Felix Salmon

It was probably inevitable, but that doesn’t make it any less depressing. Barney Frank has now come out and said that investors in mortgage-backed bonds should be liable for the underlying loans.

“More money was being lent than should have been lent,” Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds “provided liquidity without responsibility.”…

Lenders this decade have increasingly relied on mortgage-backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks’ exposure to the risk of default is excessively diluted.

By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. “There should be a decrease” in the money available for subprime mortgages, he said.

Um, Earth to Barney? There already has been a whopping great decrease in the money available for subprime mortgages. Apparently subprime MBSs are now trading at 550 basis points over Libor, up from 150bp over in early February. What you want to happen? Has already happened – without any legislation at all!

Barney seems incapable of understanding that sometimes markets can self-correct without any help at all from Washington. Underwriting standards have tightened up. The most egregrious lenders with the worst track records have gone out of business. The mortgage market is now pretty much where it ought to be, having overshot in the direction of too much liquidity about a year or so ago. We’ve made our mistakes, we’ve paid for them, and the worry now is not that there’s going to be too much liquidity but rather that there’s going to be too little.

Frank’s not going into much detail about what his proposed legislation is going to look like. But anything which penalizes bondholders is a really bad idea. The existence of the MBS market has made the US mortgage market much more efficient than any other mortgage market in the world. That’s a good thing. Let’s not break it.

It’s not easy to become a billionaire – making a billion dollars over the course of just one lifetime. On the other hand, if you’re a hedge-fund manager, it seems that making a billion dollars over the course of just one year is entirely doable. Indeed, according to Trader Monthly, Centaurus Energy’s John Arnold made as much as $2 billion last year.

My favorite part of the Trader Monthly listings is that they bucket income in increments of half a billion dollars: Arnold made between $1.5 billion and $2 billion, as did James Simons, while Eddie Lampert, Boone Pickens, and Steven Cohen all made between $1 billion and $1.5 billion.

Arnold is still only 33 years old, and in the space of one year he has become dynastically wealthy to the point where he couldn’t spend all his money if he tried. So what’s he going to do for the rest of his life? The depressing but most likely answer is that he’s going to try to make even more money. Which is one reason why John Arnold made $2 billion last year, and you didn’t.

Or, How A Throwaway Blog Entry Can Sap Your Will To Live… it all started with one of those silly little articles the WSJ runs in its Career Journal section, this one headlined “How Blogging Can Help You Get a New Job“. It got picked up by Barry Ritholtz, which gave it some semblance of relevance, so I thought I’d point out that the big headline on page B7 of the paper WSJ was actually “How Blogging on the Web Can Help You Get a New Job”. Yeah. Blogging on the Web. Which struck me because Steven Weisman of the NYT today had this to say about Paul Wolfowitz:

The highly unusual message sent out by Mr. Wolfowitz, a former deputy defense secretary who was appointed to the bank presidency by President Bush, came after weeks of discussions, both within the bank and, following an article about the subject in The Washington Post, elsewhere around Washington and in the world of Internet blogs.

If you’re a blogger, two=trend, and so I had myself a nice little throwaway blog entry there. So I tried to scan the WSJ page, and the scanner kept on crashing Photoshop. So I took a digital photo of the WSJ page, and tried to upload that to my computer, but halfway through the upload my external hard drive stopped responding. And so I’ve spent roughly the last 90 minutes trying to troubleshoot my HD problems, to no avail, and I’m now reduced to hoping that if I take it into the shop they will at least be able to back it up for me somehow.

Now, realistically, none of this had anything to do with my blog entry – it just so happened that the photo which seemingly broke the hard drive was a photo I wanted for my blog. But I’m blaming the blog anyway, because blaming the HD itself (a Western Digital MyBook, since you ask, which I bought because it was meant to be much more reliable than most external hard drives) is so boring.

Merrill Lynch announced last month that it was severely restricting the distribution of its research to journalists. How’s that working out for them? Well, Alphaville today has got its hands on Merrill’s latest ABN Amro report, and is happy to give us the juicy details.

The problem with the Barclays bid for ABN Amro, as we all know by now, is that Barclays can’t offer the savings that other suitors, such as RBS, might be able to find. So where’s Barclays’ comparative advantage? Maybe it’s financial and regulatory. Here’s Merrill’s John-Paul Crutchley:

We find it interesting that the only formal announcement from Barclays, other than the confirmation that discussions are occurring was to announce that the Head Office and Lead Regulator would be Netherlands based. We are aware that Netherlands corporate law allows for differing classes of equity. This might give Barclays a financing option which may not be available to other bidders who are less willing to either relocate their domicile or submit themselves to a Netherlands based regulator.

The idea is that Barclays would pay for ABN using a new class of non-voting, fixed-dividend shares. This gives more upside to Barclays shareholders, and more certainty as to price for ABN shareholders.

And while we’re in the world of speculation, Alphaville also offers this:

Investment bankers believe, for example, that RBS could afford to pay more for ABN, if it then sold the bank’s Brazilian operations to another lender, such as Spain’s Santander.

ABN’s Brazilian operations are the only part of the bank showing any growth, so any buyer might be loath to sell them. But RBS has no strategic interest in Brazil, and there’s surely no shortage of potential buyers for Banco Real. Santander is only one: another obvious candidate would be Citigroup, which has proclaimed an interest in a big Brazil acquisition for years.

John Carney and Thorold Barker agree: Goldman might be a glorified hedge fund, but it sure ain’t valued like one. (If you can’t get past the FT subscription firewall, there’s a decent summary here.) Carney’s solution? Goldman should spin off its trading business. That would solve at a stroke any number of conflicts of interest, as well as do wonders to the valuation of the whole.

Barker doesn’t go quite as far as Carney, but he does reckon that more transparency from Goldman on where its profits are coming from could mean the bank’s multiples moving up towards the kind of levels seen at Fortress and Blackstone.

Let me throw in my own idea: Blackstone, or KKR, or Silver Lake, or someone along those lines, should just buy Goldman already. People have been talking about the first $100 billion private-equity deal for some time now – and this could be it. Goldman is a great PE target: an undervalued company with highly-paid managers who historically have hated the idea of a public listing, with all the disclosure requirements associated with it.

Goldman’s market capitalization right now is in the region of $85 billion. Any buyer would obviously have to pay a significant premium over that sum. But in theory, there’s no reason why it shouldn’t happen. And maybe under new management Goldman’s funds will do even better.

It’s taken five months, and the fat lady (a/k/a Sydney-based Perpetual Investments) hasn’t sung quite yet, but it very much looks as though Mexican cement company Cemex has finally snagged Rinker. Cemex is arguably the best-run company in Latin America, and has been growing through acquisitions for decades – it knows how to play this game. But this was a tough one, mainly because Rinker is headquartered and listed in Australia. Rinker’s operations are primarily in the US, and so Cemex is valuing the company in US dollars. But the Australian dollar is so strong these days – it just hit a 17-year high – that any price in US dollars seems underwhelming in Aussie terms.

But the deal seems to be all but done, and the markets like it: Cemex’s shares are up, and Rinker’s shares are trading below the Cemex offer price, which means that no one expects a better offer to come along. Count this as a triumph for Cemex CEO Lorenzo Zambrano, who’s paying a sum substantially lower than Rinker was trading at last year.

Index funds are a smarter bet than mutual funds for retail investors, just because their fees are lower. So why do big institutional investors invest in private-equity companies which charge enormous fees, and which in turn hire investment banks which charge their own enormous fees, rather than simply buying companies themselves?

Ontario Teachers Pension Plan seems to have decided that enough is enough – and has decided it’s going to make its own bid for BCE (a/k/a Bell Canada). Private-equity shops such as Providence Equity Partners might be invited to join the buyout party, but then again so are real-money investors such as Caisse de Depot et Placement du Quebec and the Canada Pension Plan Investment Board, according to the NYT.

This is very much a welcome development: it shows that institutional investors are beginning to realize that their own investing skills have a pretty good chance of outperforming any PE or hedge fund, once those enormous fees are taken into account. (Hedge funds do generate alpha; they just pay nearly all of it to themselves in the form of fees.) So whether or not the BCE takeover ever happens, an important precedent has already been set. Pension funds can be in deals from the beginning, rather than being brought in at the end to provide that last chunk of equity finance.

Gordon Hanson is causing quite a stir with his study for the Council on Foreign Relations entitled “The Economic Logic of Illegal Immigration”. (Press release, WSJ op-ed, abstract, paper.) Economically speaking, he concludes, there’s really very little reason to believe that legal immigration is preferable to illegal immigration – and illegal immigration has a small but positive net economic effect.

To the extent that the US spends a lot of money keeping illegal immigrants out of the country, that’s likely to damage the economy as a whole. Much better to deal with security concerns in other ways, such as licensing global temp agencies who could fill US jobs with employees from anywhere.

Clearly, the present system of temporary work visas isn’t, well, working – this year’s quota of H-1Bs, for highly-skilled immigrants, “sold out” in a matter of hours. What’s more, the number of visas is necessarily larger than the number of legal immigrants, since many legal immigrants end up with three or more temporary visas while working here. Much smarter, says Hanson, to let legal immigrants switch jobs much more easily, and also to give them a path to citizenship.

Of course, the chances of anybody in Congress taking up Hanson’s cry are slim to nonexistent – but with any luck his paper can help move the debate in the right direction.

Brad Setser notes that Brazil just issued a new 10-year bond at 122bp over Treasuries. “I remember when…” he writes – I’ll finish the sentence for him – “Brazil was at 2,400bp over Treasuries”. The official JP Morgan Brazil index now stands at 164bp over.

Chase wants its borrowers to pony up $295 plus $5.42 per month for the privilege of paying down their mortgage more quickly. “Only a bank would figure out a way to charge you for something you can do yourself and make you think it’s a smart decision!”

The NYT’s flash-based executive compensation chart, nicking its look-and-feel from Gapminder.

Jeff Sachs is giving this year’s Reith lectures.

The going rate for Joshua Bell, playing sans name recognition? $32.17, in 43 minutes.

Cassandra Wolos on junk charts in the NYT (Via)

Greg Clayman’s luggage was lost by JetBlue, and he discovered that they don’t track bags.

Via Alea, a Reuters story about a new Citigroup product where you can apparently buy default protection at zero initial cost, paying only if and when the defaults start happening. There’s just enough information in the article for it to be intriguing, but not quite enough for it to make sense.

I understand that if the defaults happen, then the cost of protection is higher than it would have been if you’d bought it up-front. But at that point you don’t care – you’ll happily pay a lot of money to protect yourself against a certain default. Can someone explain to me how this product works? Can you really buy protection and yet pay absolutely nothing if nobody defaults?

Gretchen Morgenson had another dreadful column this weekend: the housing “nightmare grows darker,” according to the headline, but Morgenson adduces not a single piece of evidence to that effect.

If Morgenson wanted to find real reasons for worry, as opposed to inchoate doom-mongering, she could have done a lot worse than reading Bill Bischoff’s Smart Money article on the taxes people owe when they sell their homes.

In the olden days, things were simple. You took out a mortgage to buy a house, and then when you sold your house it had either gone up in value or it hadn’t. If it had, then you made money on the sale, which was a taxable capital gain. If it hadn’t, then you didn’t have a capital gain, and didn’t have to pay any tax.

Nowadays, thanks to the rise in home-equity extraction, things are very different.

Say you paid $260,000 for a home that you can now sell for a net sale price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property. For tax purposes, you’ll have a $40,000 gain if you sell, because the sale price exceeds your tax basis in the home ($300,000 sale price – $260,000 basis = $40,000 gain). The IRS doesn’t care that you’re still $50,000 in the red after the sale ($350,000 of debt vs. the $300,000 sale price). The bottom line is you can have a tax gain without actually having any cash to show for it.

Alternatively, what happens if your mortgage company forgives some of the debt you owe them? It’s not good news from a tax perspective: any money written off by your creditors is “debt discharge income”, which has to be reported as income on your tax return.

Let’s say you buy a house with zero money down for $250,000, you sell it for $200,000, and you find another $10,000 to settle up with the mortgage company. For tax purposes, you’ve just made $40,000 in income – which you need to pay tax on. Ouch.

There’s a lot of muttering in Washington about legislation to reign in predatory subprime lenders. (And yes, you’d be right in thinking that that horse bolted long ago.) Much more useful would be legislation to reduce the income-tax consequences of short sales.

Employees at Tribune are now the main owners of Tribune, thanks to Sam Zell’s innovative ways with ESOPs. Their problem is that although they own the company, they don’t control it: Zell does. And so they have to simply cross their fingers and hope that he knows what he’s doing.

Judging by comments reported by the Washington Post on Saturday, however, he doesn’t.

It’s time for newspapers to stop giving away their stories to popular search engines such as Google, according to Samuel Zell, the real estate magnate whose bid for Tribune Co. was accepted this week.

In conversations before and after a speech Zell delivered Thursday night at Stanford Law School in Palo Alto, Calif., the billionaire said newspapers could not economically sustain the practice of allowing their articles, photos and other content to be used free by other Internet news aggregators.

“If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be?” Zell said during the question period after his speech. “Not very.”

Newspapers have allowed Google to use their articles in exchange for a small cut of advertising revenue, but search engines also help to distribute their content to wider online audiences.

This is all pretty much garbage, as Jason Calacanis, among others, has done a very good job in pointing out. For one thing, the Washington Post is simply wrong when it talks about Google giving newspapers “a small cut of advertising revenue” – that’s not possible, since Google News doesn’t have any advertising.

Which also helps to answer Zell’s question. If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be? It would be just as profitable as it is today. And Google doesn’t steal their content any more than it steals anybody else’s content: Google indexes their content, which is something else entirely.

I have a rule of thumb for judging any kind of regularly-updated website which is being run on a for-profit basis. If your business plan looks like this, then it’s doomed:

People who want information will come to my site, where they will search for that information and find it, or otherwise be directed to it.

That’s simply not how people use the internet. There are maybe one or two websites which fit that bill: Wikipedia and IMDB spring to mind. But I suspect that even they get an enormous amount of their traffic from Google, because they have such a high Page Rank. Wikipedia’s traffic really started skyrocketing when Wikipedia started becoming the top search result for hundreds of thousands of Google searches.

If Zell wants to make money online, he has to embrace Google, not fight it.

Joe Nocera is not a fan of socially responsible investing, or SRI:

My problem is that socially responsible investing oversimplifies the world, and in so doing distorts reality. It allows investors to believe that their money is only being invested in “good companies,” and they take foolish comfort in that belief. Rare is the company, after all, that is either all good or all bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray.

Nocera does perform the useful service of pointing out that the main SRI screening company, KLD, has vastly insufficient resources for the job it’s trying to do:

KLD is a small firm that constructs socially responsible indexes, including the Domini 400. Its 40-member staff includes about two dozen researchers who supposedly dig into companies and decide which should be included in its indexes — and which should be excluded. Its biggest index, the KLD Broad Market Social Index, uses the Russell 3000 as its universe, which it has whittled down to 2,050 companies it deems acceptable…

Two dozen researchers are monitoring 3,000 companies — and writing in-depth reports? How is that even possible? It’s not. Mr. Kinder told me that the employees almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself. That hardly seems like enough to make a decision on whether a company is good or bad.

But his conclusion goes way too far:

It would be nice if we could invest our money only in companies that had terrific human rights record, fabulous environmental values and wonderful compassionate cultures.

Too bad it’s impossible.

Let’s be very clear, here, about what KLD is doing: it’s taking the Russell 3000 as a starting point, and then removing roughly one-third of the most egregious companies. If you don’t want to invest in companies that kill people, like arms manufacturers or tobacco firms, then KLD’s index is a great place to start. But at no point is anybody at KLD or anywhere else saying that all 2,050 of the firms on their list have “terrific human rights record, fabulous environmental values and wonderful compassionate cultures.”

There are funds which seek only to invest in companies which make the world a better place, in firms which have great environmental records, and so on. Such funds have no interest in whether BP or ExxonMobil is a more ethical investment: they would never invest in either. And they also have no interest in Nocera’s other example, Nike vs Reebok, for the same reason.

It seems Nocera is judging “negative” funds – those which exclude the worst companies – by the standards of “positive” funds – those which include only the best companies. That’s unfair. There are many flavors of SRI, and investors can and should be able to choose between them. Why does Nocera seemingly believe in denying investors that choice?