Dana Cimilluca notes
that Oracle is offering $6.66 billion exactly for BEA Systems, whose ticker
symbol is BEAS. He asks whether this is a coincidence. The answer is that no,
it isn’t. It’s another instance of tech CEOs being cute, a bit like Google’s
IPO being for $e billion, and then its secondary
offering being for 14,159,265 shares. Whether you find this kind of behavior
appealing or appalling is likely a good indication of your attitude to tech
stocks more generally.
Rick Bookstaber makes
a good point today. Across Wall Street, heads of fixed income have been
losing their jobs in the wake of trading losses. Now these men had a job: to
take on risk in the fixed-income markets. When those markets went screwy in
July and August, risk became loss. But if you tell someone to take on risk,
then it’s a bit mean to hold that person responsible for doing just that. On
the other hand, what has happened to the people who were meant to be overseeing
that risk – the chief risk officers?
In the CRO job 99% of the days there is nothing going wrong. The only test
you get of how well you are doing – short of pouring out risk reports
and looking ponderous and prudent in meetings – is what happens to the
firm during times of market crisis. Every few years something calamitous happens
in the market; if the firm gets blown away, that suggests you did not do a
very good job.
But how much power do most banks’ CROs actually have? I suspect that most of
them spend a lot of time measuring risk, but find it much harder, in practice,
to actually mitigate risk, especially when the CEO is determined to "keep
dancing".
Boeing doesn’t seem to be going into much detail about the "parts
shortages" which have delayed the rollout of its new 787 Dreamliner
by six months. But Jeff Matthews talked
to a Boeing supplier a couple of weeks ago, who said that the 787 presented
to the world on July 8 was put together, in places, with “fasteners from
Wal-Mart.”
I don’t think the supplier was talking metaphorically: as long ago as May 24
I was wondering
whether a fastener shortage might hit
the 787’s production schedule. These little things can make a huge difference,
even if they’re, um, expected. Matthews picks up a fanatastic quote
from a Boeing executive which is positively Rumsfeldian:
As we’ve experienced in the last couple of months, we are not experiencing
things we didn’t think we would experience. We’re just experiencing
slower resolution of what we thought we would find.
Translation: We knew there were fastener shortages. We just didn’t get realistic
about how long they were likely to last.
I’m not a fan of this Citigroup
shake-up. The ousted Thomas Maheras might have sat uncomfortably in his
co-head role at the investment bank with Michael Klein (co-heads nearly always
sit uncomfortably), but he was – is – a very good banker and a real
money-maker for Citi. Meanwhile, Vikram Pandit – who isn’t overrated just
because no one really rates him – gets a grand new job overseeing, as
far as I can tell, two people: Klein, at the investment bank, and John Havens,
who will run alternative investments. It’s not clear what value he adds by peering
over these executives’ shoulders and second-guessing their decisions.
Meanwhile, Chuck Prince is sounding more and more like Joe Torre every day:
“My job is to try to assess the situation and constantly reassess the
best people we have got,” he told The times. “We have gone through
a review of people in this business, and this is my view of the best lineup.
My job is to put the best players on the field.”
The problem, of course, is that in elevating Pandit, Torre has lost
Maheras:
Citigroup executives, nonetheless, did not want him to leave. But Mr. Maheras
did not want to report to Mr. Pandit, according to people briefed on the changes.
This is not a good trade, although it’s good that the squabbling between Maheras
and Klein has now come to an end. What’s for sure is that there’s still no viable
candidate to replace Prince as CEO: if Pandit got the job, the stock would tank.
Bob Rubin reckons that Prince will stay on for years yet; that’s probably true,
if only for lack of a successor.
There are pundits, and then there are prediction markets. And as a general
rule, any prediction market is going to be smarter than any pundit – even
especially when the pundit is a blogger with no real money on the line. This
is me on Wednesday:
You can also short Gore at 48 (48!) to win the Nobel Peace Prize.
No one is ever that much of a lock-in to win this highly unpredictable
award in any given year.
Ahem.
Mark Gimein reckons that a foreclosure on a subprime mortgage isn’t as bad
as a foreclosure on a more traditional mortgage, because he’s been reading about
subprime borrowers going into foreclosure, and "almost without exception
the borrowers the stories cite put zero down on their homes". He
continues:
Losing your home sucks no matter what, but it sucks a lot less if you didn’t
need to put any cash down to buy it.
If you put down nothing on a house, that doesn’t mean you’re willing to lose
it. But it’s just not the same as losing both your house and your life’s savings
with it. Lose a house on which you’ve put zero down and you’re back where
you’ve started. It’s "foreclosure lite."
I know some people will say, "But your credit record is ruined."
And indeed, for some years it is. But these days having a bad credit record
means you’re just in pretty much the same boat as people with good credit
records were two decades ago: instead of being able to get a house with 5
percent down or zero percent, you need to actually have a down payment of
20 percent.
Let me explain to Mark why he’s wrong, and why it does not "suck a lot
less" to lose a house on which you’ve put no money down.
mortgages are refis, which means that very few of them are non-recourse: just
because you lose your house doesn’t mean that you don’t still owe money to
the lender. When you go into foreclosure and/or bankruptcy, you will
lose all your savings as the lender tries to recover as much of the value
of the loan as possible. Remember that it’s the homeowner, the individual,
who owes the bank money: a mortgage is a personal debt.
heard of subprime foreclosures where the buyers put no money down; I can assure
you that there are many others where life savings did get put into down payments.
did put no money down. When people buy a house, they generally spend a large
amount of money on lawyers’ fees, brokers’ fees, surveyors’ fees, furnishings,
movers, interior decorators, architects, contractors, appliances, and dozens
of other "one-off" expenses. That’s very real money down the drain
if you lose the house entirely.
with 20% down. But you’ve lost your life savings, remember? Where are you
going to find that down payment? And, more to the point, where are you going
to live in the interim? Few landlords are going to want to rent to you with
that credit rating. It’s not uncommon for people thrown out of their houses
to find themselves unable even to sleep in their cars, since the car, too,
has been reposessed.
Mark is living in a fantasy world if he thinks that many people are going through
some kind of "foreclosure lite". It’s possible that some real-estate
speculators might find themselves in that position, if they never moved in to
the house they bought. But for real people with one home, foreclosure is a terrible
thing, and it’s just as terrible no matter what kind of mortgage they have.
It’s taken almost almost seven years since Argentina defaulted on its debt
at the beginning of 2001, but finally the country looks as though it’s going
to agree
terms with the Paris Club of bilateral creditors. Argentina owes the Paris
Club a relatively small $6 billion, but paying off or restructuring that debt
is crucial, because so long as Argentina is in arrears to the Paris Club, club
members such as Spain won’t allow their export credit agencies to guarantee
any business dealings with companies in Argentina. This, then, is good news
for Argentina, which should see a significant uptick in international investment.
It’s probably not good news for Argentina’s
private-sector creditors, however. Argentina still owes $20 billion or so
to bondholders who didn’t accept its restructuring terms back in 2005, and a
Paris Club settlement now would mean one less reason for Argentina to care about
them.
And it’s also not particularly good news for the doctrine of "comparability
of treatment," which says that if the Paris Club offeres generous restructuring
terms to a country, then that country has to demand the same generous terms
from its private-sector creditors. The corollary is not true: if a country’s
private-sector creditors end up giving very generous restructuring terms, as
happened in Argentina, the Paris Club feels no obligation whatsoever to follow
suit. That would be something called "reverse comparability", which
has never been accepted by anybody in the official sector.
In this particular situation, however, the difference in treatment between
public-sector and private-sector creditors is truly extreme. Big official-sector
creditors such as the World Bank and the IMF were paid off in full by Argentina.
Smaller bilateral creditors are now going to get a good deal at the Paris Club.
Most bondholders, by contrast, gave up 70% of their claims on the country, and
a minority of "holdout" bondholders held on to their paper and have
so far received nothing at all.
The holdouts have been reduced to stunts such as paying freelance protestors
to dress up in blue gowns and demonstrate
outside the Waldorf hotel in New York. Which is an interesting way for multibillion-dollar
hedge funds to try to make money on their investments, but I don’t think it’s
going to prove particularly successful. Clearly Argentina’s fellow sovereign
nations still have more power over recalcitrant debtors than any hedge fund.
It’s another day
of volatility in the Dow, with an intraday movement of 200 points from high
to low in the space of about 90 minutes. Barry Ritholtz is hunting
for causality: is it something to do with the oil price? Chinese tech stocks?
The ECB? Perhaps it’s something to do with that perennial favorite, Turkish-Armenian
relations?
Of course in reality there is no such simple causality. The markets move, there
doesn’t need to be a reason, and in fact it’s far from obvious why
anybody even thinks that there should be a reason. Tomorrow, stocks
will go up, or they will go down, and the hunt for causality will begin anew.
When will we learn that it’s fruitless?
Update: We
have a winner! Anthony Conroy, head trader at BNY Brokerage, says that it
is…. wait for it… profit taking. Very helpful. Thank you, Mr Conroy.
Charlie Calomiris is a hawk and a bear – a combination which means that
his latest paper makes for very interesting reading. It’s entitled "Not
(Yet) a Minsky Moment" and the big-picture takeaway is that things
are bad, but they’re not really
bad.
Essentially, Calomiris says that a lot of the international financial architecture
got ahead of itself, particularly with regard to securitization. The credit-rating
agencies gave too-high ratings to too much asset-backed debt, much of it subprime-related,
and when subprime default rates started to spike, the result was a deserved
"collapse of confidence in the architecture of securitization [which] led
to a sudden need to reallocate and reduce risk in the financial system".
That said, however, the collapse of confidence could hardly have happened at
a better time. Banks are liquid and well capitalized, corporate leverage is
low, and house prices, contra Robert Shiller, are actually not plunging
nearly as much as anecdotal evidence might suggest. We’re now going through
a deleveraging and a reintermediation of the banking sector which might be painful,
and will certainly cause a slowdown in the US economy, but there aren’t major
systemic risks, and a fully-blown "Minsky crisis", where asset prices
go into a vicious freefall, is still remote.
Calomiris’s diagnosis feels reasonably correct to me. Interest rates and unemployment
are both low, and the people who lost a lot of money over the summer were generally
speculators and financial professionals who could afford it. If you were playing
around in the structured-credit markets, the chances are you got burned badly.
If you were just a retail investor with your money in a stock-market index fund,
you’re happy as a clam: the S&P 500 has already recovered and is hitting
new all-time highs.
So the banks will have to take substantial losses, the economy will slow down
and possibly even move into recession, but crisis will be averted even without
the helpful strength of the rest of the global economy. And a chastening lesson
will have been learned, just in time for the gnomes of Basel II to make sure
that the new regime’s biggest weaknesses, including a reliance on rating-agency
letter ratings, can be redrafted and overcome.
Philanthropy is the act of making the world a better place. That can be done
directly (by giving anti-malarial bed nets to poor Africans, for instance) or
it can be done indirectly (by giving money to people who will use that money
to give anti-malarial bed nets to poor Africans, for instance). Craigslist is
a company which directly makes the world a better place: it’s an open forum
for people to freely exchange goods, services, and information. (I even bought
my Manhattan apartment on Craigslist, which charged me nothing for the service
– a much better deal than any real-estate broker.)
And so to a Q&A
with the top two executives of Craigslist, founder Craig Newmark and CEO
Jim Buckmaster:
Q: I know you guys don’t want to sell out to make
a fast buck, and I appreciate that independent spirit. But you could be making
more money by charging minimally for posting in certain categories. Wouldn’t
it be worth it to obtain that money, and donate it to non-profits, charities,
or other worthy causes?
JIM: The traditional philanthropic model is to make as much
money as possible and then give a percentage back to the community. We do
donate more than 1 percent of our revenues to charitable causes, but we feel
it is much more important to serve the community directly as our primary business.
CRAIG: It’s more effective to let people keep the cash.
We also see that groups like the Gates Foundation have lots of money to donate,
but it’s very hard to do so in a sustainable way. No one has really
figured it out yet.
I love this model of philanthropy. People in a capitalist society naturally
gravitate to inputs (money) rather than outputs when they judge philanthropies.
But Craigslist has surely done better at making the world a better place than
philanthropies drowning in cash. It’s not easy to convert money to good; if
you can create good without money, that’s a great idea.
What is the point of Value-at-Risk?
Yesterday, in a mildly
confused post, I said that if a bank loses more than its VaR six days in
one quarter, that’s "a sign of utter cluelessness". In fact, it’s
not quite as bad as all that, since I assumed erroneously that Morgan Stanley
was using 99% VaR when in fact it was using 95% VaR. But it’s still pretty bad.
At 95%, one expects to exceed VaR three times a quarter – but wouldn’t
that be three days on both the upside and the downside? Morgan Stanley,
it seems, exceeded its VaR, on that basis, not six times but 29 times
in the past quarter.
I do understand it’s not quite as simple as that. You’re not going to stop
out of a position which is soaring in value, so you should have more big up
days than big down days. But even so, the number of big up days does give some
indication of the magnitude and volatility of your trading returns, which should
in turn be reflected in your VaR.
But the bigger question is what the VaR is there to tell us in the first place.
Helen Thomas today quotes one John
Kemp:
Kemp added that standard VaR calculations tend to understate the likelihood
of large gains or losses and say nothing about the size of these gaiins or
losses in the tails of the distribution. Plus diversification effects firm-wide
become less significant in a crisis, where correlations tend to one – as the
summer so aptly demonstrated.
He estimates that given these effects, assuming that extreme day profits and
losses are a multiple of 99 per cent VaR, that the risk on Goldman’s
books could be more than $500m. Which helps to explain how Morgan Stanley
arrived at a $390m one-day loss in what was an exceptional quarter.
In other words, Morgan Stanley’s VaR model isn’t necessarily broken, even if
it manages to lose $390 million in one day with a VaR of $85 million. But in
that case, one clearly can’t use Value-at-Risk as a measure of the amount of,
um, value that’s at risk. Is it just there to make regulators happy?
From Shanghai-based data group The Hurun Rich List, via Marketwatch:
There are currently 106 mainland billionaires, up from 15 last year… The
report added that China’s 800 richest individuals have net wealth of $459.3
billion, equivalent to 16% of China’s gross domestic product last year.
Wealth-to-GDP is a silly ratio, but one which refuses to go away: how often
do we hear that "Bill Gates’s wealth is greater than the GDP of [insert
random country here]". A much more interesting ratio would be the net wealth
of those 800 individuals as a percentage of the net wealth of China’s population
as a whole. More interesting still would be to look at China’s Gini coefficient
over the past few years, but the last National
Human Development Report for China seems to have been published in 2005.
(HT: Kedrosky,
who describes the report as "highly dubious"; I’m inclined to agree.)
Update: Forbes lists 40
Chinese billionaires. (Via Rodrik)
I understand the thinking behind Live
Nation poaching Madonna. Big concert acts like her receive 90% of gross
revenues, which means that concert-promotion companies like Live Nation have
difficulty making any money:
In 2005 and 2006, Live Nation lost $130 million and $31 million, respectively.
In the quarter ended June 2007, it made a $9.9 million profit on $1 billion
in revenue.
Clearly Live Nation is hoping that synergies between touring, ticketing, recording,
and merchandising will help it boost its razor-thin profit margins – and
it’s big enough to be able to take a $120 million gamble on Madonna, even if
she will be 60 years old by the time the contract ends.
What I don’t understand is the economics of the recording business. The WSJ’s
Ethan Smith reports that the deal includes an advance of between $50 million
and $60 million against three studio albums, and continues:
People in the music industry estimate that at current recorded-music prices,
the promoter would have to sell about 15 million copies of each of its three
albums to make back its investment on that piece of the deal alone. But an
artist manager not involved in the deal said that with prices for CDs and
downloads alike falling, that number could increase.
Madonna hasn’t sold 15 million copies of anything in a very, very long time:
the handy chart accompanying the article shows all her albums since 1991 selling
somewhere between 700,000 and 3.8 million units (1998’s Ray of Light).
But how much money does a record label make on a per-album-sold basis? It’s
certainly decreasing:
When EMI’s subsidiary Virgin put out the Spice Girls debut album in 1996,
it sold for around £13 in Britain, from which the company cleared more
than £5 in profit. New CDs now seldom cost more than £9, from
which the label can expect to make £2, if it is lucky.
Let’s say that Madonna’s next three albums will sell for an average of $10
apiece, of which the label will receive $2. Then to make back $60 million, Madonna
will have to sell 30 million albums overall, which isn’t quite 15 million per
album, but is certainly much more than she’s been selling over the past few
years.
But here’s the thing: the $60 million is an advance against Madonna’s own
royalties on the albums. Let’s say that Madonna herself gets $3 for each
album sold. Live Nation would then keep $5, not $2, from every album sale until
20 million albums had been sold. At that rate, it makes its $60 million back
not after 30 million albums but rather after only 12 million albums. And the
more generous that Live Nation is being with Madonna’s royalties, the lower
that number becomes.
In order for the WSJ’s number to be true, Madonna and Live Nation between them
would have to end up making just $1.33 per album sold. I understand that profits
are being squeezed in the music business, but that number does seem ridiculously
low: you could follow Radiohead’s lead and just give the albums away on the
web and make more money than that.
Update: I missed that the WSJ chart was only for
US units sold, not global units sold. That makes an enormous difference: her
2005 album "Confessions on a Dance Floor", for instance sold only
1.6 million units domestically, but moved 11 million units globally.
Still, the mathematics remains, and I remain suspicious of the WSJ’s claim that
Live Nation will need to sell 45 million albums before making back its investment.
The second-most-emailed Technology story on nytimes.com is "Co-Founder
of Skype Defends Its Value" a story published on October 10 but which
carries an October 9 dateline. Now back on October 9, the NYT didn’t have this
story, but Reuters did. Except Reuters had the exact opposite spin on what Niklas
Zennstrom said: they went with the headline "EBay
overpaid for firm: Skype co-founder".
The blogosphere had lots of fun with the Reuters story, especially the wonderful
quote from Zennstrom saying that Skype "overshot in terms of monetization"
– an instant classic of circumlocutory corporatespeak which resulted in
tweaking from the WSJ’s Dennis Berman.
But the "overshot in terms of monetization" quote is nowhere to be
seen in the NYT story; nor is it in the reporting from Red Herring’s Neal
Sandler.
It’s at times like this that I wish reporters behaved much more like bloggers.
We could have Sandler, and the NYT’s Victoria Shannon, and Reuters’s John Bowker
openly discussing exactly what Zennstrom did or didn’t say, and whether or not
he thinks eBay overpaid for his company. But because they all purport to give
us the objective last word on the story, anybody following the goings-on reasonably
closely is just going to be confused.
And people who don’t follow it closely will fall into two very different camps.
There’s the MSM-followers, who will read the NYT story and think Zennstrom is
defending Skype’s valuation, and there’s the blog-readers, who will read the
Reuters story and think Zennstrom is admitting that eBay overpaid.
For me, I just hope that the Reuters quote is for real. I mean, you really
can’t make that kind of thing up.
Tyler Cowen recommends shorting
Thompson:
Friday I heard Fred Thompson talk for three minutes, he was so terrible I
had to leave the room….
Most of all he has rotten diction (odd for a former actor), plus he had no
idea what the market-oriented crowd wanted to hear. Sell short.
Thompson’s still trading at a respectable 20.1 to get the Republican nomination,
so you can make some decent money with a short.
Also worth a short from the Republican side: Ron Paul, who’s traded up to 6.0,
near his all-time high. Yes, he does have a fervent following. But ain’t no
way he’s getting the nomination.
Similarly, on the Democratic side, Al Gore is trading at 12.1. I suspect he’d
be trading lower than that if he actually declared, so there’s little downside
risk to shorting him.
You can also short Gore at 48 (48!) to win the Nobel Peace Prize.
No one is ever that much of a lock-in to win this highly unpredictable
award in any given year.
On the other hand, Obama is a screaming buy at 13.4. I’m not saying he’s going
to get the nomination, but he does have a greater than 13.4% chance of getting
it. Buy here, and sell when he does well in one of the early caucuses, for an
easy locked-in profit.
Unfortunately, the trading in the Nobel Economics prize seems to be completely
illiquid, so no trading recommendations there, although if you can short anybody
above 20, do so.
Finally, the 2008 US recession contract is trading at 49, and might be worth
a short. Even notorious bear Alan Greenspan doesn’t
think it that likely.
What is it with these super-short UAW strikes? The one at GM lasted only two
days, while the one at Chrysler lasted
about six hours. Is it a way for the UAW negotiators to concede gracefully
while appearing tough to their membership? Is it a gentle reminder from the
union to the management that they’d better stay friendly? Is it all some kind
of elaborate kabuki incomprehensible to outsiders? In any case, if Stephen Feinberg
of Cerberus bought Chrysler expecting little trouble from the union, he might
not have been far off the mark.
Morgan Stanley has some of the most sophisticated risk-management systems on
planet earth. And
yet, somehow,
The company disclosed today that daily trading losses during the quarter
exceeded the firm’s trading value-at- risk calculation on six days during
the quarter.
Needless to say, this is something which is not meant to happen. "Value
at risk" means, basically, the amount of money you could conceivably lose
in one day. To lose more than that in a day is a sign that your models might
well be broken. To lose more than that six days in one quarter is a
sign of utter cluelessness.
Update: jck
has the rather misleading graphic,
from Morgan Stanley’s Q3. It shows four trading days with more than $125 million
in losses, and three days with losses of somewhere between $50 million and $125
million, which means that Morgan Stanley’s VaR was probably somewhere around
$75 million or so.
What it doesn’t show is just how skewed the distribution really is: on its
worst day, Morgan Stanley lost $390 million. Which is more than four times
its VaR. Fat tail, much?
Eleven Madison Park is a very good, and very expensive, restaurant. At dinner,
the cheapest menu costs $82 per person. A glass of red wine will cost you somewhere
between $8 and $26. So a dinner with one drink can’t cost less than $90 before
tax. Add tax, and you get to $97.54. According to Zagat, the average tip in
New York is 19%. Apply that to the pre-tax total, and you get a minimum
total bill including food, one drink, tax and tip of $114.64.
Yet according to latest issue of Zagat, the "average estimated cost"
of a meal with one drink, tax, and tip at 11 Madison Park is just $104. Which
isn’t even possible, unless you’re tipping just 7.1%.
Now here’s the really crazy thing: the 2008 Zagat guide is, in this respect,
a vast improvement over the 2007 Zagat guide, which ludicrously maintained that
the average cost of a meal at 11 Madison Park was just $66. Perhaps the Zagats
took Steve
Cuozzo’s criticisms to heart and vowed to do better this year. But undeniably
the $104 figure, while still on the cheap side, is a lot closer to reality than
the $66 figure was.
So one cheer to Zagat’s for slowly moving away from its notorious underpricing.
But no cheers at all for its press releases and WSJ
op-ed which talk at length about inflation in the cost of fine dining. The
average restaurant meal has not really increased in price over the past year,
they say, although there has been more inflation at the top end of the scale.
Well yes, if you really think that the price of a meal at 11 Madison Park has
gone up by more than 57% in the space of one year, then I suppose you could
demonstrate a certain amount of price inflation. But really the Zagats aren’t
measuring meal-price inflation at all, they’re just measuring changes in the
entirely fictional amounts of money which appear in their guide. No
one actually believes them:
Overall dining prices were only three cents more than last year, at $39.46
per dinner. That’s such a low figure that we guess they must be averaging
Gray’s Papaya into it.
So there’s no need for someone like Barry Ritholtz to tie
himself up in knots trying to work out how the numbers could possibly be
true. Yes, small-plate menus are becoming more common, but no, they don’t bring
prices down; rather, they bring prices up. And yes, prix-fixe dinner menus are
also becoming more common, but in general they cost more than one would
expect to pay a la carte, not less.
The simple fact is that there is absolutely no reason why anybody should pay
any attention at all to the prices in the Zagat guide. And the idea that prices
in New York ($39.43, we’re told) can somehow be usefully compared to prices
in London ($78.57) is particularly laughable – the methodology for arriving
at those prices is going to be very different from city to city, as is the ratio
of high-end to low-end restaurants being rated.
Zagat’s food ratings go up
over time, and its cost estimates wander around randomly according to the
whim of the guide’s eponymous owners. Neither are remotely useful as emprical
evidence of anything at all.
Have you ever wondered where the enormous profits being booked by various bits
of the financial sector come from? Elizabeth Warren, whom I interviewed
in June, has an excellent blog called Credit
Slips which specializes, among other things, in revealing fees the existtence
of which many of us never suspected.
Today, Warren mentions
that she had an op-ed
in the Boston Globe last week on the subject of what the mortgage industry
likes to call a "yield spread premium (YSP)" or what she likes to
call "a bribe to steer [borrowers] to the loan that is more expensive for
[them] and more profitable for the lender".
Apparently the op-ed resulted in Warren receiving large amounts of hate mail;
a letter
to the editor from a mortgage originator said that the fee is no more than
"the vehicle used to compensate mortgage brokers for the professional service
they provide to homebuyers". But clearly the incentive system is all screwed
up here: the broker is purportedly working on behalf of the borrower, but the
broker’s fee can skyrocket if the borrower is pushed into an unsuitably-expensive
loan.
I’ve said
before that brokers should have a fiduciary responsibility to the homebuyers
they’re representing, and that borrowers should be able to sue their brokers
for egregious misbehaviour. But in general it would be a great start if brokers
were simply honest and up-front about how much they get paid and how. The secretiveness
surrounding brokers’ fees only makes the honest brokers more suspect. As Warren
says,
The full YSP is not disclosed until, at most, 24 hours before closing, and
then only if the buyer knows to ask, and nothing in the disclosure links the
payment to the broker with the fact that the rate is higher than the one the
buyer would qualify for.
Warren also mentioned
on Monday that the fees that merchants pay to credit card companies can vary
enormously according to the type of card being proffered. Many of us know that
American Express charges more than Visa, say – but did you know that all
card companies charge more for corporate and business cards than they do for
personal cards?
It’s all
quite complicated, but essentially there are different "discount rates"
which the card issuers charge. The lowest discount rate is for personal cards
which are swiped in the store; the highest ("non-qualified") discount
rate applies to transactions which are keyed in manually, or to any transactions
involving international, corporate, government, or business credit cards.
It’s the international bit which really gets me. When you use
a credit card abroad, you’re generally charged through the nose for the
privilege, first by the card company and then by the issuing bank. But the card
company actually makes even more than those fees imply, because it also ratchets
up the amount it’s charging the merchant you’re buying from. So long as all
these fees are kept under wraps, no one seems to kick up a fuss – and
if they tried, they wouldn’t get anywhere anyway. After all, what choice do
we have but to pay these fees?
One of the things I love about academic economists is that they have a certain
amount of freedom to be utterly bonkers occasionally. The LSE’s Bernardo Guimaraes
up at Vox: rewrite the bonds of developing countries so that they become variable-rate
instruments which pay less when interest rates go down, and more when interest
rates go up.
Unfortunately, Guimaraes doesn’t give us an example of such an instrument.
But he does assert at the beginning that "emerging countries are always
borrowing in order to pay their debts". Which is kinda funny in a world
where emerging countries are quickly becoming the world’s biggest creditors.
Meanwhile, of course, emerging-market countries have already discovered their
own solution to the problem of enormous dollar debts: it’s called long-dated
local-currency bonds, and it has worked extremely well.
And if a country did want to protect itself against rising real interest rates
in the US, there are probably much easier ways of doing that than trying to
fundamentally restructure the entire architecture of international sovereign
debt markets.
But Guimaraes’s proposal doesn’t even work in theory. The problem, as he paints
it, is that emerging-market countries are "always borrowing" and that
such borrowing becomes very expensive when interest rates rise. His solution,
it seems, is for those countries to borrow at lower rates when interest
rates rise. What a great idea! Except – who on earth will lend to a country
at low rates when there are much higher interest rates everywhere else in the
world?
This idea needs a little bit of work, I think.
Cowen goes searching for Paul
Krugman’s lastest book:
At my Borders, circa 4 p.m., they hadn’t even unpacked it. "Yeah, we
have that in the back somewhere, I haven’t seen it yet." was what the
guy said.
Cowen reckons Krugman won’t sell as well as Naomi
Klein. (Right now, his Amazon sales rank is 81, hers is 51.) But of course
Krugman probably has an order of magnitude more readers than Klein does overall,
now that TimesSelect is history.
On Tuesday, shares in Goldman Sachs closed
at a new record high of $239.20 per share. Goldman stock has risen by more
than 50% from its August lows – a trajectory, says, Helen Thomas, "we’re
more accustomed to seeing on a Shanghai listing".
These big moves over the course of a couple of months can be important –
much more important than moves
of a few dollars in the wake of an earnings write-down. If you really want
to get a feel for the fortunes of a bank (or any company, really), look at how
its share price has done over the past few months, not the past few days.
Stoneridge v Scientific-Atlanta is one of those battles where both
sides really deserve to lose. But I am very glad that it’s the plaintiffs who
are actually losing
this one. For all the lobbying
surrounding the case, the central fact are pretty clear: Congress has repeatedly
refused to hold companies like Scientific-Atlanta responsible for others’ frauds
in cases like this. The only reason to find in favor of the plaintiffs, then,
is, as Ruth Bader Ginsburn suggested
in court, that "such a rigid rule would leave many victims of stock fraud
with no recovery".
But I’m far from convinced that someone who loses money in the stock market
should, as a matter of principle, always be able to sue someone in an attempt
to recover that money – at least if there was some kind of fraud involved.
Fraud is a criminal act, and has criminal remedies. Unleashing a tidal wave
of class-action suits from people with mutual funds is highly unlikely to benefit
anybody except for class-action lawyers. There are risks to any activity, and
one of the risks to investing in the stock market is that there will be stock
fraud. If there is, you can sue the company which defrauded you – but
let’s please not start allowing people to sue third parties as well. That is
truly a recipe for chaos.
Bair wants to know what can be done to reduce the crowds at art museums.
Callen, meet Robert
Reich:
At a time when the number of needy continues to rise, when government doesn’t
have the money to do what’s necessary for them and when America’s very rich
are richer than ever, we should revise the tax code: Focus the charitable
deduction on real charities.
If the donation goes to an institution or agency set up to help the poor,
the donor gets a full deduction. If the donation goes somewhere else — to
an art palace, a university, a symphony or any other nonprofit — the donor
gets to deduct only half of the contribution.
Enact this law, and watch the MoMA money-spigot get reduced to a trickle. Given
that it’s the richest museums which get the most visitors, this reduction in
income should result in a concomitant reduction in visitors, no?
Do you remember when Dave Neubert bought
shares in Countrywide because they were only a little bit rich to book value?
That didn’t
work out too great. But now he’s back to the single-indicator trade, and
is buying
the Morgan Stanley High Yield Fund because the Closed-End Fund Association
says it’s trading at at 14% discount to Net Asset Value.
Now Neubert, who’s a friend of mine, is a very smart guy, and a former Morgan
Stanley employee, so he probably knows something I don’t. But I would caution
anybody who doesn’t know their onions to tread very, very carefully when looking
at the NAV of bond funds. Neubert seems to take at face value CEFA’s assertion
that the fund’s NAV is $6.72 – but how can CEFA, or anybody else, be sure?
Junk bonds, by their very nature, tend to be very illiquid animals, and I daresay
that a large chunk of this fund’s holdings has barely traded since the credit
markets slammed closed in July and August.
Now it’s one thing for a Morgan Stanley fund manager to phone up a Morgan Stanley
bond trader and ask him for an indicative price on a bunch of junk bonds so
that he can report an asset value to people like CEFA. But it’s another thing
entirely for him to actually be able to sell those bonds at that price. The
good news is that the fund in question is small – only $77 million –
so it’s probably a little more nimble than a behemoth like Pimco. But a yield
of just 7.5% on assets most of which are just single-B rated doesn’t seem particularly
attractive to me – especially not when a large part of that yield is a
function of the market discounting the value of the fund.
Before buying a fund like this, I’d want to look at a chart of the fund’s reported
NAV over time. When shares in the fund plunged this summer from $6.17 down to
$5.25 or so, was the NAV plunging at the same time? Or were the fund’s managers
reporting much more sanguine figures for its underlying value than the market
chaos might have suggested?
Right now, I can put my money in a federally-insured E*Trade savings
account paying 5.05% APR. To compensate me for the extra risk in a junk-bond
fund, given the jitteriness of the credit markets, I’d want much more than 250bp.
When the yield on junk-bond funds hits double digits, then I might
start getting interested. But if I’m going to be taking equity-like risk (and
a look at the
fund’s share price certainly looks more like a stock fund than a bond fund)
then I’m also going to want equity-like returns.
