Felix Salmon

There was much press a couple of days ago when Trader Monthly announced that the top five earners on its top traders listing all brought home more than $1 billion last year. (Of course, “brought home” is a really stupid way of putting it: in fact, the vast majority of these earnings are reinvested in the traders’ hedge funds.)

But who lies beyond the top five? The Guardian today has the whole list. They’re giving earnings in pounds, so double all the figures to get the dollar equivalents. Interestingly, no fewer than four Goldman Sachs traders are sprinkled in among the hedge-fund managers, and they all made more money than CEO Lloyd Blankfein.

Raanan Agus, Driss Ben-Brahim, Pierre-Henri Flamand, and Morgan Sze all made between $80 million and $100 million last year, we’re told. Meanwhile, former Goldman star Eric Mindich — one of those people who says “I can make more money at my own hedge fund” and goes off to start one — is nowhere to be seen. Maybe Agus, Ben-Brahim, Flamand and Sze would do well to stay where they are.

Last year, Vonage founder Jeffrey Citron wanted to take his company public. The problem was, he’d been indicted for securites fraud back in 2003, in a case surrounding his previous company, Datek Securities. So he needed someone else to be CEO, and he alighted on a chap named Mike Snyder.

Well, that didn’t last long. Snyder is out, and Citron is now “interim” CEO — we’ll see how long that lasts. Vonage, of course, is on the losing side of a nasty patent fight with Verizon at the moment, and has the dubious distinction of being by far the worst-performing IPO of 2006.

The good news is that the announcement seems to have helped the stock rise by a very impressive 10% today; the bad news is that that rise is just 31 cents per share. (By contrast, the stock closed on its opening day at $14.85, down $2.15 from the IPO price.)

For the time being, I’m keeping my Vonage service, which I’ve had for four years now; the alternatives don’t seem to be any better, especially when you take into account Vonage’s international phone rates. (Calls to UK landlines are free!) But there’s no way I’d go anywhere near the stock, even if I were a stock-picking kinda guy, which I’m not.

If you read my entry from last night, you’ll know I went to a discussion on climate change at Columbia yesterday, which was kicked off with a presentation from the man himself, Sir Nicholas Stern of the Stern Review on the Economics of Climate Change.

I managed to ask Stern the question I’ve been wanting to ask him for a couple months now — and, what’s more, I got great answers from both Joseph Stiglitz and Jeffrey Sachs as well. My question was much the same one as that implicit in Charles Kenny’s recent paper. If you look at Stern’s worst-case scenarios, most of them put the population of the future on a much higher standard of living than the population of the present. So the $400 billion we’re (hypothetically) spending today on reducing carbon emissions is being spent so that future generations can be even richer still — the whole thing feels a bit like taking from the poor (us, now) and giving to the rich (our great-grandchildren).

Stern replied first by noting that the $400 billion / 1% of GDP cost is only an estimate. It’s entirely possible that the cost could actually be negative, he said: “a Schumpeterian tech-driven burst of growth is possible and even likely from zero-carbon sources of electricity”. On the other hand, Sachs noted that the 1% of GDP cost is predicated on our developing a workable and scalable method of capturing and sequestering the carbon output from the coal-fired power stations which are certainly going to be built in huge numbers in India and China. If we don’t get the CCS (carbon capture and sequestration) right, then the cost of reducing carbon emissions could easily double, or more. So let’s split the difference and say that the 1% of GDP cost is realistic, to be borne mainly but not entirely in the form of higher energy prices.

Stern then said that it’s also entirely possible that if we do nothing at all, and carbon emissions continue to rise, then in the next century “we could end up a lot poorer than we are now”. His models show a 50% chance of global temperatures rising by more than 5 degrees Celsius in the business-as-usual case; when global temperatures were 5 degrees lower than they are now, we were in the last Ice Age and most of Europe was under a mile of ice. That sort of temperature change would be catastrophic on many levels and would transform the planet in very, very negative ways. But Stern did agree that under his models, “most of the time we’re better off”. So, he says, “you discount for that”. An expenditure today is only worthwhile, under his model, if it causes a disproportionate increase in future wealth.

And then came the barrage of very good reasons why it makes sense to spend money today for the benefit of future generations.

First, from Stern: climate change is a stock-and-flow problem. We need to decrease the flow of carbon into the atmosphere now, in order to reduce the stock of carbon in the atmosphere in future. Once it’s there, you can’t take it out — in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible. Once coral reefs die, glaciers melt, and cities drown, they’re gone forever, and no amount of future wealth can make up for that.

He put this idea in economic terms a few minutes later: think of the world as being made up of two types of capital — physical capital and environmental capital. Since the Industrial Revolution, we’ve been growing our physical capital at the expense of running down our environmental capital. As a result, what you might consider the “exchange rate” between physical capital and environmental capital has already gone up: we value our environment much more highly now, in real dollar terms, than we did a couple of generations ago. If we continue to grow our physical capital at the expense of our environmental capital, that exchange rate will continue to rise — and even if we’re wealthier in money terms in future, we’ll find that the cost of that wealth, in terms of spent environmental capital, will be seen to have been excessive. Environmental capital might be expensive now, but it will also never again be cheaper than it is today — so we have an imperative to start using physical capital to invest in it.

Sachs had another take. There’s no reason, he said, that spending $400 billion now means that we should reduce our consumption by $400 billion. Economically speaking, you can get exactly the same effect if you reduce your savings by $400 billion. Savings, of course, are the capital that we pass on to future generations in order to help them grow their wealth. “The future would rather have abatement capital than non-abatement capital,” he said, adding that you can finance expenditure out of savings rather than consumption through the application of fiscal policy. (I think that this means we just borrow the money.)

“We are stewards of the future,” said Sachs — future generations aren’t around to speak to us, so we have to act on their behalf. “And they want less capital and a better climate.”

Then Stiglitz stepped in, to introduce the distinction between social return and financial return. Not everything, he said, could be measured with GDP-per-capita figures.

And finally, my own answer to my own question, which is that the $400 billion cost will not be borne by all present citizens equally — it will be borne much more by the rich, who are the major consumers of energy. If you compare the wealth of the rich today to the wealth of future generations in general tomorrow, then the increase looks much smaller.

Let me stick my neck out on the future direction of housing prices in the US. I think that we’re in the middle of a mildly chaotic move from a pretty flat price distribution to one which looks much more like a power law. Or, to put it another way, housing inequality is on the increase. The whole concept of an “average” or “median” house is going to become useless, because people are increasingly not paying for the house so much as they’re paying for its location. Specifically, New York City is a unique property market, which can and will continue to appreciate even if the rest of the US sees a significant slowdown.

In the first quarter of this year, the New York City housing market boomed even as the rest of the country saw some nasty falls in house prices. And I suspect that the same trend might continue for quite a while. Partly, that’s because precious few Manhattan homeowners have subprime mortgages. But on a much larger scale, it’s because New York is one of a handful of global cities which are the winners in the location stakes. The set of things you buy when you buy an apartment here can’t be measured in square feet.

At 11:18am this morning, I got an email which told me that the Committee on Global Thought at Columbia University was having a discussion about the economics of climate change. The discussants? Jeff Sachs, Joe Stiglitz, and Nick Stern. Said discussion was happening at 4pm, and was free and open to the public. Of course, I went. I was even fortunate enough to be able to put to Stern directly my single biggest question/problem on the subject of climate change. He gave a great answer — and then Sachs answered the question too, and then Stiglitz gave his answer, and then Stern came back and added to his answer. (I’ll blog it in a minute.) It was a wonderful moment, and I thank New York City for it.

After the event, I bumped into a friend of mine who I hadn’t seen in a while, and we had an impromptu couple of bottles of wine between four of us at a cafe on the Upper West Side — her, me, and two very interesting scientists. I also got caught up on her cousin, who I’d lost track of, and who, it so happens, is arriving in New York tomorrow for a week.

The climate change event took place one week to the day after I went out for lunch with Nassim Nicholas Taleb, and had a fascinating and wide-ranging conversation with him. In between, I went to the movies, discovered a cool underground club in Dumbo, had a long conversation about transfiguration with a chap called Victor from Malta, hosted an impromptu barbecue where my friend Amy met my upstairs neighbor Dan, looked after a dog named Coco for a few days, went to a Mozart opera directed by a South African artist, and suffered a hard drive failure which was made much easier to bear by the fact that the Apple Store is in easy walking distance. This morning, before heading uptown to the Columbia event, I helped Dan and Amy move the couch he’s been trying to get rid of for ages into the back of a pickup truck belonging to another friend.

On the subway uptown, I listened to Decasia on my iPod, while reading Nick Paumgarten’s article about commuting in the New Yorker:

“I was shocked to find how robust a predictor of social isolation commuting is,” Robert Putnam, a Harvard political scientist, told me. (Putnam wrote the best-seller “Bowling Alone,” about the disintegration of American civic life.) “There’s a simple rule of thumb: Every ten minutes of commuting results in ten per cent fewer social connections. Commuting is connected to social isolation, which causes unhappiness.”

I have a wonderful job: blogging is something I can and will do from anywhere, and my commute literally couldn’t be any shorter, since I work from home. On its face, it’s quite a lonely lifestyle: I can very easily get up in the morning and never leave the house or have any visitors all day. I have no colleagues to gossip with over the water cooler, and I’m not paying a premium to live near my work. Given the economics of commuting, as laid out by Paumgarten, I should be jumping at the opportunity to sell my convenient-for-a-commuter place in Manhattan and move out to some bucolic rural town.

But of course I can’t imagine living anywhere other than Manhattan, because it’s unique in so many ways. Everything I’ve done over the past week is just as much a function of where I live as it is a function of who I am. And I’m pretty sure I would never have got my blogging gigs, first at RGE and then at Portfolio, had I lived anywhere else. Robert Putnam is right, it would seem: the density and vibrancy of New York forces social connections onto people whether they like it or not. And it’s impossible to replicate.

Anybody can build a suburban McMansion; if it has a lot of square feet, and money is cheap, then it might well sell for a lot of money. On the other hand, if demand for space goes down, or money gets more expensive, then the value of large homes in the suburbs is certain to fall. New York is different. When people buy here, they’re buying something you can’t get anywhere else. If you want to live in one suburb, you might well make do with another suburb. But if you want to live in New York, nowhere else will do.

And because New York is a global town, demand for property here is global as well. Every time the dollar falls, New York property becomes that much more appealing to millions of Europeans and Asians who have visited and dreamed of living here: it’s not even expensive, by London or Hong Kong standards.

I wouldn’t be at all surprised were someone to tell me that Sachs, Stiglitz and Stern were all having dinner tonight with Bill Clinton, maybe at the house of Mike Bloomberg or George Soros. It’s the kind of thing which happens in New York — and in precious few other places. Davos, maybe, once a year. As such people move to New York, other such people follow them here, in a self-perpetuating virtuous cycle.

Taleb says, in his latest book, that there’s no particular reason why New York rose and Baltimore fell. But now it has happened, it can’t be stopped. Baltimore will never again be a leading global city. And — I feel comfortable in saying — New York will never again (not in the next few decades, anyway) be a crime-addled drug den like it was in the 1980s. The road from there to here was not foreseeable. But the road ahead is clear: New York City is pulling away from the pack, and the bigger a lead it takes, the faster it goes.

There are few stories as popular as the ones ogling the multimillion-dollar paychecks of the business and finance honchos who eat at swanky New York eateries such as Balthazar and Telepan. I wonder what those masters of the universe would think if they knew that the reservationist at Balthazar makes $12 an hour, or that the waiters at Telepan not only earn just $4.60 an hour, but the managers take a “huge portion” of their tips as well. Just askin’.

(Via Eater)

The lead headline on CNNMoney.com right now is “Home prices headed for historic drop”: we’re told this will be “the first annual decline in nearly 40 years of tracking.”

The headline comes in response to news from the National Association of Realtors: while it thought in February that 2007 prices would rise by 1.2%, apparently it thinks now that they will fall by 0.7%. Apparently all the pain will be concentrated in a few markets:

The group estimates that about three-quarters of the markets nationwide could still see a narrow increase in median sales prices during 2007, but that those gains will be outweighed by the declines in the markets that saw big gains in sales and prices during the record sales years of 2004 and 2005.

This surprises me, since the data I’ve been looking at shows the biggest declines in more depressed, industrial areas such as Michigan and Ohio. But this doesn’t surprise me at all:

The group’s forecast sees an even bigger slowdown in the new home market, as it is forecasting new-home sales will come in at 904,000 this year, down 13 percent from the 1.05 million sold last year.

There’s no doubt that new-home construction is slowing down. But couldn’t that alone explain a large part of the median-price drop? Reader Glen Lineberry emails me:

Everyone assumes this means that houses are selling for less. Isn’t an equally logical explanation, given all the media coverage of the housing slump and mortgage problems, that people are simply buying less expensive houses? Wouldn’t that also shift the median price, if people decided they could live without an additional bedroom, or weren’t willing to pay the freight for someone else’s kitchen renovation?

Now, instead of “less expensive houses,” just try reading “fewer brand-new McMansions”. It’s a well-known fact that the average new-home size has been growing steadily for years, and positively booming of late. So if those new homes bear the brunt of the slowdown, and are sold in much lower numbers, that could do nasty things to the median sales price even if any given existing home doesn’t fall in value at all. The new homes don’t even need to be sold at a lower price, there just needs to be fewer sales.

For even more fun ‘n’ frolics, check out CNN Money’s list of the 100 largest housing markets in the US, complete with forecasts for how those housing markets will do over the next 12 months. The forecasts were obtained by rolling dice from Fiserve Lending Solutions. Apparently McAllen Texas is in for a big boom, San Francisco will see a modest uptick, New York City will fall by almost 4%, and poor old Phoenix, home of Glen Lineberry, will see a 5.5% collapse. Not that Lineberry is particularly worried:

The growth here is just beyond belief. More than 60,000 new housing starts in 2006. It’s down to half that this year, but that’s still the third highest number on record.

A massive light-rail project is underway, to open December 2008, and both ASU and the UA Medical School are building new campuses in downtown Phoenix, so we’re seeing a return to central parts of the city. Lots of infill projects, from single-family homes to condo and apartment complexes, are springing up and median prices are firm or slightly higher.

It’s in the giant tract developments on the outskirts of the city — often an hour’s drive from downtown and the airport — that houses aren’t selling. The builders are holding inventory, investors who’d put down small deposits have walked away, and the only way for a seller to compete is on price.

In the more central neighborhoods, it takes a little longer to sell, but houses offered at last year’s prices are selling. When you remember that prices here went up 25% last year, and doubled over the last three years, that’s no so bad.

Ooh, this is juicy! The FT’s Alphaville blog has come out and declared that one of Bloomberg’s biggest stories today is a hoax.

The story, headlined “Gold Fields May Receive Bid From Pastorini-Led Group,” is very long, very detailed, and has helped drive up shares in Gold Fields by 11% in one day.

Whether or not the Pastorini of the headline even exists is far from obvious. As Bloomberg’s Stewart Bailey concedes in his story,

Pastorini’s name didn’t appear in a search under U.S. Securities and Exchange filings. There was no trace of his name in a Google search. He declined to name his previous employers or provide details of his track record.

But Bailey does quote a lot of people in his story, all of whom at least implicitly are taking his story seriously.

One way or another, it seems, either the FT or Bloomberg is going to end up with a certain amount of egg on its face.

Bloomberg’s Doron Levin gets off a nice one-liner at Kirk Kerkorian today, and his bid for Chrysler — which, as you’ll recall, is contingent on the United Auto Workers taking on a huge chunk of Chrysler’s liabilities and risk. The bid, he says,

is a bit like proposing a manned mission to Pluto, subject to the invention of a spaceship that can traverse the solar system.

Certainly the noises coming out of Frankfurt and Detroit are unlikely to bolster Kerkorian’s spirits. Dana Cimilluca points us to an article by Tim Higgins in the Detroit Free Press, saying that both DaimlerChrysler and its unions can’t stand the idea of selling to Kerkorian:

Canadian Auto Workers President Buzz Hargrove said he opposes the Tracinda offer.

“I am not interested in Kerkorian’s style. His whole history has been to make money by taking advantage of throwing a lot of people out of work,” Hargrove said. “He’s the guy I am totally opposed to.”

Of course, the Canadian Auto Workers aren’t going to be particularly influential in this deal, but with Frankfurt analysts saying that Kerkorian “is the last person on Earth [DaimlerChrysler] would be willing to sit down and negotiate with,” and Kerkorian being kept out of meetings between DaimlerChrysler and its bidders this week, the odds of Kerkorian winning this battle would seem to be slim-to-nonexistent.

To read all the press about the Citigroup layoff plan of late, it seems there are two main planks: first, fire about 17,000 people. Then take another 10,000 jobs or so, and move them out of New York to cheaper parts of the US, or move them out of the US entirely to cheaper parts of the world. Finally, take some untold number of extra people — in the tens of thousands — and simply don’t replace them when they leave for whatever reason.

But take another look at the story now that the announcement has actually been made:

Roughly 8 percent of Citigroup’s 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts. About 1,600 jobs will be eliminated in New York City, where Citigroup currently has 27,000 employees.

If 8% of the total workforce is affected altogether, and if New York City is the most high-priced location, then one would expect much more than 8% of New York City’s employees to be affected.

In fact, however, it seems that Citigroup’s New York payrolls will only fall by 6% — which is less than the corporate average.

Is there less to this story than meets the eye? If payrolls aren’t being slashed in New York, it’s not clear where they are being slashed. Maybe in places like Tampa, Florida, where Citi has a big office with 3,000 people servicing Latin America; or in O’Fallon, Missouri, where CitiMortgage employs 4,750 people. If those places are hit more severely than New York, then maybe some of the rhetoric about cutting where costs are highest will sound a little hollow.

David Leonhardt’s Economix column has finally been promoted from the front of the Business section to the main front page! Congratulations to him. And the subject matter is dear to my own heart: rent vs buy calculations. In fact, by far the best thing about the article is the online rent vs buy calculator — bookmark it, and use it whenever you or your friends are thinking of buying a place. It’s great.

Given his space constraints, one can forgive Leonhardt not going into gruesome detail about all the different variables which go into such calculations. But I would still take issue with a large chunk of how his story is framed.

To read the article, the main variable in determining whether or not you should rent or buy is the amount by which property prices are going to rise in future. Most of the calculations hold everything else constant, and then wonder how many years it will take you to break even given different rates of property-price increase.

But spend a bit of time fiddling around with the calculator, and you realize it’s not nearly as simple as that. For instance, the NYT’s calculations have a default rate of rent increase of just 4% per year. That seems low to me, given the fact that rent increases haven’t remotely kept up with price increases in most of the country. If the two come closer into line with each other, some of that might come from prices going down — but a large chunk of it might come from rents going up. It’s hard in the rent vs buy calculator to account for the risk that your rent will suddenly go up by 15% next year.

There are lots of other variables you’ll probably want to change, too, like your marginal tax rate (the NYT assumes it’s only 20%); the upfront costs of renting, in terms of broker’s fee and whatnot (NYT assumes zero, and, it seems, also assumes that renters won’t move house any more frequently than owners); and the inflation rate — which has a surprisingly large effect on the rent vs buy curve, for reasons I don’t fully understand.

There are three main points I’d make which Leonhardt ignores. The first is that he assumes you have your entire down payment sitting around in a brokerage account compounding at 5% per annum for as long as you have your place. I don’t think that’s entirely realistic — check out my blog on buying as a commitment device for much more along such lines.

The second point is that when you look at the y-axis, your potential downside is pretty small compared to your potential upside. What the rent vs buy calculator can’t do is assign various probabilities to various outcomes and then come up with a net expected return. If it could, buying would become more attractive because of the small chance of a big windfall.

Finally, it’s worth noting that the maximum downside is normally pretty much equal to the combined buying and selling costs of owning. The NYT assumes that the cost of buying a house is 4% of the purchase price, and that the cost of selling a house is 6% of the purchase price. When you add those two up, they account for essentially all of the advantage that renting has over buying.

In other words, take your eyes off the house-price appreciation at the exclusion of everything else, and definitely ask yourself what might happen if, for example, the internet helps drive selling costs down to 2% from 6%.

Add Michael Bloomberg to the billion-dollar-a-year club. DealBook reports that Fortune’s Carol Loomis has had an inside look at the books, and found 2006 profits of $1.5 billion on revenues of $4.7 billion. Given that Bloomberg personally owns more than two-thirds of the company, his share of the profits would seem to be in the ten-digit range.

Which makes the following all the weirder:

Fortune speculates that Mr. Bloomberg might instead try to leverage up the company to pull out some cash, a scenario that would become more likely should he decide to run for president, which a number of people have reportedly urged him to do.

As for Mr. Bloomberg’s stake, Ms. Loomis writes:

One sticky fact about the $13 billion or so: Right now it’s in the company, not handy if Mike were soon to decide he needed cash for a campaign or philanthropy. So how to create liquidity? The probable answer is debt. Mike may not as yet have taken any on, but a source close to the company says he surely will.

Both political campaigns and philanthropic contributions can certainly consume a lot of cash. But $1 billion a year? Even by today’s presidential campaign standards, it would be mind-boggling if anybody spent more than that. So why can’t Bloomberg just continue to campaign and donate using cashflow rather than debt?

One reason why energy traders can make $2 billion in a year is that energy prices are crazy, crazy things — they often behave more like hotel rooms than like normal assets like stocks or bonds or 2-bedroom apartments. Back in October, for instance, the spot price for natural gas in Britain was briefly negative.

The problem is that it’s really, really hard to store electricity — which is the main reason why electricity, at least if you’re a reasonably large consumer of it, costs a lot more during the day than it does at night. What consumers and electricity companies both need is a massive network of electricity storage devices, from which electricity could be drawn down during periods of high demand.

Now, electricity storage devices are better known as batteries. But batteries don’t generally connect to the mains — unless they’re in electric cars! Now we’re getting somewhere:

A utility’s electric meter spinning backwards, pulling power from souped-up batteries in a modified Prius, drew Silicon Valley leaders to a Sunnyvale, CA parking lot today.

At an event put on by the Silicon Valley Leadership Group at the headquarters of chipmaker AMD, local utility Pacific Gas and Electric (PG&E) gave what it called the first-ever Vehicle-to-Grid (V2G) public technology demonstration.

The plan: drivers, who charged their vehicles at night when power was cheap, could commute by day, plug their vehicles in at their destinations, and receive rebates if the power grid needed electricity at time of peak demand and pulled power from their batteries.

This is a really good idea — David Neubert calls it “Electricity 2.0” — although it won’t happen in reality until well into the next decade. And it might even help smooth out energy costs so that we consumers get lower prices and people like John Arnold have to make do on a couple of hundred million a year.