The Hedge Fund Money-Go-Round

Posted on February 9, 2009 by Felix

Bill Ackman explains how hedge funds work, specifically with regard to investors in Pershing Square IV, his fund dedicated (disastrously) to going long Target:

Some of these investors, who are for the most part other hedge funds (that comprised approximately $1.3 billion of the original $2 billion of fund capital), have told me that they previously hedged a substantial portion, or in some cases 100% or more, of their exposure to Target through PSIV.

So a bunch of hedge funds invested in PSIV to go long Target (while paying Ackman his 2-and-20), and at the same time went short Target in order to hege their PSIV exposure. And for this piece of genius they charge their own investors 2-and-20.

Just think, if you invested in a fund-of-funds which invested money with say David Einhorn who in turn invested in PSIV, you could end up paying 1-and-10 on the profits after paying 2-and-20 on the profits after paying 2-and-20. But hey, if PSIV is down 90%, at least your performance fees aren’t going to be big.

Posted in hedge funds | 1 Comment

Kindle 2: Still Expensive

Posted on February 9, 2009 by Felix

Megan McArdle loves her Kindle, but says that Amazon doesn’t want to have "a glut" of Kindles if the new Kindle 2 fails to sell as well as the original.

My feeling is that having too many Kindles in stock is not going to be much of a problem for Amazon, which desperately wants to own the next iPod. The main reason why everybody has an iPod is that, well, everybody has an iPod: the network effects on this kind of thing are extremely important, and you’re much more likely to buy a Kindle if someone you know has one.

The worst-case scenario is that the Kindle 2 doesn’t sell at $359, and Bezos has to lower the price to sell more. Once they’re sold, those Kindles will generate just as much extra revenue for Amazon, in the form of eBook revenue, as the full-price devices.

I do think the price is still too expensive — but the problem is that it comes with a lot of "free" wireless data, which is hard for Amazon to discount too much. Eventually, however, I can see the Kindle being a serious revenue-driver not only for Amazon but also for newspapers, magazines, and other web publishers. I’d pay good money to be able to read all my RSS feeds, constantly updated, on the Kindle — but it would have to be a flat rate, not the per-blog pricing model the Kindle currently uses.

What seems certain is that Sony has lost the eBook reader wars just as it lost the pocket music-player wars. Once Amazon figures out a way to take the Kindle international, Sony’s Reader is toast.

Posted in Media, technology | 1 Comment

Why We Need Federal Insurance Regulation Now

Posted on February 9, 2009 by Felix

Rolfe Winkler has a great post on Allstate’s finances today, which underscores two things: the urgency of massive regulatory overhaul in the financial sector, and the necessity of including insurance companies under the unified financial-services regulatory umbrella.

Unless and until that happens, companies like Allstate will go regulator-shopping (the state of Illinois seems pretty well-disposed towards them) and bad insurance will drive out good. And then, eventually, when there’s a big insurable disaster, we’ll all be shocked — shocked! — that Allstate isn’t able to use deferred tax assets, and other "capital" of dubious real-world worth, to pay out on its policies.

Posted in insurance, regulation | 2 Comments

How the Ad Recession Could Improve the Web

Posted on February 9, 2009 by Felix

There’s an interesting quote buried near the end of the NYT’s article on the NYT:

Across the Internet, “we have a glut of unsold inventory every single day,” said Kelly Twohig, the digital activation director at Starcom, which buys media for clients like Kellogg’s and Nintendo. She said that could force major sites like NYTimes.com to cut back the online ad space they offer, to keep prices up.

Absent editorial-side cutbacks, how does one reduce inventory? There’s one easy way, which all nytimes.com readers would embrace fervently: stop spreading stories over multiple pages.

In the early days of the web, in an attempt to goose pageviews, publishers started asking readers to click through two or three or sometimes even a dozen different pages to get through one story. It’s annoying and self-defeating, and I devoutly wish that a move to reduce inventory will kill off this miserable habit.

People read from one line to the next. If you can’t read the line above the line you’re reading, it feels odd, and you can lose track of the narrative. When you’re reading a book, it’s almost instantaneous to flip a page, but with a website, the time taken to click on the "next" link and wait for the page to reload is much longer. What’s more, all that finding the link and clicking takes you out of the narrative — and, of course, makes it much more likely that you’ll disappear off somewhere else entirely, just like newspaper readers generally fail to read beyond the jump.

The multiple-pages problem is so annoying, indeed, that many bloggers, including myself, make it a point to always link to a "single-page format" or "print version" of the article instead. That’s not always possible, however, and what’s more the print version often lacks important navigation, multimedia, and other hypertext components.

Most annoying, for a blogger, is when you’re quoting a bit of an article which is on, say, page three. Do you link to page three, or to page one? Neither is particularly pleasant.

Every time I go to a website like the NYT or The Big Money, the need to hunt around for the "single page" button and click on it and wait for the page to reload makes me hate the site just a tiny bit. For really gruesome offenders like Time, I simply don’t read a lot of their listicles, no matter how good they are, because the multiple-page format makes them all but unreadable. Now that the need to maximize inventory has disappeared, maybe this whole annoying thing will go away.

Posted in Media | 2 Comments

Recessionwire, in Theory and Practice

Posted on February 9, 2009 by Felix

Congratulations to my former Portfolio.com colleagues Laura Rich and Sara Clemence for getting the great-looking Recessionwire up and running — and for snagging some very valuable NYT real estate, as well. This is my favorite bit from the NYT article:

Promotional materials proclaim that “core users” will be urbanites in their 30s and early 40s with a “theoretical income level” of more than $75,000.

I like that. People don’t have incomes any more, they have a “theoretical income level”. What’s yours?

Posted in Media, pay | 1 Comment

Against New Good Banks

Posted on February 9, 2009 by Felix

Paul Romer’s op-ed on starting up new good banks rather than trying to rescue existing institutions has gotten quite a lot of play in the blogosphere, maybe because of his famous last name; he shouldn’t be confused, however, with David "husband of Christy" Romer.

I’m someone who thinks that bank nationalization is a good idea, and as such there’s something to like in any proposal which helps the idea of state-owned banks enter the mainstream. But of all the nationalization proposals, this one seems to me to be one of the weakest.

For one thing, it’s far from clear that there’s a shortage of "good banks" in the US right now. One of the big differences between the US and Europe is that the US has many more banks; even the huge ones don’t have anything like the market share that big European banks do, and there are thousands of small and tiny banks — not to mention credit unions — which have really no European counterparts at all. Many of them — and even many pretty big banks — are doing fine.

Putting government capital into new "good banks" would create unhelpful competition for the existing good banks, while providing no help whatsoever for the existing bad banks. Remember that the single biggest problem with too-big-to-fail banks is that they can’t be allowed to fail. So even if setting up good banks was a good idea, it would be an insufficient idea, since the big bad banks would still need to be rescued: there’s simply no way we can afford a big bond default by the likes of Citigroup or Bank of America, let alone even hint that their uninsured depositors might be in danger.

And Romer ignores another key aspect of the credit crunch: yes, it’s true that underwriting and lending standards have tightened up substantially, and that the supply of credit is much smaller than it was. At the same time, however, the demand for credit has also plunged. The US might need credit to start flowing again, but you can’t force people to borrow money in this economy — especially not when every news headline reinforces the prudence of saving money rather than borrowing it.

Oh, and one other thing: setting up a new "good bank" right now is a fraught prospect. Banks, fundamentally, are maturity transformers: they borrow short and they lend long. As a result, the single most dangerous time to launch a huge new lending program is when interest rates are lower than in living memory. And the market knows it: it’s not going to have much more confidence in the "good banks", over the long term, than it does in the current bad banks.

For all these reasons, and many more, I think that outright nationalization of the existing bad banks is a much better idea than trying to reinvent the entire banking system from scratch in a few short years. There might not be a lot of useful institutional knowledge in the old bad banks — but there’s surely more than there is in banks which haven’t even been founded yet.

Posted in banking | 1 Comment

Why is the ECB Being so Gradualist?

Posted on February 9, 2009 by Felix

Jim Surowiecki asks a good question today: if you know that you’re going to cut interest rates — and Jean-Claude Trichet has made it abundantly clear that he intends to cut interest rates in March — why not do so now?

Surowiecki thinks that the ECB’s inaction on Thursday is further evidency that it’s doing "a terrible job"; I wouldn’t go nearly that far. And I think there are a few reasons why the ECB’s relatively gradualist approach is defensible.

First, it’s not really true that people won’t take out loans today because they think rates will be lower next month. Loans, remember, are either fixed-rate or floating-rate; most corporate loans are floating-rate. So if you think rates will be lower next month, you’ll be more likely to take out a floating-rate loan today than if you didn’t think that. Meanwhile, if you take out a fixed-rate loan, there’s no reason at all that a half-point cut next month — which is already fully priced in to the market — is going to show up in lower interest rates than prevail today.

More generally, while Surowiecki is right that "monetary policy takes time to work", expected interest rates are at least as important as the interest rates themselves. Trichet might have been moving slowly during this crisis, at least by US standards, but he’s been good at signalling: he follows through on his promises, and doesn’t panic.

In turn, that means that there’s much less uncertainty over European interest rates than there is over US rates — and the markets hate nothing more than uncertainty.

Why do central banks have tightening and loosening cycles? Why don’t they just set interest rates at exactly the level they think that rates should be set at, and leave it at that until they change their mind? If they did that, rates would move up and down quite frequently — but instead we commonly find very long periods of relatively small rate increases, and equally long periods of rate decreases.

The result is that interest rates become smoother and more predictable, which the markets love. And what’s more, central banks get to announce lots of rate cuts or rate hikes, rather than just one big one — and a series of interest-rate announcements, all pointing in the same direction, is a powerful thing when it comes to those all-important expectations.

Now it’s still arguable that Trichet has been behind the curve during this crisis — in fact, if the curve is being set by Bernanke, it’s absolutely certain. Maybe it’s true that exceptional times call for exceptional central bank actions, and Trichet is too hidebound to go there. But in general, holding rates steady one month while signalling a rate cut in a month’s time is not prima facie evidence that a central banker has no idea what he’s doing.

Posted in fiscal and monetary policy | 1 Comment

Ben Stein Watch: February 8, 2009

Posted on February 8, 2009 by Felix

What year does Ben Stein think that he’s in? On the one hand, he talks about "President Obama" in his latest column, so he must have some inkling that it’s 2009. But his overall message is very mid-2007: there’s a big financial credit crunch which needs fixing, but the broader economy is actually not so bad, and so long as we can fix the problems in the banking system, everything should be fine.

Maybe nobody’s told Stein that we’ve been in recession since December 2007, that we’ve lost 3.6 million jobs, that GDP is shrinking faster than ever, and that the Obama stimulus package is designed to keep the broader economy from cratering catastrophically.

Indeed, Stein seems to have no comprehension of the difference between the economy-focused stimulus plan, on the one hand, and the policies, to be announced on Tuesday, which will focus specifically on the financial sector, on the other:

But the main crisis now is not unemployment, at least not yet. It is about the lending institutions of this country…

What is the solution? With the greatest respect to President Obama, it is not necessarily to hire men and women to build more wind-power windmills, or “21st-century classrooms.” These plans may have merit in and of themselves. But they do not get at the central problem: credit…

I do not doubt that much of what Mr. Obama now proposes has merit for reasons having little to do with the economic situation. But right now, this minute, we are in a financial-monetary crisis. It is begging for a financial-monetary solution, not mammoth public works, which might be useful down the road.

Ben, there is "a financial-monetary solution", and one which makes a lot more sense than the one you’re proposing. It’s coming next week, and it’s going to be announced by the Treasury secretary, Tim Geithner. The "mammoth public works" — the windmills and classrooms and what have you — are not designed to solve the financial crisis; instead, they’re designed to provide a Keynsian stimulus to the economy as a whole. You can disagree about how much of a stimulus such a bill will provide, but arguing that it doesn’t address the problem of credit simply misses the whole point of the bill: the government’s response to the problem of credit is a separate thing entirely.

The rest of Stein’s column is a hodge-podge of ideas — if they can be called that — recycled from previous columns, without even any attempt to keep them consistent:

The financial entities of this great nation — both banks and less regulated or unregulated entities — took wild, spectacular, immoral risks with credit.

It turned out that shrewd speculators could take advantage of those mistakes when the credit bubble burst and make extraordinary sums of money, all the while terrifying markets and making the crisis worse…

Now it’s been revealed that as bad as the credit losses of banks and other entities were first thought, they are actually worse.

Today, the lenders’ problem is that their losses have been so great as to impair their capital…

The solution is to lend the banks more federal money…

As I have been suggesting for a while now, we should also start making guarantees on bank loans, absent fraud, and make sure the banks have no excuse not to lend.

This is like one of those poems with an ABBCCA rhyme scheme, only instead of rhymes you have outright contradictions.

If the problem was financial institutions taking "wild, spectacular, immoral risks with credit", then the solution can hardly to guarantee all bank loans so that "the banks have no excuse not to lend".

If "speculators" made the crisis worse by "terrifying markets" to the point at which the credit markets overshot to the downside, then credit losses can’t be "actually worse" than markets implied at first.

And if bank losses "have been so great as to impair their capital", that means that banks’ liabilities are far too big relative to their assets, and the solution cannot possibly be "to lend the banks more federal money" and thereby increase the banks’ liabilities even further.

On the other hand, maybe Stein was a bit muddled this week from all the attention he’s receiving from the "chicks" who "dig" him. And if you think that all sounds very 70s, just wait until you see the cover art for his 1982 book, ‘Ludes. It might be 27 years old, but some things never change. Here’s the review (by Cameron Crowe, no less):

‘ ‘Ludes,” unfortunately, is also about restaurants. In the process of telling Lenny Brown’s story, Mr. Stein manages to mention almost every exclusive restaurant in Los Angeles. It often seems that all the important conversations in the book take place over meals at Ma Maison, the Moustache Cafe, La Scala, the Palm or Le Restaurant…

Perhaps in his next book, Benjamin Stein might consider traveling a little farther than Restaurant Row.

Nah, he just moved the restaurant name-dropping from books to newspaper columns.

Posted in ben stein watch | 1 Comment

Extra Credit, Friday Edition

Posted on February 6, 2009 by Felix

U.S. Sovereign CDS Rockets to 82 bp: And it’s still very unclear who’s buying this protection.

Deutsche Bank Fallen Trader Left Behind $1.8 Billion Hole: As suspected, it was on the CDS basis trade.

Harvard Endowment to Cut 25% of Staff: That’s about 50 jobs.

A new hedge fund business model: Ideas for fixing the present flawed incentives.

‘Infrastructure more helpful than tax cuts’: The IMF says that government spending boosts and tax cuts are the only thing keeping the global economy from an outright contraction.

Somali Pirates Get Ransom and Leave Arms Freighter: And the NYT gets some great quotes from one of the pirates, Isse Mohammed.

Posted in remainders | 1 Comment

Treasury’s $78 Billion TARP Giveaway

Posted on February 6, 2009 by Felix

The Congressional Oversight Panel is certainly doing its job of double-checking TARP expenditures and Treasury statements. Here’s a bit of its latest report, which accuses Treasury of overpaying for assets to the tune of $78 billion:

Valuation of the transactions is critical because then-Treasury Secretary Henry Paulson assured

the public that the investments of TARP money were sound, given in return for full value: “This

is an investment, not an expenditure, and there is no reason to expect this program will cost

taxpayers anything.”

In December, he reiterated the point, “When measured on an accrual

basis, the value of the preferred stock is at or near par."

This means, in effect, that for every

$100 Treasury invested in these companies, it received stock and warrants valued at about $100.

As discussed in greater detail in the remainder of this section, an extensive valuation analysis of

the ten transactions that was commissioned by the Panel concluded that:

  • In the eight transactions which were made under the investment program for healthy

    banks, for each $100 spent, Treasury received assets worth approximately $78.

  • In the two transactions which were made under programs for riskier banks, for each

    $100 spent, the Treasury received assets worth approximately $41.

  • Overall, in the ten transactions, for each $100 spent, the Treasury received assets

    worth approximately $66.

Meanwhile, other capital providers were driving much harder bargains:

  • For each $100 Berkshire Hathaway invested in Goldman Sachs, it received securities

    with a fair market value of $110.

  • For each $100 Qatar Holding and Abu Dhabi invested in Barclays, they received

    securities with a fair market value of $123.

  • For each $100 Mitsubishi invested in Morgan Stanley, it received securities with a fair

    market value of $102.

If Treasury wants to overpay for bad assets, in order to recapitalize the banking system, then it should do so transparently. What’s unforgivable is lying, and saying that you’re paying a fair price when you’re not.

Posted in bailouts | 1 Comment

Why Does Bookstaber Hate Blogs?

Posted on February 6, 2009 by Felix

Rick Bookstaber appeared on a panel with a couple of FT Alphaville bloggers last night; "whether they become viewed as journalists," he rather cattily writes, "time will tell".

Bookstaber essentially says that blogs are "the cognitive equivalent of a string of Star Burst candies", and says that "I am employing a stream of consciousness approach in this post out of respect for my topic, because I want to write about blogs in the same way most blogs are produced and read." Oh, and for good measure, he ends the post by comparing bloggers to "rodents". Nice.

Clearly we bloggers didn’t make a very good impression on Bookstaber last night. But he’s entirely wrong about blogs. What journalistic outlet would provide a CDS overview as long and detailed as Peter Wallison’s? Bite-sized it’s most certainly not. Has Bookstaber ever read anything by, say, Willem Buiter? This blog entry, to take one instance of many, is longer, smarter, and altogether better than anything I’ve seen in the MSM on the subject of euroization. What about the fabulous blog entries of Tanta at Calculated Risk, or the incredibly detailed investigations of international money flows chez Brad Setser?

Policymakers are reading blogs during this crisis; Bookstaber should too. The ideas at places like Econbrowser, Interfluidity, and The Baseline Scenario, among many others, are detailed, sophisticated, and important. VoxEU has become a crucial forum for academics and policymakers to debate ideas; the Economists’ Forum at the FT is another. The high-end econoblogosphere has become a global seminar where ideas are honed and improved; the world is undoubtedly a better place for it.

What has Bookstaber got against blogs? It’s weird he should have this uninformed opinion, especially since he has a blog himself. (Although it’s a very hermetic one: the total number of links in his last ten blog entries is exactly zero one.) And it’s even weirder that he should want everybody to know how reactionary he is on the subject. But maybe he just wanted to say on his blog what he was too scared to say to the bloggers’ faces last night.

Posted in blogonomics | 1 Comment

Cacophonous CNBC

Posted on February 6, 2009 by Felix

Marion Maneker gets an astonishing admission from Jonathan Wald, the man in charge of news at CNBC who’s now leaving the station:

"Conflict is king in cable television," Wald says. "You want more than one guest at a time. You want cacophony, not a symphony."

Which raises the obvious question: who wants cacophony? Wald has clearly determined that CNBC’s viewers want it — but why would they? It makes no sense to me.

Posted in Media | 1 Comment

Hedge Fund Datapoint of the Day

Posted on February 6, 2009 by Felix

For most of 2007, Target stock was trading in the low 60s. If you’d bought $2 billion of stock at those levels, you’d have about $1 billion today, since the share price now is in the low 30s.

That’s the kind of performance Bill Ackman can only dream of. In 2007 he raised $2 billion for a hedge fund, Pershing Square IV, dedicated to going long Target; today, in the wake of a 40% plunge in January, that fund has dwindled to just $210 million.

The January implosion is particularly surprising because Target stock basically went nowhere over the course of the month: it closed on December 31 at $34.63, and closed on January 31 at $31.20.

Still, hope springs eternal for the fund manager:

“While PSIV and Target stock have declined materially, we still believe our fundamental investment case for Target stock will ultimately be realized, although not within the original timeframe we had initially estimated,” he wrote in the letter dated Feb. 5.

Ackman’s already tried announcing clever ideas about spinning off Target’s property holdings; they led to a brief uptick in the share price in October, but that didn’t last long. He’s not giving up, though: in fact he’s investing another $25 million of his own money into the beleaguered fund, which he says will be wiped out if the stock remains below $35 in two years’ time. This is ultra-high-risk investing: a caricature of what hedge funds do. I wonder what proportion of Ackman’s net worth that $25 million represents.

(Via Tyler)

Posted in hedge funds, stocks | 1 Comment

A Housing Thought Experiment

Posted on February 6, 2009 by Felix

I’ve been thinking a bit about the idea of housing as an asset class, and I wondered if it was possible to somehow separate the shelter aspect of housing from the financial-asset aspect in order to work out just how much people are really paying for the asset part.

So consider this: you want to buy a house which at the moment costs $1,000 a month to rent. I’m willing to sell it to you, on the proviso that if you ever sell it, or when you die — which will be many decades hence — I get to buy it back for $1. In the meantime, it’s yours: you can rent it out immediately, if you like, or you can live in it indefinitely, or you can do some kind of home-exchange with someone else if you ever want to move. How much would you be willing to pay for the house?

The answer, I think, is going to be very close to the present value of future rent payments. Now no one knows how much rents will go up over time, and it’s not obvious what the right discount rate to use might be, but fiddling around with a present value calculator and assuming rent inflation of about 3% and a discount rate of 5%, it’s easy to get a number of about $200,000 if you assume that you’ll keep the house for a couple of decades.

At this point it’s worth noting that a $200,000 mortgage at a 5% interest rate costs about $1,000 a month. So it should be a no-brainer to buy a house renting out at $1,000 a month for $200,000: that’s how much you’d pay if it had no financial-asset value at all. But in fact you’re buying an asset which you’ll be able to sell for a six-figure sum if and when you ever need to. That’s got to be worth something, right, on top of the pure shelter value of $200,000? But how much?

It strikes me that in practice the answer to that question is often zero: there are many markets where it’s actually cheaper, on a monthly basis, to buy than it is to rent. That wasn’t the case during the housing bubble, but we’re moving back to those kind of house prices now.

So could it be that although houses were perceived to have financial value for a few short bubble years, most of the time they don’t really have any financial value at all, over and above their shelter value? That when you’re buying a house you really are just buying a place to live, and not a financial asset?

Posted in housing | 1 Comment

Paying for News

Posted on February 6, 2009 by Felix

Walter Isaacson has a big article extolling micropayments as the future of the publishing industry — despite the fact that, as he admits, the technology simply doesn’t yet exist to make them easy enough to be workable.

What’s more, the entire premise of his article is flawed:

There is, however, a striking and somewhat odd fact about this crisis. Newspapers have more readers than ever. Their content, as well as that of newsmagazines and other producers of traditional journalism, is more popular than ever — even (in fact, especially) among young people.

The problem is that fewer of these consumers are paying. Instead, news organizations are merrily giving away their news…

This is not a business model that makes sense… when Web advertising declined in the fourth quarter of 2008, free felt like the future of journalism only in the sense that a steep cliff is the future for a herd of lemmings.

Newspapers and magazines traditionally have had three revenue sources: newsstand sales, subscriptions and advertising. The new business model relies only on the last of these. That makes for a wobbly stool even when the one leg is strong. When it weakens — as countless publishers have seen happen as a result of the recession — the stool can’t possibly stand.

In reality, consumers have never paid for news. Isaacson is right about the three revenue sources, but he fails to mention that newspapers and magazines have two massive cost centers which need to be covered by those revenue sources: the newsroom, on the one hand, and printing and distributing the physical product, on the other.

A subscription to Time magazine costs 70 cents an issue — that’s much less than the cost of printing and mailing it. As a result, advertising revenues have historically covered not only the entire costs of the newsroom but also a large chunk of printing and distribution costs as well.

Isaacson says he is

hoping that this year will see the dawn of a bold, old idea that will provide yet another option that some news organizations might choose: getting paid by users for the services they provide and the journalism they produce.

But really that’s not an old idea at all: it’s new and untried. Users never paid for journalism; the only service they partially subsidized was that provided by the postman or delivery boy. A few users are now paying for online subscriptions to the likes of the WSJ: that’s a new phenomenon, not an old one, and it’s a business model taken from newsletters and trade publications rather than from newspapers and magazines circa Henry Luce.

The reason that people got excited about the web in the 1990s was that they could see that it slashed printing and distribution costs essentially to zero. Ad revenues on their own were always greater than ad revenues plus subscription and newsstand revenues, minus printing and distribution costs. So there was great hope for the industry.

Unfortunately, it turned out that web advertising isn’t remotely as lucrative for publishers as print advertising was. Isaacson points to one reason:

the bulk of the ad dollars has ended up flowing to groups that did not actually create much content but instead piggybacked on it: search engines, portals and some aggregators.

Another reason is that web banner ads just aren’t as effective as print ads. A third reason is that there’s so much inventory online that it’s extremely hard to charge premium rates.

So yes, it might well be time to try to find a new business model. I don’t think that micropayments will work, largely because I haven’t seen any indication that the technology exists to make them work. But let’s be clear: the problem with the publishing industry is a drop-off in ad revenues much more than it is a fall in subscription revenues.

Posted in Media | 1 Comment

No Soup for Madoff

Posted on February 6, 2009 by Felix

There’s something very compelling about Tyler’s interactive maps of Madoff victims’ addresses. One spot in particular jumped out at me: what on earth was a Madoff victim doing on Delancey Street? It turns out, tragically, that Ratner’s deli — the legendarily grumpy Lower East Side institution which closed way back in 2000 and is now a Sleepy’s store — was a Madoff investor. It’s clearly not been a good decade for the Harmatz family.

Posted in fraud | 1 Comment

Lobbying Datapoint of the Day

Posted on February 6, 2009 by Felix

The Center for Responsive Politics does some adding up, and concludes that the 300 TARP recipients between them spent a total of $77 million last year on lobbying, on top of $37 million in federal campaign contributions, for a total of $114 million.

Between them, Citigroup, Bank of America, and JP Morgan Chase spent $21.8 million on lobbyists last year, as well as $15.3 million in campaign contributions, for a total of $37.2 million. And that’s not even including Bob Rubin’s salary.

Posted in banking, Politics | 1 Comment

Chart of the Day: Spiking Unemployment

Posted on February 6, 2009 by Felix

Jake at EconomPic Data has the chart: narrow unemployment is now at 7.6%, while the broader measure of underemployment is a whopping 13.9%.

Unemp1.jpg

Clearly this kind of spike is scarily extreme, and equally clearly it’s not showing any signs of slowing down. The AP does a good job of stating the obvious in its that’s-weird-why-are-stocks-rising report:

Jobs are important to the stock market because if people are unemployed, they aren’t likely to maintain their spending, buy a house or keep up with their debt payments. And three of the biggest problems facing the economy are dampened consumer spending, the housing market’s slide and accelerating loan defaults.

Not to mention the fact that we’re going to embark upon a wave of corporate debt defaults very soon now. It’s all well and good to mark down bond prices to anticipate a higher default rate, but when it happens it’s always a shock.

I still think that things are going to get worse before they get worse: I just can’t for the life of me see the engine for any recovery. Certainly the stimulus bill isn’t going to do it on its own — the economic problems facing the US are so large that the government can at best only try to make things slightly less bad than they otherwise might have been. But just as the boom fed on itself, so does the bust. Which means that this recession could drag on for a very long time yet.

Posted in economics, employment | 1 Comment

Extra Credit, Thursday Edition

Posted on February 5, 2009 by Felix

Wells Fargo’s Equity Pumped Up by Squishy Asset: "Exclude the servicing rights and Wells’s price-to-tangible-book ratio soars to about 4.3 times", compared to 1.2 for JPMorgan.

AP alleges copyright infringement of Obama image: Talk about tone-deafness. First the silly blogfight, and now this? AP is in desperate need of some new lawyers who understand what century they’re in.

Joint faculty letter to President Reinharz: Brandeis’s faculty isn’t happy about the decision to shutter the Rose.

Economic Know-Nothingism: Dan Gross examines the Republican side of the stimulus debate.

Duh diligence: "Their due diligence process was, essentially, ‘are you a decent chap? If not, do you at least write with the letters all sort of wiggly?’"

Look out Marketwatch says equities are the new bird flu: This headline sat atop the Marketwatch homepage for over an hour today.

Songsmith fed with Stock Charts: Yes, really.

Posted in remainders | 1 Comment

Good News: Brandeis Backpedals

Posted on February 5, 2009 by Felix

Brandeis president Jehuda Reinharz has given interviews with both the Boston Globe and the Brandeis student newspaper, the Hoot, in which he starts backpedalling madly on the subject of closing the Rose Art Museum. (As Richard Lacayo notes, the very first sentence of the Brandeis press release on January 26 talked about closing the Rose.) Now, the picture is much murkier. Here’s some verbatim quotes from the Hoot interview:

The board resolution did not speak about the closing of the Rose. The board resolution stated that we sought to find a way to integrate the roles more closely into the mission of the university…

The press release misrepresented what the board actually said, as did the initial statement. We tried to correct it immediately afterward, but it was too late, the train had left the station…

I said I’m not closing the Rose. I made that statement…

I never said that we’re closing the Rose. The board has directed us to integrate the Rose more fully into the educational mission of the university. That’s what the board resolution says.

We have a faculty committee that is working right now in thinking what and how the Rose should function on this campus. the Rose is an integral part of this university, just like the Philosophy department, the Biology department.

The press release was written in a manner that was confusing and misleading. We are going to now have lots of discussions with the faculty and students, to talk about all the options including the Rose. And I want to hear what the community says…

Integrating the Rose into the educational mission of the University may or may not save money. If you ask me how it will be done, we have a faculty committee. The board resolution also talks about the possibility of selling art. That’s where the funds are. It’s not in the closing. So that is not part of the equation. Do I make myself clear now?

Er, no: right now absolutely nothing is clear. But that’s a significant advance from before, when it seemed very clear indeed that Brandeis intended to close the Rose Art Museum. Right now, according to Reinharz, it’s all in the hands of a faculty committee.

Reinharz said in the interview that closing the Rose is not necessarily a prerequisite for selling the Rose’s art: I’m glad he’s now making that distinction, because this is the first time that I’ve seen anybody at the university admit that there’s a difference there.

In any event, the uproar seems to have worked, at least to some extent: the employees of the Rose have not been given notice, the president seems clear (today at least) that a decision to close the Rose has not been taken, and now these decisions are going to be made in sunlight, rather than by mysterious board edict. It’s not a complete victory: the Rose has by no means been indubitably saved. But it’s a big step in the right direction.

Update: In a letter, Reinharz says that "The Museum will remain open, but in accordance with the Board’s vote, it will be more fully integrated into the University’s central educational mission. We will meet with all affected University constituencies to explore together how this can best be done." Which seems pretty unambiguous to me.

Update 2: Or maybe the Rose will close, to all intents and purposes, after all. Although he told the Hoot that everything’s in the hands of a faculty committee, Reinharz said something very different to the Globe:

In reality, the Rose museum as it exists today will eventually cease to operate and instead will be turned into an educational center for Brandeis students and faculty, Reinharz told the Globe on Wednesday. It will include more student and faculty exhibits, and the public will still be allowed to visit.

"We’re saying we’re turning it into a gallery and a teaching site for the faculty of the fine arts," Reinharz told the Globe. "We don’t want to be in the public museum business."

My one glimmer of hope is that Reinharz’s statements on Wednesday have been superceded by his statements on Thursday. But who knows. I’m told by Brandeis insiders that the Rose staff still very much expects to be out of work come the summer.

Posted in art | 1 Comment

New York City Datapoint of the Day

Posted on February 5, 2009 by Felix

The Center for an Urban Future has released a startling report on the fate of New York’s middle classes — even as the population of the city continues to grow, its middle class is shrinking, and when it comes to domestic migration, there are clearly many more New Yorkers leaving town than there are people from other US towns moving in.

More residents left the five boroughs for other locales in each of the years between

2002 and 2006 than in 1993, when the city was in far

worse shape. In 2006, the city had a net loss of 151,441

residents through domestic out-migration, compared

to a decline of 141,047 in 1993. Overall, in 2006 the

city had a higher net domestic out-migration rate per

1,000 residents (-18.7) than struggling upstate communities such as Ithaca (-8.0), Buffalo/Niagara Falls

(-7.6), Rochester (-5.8) and Syracuse (-5.1).

A huge part of this is the sheer expense of living in New York — not just housing costs, although that’s a lot of it, but everything else, too, from car insurance to the price of milk. But it’s also that there simply aren’t middle-class job opportunities in New York any more:

Of the 10 occupations that are expected to have the largest number

of annual job openings in the city through 2014, only

two offer median wages greater than $28,000 a year.

Taking a wider view, 16 of the 40 occupations projected to have the largest number of annual job openings over the same period pay median wages below

$30,000 a year, while another six pay between $30,000 and $40,000.

This is a big problem, because a "luxury city", filled essentially with the rich and those who service them, with very little in the middle, can never be a vibrant and exciting place. College graduates like myself should want to come to New York, not because they think they can make millions here, but just because it’s a great place to live. And that seems to be happening less and less, as New York becomes increasingly unaffordable.

The authors write, quite rightly:

No city has had a greater history as a

middle class incubator than New York. As the legendary urbanist and long time New York resident Jane Jacobs once noted: “A metropolitan economy, if working

well, is constantly transforming many poor people into

middle class people, many illiterates into skilled people,

many greenhorns into competent citizens… Cities don’t

lure the middle class. They create it.”

That’s not happening any more, not in New York. And that’s very worrying.

Posted in cities | 2 Comments

The Blog Stigma

Posted on February 5, 2009 by Felix

Today marks a small step in the acceptance of blogs as legitimate news sources: Mayor Bloomberg took two questions from Gothamist’s Jen Chung during a press conference about a mysterious maple syrup smell. But more than four years after Gothamist first applied for official press credentials, neither Chung nor anybody else associated with the website has received any.

Gothamist is a hugely popular, and highly credible, website. It gets 4.8 million pageviews a month, compared to 1.9 million for the New York Observer and just 15,000 for the Brooklyn Paper — both of which have no difficulty at all getting credentials.

Over the six years since Gothamist launched (February 2003, it seems like yesterday), it has become a much-relied-on news source for New Yorkers of all stripes. Yet in order to get into today’s press conference, Chung had to be specifically invited, met outside, and escorted in to City Hall by the mayor’s press secretary.

Press credentials in New York are given out by the NYPD, which is incomprehensibly sticking to its determination that a website, pretty much by definition, cannot be working press. And evidently the mayor’s office, rather than simply telling the NYPD to wake up, finds it easier to just circumvent the NYPD entirely.

"Before the MSM bitches about the poor quality of blogger reportage, they should ask if the bloggers have access to any of the tools and resources they take for granted," notes Gothamist’s publisher Jake Dobkin, not unreasonably. In any case there is still clearly a stigma which attaches itself to online publications, and which can only be erased by appearing on paper. It won’t last forever, but I’m astonished that it’s lasted as long as it has.

Posted in blogonomics, Media | 1 Comment

Sachs’s Nationalization Idea

Posted on February 5, 2009 by Felix

Jeff Sachs has a slightly peculiar idea for nationalizing banks, which he calls "contingent nationalisation". As best I can work out, it involves the government buying up toxic assets at par, and then selling them off over the course of a year or two; any losses then have to be made up by the bank in the form of new equity. If that means the government becomes the new majority owner of the bank, then so be it. But I see two big problems with this idea.

One problem is that banks can’t simply issue or raise that kind of equity, largely because they’re (feared to be) insolvent. What’s more, although Sachs talks about the bank becoming "wholly owned by the taxpayers" if it does turn out to be insolvent, it’s not clear how his mechanism would achieve that, since it involves only diluting existing shareholders rather than wiping them out entirely. (This problem is exacerbated by the fact that Sachs wants the dilution to happen piecemeal, rather than all at once, which means the government is going to end up diluting itself.)

A bigger problem is that Sachs’s scheme constitutes a massive government bailout of all banks’ unsecured creditors and preferred shareholders. See how he introduces it:

Consider a bank balance sheet with 100 in assets at face value, 90 in liabilities, and 10 in shareholder equity. For simplicity, suppose that the 90 in liabilities are in government-insured deposits.

I think that by "for simplicity" here Sachs really means "for the sake of everybody in the capital structure except the shareholders". Sachs’s model basically assumes that the government has already guaranteed all of the liabilities of the bank. But of course that’s not the case at all: there are hundreds of billions of dollars out there in unsecured debt and preferred stock, as well as hundreds of billions more in secured debt. If Sachs wants a government guarantee on all that private-sector paper, which is currently trading at very wide spreads, he should come out and say so. But surely a much better solution would be to somehow bail in the bondholders and preferred shareholders of insolvent banks.

Posted in bailouts, banking | 2 Comments

Summers vs Volcker

Posted on February 5, 2009 by Felix

I didn’t like the idea of appointing Larry Summers to be Treasury secretary, largely because he’s bad at politics. And given his jealous and petty spat with Paul Volcker now that he’s running the National Economic Council, the decision to deny Summers the Treasury job looks even better:

Volcker, 81, blames Obama’s National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers, the people said. Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.

Are we already running into a too-many-cooks problem in the Obama economic team? Having lots of smart people on board is only going to work if they can play nice with each other, and be, well, collegial. The former president of Harvard should be able to work that one out.

Posted in Politics | 1 Comment

Why Live Nation Shouldn’t Merge With Ticketmaster

Posted on February 5, 2009 by Felix

I got an interesting email last night from Michael Hershfield, the CEO of ticket site LiveStub, about the proposed Ticketmaster/Live Nation tie-up. If this deal goes ahead, then it seems we might be moving, without even realizing it, to a world of much higher ticket prices, says

Hershfield:

This deal would mean that Live Nation would have direct access to Ticketmaster’s ticketing solution, including its resale marketplace TicketsNow. Live Nation could potentially harness Ticketsnow and begin to offer performers the opportunity to list tickets on the resale system without ever listing in the primary market.

Hershfield calls this "the dirty secret of this deal" — a way to give performers and management a way to directly benefit from secondary-market ticket revenues.

In a world where bands increasingly make most if not all of their money from touring rather than music sales, I’m not in principle averse to a system which funnels the money people pay for their tickets to the band rather than to scalpers and resellers. But any such system really should be transparent. If a ticket has a certain face value, it should have been sold, at some point, for that face value.

This is a known issue with Ticketmaster, which forces concertgoers to pay a significant premium to face value for "convenience" and "handling" charges and whatnot, often when they have no other way of buying tickets.

But if Live Nation Ticketmaster simply decides to sell most of the tickets to any given concert on TicketsNow, with just a token few being sold directly, then the concept of face value will lose the last vestiges of meaning that it still has.

This is not necessarily the main reason why the merger will attract anti-trust scrutiny: the main reason is that they’re both monopolies already. As the NYT says,

In the more narrow view of just concerts, Ticketmaster’s market share was closer to 70 percent, according to Scott W. Devitt, an analyst at Stifel Nicolaus. Mr. Devitt estimates that Live Nation, as a promoter of concerts, is three times the size of its next nearest competitor, the Anschutz Entertainment Group.

With Live Nation increasingly moving into recording deals, a Live Nation-Ticketmaster merger would create a soup-to-nuts music powerhouse with huge amounts of monopoly power: having two monopolies puts you in a much stronger position than having just one. So although I can see why the companies are attracted to the concept, I can’t see how it’s going to be able to survive antitrust scrutiny.

Posted in M&A | 1 Comment