett does a nice job of explaining the mathematics:

Everyone expects to be above average. And those helpers – bless their hearts – will

certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below

average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs

they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs

that are very low; 3) With that group earning average returns, so must the remaining group – the active

investors. But this group will incur high transaction, management, and advisory costs. Therefore, the

active investors will have their returns diminished by a far greater percentage than will their inactive

brethren. That means that the passive group – the “know-nothings” – must win.

Zubin and I debated this subject with Baruch in August. The anonymous Spinozist did make one good point: if you concede that there are consistent underperformers (like, say, the world’s central banks) then it’s entirely consistent for there to be consistent outperformers as well. Still, as a general rule, if you think you can beat the market, you’re wrong.

(Via Abnormal Returns)

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Why the Fed’s Interventions Aren’t Working

If you’re a bank and you need to shore up your capital base, you have the option of raising new equity, by selling shares to the public or to your friendly local sovereign wealth fund. There are other options, too. One is to raise what’s known as "tier 2" capital by issuing subordinated debt which has such a long maturity and is junior enough to all other debt that the bank regulators consider it to be tantamount to equity. But if you issue short-maturity, senior debt – that can’t be considered equity. Or can it?

Steve Waldman, in a fascinating and provocative post which is already causing a lot of buzz in the blogosphere, says the Fed’s Term Auction Facility, or TAF, is more or less explicitly designed to provide liquidity to banks until such time as they are ready and able to pay it back. And if that’s the case, then one can consider the Fed’s interventions to be more like equity than debt:

The distinction between debt and equity is much murkier than many people like to believe. Arguably, debt whose timely repayment cannot be enforced should be viewed as equity… If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these "term loans" are best viewed not as debt, but as very cheap preferred equity…

One much discussed story of the current crisis is the role of sovereign wealth funds in helping to capitalize struggling banks… Sovereign wealth funds have invested about $24B in struggling US financials. Meanwhile, the Fed is quietly providing eight times that on much easier terms.

Yves Smith buys Waldman’s theory that the TAF is "covert nationalization of the banking system". Mark Thoma seems to buy it too, but is relatively unconcerned by the fact that the Fed is now taking on credit risk: defaulting to the Fed, he says, is just another way of the Fed expanding the money supply. And Paul Krugman uses lots of charts to come to the conclusion that the TAF just isn’t going to be very effective:

The financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.

And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality.

My feeling is that the credit markets are hysterical. They’re not clearing, they’re not acting efficiently, and spreads, especially on highly-rated debt, are much higher than credit risk alone could ever account for. On the other hand, the markets are also facing reality, in the form of deleveraging and forced unwinds, in which there are lots of sellers and precious few buyers. The Fed can step in with $100 billion of TAF money if it likes, and that money might well find its way through the banking system and into the choppy credit markets. But as Krugman notes, those markets are so big that they make $100 billion seem negligible.

Krugman has also asked the obvious next question: if the TAF isn’t working, then what is to be done? He has no answer:

Geithner then goes on to describe the policy measures being taken. And here’s the thing: I don’t think it’s just me, the actions sound trivial compared with the problem. He more or less admits that credit markets are worsening faster than the Fed can cut rates, so that money is effectively getting more expensive, not cheaper; the other measures he describes sound minor. Rearranging deck chairs — that may be too strong, but it’s pretty unreassuring.

So what should be done? I’m not sure (and I’m thinking about it, hard.) For now, I’d just say that this is really, really scary.

What we’re seeing here is a kind of financial-world equivalent of a run on the bank. Bank depositors are owed money, but that never normally bothers them: they know their bank is safe. If they all come to the same conclusion at the same time that the bank isn’t safe, however, disaster can strike, and their worries can become self-fulfilling. In this case, it’s not bank depositors who are asking for their money back, but rather prime brokers, repo desks and other sources of lubrication in the world of credit. They used to be happy to lend against ultra-safe assets like triple-A monoline guarantees or agency bonds; now, not so much.

How do you solve a bank run? The government, which is much bigger and safer than the bank, can step in and guarantee the bank’s deposits. How do you solve the present crisis? That’s much less obvious, since the obligations of the agencies and the monolines and so on and so forth are orders of magnitude bigger than any bank that’s ever gone bust. You don’t need to bail out the agencies and monolines directly: the Fed can try to do it indirectly, by pumping liquidity into the banking system. But the Fed’s bucket just doesn’t seem big enough right now to bail out this particular sinking ship.

Posted in banking, fiscal and monetary policy | Comments Off on Why the Fed’s Interventions Aren’t Working

Extra Credit, Weekend Edition

WaMu rewrites execs’ bonus plan to dodge subprime damage

Remember the Alamo: The Epicurean Dealmaker on Carlyle Capital.

Download Whitney Tilson’s slide show "Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles".

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A Market Movers Milestone

2000.jpg

As I approach the end of my first year at Portfolio.com, I’ve now officially posted my 2,000th blog entry here. (In fact, they weren’t all mine: many thanks to Yves Smith for pinch-hitting for a few weeks last summer.)

In honor of this milestone, I think it’s time to change the official description of the blog (above) – while the blog has been something of a success, it certainly didn’t quite turn out as originally intended – I can’t even remember when I last wrote about "the people behind the big deals".

So, any suggestions as to a replacement?

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Should the Government Partially Refinance Mortgages?

Martin Feldstein has a bright idea: allow homeowners to refinance 20% of their mortgage balances with the government, where the new loans amortize over 15 years and reset every two years at the interest rate on 2-year Treasury bonds (currently 1.6%).

Mark Thoma worries that participation won’t be high; I worry rather that participation will be too high. Would this program be available to anybody? Offering 1.6% loans to the entire homeowning population doesn’t strike me as particularly intelligent fiscal policy. And even if it’s available only to people with outstanding mortgages as of a certain date, it’s sure to be taken advantage of by prime borrowers with lots of positive equity – people the government has no need to subsidise in this manner.

Feldstein’s motivation is noble: he wants to minimize the number of houses finding their way onto the market as a result of foreclosure. I think a better way of doing that is the proposal put forward by Baker and Samwick – did that get any traction at all?

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Did Lloyd Blankfein Earn $100 Million in 2007?

There’s a bit of buzz today over Goldman Sachs’s 2007 executive pay packages. It’s all a bit confusing: do you include previous years’ stock grants? How do you account for options?

If you add up stock awards and options awards and cash payments from 2007 alone, Lloyd Blankfein got $68.5 million last year, while the top five executives between them made $305 million.

Blankfein’s been at Goldman a long time, so his old option grants are now vesting. If you ignore the option grants he got in 2007, but include the value of his stock that vested, you get $99.6 million – which allowed Reuters to run a headline saying "Goldman Sachs CEO gets $100 mln in pay, stock".

And if you simply add up the numbers in the summary compensation table from the annual proxy statement, you get a total of $322 million, which includes expenses that Goldman booked in 2007 for stock grants in previous years. Using that figure, a commenter at DealBook noted:

great, the Goldman Five’s compensation packages just surpassed a little bit over the FY07 free cash flow of The New York Times.

The NYT’s free cash flow in 2007 being $317 million.

In any case, all these numbers are out of date, because they’re based on a year-end stock valuation of about $215 per share. Today, Goldman’s trading at $160, which means that all of those stock awards are now worth about 25% less than the figures being reported. Not that anybody’s exactly crying rivers of sympathy for Blankfein & Co.

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Google vs Microsoft: Can You Tell the Difference?

Are Google and/or Microsoft interested in buying Digg? We don’t know:

Google and Microsoft both declined to comment on whether they are interested in Digg, issuing identical statements that they do not address "rumors or speculation."

Identical, you say? I don’t know why I was instantly reminded of this:

No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.

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Shipping Datapoint of the Day

Scott Borgerson, in Foreign Affairs:

Taking into account canal fees, fuel costs, and other variables that determine freight rates, these shortcuts [through the Arctic Ocean] could cut the cost of a single voyage by a large container ship by as much as 20 percent — from approximately $17.5 million to $14 million — saving the shipping industry billions of dollars a year.

I had no idea that a single journey by a single container ship could cost as much as $17.5 million. No wonder all those Greek magnates are so wealthy!

(Via Cowen)

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The WSJ’s New Magazine: An Obvious Money-Spinner

Irin Carmon today gets some hard facts about the WSJ’s new glossy magazine.

WSJ.’s circulation of 800,000 will be targeted to the 15 largest metro markets, including subscribers with a median household income of $300,000 (15 percent higher than the Journal’s overall), plus a small amount of newsstand distribution. (For would-be readers shut out, all the material will be online.) Another 180,000 copies will be distributed in the Asian and European editions of the paper. As with Time magazine’s Style & Design spin-off, the strategy hones the demographic profile while keeping production costs down.

This seems like a sensible strategy to me, but some people are skeptical:

"I don’t see full relevance…The Wall Street Journal reader is going to the newspaper for vital information," said one media planner who specializes in luxury and requested anonymity. "You can’t just hand them a free luxury magazine and hope they’re going to read it."

Er, yes you can, and it’s not just the NYT (T Magazine) and the FT (How To Spend It) which have shown quite convincingly that it can be done. Consider an obvious peer/competitor, with a circulation of just over a million readers who have an average household income of $296,425. It built its franchise, which is now extremely strong, from absolutely nothing, using exactly the strategy of handing its readers a free luxury magazine and hoping that they were going to read it. What am I talking about? Departures, the magazine distributed free to holders of the American Express platinum and black cards.

In many ways, magazines such as this are a better way of reaching high net worth potential customers than are magazines like Vogue. Buying space in Vogue will help your buzz within the fashion industry, which is very important. But Vogue’s readership is not particularly elite, in aggregate: it’s sold on supermarket magazine racks across the country, to people who will never spend thousands of dollars on a jacket or tens of thousands of dollars on a watch.

Historically, the problem with the WSJ launching a luxury magazine was the fact that its readers generally got the newspaper at the office. The Saturday WSJ has solved that problem; once it launched, the magazine was only a matter of time. And with Rupert Murdoch bankrolling it, I have no doubt that it’s going to be a huge success.

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CDS: It’s Not About Credit

The FT has an excellent article explaining that corporate issuers are now being able to price new bonds off their illiquid secondary-market bond curves, rather than off their (wider) CDS curves. If you have real corporations borrowing real new money off real money investors, it seems, the credit crisis isn’t quite as bad as the secondary-market prices might imply.

Alea is puzzled:

Apparently some “sophisticated” investors can’t count. What would you prefer a cash bond that pays X or the same as synthetic bond that pays X+60 bp ?

For a 60bp premium, I’ll take the synthetic. But then again, I don’t mark to market. And the kind of people who buy synthetic bonds are exactly the kind of people who do mark to market – which means that they have to be worried about the deleveraging in the CDS market getting much worse before it gets better.

Besides, the arbitrage plays here aren’t easy: they involve not only writing protection (that’s the easy bit) but also shorting cash bonds. And with margin requirements where they are, and hedge funds’ cost of capital spiking sharply, the cost of shorting those bonds could be very high indeed. Remember that’s why the CDS market became so big in the first place: it’s vastly easier to buy credit protection than it is to short a bond.

Basically, the market is in turmoil – which is why the Fed is stepping in with a large bump in the amount of liquidity it’s providing to the banking system. The liquidity won’t bring bond spreads and CDS spreads in line overnight, but it will help at the margin. In the mean time, prices are driven by the fact that there are a lot of forced sellers, and precious few willing buyers. They’re not driven by investors who know more than you do about credit risk, pace Brad DeLong, who worries that "somebody knows something and wants to be your counterparty".

No one thinks there’s an efficient market in credit right now, and even Andrew Lahde has stopped putting on new short positions because the cost of doing so is too high. A year ago, credit was too cheap. Now, it’s too expensive. The big unknown is not whether spreads will tighten back in, but when.

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Meme of the Day: 50% Housing Equity

Mark Stein picked up on it yesterday; the WSJ splashes it across the front page today; Whitney Tilson has included it in his 75-page slide show entitled "Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles". What is it? The fact that on line 50 of table B.100 of the Federal Reserve Flow of Funds report (you can find it on page 110 of this pdf), "owners’ equity as percentage of household real estate" is less than 50%.

The first question: why is everybody glomming on to this now? The number has now been below 50% for the past three quarters: it’s nothing new. The second question: why look at the equity ratio? It seems to me that line 49, "owners’ equity in household real

estate", is really more germane in answering the question of how much wealth Americans have tied up in their houses, net of debt. That has fallen to $9.65 trillion in the fourth quarter from $9.93 trillion in the third quarter – it hasn’t been this low since 2005, and it’s down from a peak of $10.07 trillion in the first quarter of 2007. That erosion of $426 billion in wealth over the course of the year seems to me much more relevant than the ratio of total wealth to housing values.

After all, there are actually very few people who have anywhere near 50% equity in their homes. Most homes are either paid off in full or else very highly mortgaged: taking the average gives you a number near 50%, to be sure, but we’re definitely not talking about a bell curve here. The mean might be 47.9%, but the mode is 0%.

Over the course of 2007 house values actually rose, by $550 billion, according to the report, although they pulled back to the tune of $95 billion in the final quarter. But mortgage values rose faster: they increased by $655 billion over the year, and by $116 billion in the final quarter. Those are all interesting numbers. But the ratio of mortgage values to house values? That one I’m having difficulty getting excited about.

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Credit Market Quote of the Day

An anonymous London credit hedge fund manager, quoted in the FT:

"Every time you buy anything it is worth less the next day. Eventually you stop buying."

In theory, hedge funds, with their cash lock-ups and their higher risk appetites, should be first on the scene with rescue liquidity in the event of a credit crisis. But hedge funds mark to market every day, and if Fannie Mae bonds widen from 200bp over to 220bp over, that means investors are losing money, even if the bonds are a screaming buy at 200bp over. Which is why this crisis is going to take some time to resolve.

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Payrolls: Even More Bearish Than the Headline

I’m not a big fan of the monthly payrolls report, which has a 90% confidence interval "on the order of plus or minus

430,000". Payrolls fell by 63,000 in February – something which I’m sure is going to be treated as a bearish indicator by the market. But if they’d risen by say 200,000 – which would be well within the margin of error – that would have been incredibly bullish. Meanwhile, of course, the unemployment rate (not particularly reliable, we know) went down. It’s all a bit of a mess, but the market pays close attention to it because it gives hard macroeconomic numbers more or less in real time.

If you do want to get something useful out of this report, it’s worth taking some advice from Megan McArdle:

The BLS lists figures for "discouraged workers" who say they want to work but are not looking for a job for economic reasons, and "marginally attached workers", who say they want to work, and have looked for work in the last 12 months, but did not seek work in the last four weeks for some personal reason. These are in the labor report right beneath the "headline" unemployment figure; it’s just that journalists usually ignore them. That is a problem, but something the Bureau of Labor Statistics (BLS) cannot control.

Well, let’s look at those numbers. Payrolls fell by 63,000, we know; employment fell by a much larger 255,000. And the "not in labor force" number spiked alarmingly, rising by 644,000.

So yes, this is a bearish report. Although I still think it’s given far too much weight.

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Extra Credit, Friday Edition

Municipal Bonds: Yeeeeaaaaahooooooo! "Smith Barney, Citigroup’s retail brokerage arm, supposedly had the best day for selling municipal bonds in their entire history on Monday. One large dealer I talk to regularly said they had sold every bond in their inventory by 11AM."

Climate change redux: Peter Orszag re-enters the carbon tax vs cap-and-trade debate, on the pro-tax side.

Taxing Sovereign Wealth Funds

Citic Confirms Talks With Bear Stearns for Bigger Stake

Venezuela or Ecuador to declare war on Colombia: The latest contract at InTrade, it hasn’t traded yet.

What can not go on forever seems to be going on forever: China’s amazing January reserve growth: Between them, China and Saudi Arabia "could have supplied the $62.5b a month the US needs to sustain a $750b current account deficit and still had a bit left over to buy euros."

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