Stock Traders and the Attention-Driven Economy

Barry Ritholtz in

the flesh! How could I resist? His talk at the Princeton Club sounded interesting,

on what he called "The attention-driven economy". The basic thesis

was actually formulated

by Herbert Simon, back in 1971:

What information consumes is rather obvious: it consumes the attention of

its recipients. Hence a wealth of information creates a poverty of attention

and a need to allocate that attention efficiently among the overabundance

of information sources that might consume it.

What’s more, a quick email was sufficient to sign me up as Barry’s guest: I

realized when I got to the club and they asked me for a $40 entry fee that being

Barry’s guest is actually a very valuable thing!

Barry’s talk was actually quite short, and most of the 90 minutes was spent

in Q&A mode, with Barry using questions as an excuse to discourse upon an

impressively broad range of subjects, which may or may not have been peripherally

related to what he was originally talking about.

One recurrent theme was the disappearance of the individual stock-market investor,

who went away after the 2000 stock-market crash, and never really returned.

People don’t talk about stocks the way they used to; when you walk into a bar,

the TVs are never tuned to CNBC like they once were; online trading volumes

are a shadow of their former selves.

To which I say: Good. Individuals have neither the time nor the expertise to

even think about beating professional investors at their own game, and they

should go off and do something more worthwhile instead, like sipping excellent

cappuccinos while reading a middlebrow periodical, or playing fetch with the

dog.

But Barry’s attention-driven economy thesis is relevant too. In the era of

YouTube, there’s more clamor for peoples’ attention than ever before. And in

the era of the Great Moderation, stocks just aren’t as exciting as they used

to be. So people move on to the next thing, especially since the big money is

being made in prop trading and private equity and lots of other places which

are utterly off-limits to individual investors.

Barry is a stock trader: he thinks in terms of stocks, judges economies by

how their stocks are doing, and always seems to bring everything back to the

stock market, somehow. That’s fine; he’s a professional, and that’s what he

does. But you and I shouldn’t be thinking like that. In fact, we’d be better

off spending our time watching David Hasselhoff trying to eat a hamburger.

Posted in stocks | Comments Off on Stock Traders and the Attention-Driven Economy

Questions for Economic Advisers

Harvard’s Greg Mankiw, an economic adviser to Mitt

Romney, notes

on his blog that Berkeley’s Christina Romer and David

Romer are economic advisers to Barack Obama; Stanford’s

Michael Boskin is advising Rudy Giuliani;

and Boston University’s Larry Kotlikoff is advising Mike

Gravel.

I’m interested in how this process works, since being an adviser to a presidential

candidate is generally considered to be a sign of support for that candidate.

(No one, to my knowledge, is an economic adviser to more than one candidate,

and Mankiw himself talks about where he "stands".)

On the other hand, being an economic adviser to a presidential can’t really

be considered a sign of support for that candidate’s economic policies, since

the whole point of hiring an economic adviser in the first place is to develop

those policies.

So how are these marriages made? Do prominent economists reach out to presidential

campaigns offering their services to the candidate they like the best for non-economics-related

reasons? Would you ever find a Republican economist advising a Democratic candidate,

or vice versa? And what are the chances of a campaign’s economic adviser getting

a plum job at the Fed or Treasury or the Council of Economic Advisers should

the candidate ultimately win the presidency?

Maybe Greg Mankiw or Brad DeLong can help me out.

Posted in technocrats | Comments Off on Questions for Economic Advisers

The Bloomberg-Livingstone love-in

There was quite a love-in this afternoon between "Red" Ken

Livingstone, one of England’s most popular left-wingers, and billionaire

Mike Bloomberg, who mentioned at one point that since he owns

a house in London he helps to pay some of Ken’s salary. It’s worth remembering

that Livingstone at one point was too much even for the UK Labour Party, but

nothing succeeds like success, and Bloomberg made a point of reiterating that

Livingstone’s popularity ratings went up more than 10 points after he introduced

congestion charging in London.

What’s more, Livingstone did a great job of painting himself as business-friendly:

he had no particular intention of introducing congestion charging when he was

first elected in 1997, he said, but London’s businesses complained to him about

the £2 billion per year that London was losing thanks to traffic congestion,

and so he was simply responding to them in doing something about it.

I’ll add a link here to Bloomberg’s speech when it appears on the nyc.gov website.

But here’s a snippet:

As we developed the initiatives making up PlaNYC,

we saw that almost all of them, whether they have to do with encouraging transit-oriented

housing, or improving natural drainage by greening our city streets, or promoting

energy conservation in homes, businesses, schools and City buildings: You

name it — virtually all of them will also cut greenhouse gas production.

Addressing one’s carbon footprint is very much a positive-sum game, in other

words. David Miller, the mayor of Toronto announced a new website,

Zero Footprint Toronto, which

will help people not only in Toronto but around the world calculate their carbon

footprint and work out ways to minimize it or eradicate it entirely. Businesses

and cities are already on board; individuals are coming on board. All that’s

left is national governments, and they will surely follow sooner or later.

Posted in cities, climate change | Comments Off on The Bloomberg-Livingstone love-in

Thomson-Reuters vs NewsCorp-Dow Jones

Alphaville

has the memo from David Schlesinger, the editor-in-chief of

Reuters, and a key member of the team which made the final decision to let their

company be sold to Canada’s Thomson.

Clearly, the Directors of the Reuters Founders Share Company had to approve

of this new company. They did it because our partner and its controlling shareholder

have similar values to the values Reuters has always been proud of and espoused.

More importantly, they did it because the Reuter Trust Principles will now

apply across the combined company, and not simply the part that came from

Reuters. That gives the Trust Principles new power and life, and allows us

to build on 156 years of tradition as a platform for a new century of growth…

As part of Thomson–Reuters, we will have the resources and a renewed

will to expand our news coverage to inform and give insight to customers in

their professional and personal lives.

One can’t help but think of another public media company which is controlled

by a small group of insiders: Dow Jones. While Schlesinger and his colleagues

embraced the approach from Thomson, the Bancroft family felt that they should

reject the approach from Rupert Murdoch. And the reason they felt that way was

that Rupert Murdoch does not have similar values to the values they have always

been proud of and espoused.

For all that I think the proposed acquisition of Dow Jones is a good idea,

and will give Dow Jones "the resources and a renewed will to expand its

news coverage," in the words of Schelsinger, the fact remains that Rupert

Murdoch is a very different kind of press baron than the present owners of the

Wall Street Journal.

Indeed, Murdoch’s acquisition of Dow Jones must be contingent on his deliberately

insulating the Wall Street Journal from his personal influence — this is necessary

because he does, regularly, interfere personally at other media properties he

owns.

One can argue till the cows come home about the degree of influence that Murdoch

personally exercises over his broadsheet properties. It’s not huge, that much

is clear – but it’s definitely true that we Murdoch defenders are put

on the back foot by having to try to restrict discussion about editorial influence

to his broadsheets.

Murdoch’s overall approach to his media properties is undoubtedly much more

interventionist than the Bancrofts would ever be, which makes his proposed acquisition

much more problematic than the relatively easy tie-up between Thomson and Reuters.

Posted in M&A, Media, publishing | Comments Off on Thomson-Reuters vs NewsCorp-Dow Jones

How Cities Can Help Save the Planet

This morning’s proceedings at the New

York Climate Summit were a good way to start the day: full of hope and optimism.

Rather than getting frustrated at the seeming inability of the world’s national

governments to do anything about climate change, the assembled mayors and other

municipal officials seemed convinced that, collectively, they were willing and

able to take on a large part of the challenge themselves.

New York’s Dan Doctoroff kicked it off, explaining how his

PlaNYC

started by looking how to solve problems related to energy usage, congestion,

transportation, livable streets, and generally the ability of the city to survive

an expected influx of 1 million new inhabitants. It turned out, he said, that

nearly all of the ways to address these issues — and save money at the same

time — involved "going green".

London’s Ken Livingstone then said that cities produce 3/4

of global carbon emissions, which means that cities can and should take the

lead in terms of tackling climate change issues. "It is in cities that

the battle to tackle climate change will be won or lost," he said, calling

for a democracy in terms of carbon emissions: those who emit too much now must

drastically reduce their emissions, while developing cities with much lower

per-capita emissions "should plan for stabilizing their emissions in the

future".

Interestingly, municipal governments don’t only seem to be well ahead of federal

governments on this issue; they’re also playing a crucial role in encouraging

the businesses and residents of their cities to get up to speed as well. Richard

Daley of Chicago knows that developers and unions are not exactly famous

for being green; he said that he’s now implemented a system whereby they can

get their construction permits much more easily if they’re constructing green

projects.

David Miller of Toronto was a fount of statistics: Greenhouse

gas emissions attributable to the municipal government have been reduced by

40% since 1990, he said, largely thanks to a profitable initiative which captures

methane from landfills. He also said that if 20% of the buildings in Toronto

which could have green roofs actually had them, then summertime temperatures

in the city would be reduced by 2%.

That’s not the only way to reduce energy consumption, either. Everywhere else

in the province of Ontario, summer electricity consumption went up last year;

in Toronto it went down, thanks to a plan whereby if you reduced your consumption

by 10%, then you’d get a 10% discount on your next electricity bill.

The cities can’t do everything. George David, the CEO of UTC,

noted that only 9 of the 50 US states have legislation which facilitates net

metering. (That’s the system whereby your electricity meter can run backwards

if you put electricity back into the grid.) Some involvement from the state

and federal level is definitely necessary. But the general feeling was that

all the cities were asking was that the state and federal politicians simply

get out of the way, and let them do their thing.

Right now, we’re at the easy bit of reducing our carbon footprints: the point

at which doing so can actually make money. I look forward to a future where

living in a green city is a point of pride for all city dwellers, rather than

just ones in places like Germany and Toronto. Right now, the New York mindset

isn’t particularly green. But all that means is that it’s easier for New York

to reduce its carbon emissions than for European cities — which start from

a much lower level — to reduce theirs. Today’s a day for optimism.

Posted in cities | Comments Off on How Cities Can Help Save the Planet

Wolfowitz Damned by Bank Board

I don’t have time right now to give the World Bank’s Wolfowitz

report the attention it deserves: I’m off to midtown, where lots of the

world’s mayors are congregating for the Large

Cities Climate Summit. In any case, worldbankpresident.org

should fulfill all your Wolfowitz needs for the time being. Suffice to say that

despite the damning nature of the report, Wolfowitz and the Bush administration

aren’t giving up, and I

was wrong about Hank Paulson: Steven Weisman reports

that

Treasury Secretary Henry M. Paulson Jr. was on the telephone during the day

with counterparts in at least half a dozen countries to tell them that “these

facts do not rise to the level of warranting dismissal,” according to

a senior Treasury official.

There seems no way now that this whole thing isn’t going to become very ugly.

The worst possible outcome, really, for the Bank – unless it somehow results

in a new president from a developing nation.

Posted in world bank | Comments Off on Wolfowitz Damned by Bank Board

One Question for Rupert Murdoch

In Rupert Murdoch’s letter

to the Bancroft family, he’s quite unambiguous:

The businesses of Dow Jones, and in particular The Wall Street Journal, represent

American journalism at its best. Your record of journalistic independence

and integrity is second to none. Any interference — or even hint of interference

— would break the trust that exists between the paper and its readers, something

I am unwilling to countenance. Apart from breaching the public’s trust, it

would simply be bad business.

The Journal’s reporters in China don’t

trust him at all, however.

News Corp. Chairman Rupert Murdoch has a well-documented history of making

editorial decisions in order to advance his business interests in China and,

indeed, of sacrificing journalistic integrity to satisfy personal or political

aims.

The way I see it, where editorial independence is valuable, Murdoch values

it. Where it isn’t, he doesn’t. So even if he’s interfered in editorial decisions

in China in the past, that doesn’t mean he’ll do so with the WSJ in the future.

Yes, Murdoch interferes in the editorial decisions of papers like the Sun and

the New York Post. And the readers of those papers couldn’t care less. So if

I were the Bancrofts, I’d accept Murdoch’s offer of a meeting, and then ask

him one question:

Do Fox News, or the New York Post, or the Sun, have editorial independence

or integrity?

If Murdoch answers yes, then he’s a liar and he can’t be trusted with the Wall

Street Journal. If he starts muttering about how they don’t have the same editorial

safeguards that he’s proposing for the Journal and has put in place at the Times,

I’d just ask the same question again: never mind the safeguards, do you, Rupert

Murdoch, personally interfere in the news coverage at those institutions?

The answer, of course, is yes – and Murdoch should say so. He should

then try to explain in a compelling manner why he interferes with Fox News and

the New York Post, and why he wouldn’t interfere in the Wall Street Journal.

Of course, he will — and should — allow himself to make changes. The Wall

Street Journal might win Pulitzers for grand pieces on China and Capitalism

which read well in New York, but it’s weak in terms of being a must-read provider

of breaking business news to Asian businessmen. The Bancrofts should then ask

themselves whether Murdoch’s is a vision they want to sign on to.

The way I see it, the current impasse is due mainly to the fact that the Bancrofts

don’t trust Murdoch with their paper: they think that what he says he’s going

to do and what he actually will do are two different things. And it’s a little

silly for a $5 billion deal to be scuppered by mistrust between two sides who’ve

never even met. They should get together, and talk. If they still don’t trust

him, the Bancrofts are under no obligation to sell. But they should at least

make an effort to find out for themselves what Murdoch’s really proposing.

Posted in Media, publishing | 1 Comment

New York Property Datapoints of the Day

I have a soft spot for anecdotal journalism, like yesterday’s great NYT

piece from Josh Barbanel, featuring not only a $30 million

apartment which the developer won’t allow would-be buyers to inspect, but also

a $16.5 million 2-bedroom apartment on the second floor of the Dakota Building,

on Central Park West.

But today’s news from the Real Estate Board of New York is really impressive:

the average New York City apartment has gone

up 23% in the past year, while the median apartment went up 20%. Median

price per square foot was up 28%.

In other words, we could have a 20% property-market crash in New York City,

and still only be back to where we were at what everybody else seems

to think was the top of the market, in the first quarter of 2006. But as I’ve

said, I

think that unlikely.

Posted in housing | Comments Off on New York Property Datapoints of the Day

The Epicurean Dealmaker

On Friday, I tried to take a stab at talking about fat

tails and kurtosis. What I should have done, had I known about his blog

then, was simply link to the Epicurean

Dealmaker, whose blog

entry on the subject is a model of clarity and clearheadedness. He’s now

on my blogroll, and I’m very much looking forward to everything else he writes.

I might be a bit late to the game — he’s been blogging all year — but welcome

to the blogosphere, O anonymous banker!

Posted in banking | Comments Off on The Epicurean Dealmaker

Can Mortgage-Backed Bonds be Restructured?

Amidst all the noise and hype surrounding the subprime mortgage market, there’s

one thing which hasn’t got a lot of press. (USA

Today, astonishingly, seems to be ahead of the curve here.) If loans have

been pooled, tranched, retranched, and sold to hundreds of investors and CDOs

and the like, what happens when the loans goes bad? How much leeway do loan

servicers have to modify loans which are owned by a disparate set of bondholders?

And what kind of mechanism exists for bondholders or ratings agencies to approve

servicers helping out homeowners in distress?

I’ve been looking into this a little bit, after attending a panel at the Milken

Institute Conference where Lew Ranieri brought up the subject.

Calculated

Risk has a transcript of some of his comments:

The real dilemma for me and I think the real issue . . . will be, we’ve never

had to do substantial restructurings in housing in mortgage securities.

They were always in portfolios, and that made it very easy or at least, we

didn’t have to get 409 people or we didn’t have to rent the Nassau Coliseum

to have a bondholders meeting; we could do it very quickly. In a very long

meeting, last Monday, where we tried to collect virtually everybody in a room,

it became evident that there are a whole host of unforeseen technical problems

if you try to restructure or do large amounts of restructuring within the

security, some of which, we had never even heard of or thought about.

One of the accountants raised his hand and said if you restructure that many

loans, you’re going to taint the Q election and FAS 140 and what he was basically

saying in English for the rest of [us] poor fools, was that there is a presumption

when you – when a bank sells loans, into a securitization that it sold the

loans . . . And what he was saying is wait a minute, if you guys can restructure

all these loans without going back to bondholder, you obviously have control

and you’ve just tainted 140 and Q election.

I’m no expert on FAS 140, and I don’t even know what a "Q election"

is, but it does seem to be the case that when more than 5% of the loans in a

pool need to be restructured, the servicer often needs to get permission, which

isn’t something a lot of servicers have had to do in the past. And when 30%

of the loans in a pool need to be restructured, there’s a good chance you need

unanimous bondholder consent for that, which is something all but impossible

to get.

So, if anybody could point me to places or people where I could learn about

whether and how mortgage-backed securities might be able to be restructured,

I’ll be most obliged – and I’ll report back here as and when I learn anything.

Posted in housing | Comments Off on Can Mortgage-Backed Bonds be Restructured?

Murdoch Takes Another Shot at Wooing Bancrofts

Rupert Murdoch has reportedly offered

the Bancroft family a seat on the News Corp board as part of his campaign

to get them to sell him Dow Jones. I can’t see what good that would do, frankly.

He’s not offering them News Corp stock, and the Wall Street Journal will be

such a tiny part of News that it would probably only come up peripherally at

board meetings. And the Bancrofts, as the Journal itself has done a very good

job of reporting, are hardly monolithic enough to benefit from a single seat

in any event.

Murdoch clearly hasn’t given up, but efforts like this seem unlikely to make

much of a difference. An editorial board which would need to approve the hiring

and firing of the WSJ editor? Would hardly stop Rupert from badgering the editor

with phone calls day and night should he be so inclined. And Murdoch’s promises

to invest extra money into the Journal’s Washington, New York and international

operations do risk coming across as though he’s accusing the Bancrofts of mismanaging

their crown jewel.

On the other hand, Dow Jones stock was trading below $52 today before news

of Murdoch’s letter came out. Maybe what Murdoch really needs is a credible

threat of withdrawing his offer. The problem, of course, is that nobody would

believe it.

Posted in Media | Comments Off on Murdoch Takes Another Shot at Wooing Bancrofts

Wolfowitz 0-1 Bloggers

Yet another reason why Paul Wolfowitz should have resigned

weeks ago. With the media seemingly unable to get its hands on the World Bank’s

final report on its president’s behavior, newspapers such as the Washington

Post are looking elsewhere for material – specifically, the question of

Wolfowitz’s

marital status.

The calls usually start: "Why do you people always . . . " Of late,

there have been a couple e-mails and calls demanding to know why the media

often refer to World Bank President Paul D. Wolfowitz’s companion, Shaha Riza

as his "girlfriend" when, they insist, she’s his mistress, because

Wolfowitz is not divorced from his wife, Clare.

Meanwhile, the blogs are printing much

juicier gossip about Wolfowitz and his disliked aides Kevin Kellems, Robin

Cleveland, and Suzanne Rich Folsom. (The phrase "found lying naked in a

drunken state in a stairwell" appears.) None of this had to happen, but

if people insist on staying on well past their welcome, then dirt will inevitably

start to be thrown.

Of course, Washington being Washington, a lot of this gossip has probably been

in circulation for a while. But now it’s appearing on websites which have received

half a million

pageviews in the past month. At this point, even if he wins, Wolfowitz has

lost.

Posted in world bank | Comments Off on Wolfowitz 0-1 Bloggers

Market Inefficiencies, CDO Edition

Some of us sip

cappuccinos on Sundays, and if we do any weekend blogging it’s as likely

as not to be something silly like constructing an entire blog entry which

lacks the letter e. Alea, however, seemingly

spends his time reading press

releases from second-tier investment banks – something for which the

rest of us can be very grateful.

You know all those stories about how the abundance of hedge funds out there

means that simple arbitrages and profit opportunities have become as rare as

hen’s teeth? Well, it turns out that’s not exactly true. Consider the case of

a special-purpose entity known as Balthazar CSO I BV – or Balthazar, to

its friends. Balthazar issued three tranches of debt, and one tranche of equity,

in 2003. All those tranches then traded in the secondary market.

Now here’s the weird thing: the debt markets soared after Balthazar came into

existence, so one would expect the value of the equity tranche to go up as well.

But in the secondary market, it was trading at only 60% of par. (Or, rather,

it wasn’t trading at 60% of par, but if you wanted to sell your holding,

that’s all that the investment banks would offer you.)

Enter NewSmith Capital, who bought up enough debt to be able to vote to unwind

Balthazar. When that happened, the equity was released, and turned out to be

worth not 60% of par, but 145% of par. In other words, its value, to its owners,

more than doubled, essentially overnight.

What does this mean? Well, the obvious conclusion is that investment banks

are making a fortune when they trade exotic instruments such as CDO equity tranches.

And that the buy-side can and should be a lot more aggressive and a lot less

trusting when it gets bids which seem far too low.

Posted in derivatives | Comments Off on Market Inefficiencies, CDO Edition

Another Art Fund is Founded: How Long Until it Founders?

Chris Carlson has decided he’s had enough of prop trading,

and so he’s moving into the art world instead, setting up an art

hedge fund. Apparently it’s already "raised" £10 million,

although I suspect that a very large chunk of that belongs to one C. Carlson.

Art is not something which lends itself to being invested in by dedicated hedge

funds, and I don’t think that Carlson’s hedge fund is going to do particularly

well. (It’s also not going to be particularly lucrative for Carlson: even with

20% returns and $40 million under management, 2-and-20 comes to only $2.4 million

– and that’s top line, not bottom line.)

There’s certainly a lot of money to be made in the art world, but the real

money is made by being willing and able to hold art for long periods of time.

In that respect, art is more like property than like securities. Carlson’s fund,

however, is called the Art Trading Fund: he wants to be able to move in and

out of art like others move in and out of stocks. Oh, and he wants to hedge

himself, too:

Mr Carlson, a former proprietary trader at Deutsche Bank and UBS, and two

co-founders, are aiming to hedge their investments in pictures using exchange-traded

options that they believe are closely correlated to the art market.

It sounds like what Carlson wants to do is play his eye for undervalued art.

He’ll buy an impressionist "cheap", for instance, hedge the broader

art market using exchange-traded options, and then sell the painting at a profit.

It all seems a bit dubious to me.

I’ve got a better idea for Carlson, who seems to think that he can replicate

art-market returns in the options market: create a tradeable instrument which

mirrors the art market. If it works, I think there could be a lot of demand

for it.

Posted in art | Comments Off on Another Art Fund is Founded: How Long Until it Founders?

What is Ben Stein Smoking?

Poor Brad DeLong has been beating

himself up by reading Ben Stein again. I do have sympathy

with him: I was happily reading the newspaper myself yesterday, sipping on an

excellent cappuccino from Tarallucci

e Vino, when the Stein

column loomed up in front of me like some kind of car crash I couldn’t turn

away from.

Brad’s already dealt with the inflation/unemployment silliness. But in many

ways it just gets worse from there. What does Stein mean, for instance, by this?

If oil, for example, becomes denominated in euros, the price in dollars rises

— perhaps significantly.

Er, no. If Tarallucci e Vino were to start denominating the price of its cappuccinos

in euros, and the dollar continued to fall, then certainly the price in dollars

would rise. But that’s because cappuccino prices are fixed. Oil prices, on the

other hand, are not: they change from day to day and indeed from minute to minute.

At any given point in time, oil has a price in dollars, in euros, in Venezuelan

bolivars, or even in pork bellies, should you be so inclined. If the dollar

falls, then oil might indeed cost more dollars. But that’s got nothing to do

with denomination.

But wait, Stein’s not done yet:

Allow me to deviate from our theme a moment to consider exactly what policy

makers and regulators in Washington might be up to when it comes to monitoring

chief executives.

A new low was suggested in that realm recently by news reports saying that

the Securities and Exchange Commission was considering allowing revisions

to corporate law that would bar stockholders from suing their own managements

in court for wrongdoing.

Instead, corporations would be able to require their owners — yes, their

owners — to go through arbitration instead of court litigation if they had

grievances. To say that this trivializes and betrays the ownership rights

of stockholders is putting it mildly. It’s really a betrayal of capitalism

itself.

No, it’s not a betrayal of capitalism, it’s a betrayal of tort lawyers. Shareholders

suing managers is a spectacularly inefficient way of trying to enforce rules

on how people should run a public company. Intra-company grievances between

owners and managers should be worked out in arbitration. Companies

have a real problem with the class-action lawsuits which pop up every time a

share price falls. They have nothing to do with "the ownership rights of

stockholders" and everything to do with those stockholders refusing to

take responsibility for their own investment decisions and wanting a do-over.

Arbitration is a good thing for genuine shareholder grievances, because they

are likely to be settled more quickly and without as much in the way of legal

fees. It’s a bad thing for people wanting to bring spurious lawsuits.

And then there’s the real clincher.

Another thing that preoccupies me, albeit on a slightly smaller scale, is

an enduring mystery of the retail economic world: why don’t people in

New York City want a Wal-Mart in Midtown?

Yes. A Wal-Mart in Midtown. Maybe we could tear down Rockefeller Center

and build one there. Or repurpose the Central Park Zoo as a big-box retailer;

the Sheep Meadow could be the parking lot. Obviously we’d need to give Wal-Mart

the space rent-free, or for maybe no more than a buck or two a foot, because

that’s how the company can offer us its everyday low prices. But doing so would

surely be worthwhile: "every New Yorker needs food and paper towels".

I only wonder how we’ve all managed to cope until now.

Posted in ben stein watch, economics | Comments Off on What is Ben Stein Smoking?

The World Bank and Corruption

The Wall Street Journal has a long front-page article about the World

Bank and corruption today, by Neil King and Greg Hitt. I think it’s worth

supplying a little bit of background, however, since a lot of people I talk

to don’t seem to really understand the issue here.

The question is how — not whether — the World Bank should deal with corruption.

One way to do so is to engage the issue, and work on plans which aim to reduce

corruption in countries which suffer greatly from it. The problem that many

Bank staffers have with Wolfowitz is that he seemed to be more keen to not

engage the issue, and simply walk away from countries which suffer greatly from

it.

Corruption is something which grows slowly and has deep roots. It can’t be

eradicated by fiat — not by the governments of the countries in question, and

certainly not by the World Bank. It does make sense for World Bank projects

do deal, if at all possible, with the less corrupt parts of the governments

they have to work with. It serves no purpose for the Bank to simply pick up

its ball and go home whenever it smells corruption — all that does is guarantee

that corruption will continue in that country unabated.

And in any case it’s worth remembering that eradicating corruption is both

a very long-term project and also a means to an end, rather than an end in itself.

The true goal of the Bank is poverty reduction. And that can be achieved in

very corrupt countries: see Dennis de Tray, for instance, on

poverty reduction

in Indonesia during the reign of Suharto.

A lot of people seem to think that although Paul Wolfowitz must go, it’s a

pity that the Bank’s anti-corruption initiative might be weakened at the same

time. I think the opposite is true: that without Wolfowitz’s moralizing about

corruption, the Bank can actually be more effective on the issue.

Posted in world bank | Comments Off on The World Bank and Corruption

Unions Cheer Private Equity Takeover of Chrysler

What’s with this new-found love affair between the auto unions and private

equity? The main auto unions in the US, Germany and Canada all can’t seem to

say enough good things about the $7.4 billion deal wherein Cerberus

is buying Chrysler. The deal seems to be that the unions will embrace the

offer in return for assurances that there won’t be any job cuts, which seems

to be a reasonably sensible quid pro quo, Cerberus’s history of slashing and

outsourcing jobs notwithstanding.

Cerberus will now control not only Chrysler but also Delphi and GMAC, which

is a little ironic. First the Big Three start selling off their suppliers and

their financing arms, only to see Cerberus bring not only those former subsidiaries

but now also a carmaker itself back under one roof. Maybe the spinoffs were

more desperate than they were sensible.

Posted in M&A, private equity | Comments Off on Unions Cheer Private Equity Takeover of Chrysler

Paulson hangs Wolfowitz out to dry

Hank Paulson isn’t

going to summit with G8 bigwigs. Kimmitt will go, and probably not say much.

But – and this is important – Paul Wolfowitz will

turn up. What can it all signify? I think Paulson may look at his no-show as

tantamount to hanging Wolfowitz out to dry.

Why isn’t Paulson going? I don’t buy Brookly McLaughlin’s spin from St Louis,

that Paulson’s truancy shows his focus on talks with China. Swotting up on China

is a good thing, no doubt, but a hard-living Goldman Sachs alumnus such as Paulson

can swot on his G5.

John Kirton in Toronto says that Paulson should go, judging by US

actions at past summits, and noting that Paulson is not ill.

Is Paulson unhappy about April’s Namibia

scandal? I think not. I think that Paulson’s no-show has to do with Wolfowitz’s

showing up. Sans Paulson, discussions about Wolfowitz will not go far,

so it could look as though Paulson supports Wolfowitz. But I think that Paulson

in fact thinks Wolfowitz must stand down, and do so soon.

My conclusion: Paulson wants to watch Wolfowitz hang out to dry, and wants

to do so from afar.

(No thanks to TC and J Galt for inspiring

this post’s unusual and lipogrammatical form.)

Posted in defenestrations | Comments Off on Paulson hangs Wolfowitz out to dry

Investment Professionals Stumped by “Portable Alpha”

A survey of

investment professionals at the 2006 National Strategic Investment Dialogue

came up with some depressing results: only 60% of them could define what "leverage"

is, and less than half could define "portable alpha".

On the one hand, it’s easy to say that if you can’t define relatively basic

buy-side terms like these, you shouldn’t be in the business. On the other hand,

I’ve tried my hand at such definitions myself, and it’s harder than it looks.

Here’s my attempt at defining "portable alpha"; it assumes, of course,

that the concept – which is based on something called the Capital Asset

Pricing Model – actually makes some sense.

Institutional investors want to invest with people who use skill (or "alpha")

to beat the market. Hedge funds and other alternative investments often have

very high alpha – but the problem is that they have no correlation with

the market that the investors want to beat. A portable alpha strategy gives

investors broad exposure to whatever markets they want, while layering select

fund managers’ alpha on top.

The definition of "leverage" is left as an exercise for the reader.

(Via Dealbreaker)

Posted in hedge funds | Comments Off on Investment Professionals Stumped by “Portable Alpha”

Mystery Russian Billions Update

It’s obviously Mysterious Russian Billions day today. Not only do we have the

shady Oleg Deripaska paying $1.54

billion for a 15% stake in Magna, a Canadian auto supplier, but we also

have the even shadier Prana, whatever or whoever that might

be, paying $3.9

billion for a shabby 22-story building in Moscow and a few other assets

of dubious value.

In the case of Deripaska, the Wall Street Journal hints at possible national-security

implications, since the Russian oligarch has been denied a visa to enter the

US and will now presumably be part of Magna’s bid for Chrysler. Says the article,

ominously:

Though owned by a German parent, Chrysler is still considered a U.S. company

in that it continues to design, develop and manufacture cars and trucks in

North America and employs about 80,000 people here. If Chrysler does work

for the Defense Department, or has operations that are deemed of national-security

interest, the deal could be subject to review by the Committee on Foreign

Investment in the U.S.

I have no idea what this is talking about – I’m pretty sure that the

PT Cruiser isn’t

in fact part of a top-secret plan to take over the world by means of retro styling.

But in any case, the Prana deal, for the old Yukos headquarters, is even more

mysterious: the company got into a massive bidding war with Rosneft (707 bids

and counterbids in all) for an asset which doesn’t seem to be worth anything

near its final price.

"We considered the lot interesting and we went as far as we were prepared

to go," said Rosneft spokesman Nikolai Manvelov, without explaining why

it was worth almost $4 billion.

The bidding amounts appeared unjustified by the value of the 22-story Moscow

headquarters building and several other buildings in the city center.

"In the investment sales market, the largest sales of office buildings

have been around $120 to $140 million. This is off the scale," said Christopher

Peters, head of research in Moscow at real estate firm Cushman & Wakefield

Stiles & Riabokobylko.

Some observers of the auction said it was possible the bidders knew about

hidden value in another asset in the lot.

I smell the plot for a spy novel here. But in any case, this is Russian capitalism

for you. Money? Yes, lots. Transparency? Not so much.

Posted in geopolitics | Comments Off on Mystery Russian Billions Update

When the Carbon Tax and Cap-and-Trade Kiss and Make Up

Ronald

Brownstein, in the LA Times, has a long column looking at the question of

carbon

trading versus cap-and-trade. The link is from Mark

Thoma, who says that "many economists will tell you a carbon tax is

best"; I’m not sure about that, especially if cap-and-trade emissions are

auctioned rather than allocated.

In any case, Brownstein ultimately comes down in favor of (c), all of the above.

He likes cap-and-trade; he also likes a carbon tax. This is not as silly as

it sounds: cap-and-trade works well for big emitters like energy companies;

a carbon tax works well for small emitters such as individuals with cars. My

main issue with Brownstein’s column is one of omission: he goes into some detail

about the logistical difficulties involved in setting up a cap-and-trade system,

but never mentions that a carbon-tax system would be at least as hard to operate.

And Brownstein is also alive to just how difficult it is going to be to implement

either scheme:

In today’s political climate, weighing the relative virtues of a cap and

a tax is a little like the Tampa Bay Devil Rays deciding whether they would

rather face the Dodgers or the Mets in the World Series. At the moment there’s

no sign Congress is ready to approve even a cap-and-trade system; the last

time the Senate voted on the McCain-Lieberman plan, in 2005, it attracted

only 38 votes. And a carbon tax proposal—because it includes that three

letter word—is a much more incendiary proposition than a cap-and-trade

proposal (which would also raise electricity and gasoline prices, though in

a more muffled and indirect way).

I’m a bit more optimistic. I think the political climate is changing fast,

as the Republicans increasingly move to where big business stands. Bush is going

to do nothing. But his successor, I’m hopeful, will. And I can’t agree more

with Brownstein’s conclusion:

When Washington is ready to act, the real lesson it should take from this

brewing debate over the best way to discourage carbon pollution is that there

is no best way. Progress against a challenge as vast as global warming will

require us to use all the tools available to us: direct regulation (tougher

fuel economy standards for cars, requirements on utilities to generate more

of their electricity from renewable sources); economic carrots and sticks

(a carbon tax that helps fund tax breaks for investment in greater energy

efficiency and alternative energy sources); a cap-and-trade system that sets

a hard limit on emissions; federal procurement that nurtures clean new technologies;

and steps beyond all of these that we can’t yet imagine.

"The reality is we are going to spend most of this century trying to

figure out how to crank down our global warming emissions," says Dan

Becker, the director of the Sierra Club’s global warming program. "We

are going to need everything we know how to do and probably a whole lot more."

Posted in climate change | Comments Off on When the Carbon Tax and Cap-and-Trade Kiss and Make Up

Event Risk and Fat Tails in Hedge Funds

All

About Alpha has made noble attempt to paint hedge funds as not particularly

risky, and "fat tails" as not particularly worrisome. But it misses

the main point, I think.

The blog makes some good points, foremost among them being that the standard

measurement of tail fatness, kurtosis, is a really bad way of measuring how

likely a hedge fund is to encounter a disastrous fat-tail event.

The blog concludes with a provocative quote: "If you think hedge funds

are risky, try stocks." Which is a bit misleading, because what that really

means is that individual stocks are more likely to lose their value than individual

hedge funds. That’s true, which is why no one in their right mind puts all or

even most of their money into an individual stock. Instead, they put their money

into funds, which are designed to be much lower risk. (The reason why hedge

funds are so called is precisely because they’re supposed to hedge the risks

inherent in the stock market.)

What’s more, the problem with improbable but disastrous events is that they

don’t happen very often, and that therefore they’re very hard to measure with

any accuracy. A fund might have low kurtosis, while still being very highly

exposed to any number of individual events which just haven’t happened over

the course of the fund’s existence.

Stocks, for all their volatility, represent real companies in the real world,

which tend not to be wiped out overnight by improbable fluctuations in the financial

markets. In fact, companies have much lower event risk than hedge funds do.

And in any case, the problem with hedge funds is not that they have too much

event risk in aggregate. The problem is rather that there’s bound to be one

or two hedge funds out there which are too highly levered and carry too

much event risk. If those one or two hedge funds are big enough – as we

saw with LTCM – they can pose real systemic risk.

Posted in hedge funds | Comments Off on Event Risk and Fat Tails in Hedge Funds

Wolfowitz: Deals No Longer On The Table

Paul Wolfowitz should have resigned weeks ago, and the longer

he’s holding desperately onto an untenable position, the more painful his departure

is going to be, both for him and for the USA. Steven Weisman

reports

today that no one’s really interested in doing deals any more:

There had been talk in recent weeks of an arrangement in which Mr. Wolfowitz

would be offered the option of resigning in return for some kind of resolution

saying he acted in good faith in the handling of a pay and promotion package

for Shaha Ali Riza, his companion. But on Thursday it appeared too late for

such language to be included in any resolution to be adopted next week.

European officials have encouraged the United States to go along with Mr.

Wolfowitz’s ouster in return for a promise that President Bush could

continue the tradition of the United States picking the next president. But

that possibility has not been seized by the administration in its talks with

the bank.

It’s worth noting that the Europeans are incredibly reluctant to force a board

vote on Wolfowitz. They don’t want to anagonize their allies, the Americans,

and they don’t want to damage the Bank more than it has been damaged already.

But the intransigence being shown by both Wolfowitz and the Bush administration

is forcing their hand. A sad state of affairs, indeed.

Posted in defenestrations, world bank | Comments Off on Wolfowitz: Deals No Longer On The Table

New York Traffic Pricing, Not Very Bright Ideas Department

What is it about Manhattan traffic which makes clever people come up with decidedly

silly ideas? Back in 1999, for instance, James Surowiecki wrote

a column headlined "Deregulate

New York City", in which he said that New York should deregulate the taxi

market, allowing yellow cabs to compete with each other on price.

Aesterday, Robert Frank wrote a New York Times column explaining

that although congestion pricing is a good idea, it would be an even better

idea if it didn’t

actually cost people much money to drive into Manhattan:

Every worker in Manhattan could be given transferable vouchers that could

be used to defray some portion of the new fees. This would protect low-income

people who sometimes have no choice but to drive into the city during peak

hours. Those who could avoid such trips could sell some or all of their vouchers

to others. All New Yorkers could thus enjoy the benefits of cleaner air and

reduced traffic congestion without imposing a burden on low-income families.

None of this makes any sense. For one thing, you’d need to determine who counted

as a "worker in Manhattan" – would a self-employed blogger working

from home count? Would a light-industrial manufacturer in Queens needing to

visit a client in Midtown count? Then, you’d flood the market with transferable

vouchers, since the vast majority of workers in Manhattan never dream of commuting

by car. Hell, most of them probably don’t even own a car. So the cost

of a voucher allowing people to drive into Manhattan would plunge, traffic into

Manhattan wouldn’t go down, and you wouldn’t get any of the benefits of cleaner

air or reduced congestion.

The whole point of a congestion charge is that it has to be expensive enough

to hurt, at least a little bit. If you defray the cost, you defeat the purpose.

London mayor Ken Livingstone has a much better idea: charge

high-emissions vehicles $400 to enter the congestion zone. The congestion

charge should be higher, not lower. (Hat tip to the excellent Streetsblog

for picking up on this.)

As for the political problems associated with low-income New York City car-owners

who regularly drive into Manhattan, first you’ll need to persuade me that such

people exist. Maybe we could just pay both of them a couple of hundred bucks,

and be done.

Posted in cities | Comments Off on New York Traffic Pricing, Not Very Bright Ideas Department

The Payday Loan Debate

There’s a short

but sweet debate over at Business Week today between two prominent econobloggers,

Nouriel Roubini and Tyler Cowen. The question

is whether the US government should place greater restrictions on car sellers,

pay-day lenders, and tax preparers who offer the working poor cash or credit

with high fees and interest rates. Roubini says yes, it should. Cowen says no,

it shouldn’t. Roubini is right.

Roubini, a famous housing bear, concentrates, as is his wont, on subprime mortgages.

I’m happy to see those restricted, but I don’t think it would make the slightest

bit of difference – because few if any of them were written at usurious

interest rates. The problem was that people were buying houses they couldn’t

afford, not that banks were charging them exorbitant interest. (In fact, the

banks are losing money on those loans, which means they’re not exactly profiteering.)

The real scandal is not with subprime lenders but with payday

lenders. Many of these are geniunely predatory and should be curtailed.

Cowen approaches the debate from the standpoint of a theoretical economist.

"There are hundreds or thousands of lenders competing to give borrowers

the best deal possible," he says, setting up a utopian world which simply

does not exist in reality. Insofar as paday lenders compete, they don’t compete

on price: they compete in terms of having convenient locations which are open

very late and very early, and which don’t ask nosy questions about the borrower’s

income or immigration status.

In any case, the number of payday lenders in any given location is hardly in

the triple digits, let alone the quadruple digits: indeed, I’d be most surprised

if it was even in the double digits. Payday lenders tend to have tiny little

hyperlocal monopolies, a bit like corner delis in New York: you just go to your

nearest one.

As a board member of my local community development credit

union, I feel obliged here to point out that CDCUs nearly all offer vastly

superior alternatives to payday loans – at least as far as their financial

terms are concerned. Tyler’s wrong that the interest rates charged by payday

lenders are necessary because the borrowers are bad or unknown credit risks

– he just needs to look at his local credit union to work that one out.

The problem, of course, is that credit unions find it very hard to compete in

terms of having convenient locations and long opening hours. But they are, always,

a much better way to go.

Posted in economics | Comments Off on The Payday Loan Debate