Citigroup estimates that in the past 18 months Fortress has lost an astonishing 85%, or $6 billion to $7 billion, in the value of publicly-traded companies in which it holds large positions.
It takes an extra-special level of skill to be able to lose 85% of your money in the public stock markets in the space of 18 months. Even Citigroup isn’t down that much!
Update: Never mind, Newmark is wrong. It’s 85% of unrealized gains, not 85% of total value.
The home equity line of credit, or Heloc, is a wonderful thing: the best way of having liquid funds available in case of emergency you could possibly imagine. Your net worth might be tied up in your house, but that doesn’t matter: if you have a Heloc, you can tap it at any time you like, just by writing a check. And best of all, so long as you don’t tap the credit line, it’s completely free: the opportunity cost is zero.
But now, as Barry Ritholtz points out, banks are having second thoughts:
Morgan Stanley, the second-biggest U.S. securities firm, told several thousand clients this week that they won’t be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.
The lesson, to Ritholtz at least, is clear:
If you have those HELOC checks your lender sent you — AND YOU CAN AFFORD TO SERVICE THE LOAN — then you better hurry up and use them before its too late!
Except the minute you write that check, the Heloc ain’t free any more.
Are Helocs cheaper now than they have been in years? Yes. Most Helocs charge somewhere between a point below and a point above prime, which puts them in the 4% to 6% range. Even so, if you have a prime-rate Heloc and borrow $20,000, that’ll cost you $1,000 a year. Money-market accounts are paying about 2.5% right now, so the net cost is about half that, or $500 a year.
Is it worth $500 a year to have that $20,000 sitting in the bank, just in case? Maybe it is. But remember that if and when rates start to rise, the Heloc rate is likely to go up significantly more quickly than the interest rate on your money-market account. $500 is likely the minimum annual cost of keeping that money in the bank; it could go significantly higher.
Oh, and one other thing: a maxed-out Heloc doesn’t look good as far as your credit report is concerned. If you’re juggling assets and liabilities, needlessly increasing your liabilities is not necessarily a bright idea.
So should you "tap that thang," as Ritholtz urges? I’d probably say no, so long as you have significant positive equity in your home. (That is, more than the amount of the Heloc.) Chances are, your Heloc won’t be frozen. On the other hand, if your Heloc is large and your home equity is negative, borrowing the money now while you still can might be a sensible precaution. You’re unlikely to find money that cheap anywhere else.
Heather Havrilesky has an important piece in Salon about online retirement calculators, and she ultimately ends up in exactly the right place, albeit with a very low level of confidence. The right place, in case you hadn’t worked it out by now, is to ignore online retirement calculators. Which a reasonably numerate person could probably work out from this anecdote alone:
One day I decided to try out an online retirement calculator, just to reassure myself that we were well on our way to not just a secure financial future but also a rosy one. I plugged in my age (38), my current retirement savings (respectable), my desired income upon retiring (50K) and a few other figures, and pressed "calculate" with a little smile on my face, ready to be praised for my prudent savings and congratulated on the happy, golden years ahead.
Instead, I read these words:
"To retire with an inflation-adjusted retirement income of $50,000 for 20 years would require $3,075,744.65 in savings by the time you retired at 65. You need to save an additional $47,613.58 each year to reach your retirement goal."
Of course, nobody in the real world is saving $47,613 per year. But more to the point, you don’t need $3 million in savings to have an income of $50,000 a year for 20 years. How is such a thing even conceivable? After all, $50,000 a year for 20 years is a total of $1 million. If you invest $1 million in TIPS, it’ll keep pace with inflation. What’s the other $2,075,744.65 for? Emergencies?
The Economist has actually gone out and gotten a quote for an annuity paying $50,000 a year, inflation-adjusted, for the rest of Heather’s life, assuming retirement at 65, and the cost isn’t even $1 million: it’s only $827,000. What’s more, Heather’s currently in a house big enough not only for herself and her husband, but also for her two children. She’ll have paid off that house by the time she’s 65, and she probably won’t need something that big any more at that point — if she and her husband moved into a smaller and cheaper place, they could pocket the difference and put that towards their annuity.
There are also unexpected financial shocks — but those can come to the upside as well as to the downside. Inheritances can be larger than you expected, or they can be completely unexpected in the first place. Those stock options you currently consider to be worthless might turn out to be hugely valuable. That book you’ve been working on in your spare time for the past five years might end up a bestseller. Can you expect any of these things to happen? No. But along the way people do come into mini-windfalls. Save those, and you’re doing well.
Commenter dWj also makes a very good point on my last savings post:
I think very silly the idea that I should work making slightly increasing money every year until the day I turn 65 and then make no money thereafter, regardless of my net assets at the time. This is the way a lot of people seem to do "retirement planning".
Come 65, Heather is more than likely to be happy, healthy, and full of valuable ideas and skills. Is she really going to want to down sticks completely, write nothing for money, and live on nothing but savings? It’s not realistic. Most 65-year-olds these days are pretty healthy people; many of them want to work, especially when "work" is something like writing rather than any kind of manual labor.
Still, as I say, Heather’s ended up in the right place:
Finally, I start to consider how old I’ll be in 15 or 20 or 25 years, when all of this saving finally starts to pay off. Fifty-two, 58, 67 years old. Will I be healthy enough to enjoy my money, or will I be hobbling around wondering why I didn’t live it up a little more back when I was young and vivacious and still had teeth in my head?
So I take a deep breath, and I make a new, realistic savings plan, one that isn’t all that impressive and doesn’t grow very fast and doesn’t qualify us as "Millionaires in the Making." We’ll save as much as we can for retirement, and see how it goes. We’ll try to put a little aside for college, if we can. We’ll do what we can to avoid financial ruin. These days, that’s about all most of us can hope for.
More important, I’ll stop torturing myself with these stupid online calculators. I’ll go running with my dogs and my kid instead, thereby reducing my future healthcare costs by untold sums, decreasing my stress, strengthening my bond with my child and planting me in the present, a place that’s pretty great, even when it’s 100 degrees outside and the floors are hot under my feet and the dishes are piling up in the sink. We’ll save up for a dishwasher and central air, and we’ll start making a healthy yearly donation to UNICEF, for families who can’t.
Heather, you’ve already saved up more than enough money for a dishwasher, go out and treat yourself. They really do make an enormous positive difference to your life, much more than a marginal extra thousand dollars in savings ever will.
John Hempton is doing an admirable job teasing out the dynamics of the US mortgage market, and asking whether the losses we’re currently seeing are due to fraud or to broader economic stress. If it’s mainly fraud, he says, that good news: the defaults come quickly, and then they’re over:
Once the pig (a pile of fraudulent loans) has worked through the python (the mortgage market) then the bulge (defaults) will decline just as rapidly as it rose.
I’m more of a pessimist, even assuming that fraud (broadly defined, to include most stated-income loans) was a huge part of the problem. And I’m pessimistic because I believe non-fraudulent loans are increasingly going to behave just like fraudulent loans. Crazy subprime underwriting might be a thing of the past, along with high levels of outright fraud. But I fear the loss curve associated with those subprime loans is going to spread into the rest of the mortgage market, like a cancer.
One reason is a severe lack of human capital in the mortgage industry. Here’s Hempton, describing one stereotypical borrower:
My last couple will pay (almost?) all the loan and all their loan under modified terms because they want to keep their kids in that school. But they need the loan to be modified because they are at the edge of being able to pay. Still they will cut entertainment, holidays and shrink the car to stay in the house because they want their kids in that school. If there is a recession and the husband’s hours get cut – well you should probably modify the loan as that is a better outcome for the bank than foreclosure.
No doubt the bank should modify the loan. But will it? That’s a very different question. The papers are full of borrowers who’ve done everything right, who have tried to maintain contact with their bank at all times, who have requested dialogue and loan mods, and who are faced with nothing but recorded messages and bureaucracy until they wake up one morning to find themselves in possession of a foreclosure notice.
To date, we simply haven’t seen the spike in loan mods that one would have expected given the rise in borrowers facing financial difficulty. The mortgage boom was all about automation; loan mods by their nature are much more of a case-by-case phenomenon, and the struggling loan servicers don’t have the manpower to do that. Something that is an obvious mod to Hempton or Tanta or you or me is just another customer to the overworked employees in telecenters who want nothing more than to pass that person on to somebody else and who in any case aren’t empowered to make substantive decisions.
As a result, homes are going into foreclosure which, if there was any sense in the world, would never be foreclosed on. No one gains by this, but it happens every day. And the losses on these homes are very similar to the losses on the fraudulent loans.
The other reason for the metastasizing loss curves is something I alluded to yesterday: the increasing willingness of borrowers to default on their mortgages even if they’re staying current on things like car and credit card payments — or school fees, for that matter.
Partly, this is a function of the 2005 bankruptcy-law reform, which made it much harder to expunge credit-card debt. As a Bloomberg article last year put it in its headline, "Bankruptcy Law Backfires as Foreclosures Offset Gains":
"Be careful what you wish for," Westbrook said. "They wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures."
The unintended consequence of the bankruptcy bill is that defaulting on a credit card is extremely painful — more painful than defaulting on a mortgage, especially in non-recourse states like California. As one reader put it to me in an email this morning, "the ding on your credit for defaulting on a mortgage that is underwater is mild relative to what the credit card companies want to do to you now".
The result is a massive asymmetry when it comes to the cost of default. For lenders, it’s never been higher; for borrowers, it’s never been lower. It’s a lethal combination for lenders, and they really only have themselves to blame.
Rupert Murdoch’s News Corp today announced a 57% rise in annual profits, to $5.38 billion. Please, Mr Murdoch, spend a tiny, tiny amount of that money on fixing the Wall Street Journal’s horrendously broken subscriptions system.
I’m spending the summer in the Mitte (central) section of Berlin — the heart of the capital of Europe’s largest economy. You’d think it should be relatively easy to suspend my WSJ subscription in New York, and replace it with a WSJ Europe subscription here. But you’d be wrong.
Suspending a WSJ subscription in the US for longer than 90 days is non-trivial, but doable, with a single phone call. That’s the easy bit. But the US people can’t help you with the European paper: the two editions don’t talk to each other. If you want a subscription to the WSJ Europe, you have to set up a whole new account. Once you’ve done that, your paper eventually starts arriving — a day late, in mid-afternoon, in your mailbox. Stories from the US edition of the WSJ often make it into the European edition the following day, so news which breaks on Monday in the US might get reported in Tuesday’s WSJ, and Wednesday’s WSJ Europe — which then arrives on Thursday in your European mailbox. This is not timely.
When you phone up to find out what’s going on, they say that they do have hand delivery in Berlin, but not, it seems, to Mitte — or at least not to the bit of Mitte where I’m living. OK, well, never mind, I never liked the WSJ Europe that much anyway, I’ll make do with my online access, I am a blogger after all.
Until, one morning, you go to check a news story, and find it blocked:
"Your subscription to the Online Journal is no longer active."
There’s a button you can press to try to resolve this problem, but when you press it, you’re out of luck:
"Due to your subscription type, you are unable to modify your account online. Please call Customer Service at the numbers above."
You call Customer Service, but, of course, Customer Service is in the US, or at least follows US hours, which means that they don’t answer the phone until 1pm European time. In the mean time, so long as you’re logged in to the WSJ system, you can’t read anything on the WSJ site — not even the home page! When you try to access the home page, you just get the standard error message:
"Your subscription does not include access to this service."
Only by logging out of the system entirely can you see the home page. What purpose does this serve? I do understand having two versions of the home page, one for subscribers and one for non-subscribers. But if there are problems with the subscription, at least serve up the non-subscriber version, rather than nothing at all.
Eventually the afternoon rolls around, and you get through the phone tree to a human being at Customer Service. Can the human being reinstate access to the website? Amazingly, no. "The system" won’t allow it. Apparently I’d been cut off automatically (without any kind of warning) after my paper hadn’t been delivered in the US for 90 days; I’d asked about this and been assured that it wouldn’t happen, but it still did. In order for "the system" to be able to reinstate my online access, I would need to talk to the newspaper people — not the online people — in the US, and physically restart delivery to my US address, where I’m not living. Then it could be suspended again, but "the system" would at least allow me to read the newspaper online.
So I talk to a chap who set me up for a day’s worth of newspaper delivery to my US address. My account’s been restarted, I should have online access. But I still don’t, even after an hour. Back to online customer service; apparently they need to reset something at their end, and then I need to log out again and back in again, and — finally — I can access the website! Yay!
Incidentally, the FT is no better: they, too, have entirely separate departments and accounts for newspaper and online subscriptions, and so I need two different logins and passwords for the two different systems. But at least they deliver to Mitte.
The NYT is more advanced: it has one account to cover both newspaper and online, although they haven’t expanded that to include the IHT.
But in a world where newspaper subscriptions are both hugely valuable and falling precipitously, it’s astonishing to me how difficult they are to manage, and how willing companies like Dow Jones are to alienate their most valuable customers — their print subscribers — by summarily cutting off website access with no warning and making it impossible to regain access without multiple international phone calls.
The long-term solution, of course, is for wsj.com to go entirely free, just as nytimes.com did. But if you are going to set up your website as a premium product, you definitely need to invest in it and make sure it works smoothly. People are often willing to forgive something free and broken. But something expensive and broken is much less forgivable. And if you’re going to set yourself up as a genuinely international newspaper, make your customer support system reflect that, and reflect your internationally-mobile readership.
Remember the big Libor makeover, prompted by fears that Libor was increasingly fictional? Well, now that we’ve all pretty much forgotten what the fuss was all about, the BBA has come out and decided to do nothing. In a 14-page paper, the BBA carefully runs down the list of all the proposed possible changes, and rejects each one.
The only proposal that got any traction at all was the idea of increasing the size of the panels — and that ran into the entirely predictable problem that no one had any desire to join them.
I think this is probably the right decision: this is the kind of thing where you have to be very aware of the law of unintended consequences. My hope is that as the interbank market remains illiquid, especially at relatively long tenors like six months and one year, financial markets will slowly move away from 6-month and 1-year Libor as standard benchmarks. That will solve the problem, insofar as there is a problem, slowly and quietly.
Incidentally, the FT is reporting this news in a most peculiar way: "BBA to enhance Libor governance" is the headline, and the story leads with the largely cosmetic tinkering that’s going on at the committee level; nowhere is it mentioned that all the possible substantive changes have been rejected. Is there a companion article about the rejection that I’m missing? Or did the FT just get this one wrong?
(HT: Alea)
I’ll get this out of the way immediately: Daily Candy isn’t really a blog, it’s more of an email newsletter. But still, this is impressive: after buying the company in 2003 for what seemed at the time to be the enormous sum of $3 million, making founder Dany Levy a millionaire, Bob Pitman is now flipping for a $122 million profit.
It’s rare to see a property like Daily Candy sold twice, for an eye-popping sum each time, so this is definitely good news for those who want to be able to monetize their websites. It’s also an important reminder: if you want to make money from a website, put a lot of effort into turning your blog(s) into some kind of email product. Email reaches millions of people who never read blogs, and advertisers often adore it.
In the world of financial blogs, Dealbook has probably understood this better than anyone. Yes, it’s a popular website. But more than that, it’s an email newsletter. Most financial executives simply don’t have the time or the inclination to surf the web for news — yet at the same time they’re addicted to their Blackberries. As a result, email is by far the best way to be able to deliver their attention to advertisers.
Dealbook might not be as valuable as Daily Candy: it doesn’t reach an audience which is looking to shop right now. But there is a large number of advertisers wanting to reach high-level Wall Street types, and there are precious few means of effectively doing so. Dealbook is one of them.
FOMC Statement: No change, as expected.
Hovering Above Poverty, Grasping for Middle Class: "The vast majority of those polled said religion or their faith in God plays an important role in helping them through financial straits."
Argh. It hurts: "I, Baruch, have just had the worst 2 days of my investment career."
Just some comments on the email I am getting: "If a major earthquake were to flatten the Inland Empire not only would it be a human tragedy – but I doubt anyone would want to rebuild a large number of the houses. What is a bad situation there for Fannie could turn suddenly diabolical. Warren Buffett once said that he thought Fannie Mae had more super-catastrophe risk than Berkshire."
The Consigliere Creed: "To me Sam Walton was one of the great value investors–his only investment was "build more Wal-Mart stores" but the returns on those investments have put most hedge fund managers to shame."
NYT Hit Job on Freddie Mac: Whenever there’s a real-estate-related story on the front page of the NYT, your first stop should be Tanta to see what she thinks.
Great Moments in Business: A Five-Act Play: A brief history of Carl Icahn and WCI.
What’s the value added of World Bank?
Inside the Economist’s Mind: A Book Review
FT European house price guide: A nice interactive map.
It used to be that if you were having difficulty making your mortgage payment, you’d end up, one way or another, putting it on your credit card — if only by being unable to pay off much of your credit card bill that month.
Today, says Meredith Whitney in a Fortune profile, it’s the other way around, and if you’re having trouble making your credit-card payment this month, you’ll end up using your mortgage money to keep current on the plastic.
Any borrower who’s upside down in his mortgage – i.e., the size of his mortgage is bigger than the value of his home – is likely to make car and credit card payments before paying his home loan. "The hierarchy of payments has totally shifted," Whitney now says.
I’m having difficulty believing this, although it might well be true. My problem is this: if you’re not upside down on your mortgage, then you quite obviously and sensibly will put your mortgage payments first. But are do people really have such a good idea of exactly how much equity they have in their house that they’re able to turn that hierarchy of payments on its head the minute that their equity falls below zero?
I also don’t quite understand the psychology. I can understand someone giving up, maxing out their credit cards, declaring bankruptcy and letting all their creditors simply fight it out between themselves; I can also understand someone with credit difficulties doing everything in their power to hold on to their home. But what loyalty do people have to their credit card company? What does it benefit a man to stay current on his Amex if in doing so he loses his home?
Financially, however, there’s something to be said for Whitney’s strategy. You should pay off high-interest debt before low-interest debt, and right now homeowners with relatively small arrears are in a very strong negotiating position with their banks, who have no desire whatsoever to foreclose. Still, it’s not something I’d recommend.
The word count for Marc Lefar’s new employment agreement with Vonage? 18,418.
The document does say that Lefar will receive up to $50,000 in reimbursement for "reasonable counsel fees incurred in connection with the negotiation and documentation of this Agreement". At $2.71 a word, that might almost be considered reasonable.
(HT: Leder)
"Discounting smacks of desperation," says Liz Gunnison. "That’s why brands like Louis Vuitton and Apple don’t do it."
Is this a common strategy, or is it a very tough one?
All department stores have sales, no matter how high-end they might be; I’m quite sure that a number of LVMH retail brands do as well, even if Louis Vuitton stores specifically do not. Sales are a great way of moving inventory which otherwise wouldn’t sell, and of broadening a retailer’s customer base. And even Apple strategically drops its prices; it just does so on a permanent rather than temporary basis.
My feeling is that a no-discounting policy is something which can work in rarefied circumstances, but that it isn’t necessarily a model to be emulated. What’s more, when it does work, it can work at the low end (Wal-Mart, I think, has the same policy) as easily as at the high end. If Starbucks can make money by selling cheaper coffee in the afternoons, they should. Right now, they need any boost to profits they can get.
May 2007: Terra Firma buys EMI at a valuation of $6.3 billion.
August 2008: Sony buys out Bertelsmann, its partner in the Sony BMG joint venture, at a post-deal valuation of $1.8 billion.
The first chapter of Sarah Thornton’s Seven Days in the Art World is on auctions, and it’s a corker. Thornton not only has sharp insights, she also expresses them beautifully:
The hammer punctuates and passes judgment. It acts as a full stop to the end of every lot, but it is also a little punishment for those who didn’t bid high enough.
She can cut to the chase devastatingly when she teases apart the difference between aesthetic and financial value:
A "good Basquiat," for example, was made in 1982 or 1983 and contains a head, a crown, and the color red.
Thornton also quotes Josh Baer making the crucial distinction between caring about the secondary market and buying as an investment:
"The auctions give a sense that most of the time, most things will sell. If people thought they couldn’t resell–or that if they died, their heirs couldn’t sell–many wouldn’t buy a thing."
This doesn’t mean that buyers at auction are "acting like investors", but it does mean that price action matters, even if you’re a collector who has no intention of selling. Especially now that hedge-fund managers play such an important role in injecting liquidity into spending money in the art world, it’s important to realize what has always been the case: that all collectors mentally mark their collection to market on a regular basis. In this sense, art is like housing: I might intend to stay in my apartment until I die, but I’m still interested in how much it’s worth. And a collector who has made a large mark-to-market profit on his collection is much more likely to continue to spend large sums of money on art than one who has made a large mark-to-market loss.
For all that the big primary-market dealers love to kvetch about the auction houses, then, most of them could barely operate were it not for the fact that Sotheby’s and Christie’s loom in the background. The auction houses perpetuate the fiction that art is sellable, and that fiction is a great help in persuading collectors to buy.
In reality, of course, the auction houses reject most of the art that is offered to them for auction. You can’t just rock up to Sotheby’s with a canvas under your arm and get it into a prestigious evening sale, or even a day sale, for that matter. If it’s by an artist who’s out of favor this week, they might not accept it at all, and your best hope for monetizing that asset is to go back to the gallery which sold it to you (should the gallery still exist) and start talking fast. But if that gallery already has a substantial stock of the artist in question’s work, they’re not going to be falling over themselves to buy up another example.
I’d love to see a real secondary market in art, where anybody could consign any painting and anybody could buy it. That would give a much better idea of real values than the highly artificial and choreographed evening sales at auction houses (which, incidentally, are responsible for all of the seemingly impressive rise in the Mei-Moses art indices). But of course since such a real secondary market would not be in dealers’ interests, you can be sure it’s not going to happen.
Don Fishback and Barry Ritholtz are shocked — shocked! — that the InTrade recession contract is based on hard GDP numbers rather than, um, something else, maybe an NBER pronouncement the timing of which is entirely unknown.
The fact is that prediction markets have to be based on something hard and fast like GDP numbers: they need an expiry date, and the results need to be completely unambiguous. This isn’t a "flaw in the betting process," as Ritholtz would have it: it’s a feature, not a bug.
Ritholtz even complains that InTrade is using the final GDP figures, and that they’re not waiting indefinitely to see whether those final GDP figures get revised again. Does he ever want the winner of this bet to get paid out?
And neither Fishback nor Ritholtz points out that the Recession 09 contract is now trading at twice the level of the Recession 08 contract. This is par for the course, as far as the current slowdown is concerned: the people predicting recession are likely to be proved right eventually, but it’s taking much longer than anybody expected. Consider this, from Nouriel Roubini:
Given the recent flow of dismal U.S. economic indicators (Q2 GDP report, July payrolls, service ISM, etc.) I am now taking the view that the odds of a U.S. recession by year end have increased from my previous 50% to 70% now.
The year in question was 2006. No matter what the NBER finally pronounces, I’m pretty sure they’re not going to declare a recession which began in 2006.
For all the chaos in financial markets, the supertanker US economy seems to take a really, really long time to slow down. That’s the real reason why the people betting on a 2008 recession are now out of the money — it’s got nothing to do with the entirely sensible ground rules laid down by InTrade.
Dennis Berman looks today at Merrill Lynch’s earnings per share. With earnings down and the number of shares up, he concludes, reasonably enough, that, in the words of Sanford Bernstein’s Brad Hintz, "it’s extremely difficult to get to the earnings-per-share number of 2004 anytime soon".
Er, yes. But then again, Merrill’s share price is now less than half what it was back in 2004: surely therefore the bank needs to come up with less than half 2004’s earnings per share in order to justify its trading level?
It’s true that back in 2004, Merrill’s shareholders wanted earnings per share of substantially over $4. Right now, by contrast, they’d probably be happy with anything over $0.
Berman seems to think that Merrill CEO John Thain will have failed if he can’t get back to 2004’s $4.40 EPS. That’s not true: Merrill 2008 is not the same as Merrill 2004, and the goals have changed as the share price has fallen. The only reason to want $4.40 EPS right now would be if you were paying something over $50 a share for the stock, and nobody is doing that.
All the same, it does seem that for all Thain is downplaying his bank’s prospects on CNBC, he still hasn’t mastered the art of playing the expectations game. If the Wall Street Journal still thinks that Merrill should be earning $4.40 a share, there’s clearly far too much optimism out there.
At a press conference this morning in Mumbai, mobile-banking company Obopay announced an alliance with Grameen Solutions — an alliance with an extraordinarily ambitious goal. In ten years’ time, the companies said, they would like to see 1 billion of the world’s poor — people living on less than $2 a day — receiving banking services via their mobile phones. It probably won’t happen, but it would be amazing if it did.
Mobile banking is not new, of course, although it is still young. What sets this particular initiative apart are three things: its global ambition, its emphasis on the poor, and the central role of microfinance institutions (MFIs).
Mobile banking is of course banking, and banking is regulated nationally, not globally. As a result, it’s hard to scale mobile banking across borders — but that’s precisely what Obopay and Grameen are trying to do. They’re starting in India and Bangladesh, with a small core team of engineers looking carefully at what works and what doesn’t in the real world. They will then offer that expertise to anybody in the world who wants it, and plan to entrench themselves as a "center of excellence". If MFIs in Congo or Nicaragua want to team up formally with Grameen and Obopay, that’s fine; if they just want to talk to them to get advice on how to proceed on their own, that’s fine too.
In any event, the system being set up by Grameen and Obopay is designed from the beginning to be able to handle payments and remittances not only nationally but also internationally. The problem of domestic remittances is often overlooked: large cities like Dhaka are home to millions of migrants who would love to send money back to their families elsewhere in the country but who are unbanked and have no real means of doing so. The ability to remit money domestically with little more than a text message could be revolutionary.
Then, of course, there’s international remittances — which already account for an enormous part of the annual capital inflows into many countries around the world, especially in Central America. Compared to Western Union or banks, the ability to send money directly from mobile phone to mobile phone is orders of magnitude easier and cheaper.
Then there’s the emphasis on the poor. Although the poor are more likely to be unbanked and therefore in need of mobile banking services, they haven’t been directly targeted by many of the first wave of mobile banking providers. As Gautam Ivatury and Ignacio Mas write in their excellent overview of the situation as it stands today,
Providers experimenting with a new technology or business
model typically seek to reduce risk by focusing on
known markets (avoiding the “double gamble” of
new business model and new customer segments),
and within those on likely “early adopter”
subsegments (i.e., those more naturally predisposed
to try the new offering).
The poor, of course, are both a new customer segment and generally the very last adopters of any new technology. It’s hard to sell banking services to someone who neither knows nor understands what a bank is.
So that’s where MFIs come in: they can play a crucial role in reaching out to, and educating, potential customers among the world’s poorest people.
Grameen Solutions’ CEO, Kazi Islam, told me that I shouldn’t try to extrapolate forwards from where mobile banking stands today, but rather work backwards from the needs and capabilities of the world’s poor. MFIs have been reasonably good at extending credit to such people, but they’ve found it much harder to offer savings accounts, since banking licenses are hard to come by.
Other financial services, like microinsurance — especially crop insurance for people working small plots of land — have barely gotten started: insurance "doesn’t make sense if it costs 20 rupees to collect 25 rupees," said Islam at the press conference. "It’s all about reach, and cost and operational reasons make it difficult to reach these people."
With mobile banking, reach is effortlessly expanded, piggybacking on the massive investments made by mobile-phone companies. Meanwhile, costs are tiny: in the US, Obopay’s money-transfer fee is a flat 25 cents for any amount up to $1,000.
All the same, the goal advanced at the press conference this morning is so ambitious that I give it only a small chance of success. One big reason is China: without access to China’s rural poor it’s going to be almost impossible to reach the 1 billion goal. And while China’s rural poor are getting cellphones at an astonishing pace, the chances that they’ll be able to plug them in to a global — or even national — payments system still seem remote. On the other hand, no one imagined ten years ago the progress that China has made to date; if you extrapolate that rate of change, anything is possible.
Another risk is that the goal will be reached but in name only: people might have mobile-banking accounts, and might even automatically get such an account when they get their phone. But the accounts might not be used, and insofar as they are used, they might be used only for payments and not for real banking services. It’s relatively easy to see a world where mobile phones are used as mobile wallets, containing roughly as much money as one might have in a real-world wallet. It’s harder to see a world where mobile phones are used as mobile bank accounts, home to individuals’ life savings.
There’s also the effect which mobile banking might have on repayment rates at MFIs: experience in Kenya suggests that letting people make their loan payments via mobile phone rather than in person at a group meeting results in higher delinquency rates.
And insofar as mobile banking does take off, it will inevitably and necessarily do so primarily via the mobile phone providers themselves. Depositing money into one’s mobile bank account must never be harder than buying extra airtime for one’s phone; ultimately there’s no reason why airtime charges can’t come straight out of the bank account, combining the two accounts into one. What’s more, mobile operators already have a network of agents licensed to accept cash on their behalf; it seems silly to try to build a parallel bank-agent network from scratch.
It’s a great idea for banks and MFIs and mobile phone companies all to pull together in the same direction, resulting in a global open system which benefits from massive network effects. But with a couple of big exceptions like Grameen, and possibly not even there, the MFIs will always be dwarfed in size, reach, and importance by the mobile-phone operators. The MFIs risk being marginalized, to the point at which the poor get forgotten in the drive towards broader mobile-banking adoption. And without MFIs to help guide the way, the chances are that the poor won’t embrace mobile banking of their own accord.
Obopay CEO Carol Realini understands this. "The carriers could be the MFIs, but you don’t want to take away from the MFIs," she told me. "They serve the customers, and they’re part of the last mile to the customer. They offer services beyond transactions. They’re underwriting loans and coaching customers. Having the MFI play an active role with the poorest people is great, because they’re not comfortable with credit and savings. The MFIs make the approach to the poorest people that much better, and it helps them understand how to use this powerful new tool."
The promise of mobile banking for the poor is that mobile phone providers have managed to get a degree of penetration among the world’s poor that MFIs can only dream of. But that’s also the peril. The mobile phone providers are likely to continue in the direction they’re headed in at the moment: staying away from banking regulation, confining themselves largely to payments rather than fully-fledged banking, and targeting their entire customer base without any particular emphasis on the bottom of the pyramid. The MFIs, by contrast, are going to want something which is both narrower and more ambitious. Will the mobile phone companies sign on, even if they see lots of regulatory headaches and very few profits by doing so? The answer to that question could be the answer also to whether Obopay and Grameen Services will come close to achieving their 10-year goal.
Will Wilkinson is optimistic about energy. Don’t worry about peak oil, he says: as oil prices rise, alternative energy sources will become more attractive, and eventually innovation and competition in the alternative-energy space will drive alternative-energy prices down below the "historical trend" of oil prices. That’s how we get to environmental nirvana: it’s a natural consequence of fossil-fuel scarcity.
But the problem is that fossil fuels aren’t scarce, and they are cheap — coal, especially. There’s still enormous amounts of coal left in the ground, and there’s no sign that any alternative will be cheaper than coal for the foreseeable future. And even if we have reached peak oil, there’s still a hell of a lot of oil left — especially if you start including tar sands in Canada and Venezuela.
Will writes:
There are no meaningful limits to growth from either the scarcity of energy, or from negative environmental externalities from economic production, since in the medium run, those externalities are positive.
But he has no reason at all to believe that in the medium run environmental externalities are positive rather than negative. It’s entirely possible that in the medium run fossil fuels will remain cheaper than alternative energy sources, and that externalities will remain negative. It’s also entirely possible that by the time fossil fuels are so scarce that alternative energy sources are cheaper than their carbon-emitting counterparts, we will have pumped so much carbon dioxide into the atmosphere that it will be too late: environmental catastrophe will be upon us.
Will’s argument, it seems to me, seems to rely on the peculiar idea that we’ll run out of fossil fuels just in time to avert environmental catastrophe: that even if we don’t change our ways unilaterally, the finite supply of oil and coal wil force us to do so before it’s too late.
But scientifically speaking, there’s no reason to believe this. Carbon levels in the atmosphere are already too high, and they’re rising fast. There’s more than enough carbon left in the ground to bring atmospheric carbon concentrations up to catastrophic levels, if we burn it rather than leave it untouched. So we have to start reducing our emissions now — not in Will’s vaguely-defined "medium run".
Economist Rankings: On the Wu-index, Andrei Shleifer is clearly Top Dog, with 14 papers having at least 140 citations. Lucas, Barrow, and Bernanke are in joint second place, each with 12 papers having at least 120 citations.
A Comparison of Two Suburban High Schools: "The educational outcomes of privileged kids are remarkably similar across schools with similar curricula" — whether they’re privileged or not.
Lawyer Who Sued Sullivan Lands at Clifford Chance: "Many lawyers thought that Mr. Charney would have a tough time finding a job at another top firm because of the publicity surrounding the litigation. But despite a downturn in some areas, midlevel M.& A. associates are still in demand."
Starting Today, No More Free Water on US Air: But coffee’s only half the price of water, for some reason.
Port Authority Will Block U.S. Plan to Auction Airport Slots: Chuck Schumer might be mostly market-friendly, but not always.
Charlie Calomiris and two co-authors have a piece in today’s Washington Post making an improbable case:
Most Americans have not experienced any significant decline in the value of their homes — nor are they likely to.
"In our research," they continue, "we conclude that declines in house prices are highly likely to remain small". This sounds like fascinating research for me, so why on earth can’t I read it?
An abstract has been up on SSRN.com for a month now, but there’s no sign of the actual paper anywhere. If Calomiris et al are going to be talking about their research in the pages of the Washington Post, they really ought to make it available somewhere. Otherwise it looks as though they’ve got something to hide.
Update: The full paper’s up now at SSRN.
Jimmy Cayne has been speaking at length with Fortune’s William Cohan, and has now managed to tell his side of the story.
No wonder people don’t like him much: he comes across really badly even here. After reading the piece, you get the impression of Cayne as a vindictive, ungrateful, out-of-touch executive who’s more willing to lay the blame for Bear’s demise at the feet of Goldman Sachs than he is to fly commercial, even in an emergency. Here’s one paragaph from the 5,800-word article:
As Bear Stearns’s liquidity dried up in March, Cayne was playing bridge in Detroit, at the North American Bridge Championships. When playing tournaments, Cayne, who only recently got his first cell phone and has no BlackBerry, was hard to reach. While he saw Schwartz’s March 12 appearance on CNBC – in which Schwartz said he was not aware of any imminent threat to Bear Stearns’s liquidity – from his hotel room in Detroit, Cayne was not told of the firm’s crisis until late Thursday night, March 13, when the "run on the bank" was already well along. Cayne was still playing bridge in Detroit when the board met by conference call that night, so he joined the call late. He didn’t know about the Fed’s rescue financing on Friday or that the stock had closed at around $30 that day after the credit agencies downgraded the firm. He couldn’t get a private flight out of Detroit until four in the afternoon on Saturday (and no, he didn’t think to call Northwest), so he arrived at Bear’s office in New York at around 6:30 that night. "When I walked in they said, ‘It’s $8 to $12 a share. That’s the deal with J.P. Morgan,’" remembers Cayne.
Cayne, it turns out, was inordinately cocky even on the first day he interviewed with Ace Greenberg for a job at Bear Stearns:
In an effort to make a little small talk, Greenberg asked Cayne if he had any hobbies. Along with magic and yo-yos, bridge was a serious interest of Greenberg’s. "And I said, ‘Yes, I play bridge,’" Cayne recalled. "You could see the electric light bulb. He says, ‘How well do you play?’ I said, ‘Mr. Greenberg, if you study bridge the rest of your life, if you play with the best partners and you achieve your potential, you will never play bridge like I play bridge.’"
Improbably, after those beginnings,
Greenberg became Cayne’s mentor at the firm. "Greenberg had very few friends," Cayne remembers of those years when he was Ace’s protege. "And I was one of them."
Of course, the two didn’t remain buddies for long: Cayne ousted Greenberg as CEO in 1993, and made no secret of his disdain for the elder banker.
Much more recently, Cayne ousted Bear president Warren Spector for an interesting crime. The ouster happened after Cayne had agreed to lend $1.6 billion to Ralph Cioffi’s failed High-Grade hedge fund: in the end, Bear lost some $1.2 billion of that money. Yet it was an earlier and much smaller decision which led to the defenestration of Warren Spector:
Cayne fired Spector on Aug. 5 – the final straw being Spector’s decision to invest the $25 million in the hedge fund.
Was the $25 million investment bound to succeed? No. But if it had succeeded, it would have obviated the need for the $1.6 billion loan. And in the end, losing $1.2 billion is 48 times worse than losing $25 million. But still Cayne refused to take responsibility for his own actions; indeed, he strongly implies to Cohan that Ace Greenberg, of all people, had pressured him to extending the loan. As if Cayne would ever do something just because Greenberg told him to!
Near the end of the piece, Cayne starts pointing fingers and asking for investigations of Bear’s downfall:
He thinks a good place to start such an investigation would be with those firms that profited the most – to the tune of billions of dollars – from Bear’s demise, including Goldman Sachs; hedge fund Paulson & Co., which cleared through Bear Stearns and whose principal, John Paulson, was a former Bear Stearns investment banker; and Kyle Bass, the head of Dallas-based Hayman Capital.
Does Cayne have any evidence that Goldman, Paulson, and Hayman profited "to the tune of billions of dollars" when Bear went under? If so, I’d like to see it; until then, I’d really rather that he shut up.
Hugo Chávez has done a lot of things to endanger the Venezuelan economy. But to read John Lyons in the WSJ today, one of the worst and riskiest is his decision to nationalize Banco de Venezuela, which the then-government sold to Santander in 1996 for $300 million.
The deal is a great one for Santander, which has made billions of dollars in profit from the bank and is selling at pretty much the top of the market. It also makes sense for Venezuela, which will now control an important means of distribution of wealth and also a bank which already holds a very large quantity of government deposits. Bank nationalizations are pretty standard things for left-leaning governments: Francois Mitterand nationalized every bank in France not so long ago.
Yet here’s how Lyons starts his piece:
Venezuelan President Hugo Chávez has made nationalizations a centerpiece of his decade-old administration. But his decision to take over a unit of Spanish giant Banco Santander SA carries a new set of risks, touching on local confidence in the banking system.
Banking affects Venezuelans more personally and immediately than oil, telecommunications and other strategic industries in which Mr. Chávez has intervened. The move could backfire if depositors lose faith in the government’s ability to protect their savings, and yank their money.
In Venezuela, as in many Latin American nations, mass withdrawals at one bank have a way of snowballing into a systemic bank run that puts the economy and political system in play.
Mass withdrawals? Systemic bank runs? This is alarmist stuff, which Lyons admits, later on, is based on nothing but sheerest speculation.
Lyons does at least attempt to address the obvious problem here, which is that state-owned banks are safer than their privately-owned counterparts, not more risky:
While in the U.S. the government is seen as a guarantor of bank stability, nationalizations are viewed with deep skepticism in many Latin American nations, where official corruption and incompetence are pressing issues. Many Venezuelans already blame government mismanagement for a host of problems ranging from food shortages to the declining productivity of the oil industry.
"Chávez said the bank’s deposits will now be in the government’s hands, but the problem is there may be people who think that’s not such a good thing," said Alejandro Grisanti, a senior Latin America economist who follows Venezuela at Barclays Capital Inc.
I’m sure most people agree that Banco de Venezuela will make less money in public hands than it did as a private corporation. The Venezuelan masses are likely to consider that a good thing; the elites might not like the idea of directly funding the government with their deposits, and there is a risk that they’ll move their money elsewhere in protest, but I don’t think that there’s any risk of a fully-fledged bank run. Besides, if the deposits ended up in other, privately-owned, banks, how could that kind of transfer "snowball into a systemic bank run" affecting all banks? Lyons never says.
Besides, as any Argentine will tell you, having your money at a privately-owned bank is not going to protect you from governmental incompetence, mismanagement, intervention, or outright confiscation, should the government be so inclined. If Chávez ever wanted to freeze or seize bank deposits, he could do so whether or not he owned the banks in question.
So I’m not nearly as down on this nationalization as Lyons is. Chávez seems to be paying the full market price for Banco de Venezuela, and deposits there will be just as safe as they ever were, if not safer. There are lots of decisions that Chávez is making which are likely to be very bad for the Venezuelan economy. This one, I think, comes quite a long way down the list.
Comes from Edmunds.com:
The median household is spending 11.5% of its income on gasoline, up from 4.6% of its income five years ago.
It’s a pretty basic calculation, which assumes that both miles driven per year and fuel economy have remained constant over time (at 30,000 and 22 miles per gallon, respectively). But to a first order of approximation, it’s probably reasonably reliable. And at 11.5% of income, pain at the pump is certainly more than just psychological: it’s equivalent to a seven-point spike in income tax rates, with the brunt of the tax hike borne by those least well off.
David Galenson has a list of the greatest works of art of the 20th Century. The Demoiselles are in top place, which is reasonable enough. But the list gets rather screwy after that: Tatlin’s model of his unbuilt Monument to the Third International is at number two, and at number four is Richard Hamilton, of all people, with his collage Just What Is It That Makes Today’s Homes So Different, So Appealing?. Meanwhile, there’s no Johns flag, no Pollock splatter painting, no Warhol anything.
There are two big reasons for the screwy results, both related to Galenson’s methodology: he simply lists the works most illustrated in textbooks.
As a result, he’s overweight "one-hit wonders". If you want to represent a Johns flag or a Warhol Marilyn, you have a few to choose from, so no one painting is likely to make the Galenson list. On the other hand, if you want to represent Tatlin, you’re basically forced to go with that model: there’s nothing else.
Even that’s not enough to explain the presence of the Hamilton in fourth place, however. Yes, it can be seen as early Pop — but it can just as easily be seen as late and derivative Surrealism. I’ve actually seen it, and it’s decidedly underwhelming in real life. But it’s developed a life of its own as an illustration: it looks great in textbooks. You can’t see how small it is; you can’t see the amateurish cut-and-pasting, or the pieces of old magazines peeling away. Instead, you see a much more coherent and perfect artwork: almost as if Hamilton was anticipating Photoshop.
If I were putting together a collection of great Pop art, I would never include this piece. But if I were putting together a book of great Pop art, I’d include it in a heartbeat. It’s become an instantly-recognizable icon, to the point at which the Modern Review, a cultural-studies journal founded by Toby Young and Julie Burchill, decided to remix it for their inaugural cover in 1991. But that doesn’t make it great.
One of the bright spots in the recent GDP reports has been the productivity figures. Whenever GDP continues to grow even as employment is falling, productivity — which is the growth in GDP per worker — will look particularly strong. And productivity this year is rising at a healthy 2.5% pace.
Brian Blackstone explains in the WSJ that the news on productivity helps out the Fed:
Strong productivity growth, by countering inflation pressures from energy and commodities, allows the U.S. Federal Reserve to keep interest rates lower than it otherwise might, helping it stoke the economy.
But Dean Baker is having none of it:
Perhaps, the last few quarters haven’t been bad, but the record since the second quarter of 2004 is pretty dismal. Productivity growth has averaged less than 1.7 percent annually. This is only a bit higher than the 1.5 percent annual rate during the long slowdown from 1973-1995.
Dean did not choose the second quarter of 2004 arbitrarily here. Since productivity growth is rising, it’s now the highest it’s been since, um, the first quarter of 2004. So productivity growth since the second quarter of 2004 is sure to be lower than productivity growth this year.
More to the point, Dean’s lowball 1.7% figure is a vast improvement on what it was only a year ago. Here’s his complaint from this time last year:
The release of revised data puts productivity growth over the last three years at 1.2 percent annually. This is below the 1.5 percent rate of the long 1973-1995 productivity slowdown… This is REALLY big news.
If medium-term productivity growth has risen from 1.2% to 1.7% in the space of one year, that’s good news, no?
In any case, productivity numbers are very noisy things. Check out the chart at the bottom of Blackstone’s article: productivity spiked up and down all over the place between 1973 and 1995, from a high of over 5% in 1983 to lows of -2% in 1974 and 1982. Yes, you can take the average of all those figures and come out with a +1.5% baseline. But I’m not sure how useful that number really is.
I’m not overjoyed by the productivity numbers, because to a large extent they’re just another way of framing the atrocious employment situation. But I don’t think it’s fair to say that they’re "dismal".
A Response to the Gates Foundation Memo: Stephen Landsburg lays into the "creative capitalists".
I Heart Adam Smith: He groks all the contradictions in the nexus between wealth and happiness.
Riches to Rags: "Phillips believes the agony of the American consumer is a function of ‘the global crisis of American capitalism.’ But he’s got it backward. We’re experiencing the first American crisis of global capitalism."
The latest moves in the market for marriage law: How Massachussets, California, etc, compete.
What to Do When Your Fancy ETF Goes R.I.P.: And a response from Greg Newton.
The Economists Are Wrong; Bush Nominal Record Deficit Is Indeed Important: "The administration previously projected a $500 billion deficit, but it has never dared talk about $600 or $700 billion. Doing that now would have set off a political firestorm and possibility created the U.S. equivalent of the peasants storming the castle with pitchforks."
