Things are getting serious at Citigroup. Just check out how the WSJ’s reporting has changed from last week, when Citi was merely closing consumer credit outlets in Japan, to this week, when Citi is closing the Old Lane hedge funds it bought from Vikram Pandit. In fact, you don’t even need to look at the reporting. You just need to look at the dot portraits.
Update: A wag writes: "It must be due to a lack of sleep."
The FT’s Lombard column asks a good question today: Why is Libor used as a basis for US loans in the first place?
Dollar Libor started life three decades ago as a "eurodollar" index – meaning it was mostly used by international banks trading in London. But in the past decade, the index has been used as the benchmark for a mountain of domestic US contracts. In good times, nobody noticed this discrepancy (and the BBA simply enjoyed the boost to its brand), but now the pitfalls of basing so much domestic US activity on an index compiled in London have been laid bare.
This problem could be solved by creating a new US-focused dollar index, perhaps set during New York trading time with US banks.
Of course, there is now such an index – NYFR. We’ll see whether it takes off or not. But the idea behind it makes sense. Remember why eurodollars began in the first place, in the late 1950s: the Soviet Union was worried about expropriation risk on its dollars in New York. Later, in the 1960s, the eurobond market emerged as a "pure" bond market: because the money was all lent and borrowed outside the US, there was no way of it becoming subject to US taxation or other regulation.
Nowadays, the US neither has capital controls and nor is there much of a risk that it will impose them in future. But there is still a difference between onshore and offshore dollars, and it makes sense to peg onshore loans to an onshore index rather than a eurodollar index.
That said, however, I’m not entirely clear why such an index should necessarily be based on interbank lending rates. There are alternatives: not just eurodollar rates (which wouldn’t solve this particular problem) but also domestic CD rates – the rate at which banks fund themselves in the CD market. Explain Stanford’s John Taylor and the San Francisco Fed’s John Williams, in a recent paper:
The argument is that banks are
reluctant to lend funds in the inter-bank market because of uncertainty about their own
future need for funds, perhaps because of concerns about risk in their own balance sheet.
We referred to this phenomenon as “liquidity risk” in our earlier paper.
One way to discriminate between liquidity risk and counterparty risk is to look at
rates paid when parties other than banks lend to banks, as in the market for certificates of
deposit. As long as lenders exist who are not constrained by liquidity concerns, banks
who seek to hoard liquidity can borrow from these lenders in the CD market.
Taylor and Williams find that "CD rates have tracked Libor
and other inter-bank term lending rates closely during the crisis, except for a few notable
episodes, suggesting that liquidity risk is not a significant separate factor driving term
lending rates." But those notable episodes include a large chunk of this year, especially in the longer-maturity 3-month Libor rate.
Maybe the answer here is to add commercial lenders to the Libor mix: include the CD rate as another input, since it is ultimately a bank funding rate. After all, the key reason for using Libor in the first place is that it represents banks’ wholesale unsecured funding costs: the fact that it’s an interbank rate is largely incidental.
(Thanks to Darrell Duffie for pointing me to the Taylor paper. And thanks to Padraig Fallon for forcing me to learn the history of the euromarkets back when I started at Euromoney in 1995: I knew it would come in useful one day!)
In case you were wondering why Ron Lieber left the managing editorship of IAC-WSJ joint venture FiLife to become a columnist at the NYT, now you know. FiLife has launched, and it’s a disaster. It looks like a parody of Web 2.0, full of cute colorful curvy orange and green animated matchstick men. It has no original content, beyond a rather crappy blog which has managed five whole posts so far this month. And, worst of all, its ethics are highly suspect.
A large part of FiLife’s business model seems to be the idea that it will be paid for driving traffic to financial-services companies selling their wares to the coveted younger consumer. It does this by means of big "Get Deal" buttons and little orange and blue pyramids. Here’s a "deal" with an orange pyramid: can you find the tiny little notification, near the bottom of the page on the right hand side, that the orange color means that the deal is "sponsored"? With this kind of obliteration of the line between editorial and advertising, I’m not surprised that Lieber jumped ship. As for what on earth Dave Kansas is doing there, I have no idea.
Yesterday, June 11, InBev CEO Carlos Brito sent a letter to his counterpart at Anheuser-Busch, August Busch IV. It explained why a merger of the two companies was a great idea, and concluded:
It is our current intention to keep the contents of this letter private. However, given the significance of this proposal to our respective shareholders and the widespread speculation with respect to this potential transaction, we may be required by regulatory authorities to make public disclosure of this letter in the future. If circumstances permit, we will endeavor to notify you in advance of any such release.
Later the very same day, InBev put out a formal press release containing the entire letter, with no indication of any arm-twisting from regulatory authorities.
What’s the meaning of that "keep private" paragraph, and of the fact that it was so rapidly reversed? Is it an indication that things are already not going as Brito planned?
Headline from a press release which arrived in my inbox Wednesday evening:
“Golden Coffin Pay” is Not Pay-for-Performance Says Executive Compensation Expert
Glad that’s cleared up, then.
No mention is made of the front-page WSJ article which appeared on Tuesday and clearly precipitated the release.
China’s Safe to invest $2.5bn in TPG fund: It probably counts as an SWF at this point.
New Owner for Silverjet: "We expect to take on all of the existing staff, to honor Silverjet’s existing customers’ tickets and see Silverjet return to the skies in a matter of weeks," they say.
InBev Makes Offer for Anheuser: I’m rooting for the Brazilian Belgians. Oh, wait, this isn’t soccer?
Ride the City: Directions for NYC bikers. Really cool.
Alfonso Serrano might think that he’s joking:
The Times itself could give out shares of its stock with long-term subscriptions. It may not increase reader loyalty (the stock price is down 37 percent from a year ago), but it may help keep those pesky hedge funds out of its hair.
Personally, I think this is a really good idea: give every print subscriber one Class B voting share of NYT stock, and then give them one more share every three months thereafter, assuming their subscription is still in good standing. The securities would automatically convert to Class A shares if they were sold or transferred, or if the subscriber let his subscription lapse.
The cost of such a scheme would not be great: NYT shares closed today at $16.59 apiece, compared to a standard subscription rate of $10.20 a week, or $530 a year. But the votes of the NYT subscribers would be a formidable force to be reckoned with for anybody seeking to shake up the company, and they could almost certainly be relied upon to vote for the best possible journalism, rather than the highest possible share price.
If the Sulzbergers are serious about the New York Times being a public trust, what better way to show it than by giving their public – their subscribers – voting shares in their enterprise? And it would act as an incentive for people to subscribe and renew, as well. What’s not to love?
Andrew Ross Sorkin and John Gapper have done an excellent job of fisking the idiotic rantings of Lou Dobbs, who seems to think that because 1% of the investors in Chris Hohn’s TCI are sovereign wealth funds, it should never have any influence over something as critical to national security as – wait for it – a railroad.
But of course the combined readership of Sorkin and Gapper includes essentially zero swing or undecided voters, while Dobbs’s rhetoric can really change the way that a large number of his viewers vote. Which explains why otherwise sensible senators are so willing to go onto his show and complain about foreigners buying up strategic US assets. For shame, Evan Bayh and Robert Menendez. But it always has been true and it always will be: when politics meets economics, politics wins.
Back in January, in the opening session at Davos, Yu Yongding sounded a warning.
Yu also noted political risks in China: there are 150 million small Chinese stock-market investors who are going to be very angry if and when the Chinese stock-market bubble bursts. "They were hopeful that they could regain their money, and then they lost more," he said.
At that point, the Shanghai Composite had fallen to 4,700 from a peak of more than 6,000 in mid-October. Today, the index fell below 3,000. And yet, there’s precious little in the way of political fallout that I can see. Sure, there’s noise. But if any other country’s stock-market index lost half its value over the course of eight months, things would be a lot nastier than they are in China right now. Maybe a nation of gamblers understands intuitively that sometimes you lose. Or maybe it’s something to do with the fact that the stock market is still at double its levels of two years ago.
It seems that the BBA will be fiddling with Libor after all. But it’s not at all clear exactly what the changes will be, or even when they will be implemented: Carrick Mollenkamp is simply saying that the number of banks on the panel will go up, and that "the changes to Libor may not be completed until autumn".
The big unanswered question now is which banks will be added to the panel. Specifically, will they be US banks with a strong reliance on funding themselves through deposits? That would help make the index more American, since at the moment only 3 of the 16 banks are US-based. But it would also make Libor even less representative of banks’ creditworthiness, which is the main complaint about the index at the moment.
Ultimately, Libor is an anachronism, dating back to the days when banks really did fund themselves in the interbank market, and no amount of fiddling is going to change that. But insofar as Libor is a very important anachronism, I’m glad the BBA is working on making it as good as they can.
One other question, though: Why on earth would any bank want to join the Libor panel? Is there any upside to publicizing your borrowing costs to the world at large, and facing "a special BBA committee" any time those costs might seem unusual? I hope Angela Knight has some very strong powers of persuasion.
From Bespoke Investment Group:
That’s quite an astonishing decline: As recently as 2004, the USA had 45% of the world’s market capitalization. Today, it’s less than 30%. Remember that, the next time someone tells you that the S&P 500 "is" the market.
Oh, look! Another article filled with counterfeiting statistics! This one’s from Bloomberg, it’s 1,300 words long, and is the work of four journalists (Allan Dodds Frank, Jaime Hellman, Elizabeth Lopatto, and Wendy Soong) as well as four editors (Michael Waldholz, Jeffrey Tannenbaum, Antony Michels, and Karin Annus). Did it occur to any of these people to treat the numbers they were given with a little bit of skepticism? Of course not. Instead, as is SOP in such stories, everything is painted in the most alarming possible manner.
New York-based Pfizer, the world’s largest drug-maker, estimates it may be losing sales of $2 billion a year in Viagra alone, given how much of the drug’s active ingredient is produced in India and shipped abroad, says Rubie Mages, a company director of global anti-counterfeiting. Sales of the impotence drug in 2007 totaled $1.8 billion.
Let’s accept, for the sake of argument, that total shipments (by volume) of counterfeit Viagra are roughly equal to shipments of the real thing. (It’s worth noting here that counterfeit Viagra pills are often what the article calls "chemically identical duplicates created by manufacturers in China and India and shipped to the U.S. or Europe in violation of patent laws": they do the same thing, but the proceeds don’t flow to Pfizer.)
Now what do you suppose the chances are that someone ordering Viagra on the internet would, if that channel were shut down, instead go to his doctor and get a prescription for the legitimate, full-price version? If you say 100%, then give yourself a gold star: you’re well qualified to become a statistician for Pfizer.
And of course the size of the counterfeit drug market is always equal to the amount that the same quantity of legitimate drugs would sell for if sold at full price: as everybody knows, there’s never any discounting done on the internet.
Seizures of bogus prescription medicines jumped 24 percent to 1,513 incidents in 2007… The $3 billion in counterfeit drugs seized include generic copies that violate patent laws…
Do the math: that’s $2 million per seizure. Somehow I doubt that the average shipment of counterfeit drugs is really worth $2 million: that would be too risky for the largely small-time operators who deal in such things. But if you value the fakes as though they’re real, then it’s much easier to come up with such numbers.
Remember that it’s the heavily-discounted drugs which are the most common in the counterfeiting trade, not the ones which attempt to pass themselves off as the real thing and sell at full price:
Pfizer’s Mages says Viagra remains the world’s most- counterfeited drug and accounted by volume for almost three- quarters of the illicit copies of Pfizer brands seized last year in 45 countries.
But with no one checking the math, no one will object to enormous numbers being bandied about: the article uncritically quotes Congressman Steven Buyer saying that counterfeit drugs will be a $100 billion business in five years.
Let’s say that the legitimate pharmaceutical industry reaches $1 trillion in five years’ time. (It’s improbable, but possible.) And let’s say that 75% of that industry is in what the World Health Organization calls "industrialized countries with effective regulatory systems and market control (e.g. USA, most of EU, Australia, Canada, Japan, New Zealand)". In those countries, according to the WHO, counterfeits constitute "less than 1% of market value". So put industrialized-country pharmaceutical counterfeiting in five years time at 1% of $750 billion, or $7.5 billion.
Then in order for Buyer’s estimate to make any sense, the counterfeit pharmaceutical market in the rest of the world would have to be $92.5 billion, or 37% of its legitimate $250 billion future size. (Which is itself almost certainly a significant overestimate of how big that market is going to be: next year, the biggest developing markets – Brazil, China, India, Mexico, Russia, South Korea, and Turkey – are estimated to be less than $80 billion in total.)
But I doubt that Buyer has actually done these sums himself, he just likes bandying around enormous numbers in a manner which makes his pharmaceutical-industry campaign contributors happy.
What really annoys me, though, is when Bloomberg itself exaggerates the numbers.
The World Health Organization says 10 percent of the drugs worldwide may be counterfeit, with more than 50 percent of the medicines that are shipped to some countries not containing the proper ingredients.
Let’s go to the tape here:
Although precise and detailed data on counterfeit medicines is difficult to obtain, estimates range from around 1% of sales in developed countries to over 10% in developing countries, depending on the geographical area…
Many countries in Africa and parts of Asia and Latin America have areas where more that 30% of the medicines on sale can be counterfeit, while other developing markets have less than 10%; overall, a reasonable range is between 10% and 30%.
How on earth the Bloomberg team interpreted that to mean that 10% of drugs globally are counterfeit I have no idea. And the 50% figure they cite is nowhere to be found, unless you consider it to be the same thing as "more than 30%".
Once, just once, I’d like to see some responsible and mildly sketpical reporting on counterfeiting statistics. But I have a feeling I’m going to be waiting a long time. After all, with the exception of the occasional curmudgeon on the internet, who’s going to complain about these ridiculous exaggerations?
David Brooks did a good job yesterday of focusing the econoblogosphere’s attention on a report entitled "For a New Thrift: Confronting the Debt Culture". Or at least he would have done, if it weren’t for the fact that the report isn’t actually available online: in order to read it, you need to print out a PDF and send a $7 check in the mail to an address in New York; in return, you’ll get a physical copy of the report, which can’t (obvs) be copy-and-pasted. As a means of drawing the public’s attention to a very important issue, this is probably as idiotic as they come.
In any case, between Brooks and Barbara Dafoe Whitehead, it’s at least possible to list a number of very alarming datapoints:
This is not, contra Brooks, a function of out-of-control discretionary spending. But it’s clearly a problem, all the same, and one to which there are few easy solutions.
Still, there are some good ideas. It would be great if there were more and more-accessible credit unions and other financial institutions which exist to encourage thrift and serve their members rather than their shareholders. And yes, it would be a Really Good Idea for many more states to implement the strict anti-usury laws which have been successful in the 12 states which have implemented them so far.
Then – I know this sounds counterintuitive, but bear with me – state lotteries should be privatized, and the proceeds used to refinance the debts of the poor. Once the cash has been banked, there’s very little fiscal cost to future legislation severely restricting where and how lottery tickets can be sold.
It would be great if all of this could be done in a top-down, federally-directed manner, since the states have proven themselves largely incapable of rising to the task of tackling their citizens’ debt troubles. But I fear that this battle is going to have to be waged state by state. Which is bad news indeed for people in places like Utah and Montana: there’s very little chance of anything happening there.
A lot of people seem to be watching the Fed Funds futures contract these days. I’m no expert in how to read it, but the consensus seems to be that if the market is right, the Fed will hold steady in June, raise by 25bp in August, and then raise another 25bp in either September or October, bringing us back to 2.5% by November.
A rising-interest-rate environment would help put a floor under the dollar (is the hope) and help to dampen fears about non-oil inflation picking up. It would also act as a signal from the Federal Reserve that the financial crisis is over, and that the Fed no longer needs to set very low rates in the hope of getting liquidity to start flowing around the banking system again.
The downside? Well, higher interest rates can’t be good for equities. Martin Hutchinson of Breaking Views made the interesting point this week that since 1995 or so US stocks have risen in line with the amount of money in the economy, and not with GDP. It makes sense that insofar as Bernanke has turned on the spigots over the past year, that has helped to minimize the natural decline in stocks which one would expect heading into a recession. Without that monetary help, stocks might look significantly less buoyant.
Would the economy more broadly be hit by a 50bp hike by November? I somehow doubt it. Companies aren’t really borrowing right now, and the reason they’re not borrowing is entirely a function of bank liquidity, rather than a function of high interest rates.
And a Fed funds rate at 2.5% is still very much on the easy side of neutral. Bernanke would still have his foot on the gas pedal rather than the brake, he just wouldn’t be flooring it.
There’s also, however, the question of Bernanke’s vanity. Let’s say there’s another sickening lurch in credit markets, or the stock market falls by 8% in two days, or a major financial institution (it doesn’t need to be Lehman; it could be, say, Freddie Mac, or even conceivably Countrywide, if Bank of America backs off) implodes. At that point, the Fed would be inclined to come swinging to the rescue with another emergency rate cut – but it’s well known that central banks, like ratings agencies, hate to wobble. They’re going up, or they’re going down, or they’re holding steady. They don’t zig-zag.
But the good news here is that Bernanke isn’t that vain, and he might even welcome the extra room for maneuver which a slightly higher Fed funds rate would give him.
So my feeling is that now Bernanke is sounding increasingly hawkish, it’s quite easy to get behind the idea that we’re entering a rising-interest-rate environment. Nothing’s going to happen at the meeting this month, most likely, which means the Fed will be able to wait and see what happens through all of July before finally pulling the trigger on a 25bp increase on August 5. Right in the middle of what is certain to be a hotly-contested presidential election campaign in which the economy is Issue Number One. Ah, timing.
I’ve started writing a monthly column on art collecting for Poder, a magazine in Miami. Here are the first four. I love the art direction on them, it makes a refreshing change from the blog format.
When a Balloon Looks Like a Bubble:
Now that MasterCard’s ranking of the "75 Worldwide Centers of Commerce" has been released, it’s fun to pick out some datapoints.
The main conclusion I draw from all this is that London and New York really are superstar cities compared to everybody else. It really doesn’t matter if you’re a capital city or not, but if you want to rise up the list, you’re going to have to spend a lot of money on infrastructure. Not skyscrapers.
Citi CEO Calls For Debate On Financial Services Regulation: Pandit, who sold his hedge fund for $800 million, now thinks hedge funds should be regulated.
When Markets Collide: Mohamed El-Erian’s optimal asset allocation. Just 15% is US stocks.
Earth to Tom Brown…. "Brown, who regularly appears on CNBC (including Monday night) to talk about the coming turnaround in financial stocks, has seen the value of his holdings fall from $852.7 million as of Dec. 31, 2006, to $139.3 million as of March 31, 2008, according to regulatory filings."
Fed to Scrutinize Derivatives Trading
Lehman Never Saw It Coming: It could have issued substantially more preferred stock at 7.25%, convertible at $49.87. Instead, it held off, and has now issued another $2 billion at 8.75%, convertible at $33.04. How come? Problems with "visibility", according to the CFO.
Companies Promise CEOs Lavish Posthumous Paydays: "Comcast’s Mr. Cohen called the five years of postmortem salary and bonus for the chief executive ‘fair and reasonable.’"
I’m puzzled by my colleague Jeff Bercovici’s take on the concept of citizen journalism. Yesterday, he pronounced, in a blog entry headlined "‘Citizen Journalists’ Don’t Get a Pass on Ethics", this:
Being a "citizen journalist" doesn’t mean you get to pose as a citizen and then publish as a journalist.
Really? Because I thought that’s exactly what it means. (Let’s ignore, for the time being, the fact that journalists, as a rule, are citizens. You can’t "pose" as a citizen if you are one already.) But Jeff reckons that if the Huffington Post pulls such stunts, it will lose its "credibility as a news organization".
Today he clarifies his position: by "credibility" he means "access".
Much as the site claims to disdain the access-based Beltway news paradigm, it does seek access, whether in the form of an exclusive statement from Barack Obama, an interview with Dan Rather or invitations to cover events. (How many Huffpo reporters did I see at the Time 100, again?) Hell, Huffpo was founded on access — Arianna Huffington’s access to the bold-faced names who blog for her.
As it increasingly adopts the trappings of a conventional news organization, then, Huffpo becomes subject to the same kind of reprisals as a conventional news organization.
This is nothing to do with ethics any more, it’s simple expediency. If Huffpo wants its precious access, then it had better learn to play by the rules, or else face "reprisals" (which would presumably take the form of Dan Rather no longer granting the site interviews).
I, for one, hope it does no such thing. Huffpo is a new form of journalism; that’s the whole reason for its existence. There’s no equity in its transforming slowly into "a conventional news organization". If individuals want to give access to Huffpo and its new journalists, they can; on the other hand, if they don’t want to, no one is forcing them to. So far, the amount of access that Huffpo has been getting has only been going up, which implies that they must be doing something right. And Jeff adduces no evidence that Huffpo has been on the receiving end of any "reprisals" as a result of its citizen journalism. Indeed, there’s a much stronger case to be made that its Huffpo’s citizen journalism which is precisely what got it that access in the first place.
Jeff and I have been here before: he said that Huffpo should, like a conventional news organiztion, pay its bloggers; I disagreed. And this is where I agree with Jay Rosen that Jeff sounds as though he’s channeling "the guild mentality in the press". That doesn’t mean that Jeff went to J-school or doesn’t spend most of his time writing online; it just means that he considers journalists and conventional news organizations to be special things, and he worries when the Great Unwashed dare to crash the party (or break into the guild).
I, on the other hand, am much more upbeat about the transformation of the communication of information. More sources, more voices, more opinion, more debate? Good! Yes, there is very much a role for conventional journalists to play in such a world. But when someone like Mayhill Fowler breaks news despite not being a conventional journalist, I just smile. In the old days, she might have just told a few friends what she’d heard, and no one would have cared. Nowadays, she posts online, and can have an enormous impact: in a sense, we are all Mayhill Fowler’s friends today.
Jeff’s worries about access stem from the way in which newsmakers try to control news coverage of them. It’s an invidious practice, which I hope will slowly fade away. Maybe if conventional journalists didn’t need to worry so much about access, they would do a better job. That’s where citizen journalists come in: without worries about access, they can be as honest as conventional journalists would often like to be.
The most web-savvy politicians understand that it’s silly to try to corral Mayhill Fowler and her ilk like so many sheep. You have to encourage them to post what they like; sometimes that will result in a minor embarrassment like "bittergate", but most of the time they do a much better job of whipping up support and enthusiasm than any centrally-directed campaign ever could.
So, let a thousand Mayhill Fowlers bloom. Will Huffpo lose its precious access? Probably not, but it wouldn’t matter if it did. The downside of lost access is much smaller than the upside of the public being informed of what’s really going on.
Bloomberg’s Darrell Preston has found three investors in auction-rate securities who have found buyers for their holdings. That’s the good news. The bad news is that these investors’ brokers are refusing to let the owners sell.
Franklin Biddar bought $100,000 of ARSs through Bank of America; Chris Longman bought $375,000 of ARSs through UBS; and David Wilner and Maxwell Stokes bought $200,000 and $50,000, respectively, of ARSs through Wachovia. All four of them would like to sell their holdings; three of them have buyers lined up; and none of them are being allowed to sell.
Why can’t the banks in question simply do as their clients are asking them to do? Well, they could, if they wanted to. But they don’t want to, because that might open them up to legal liability:
"By allowing customers to sell at a discount, the banks allow customers to establish damages," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin. Lantagne is head of a task force for nine states looking at whether brokers misrepresented the debt as an alternative to money-market investments.
This definitely has the ring of truth to it: I’m sure it’s the real reason that the banks aren’t allowing their clients to sell. And it stinks. It’s not the banks’ money, after all, and they have no right to hold on to it against their clients’ wishes. Will the clients thereby establish damages? Quite possibly, yes. But if you’ve screwed up once, it’s not generally advisable to compound the error by acting unprofessionally a second time. (And if you didn’t screw up originally, then you have nothing to fear from your clients taking a loss: clients take losses every day.) These orders should be filled, forthwith. And if they are, a much more liquid secondary market might even start to spring up in such things.
Barack Obama’s economic policy, says Justin Fox, is "a hard-to-summarize mix of moderate Democratic standbys, populist silliness and the occasional truly visionary proposal". His example of an Obama "populist pander"?
He favors a windfall profits tax on oil companies (which could discourage investment in new energy resources).
I think this is unfair to Obama. A populist pander is McCain’s idea to abolish gasoline tax for the summer. A windfall tax on oil companies, by contrast, actually makes a certain amount of sense.
For one thing, it raises money for the federal fisc – something important when you’re coming up with new spending plans, as Obama is. For another thing, it acts as an indirect carbon tax, which is a pretty good stopgap until you can get a proper carbon tax or cap-and-trade system up and running. And the downside to a windfall tax is actually very small.
Justin’s argument (I think) is that if oil companies rationally expect to face windfall profits taxes in the future, then they’ll be less keen to invest money in the present. I don’t buy it, for two reasons.
The first is simple: if you’ve already spent money on investment, then that money isn’t profit. Investment is a perfectly legitimate business expense, and a rational oil company, faced with a looming windfall tax, would do well to invest its profits back into its business, thereby avoiding paying a windfall tax on them.
But investments should have a positive expected return, so won’t there be even more in the way of windfall tax to pay when the investment finally pays off? No: because a windfall tax, by its very nature, is a one-off beast. It doesn’t get levied every year, it only gets levied once. So the calculation that the oil company has to make is easy: does it pay a certain windfall tax this year, or does it run the risk of paying a larger windfall tax in the future? Given that windfall taxes are very rare beasts, the latter is the obvious course of action.
What’s more, oil companies risk running into future windfall taxes whether or not there’s one in effect right now. Does the risk of a future windfall tax reduce investment today? Yes, probably. But implementing a windfall tax today doesn’t change that calculation much if at all, because it doesn’t significantly change the probability that there will be another windfall tax in the future.
All that said, I’m not a huge fan of windfall taxes, and they wouldn’t be at the top of policies I’d recommend to Obama. I just don’t think they’re stupid populist panders.
Here’s what I don’t understand about the crazy-desperate moves that Sam Zell is making at the LA Times, like judging journalists by the number of column-inches they generate, or removing all the editorial employees at the the magazine and moving it to the business side – something Jeff Bercovici says could "spark a mutiny".
Clearly, Zell has ended up owning a property quite different from the business he thought he was buying. And equally clearly these measures are a panicked response to a worse-than-expected P&L, rather than the kind of thing he was planning to do all along. But what he’s doing is systematically chopping away at any value the LA Times has, in a desperate attempt to stop it from bleeding money. As Mike Kinsley says:
It won’t be long before he figures out that you can have an equal number of advertising and editorial pages if you have none of either and simply stop publishing the paper. That way you won’t have to employ any journalists at all.
Right now, however, the LA Times does, very much, have value: David Geffen and Eli Broad and probably a few other local billionaires as well are seriously interested in buying it and investing in it. Why kill yourself and the paper to squeeze out the profits needed to pay down the company’s huge pile of leveraged debt, when you can just sell the bloody thing, just like you did Newsday, and be done?
Zell has his flagship newspaper: he’s a Chicago man, and he owns the Chicago Tribune. He neither wants nor needs the LA Times for vanity purposes. So why does he still own it?
I’ll leave the likes of Dan Frommer to do the big-picture corporate economics of the costs and benefits of changing Apple’s business model. I’m more interested in the user end: if the price of an iPhone drops by $200, but your phone bill rises by $10 a month, how much of a savings are you really making? Remember that you’re tied in to a two-year contract, so over the course of those two years you end up paying an extra $240. Discount that by your own personal discount rate, and it probably ends up pretty much a wash.
And what about the Mobile Me service at $99 a year? ("Exchange for the rest of us", Apple calls it.) Aren’t you basically paying a hundred bucks for exactly the same kind of automatic synchronization that Exchange users are getting for free? Actually, in this case, no. It turns out that data plans for business cost $45 a month, $15 more than the consumer plans. (Both are unlimited.) So essentially Exchange synchronization is "free" if you pay an extra $15 a month, which makes $99 a year look like something of a bargain.
Many thanks to Matthew for pointing me to an extremely peculiar 3,000-word Business Week feature on global architecture. If you want proof that the teachings of Jane Jacobs have yet to sink in around much of the rest of the world, then all you need to do is read this article, which paints global architectural activity as, in the words of the headline, "The Battle for the World’s Skyline".
The word "skyline", to me, is closely related to the concept of zoning. Go to Sao Paulo if you don’t understand what I mean: innumerable skyscrapers, but no skyline, since there’s no zoning. But the Business Week article’s authors seem to think that the best skyline, by definition, belongs to the city with the most and newest skyscrapers:
The battle for the best skyline, which has been underway for more than 100 years, is entering a new round. And it already seems to be clear who the winners will be: the Middle East and the Far East. Kazakhstan and Qatar could soon be aesthetically more dominant than Europe or the United States. It is an architectural clash of civilizations.
Puh-leaze. St Paul’s Cathedral, finished in 1708 and just 365 feet off the ground at its highest point, is a key, instantly-recognizable element of the London skyline to this day. There’s a world of difference between a city with lots of glass towers, on the one hand, and a vibrant global city with a great skyline, on the other. And I know which one I’d rather live in.
A skyline implies sensible zoning, a coherently-planned central business district, and a transportation infrastructure which is designed to funnel a lot of people in and out of the same place at the same time. And a great city does not need many tall buildings: if you look at that list of top global cities, London is at number one (not too many skyscrapers there), and even Amsterdam makes the top ten, easily beating out Dubai and Shanghai and Mumbai, let alone Almaty or Tripoli.
So what are we to make of this?
Economically booming megacities — such as Beijing, Shanghai and Dubai — where extravagant skyscrapers are shooting up all over, mean that cities like New York are beginning to look old and outdated, despite attempts to modernize. In Europe, the eastern part is beginning to look more modern than the western part. Cities like Istanbul and Moscow are more dynamic than London, Paris or Milan.
Cities such as London and Amsterdam are living proof that old is not the same as outdated, and that tall buildings are not the be-all and end-all of municipal dynamism. Do the authors of this article really think that adding a bunch of "extravagant skyscrapers" would make Milan "more dynamic" than it already is? Evidently they’ve never heard – or if they have heard they haven’t really understood – Jacobs’s famous saying that "new ideas require old buildings".
Which is not to say that there isn’t development in western cities; there is. And Business Week’s list of ways in which "the massive downturn in the American credit market has caused the cancellation or postponement of many major architectural and urban-planning projects" is very silly indeed: there’s always a long list of such projects which have been cancelled or postponed, no matter what the credit markets are doing. What’s interesting to me is the number of projects, such as Larry Silverstein’s towers at the World Trade Center site, which are still being built speculatively, with no anchor tenants.
And it would be very hard indeed to find many New Yorkers who agree with the Business Week article that the scaling-back of Bruce Ratner’s Atlantic Yards project in Brooklyn is "a tough blow for New York". (I suspect the authors will have lost most Brooklynites when they describe the area as "an industrial wasteland".)
But my favorite part of the article is this:
And what about Europe? Will the old world have to start getting used to the idea of becoming a museum — picturesque, but without any real chance of keeping pace with the iconography-rich growth of other continents?
It comes just a few paragraphs after this description of Dubai:
The skyscrapers look somehow familiar — and not accidentally so. Many of the building’s architectural elements — including the bell tower from St. Mark’s Square in Venice and the silver arches of New York’s Chrysler Building — are borrowed.
Ah yes, St Mark’s Square, that icon of modernity. I’m so glad that the Venetians decided to build a series of 75-story glass towers right alongside it, otherwise they wouldn’t have been "keeping pace with the iconography-rich growth of other continents".
The article ends by quoting German architect Hilda Léon:
Léon already has her sights set on the next market. It is only a matter of time, she says, before all of Africa will be "the next big thing." In this context, the word "big" is no exaggeration. What a paradisiacal concept for architects: all that undeveloped land for what Friedrich Nietzsche called representative architecture’s "eloquence of power."
It’s a vision of empty space as the ideal place to build skyscrapers. Well, good luck with that. I’ll stick with my tried-and-tested cities, thank you very much. They might not be as paradisical for architects, but they’re much nicer for people.
MasterCard’s Centers of Commerce Index has been getting a lot of press today (it’s London 1, New York 2, just like last year). So I wanted to check it out, and to see just what
MasterCard’s Michael Goldberg meant, in quantitative terms, when he said that "London towers over other cities not only in narrow financial terms but in a broader sense as well". So I went to the website. Which (a) plays annoying music which can’t be turned off, and (b) is a full year out of date.
I don’t mean to pick on MasterCard here, necessarily. But pretty much every day I get press releases about some new report or index, and very occasionally the release itself actually contains interesting information which is worth linking to. In my experience about 60% of the time the press release isn’t online, and about 90% of the time the referenced report or index isn’t online.
I do not understand why institutions hire PR companies at great expense to publicise their research, and then refuse to make that research public. Invariably, if I reply to a press release with a note saying that it looks interesting and where can I link to the research, I’m offered instead an interview with the lead researcher. Which means that my readers, unable to judge for themselves, will have to go simply on what I choose to tell them. And oftentimes the people in question won’t even email me the research report, I have to go only on a flimsy executive summary or somesuch.
Worst of all, however, is when I’m pitched stories about research which doesn’t exist. In November 2007, I got a press release headlined "Groundbreaking research reveals a high number of entrepreneurs suffer from dyslexia", which put forward the fascinating hypothesis that dyslexia is actually a very good thing if you’re an entrepeneur: it helps with things like oral communications, problem-solving, delegation, and spatial awareness. When I asked for more information, I was emailed an 800-word executive summary, and told that "the
report of the study hasn’t been published and is still in the works". In other words, the summary was of a nonexistent report. Clever.
At this point, seven months later, there’s still no sign (online, at least) of the report, or even the 2007 press release. (There is an older 2004 press release, maybe we’re meant to make do with that.) I find it quite astonishing that even as the media has decided to embrace the Web, the PR industry is still stuck in a world where journalists have no interest in being able to link to anything.
If you want to publicise your Centers of Commerce Index, say, wouldn’t it make sense to make sure it was online first, and to put a link to it in all the materials you send out? That way you get not only the old media but also lots of potential links from Digg and Reddit and the blogosphere and Facebook and people emailing each other and so on and so forth. What’s the downside to that, especially if you’re going to put it all online pretty soon anyway?
(Update: It’s online now.)
Dane Hamilton is a stickler when it comes to what is and what isn’t a hedge fund:
Some funds that call themselves hedge funds really aren’t, because they don’t sell short, use leverage or buy derivatives, but are basically long-only funds with lucrative hedge fund fee structures aimed at wealthy investors.
Sounds a hell of a lot like a long-only hedge fund to me. But now I feel almost sorry for all those poor HNWIs who’ve invested their millions in a so-called "hedge fund" only to discover that it isn’t, because it hasn’t been levering up its CDOs of CDSs. They’re going to feel dreadful when they find out.
