Why Brandeis is Closing the Rose Art Museum

Posted on February 1, 2009 by Felix

The Brandeis Hoot has put up an audio recording of a Wednesday presentation from Jehuda Reinharz, the president of Brandeis University, and Peter French, its COO. There are summaries here and here which give an idea of how the presentation was received, but where I’m quoting either man, it’s straight from the horse’s mouth, as it were.

One thing which is clear to me now, and wasn’t clear before, is that Brandeis is still spending down its endowment. The endowment has a value of $549 million now, and according to French that figure will fall as low as $468 million in 2009, thanks mainly to the erosion of Brandeis’s $100 million reserve fund.

French said that the Brandeis endowment was just $190 million when Reinharz took over as president in 1994, which helps to put the university’s current problems in perspective. But it also helps to explain why Brandeis is facing such a crunch: a very large proportion of the Brandeis endowment has arrived relatively recently. Since Massachusetts law doesn’t let endowments spend the original principal, just income and capital gains, most of the endowment, eroded as it has been by market losses, is now untouchable.

All the same, Brandeis is going to be able to keep going for the next couple of years, and even draw a good $40 million per year out of its endowment, by tapping that $100 million reserve fund, which is part of the endowment but which doesn’t seem to have the same restrictions.

The problems at Brandeis are exacerbated, said French, by the fact that "we have historically relied on gifts to support our operations more than other institutions" — or, to put it another way, donations are a very important source of income for Brandeis, as opposed to simply being a way to boost the endowment, as they are elsewhere. Clearly Brandeis has seen a large part of its expected future donations disappear, thanks to Bernie Madoff: the promised and expected gifts didn’t "ripen" in time, to use the euphemistic phrase of the philanthropic world, which means that the donor has finally dropped dead.

Neither French nor Reinharz ever quite came out and said that they needed future cashflow to replace the gifts which have been nuked by Bernie Madoff and the recession, but that was the clear message all the same. And in the absence of any other way of getting money, they’ve decided to start raiding their art closet, otherwise known as the Rose Art Museum.

Weirdly, neither French nor Reinharz felt the need to explain why they were closing the museum: maybe they thought it was obvious. And no one asked them, either. But whenever journalists have asked the question, the answer has been the same: basically, it’s really difficult to sell art out of a museum, so if we’re going to be selling art, we’re going to have to close the museum first.

Still, they seem perfectly happy for their students to write about shuttering the Rose as a "large-scale cutback", or to talk about "the savings expected from the Rose". Let’s be absolutely clear, here: closing the Rose will not save Brandeis a significant amount of money. Brandeis does not subsidize the Rose; if anything, it’s the other way around. (Yes, there’s about $600,000 a year in indirect expenses for the building such as heating and water, but since Brandeis expects to continue to use the building for other purposes, those expenses aren’t going to go away.) Instead, Brandeis wants to use the Rose’s art collection as a money spigot, until such time as its endowment has recovered in value and it can start spending endowment funds again.

It’s a desperate decision to make — and it was clearly made quite recently: "As late as December, I went out to California to raise money for the Rose," said Reinharz. But he forcefully reiterated what French had said earlier:

We can’t dip into the endowment, because Massachussets law does not allow us to dip into the endowment. We can’t do it.

I have to say that I wonder how true that is. Is it not the case that if the university asks nicely and shows true hardship, then under the doctrine of cy pres, the Massachussets attorney general can grant a waiver and allow the university to dip into endowment funds which are worth less than their original principal amount?

And in any case it’s clear to me that closing the Rose is completely and utterly unnecessary. Tyler Green gave me grief for inadvertently referring to "deaccessioning laws" rather than AAMD rules or guidelines — he’s quite right that there’s no law against a university selling off art belonging to its museum.

Keeping the museum open would surely make selling the art more difficult — the director would surely object were any important works to be put on the block. But there should be someone standing up for the works, and making it clear that there’s a serious cultural downside to selling them off. I suspect that shuttering the museum is basically a way of minimizing the opposition to any given sale: if everything goes according to the trustees’ plan, then once the current firestorm is over, the university might be able to sell off individual works very quietly, without having anybody try to stand up for them and the role they play in the university’s cultural life.

I do still think that closing the museum is a way of getting around deaccessioning rules. But there’s something else going on here as well: if a painting is part of a museum, it has obvious cultural value. If the museum has been closed and the painting is in storage, then just about any fate for that painting becomes preferable to the status quo.

The Rose’s collection is marked on the Brandeis endowment’s books at $1 per artwork. Right now, when the works are exhibited in a first-rate museum, it’s clear that their value is much higher than that. But if the museum closes and they’re crated up and stored, then suddenly the optics change. Which of these two propositions would you rather put to trustees?

  • "We have a priceless artwork which is a central part of a highly-respected museum. Would you mind if we sold it off to raise some money?"
  • "We have a priceless artwork sitting in storage and doing no good to anybody. Would you mind if we sold it off to raise some money?"

To put it another way: those artworks which Brandeis wishes to sell, it first puts in storage. It’s a nasty and dishonest ploy on both an intellectual and an ethical level. And Brandeis shouldn’t be allowed to get away with it.

Posted in art | 1 Comment

Merlot Contest

Posted on January 31, 2009 by Felix

After the wine contest and the Pinot contest, last night was the Merlot contest. And boy did passions run lower. I thought that there would be many more really bad wines, just because people don’t really know the grape, and we’ve all had some pretty disgusting Merlot. Meanwhile, I was hoping for a couple of magnificent standouts: this is a key Bordeaux grape, after all, and Chateau Petrus is 100% Merlot.

Neither really happened. Instead, we got some interestingly counter-counter-intuitive results.

The format was the same as always: each contestant brought two identical bottles of wine. One was tasted blind, while the other was kept for the prize pool. This year, every bottle had to be a Merlot. Everybody scored every wine out of 20, and we added up the results, which you can download as an Excel spreadsheet with a wealth of information in it. With 14 people tasting 12 wines, the maximum score was 280. In the end, the scores ranged from 141 to 209.

Here’s the price-quality scattergraph you’ve all been waiting for:

Merlot Scatterplot

Compare that to the results of the the Pinot contest, and it’s striking:

Pinot-Tm

The Pinots had a slightly negative price-quality correlation (as measured here) of -0.2; the Merlots, by contrast, had a clearly positive price-quality correlation of +0.55.

What’s more, after reading the story of wine judges who couldn’t even identify identical wines, one game couple — Gaby and Dave — brought four identical bottles, placing two of them, separately, in competition. I was expecting them to come hilariously far apart, but astonishingly they got basically exactly the same score, garnering 195 points and 196 points respectively; not a single person rated the two wines (D and J) more than three points apart. Maybe this add-up-the-totals technique actually does work, after all!

The Merlots also, interestingly, scored consistently higher than the Pinots. I’m not sure that means they’re better wines, though: the consensus of the people who came to both parties was that the Pinots were much better wines. After both of the first two wine contests I ran out to buy the wines I loved; after this one, I’m glad that the second bottle of the winning wine is still in my cellar, but that’s about it. While total scores can be compared within a contest, I don’t think it’s particularly useful to compare them across contests. In general, the Merlots seemed rather bland; the comment which sticks in my mind is “it tastes like wine”. A lot of them didn’t taste of much at all, or just weren’t memorable.

One thing I’d love to do, but can’t do in my version of Excel, is plot a histogram with the scores along the x-axis, from 1 to 20, and the number of times that score was given out going up the y-axis. I suspect that the Merlots will be much more bunched together in the middle, and have much thinner tails, than the Pinots; the spreadsheet for the Pinot contest can be found here. If anybody wants to chart the two varietals in that way for me, I’d be much obliged.

Update: Here they are! Thanks Todd!

Merlotpinot

There do seem to be two lessons here for people buying Merlot. The first lesson is that if you want to get something really good, then it might actually be worth moving into the $20-and-over range; if you’re not going to do that, just grab the cheapest Merlot you can find. The second lesson is that California clearly beats France.

The two wines which got more than 200 points were both Californian; the next-best wine (the D and J pair) was from Washington. After that, the fourth-best wine (wine E) was actually the cheapest of them all: a $4.99 Chilean Merlot I picked up at Warehouse Wines on Broadway. (It’s the 2004 Carmen Merlot from the Rapel Valley, if you want to look for it yourself.) The Chilean wine easily obliterated every other wine in the bang-for-the-buck stakes, with 36.6 points per dollar; meanwhile, the lowest bang-for-the-buck was actually the winning wine, which got only 4.2 points per dollar.

All of the French wines came from Bordeaux, including the worst wine of the lot (wine B), which got just 141 points. The other two French wines (wines C and I) didn’t really stand out.

The field included one wine from New Zealand (wine A), which was quite expensive and did quite poorly; a non-vintage wine from the North Fork of New York (wine L), which at just $9 came second in the bang-for-the-buck stakes and got a respectable 169 points; and a novelty charity wine, Abreu’s Finest (wine K), which only really managed to eke out a single. There was also an old 1998 Australian wine (wine F), which once upon a time retailed at about $25 a bottle, but which was bought on sale for just under $10; it did quite well, getting 180 points.

The runner-up, from Murray, with 206 points, was an organic 2004 Robert Sinskey Merlot (wine H) which cost $23. The winner, from Michelle, which got 209 points, was the 2005 Merlot from our favorite vineyard, White Cottage. We tasted it at the ranch in December, loved it, and brought back two bottles especially for the wine contest, as part of the barbell strategy: one very cheap wine (the $5 Chilean) and one very expensive (the $50 wine from Napa). The strategy worked out great, with the wines garnering fourth place and first place, respectively, out of 13 wines in all.

Many thanks to everybody who came: as ever, a fun time was had by all. And here’s a picture of the winners, Michelle and Murray, with their expensive Californian Merlots. Congratulations to both!

Mv&Ac Winners

Posted in Uncategorized | 12 Comments

Extra Credit, Friday Edition

Posted on January 30, 2009 by Felix

The game changer: George Soros joins the CDS demonizers, but adds some substance to their arguments.

Nouriel Roubini Partying With Intellectual Peers: Where’s Julia Allison’s high-tech name badge? Maybe her cleavage suffices.

Ben Stein to Deliver Commencement Address: At the University of Vermont. I wonder how that’s going down with the faculty, especially the ones who teach evolution.

Deep Market Thoughts…CNBC MUST be Stopped to end this Bear Market! Lindzon: "The loudest, most broken funnel of noise and misinformation is CNBC… CNBC is a cancer in this country."

Posted in remainders | 2 Comments

When Bonuses Aren’t Discretionary

Posted on January 30, 2009 by Felix

It’s becoming increasingly clear that if there’s a problem in the general economy with sticky wages — employers being unable to cut costs by cutting wages, and thereby going bust — then on Wall Street the problem is the other way around: wages aren’t sticky enough.

Rick Bookstaber writes today:

Employees in banks and investment banks get part of their pay bi-weekly over the course of the year, and then get the rest of their salary in the form of an end of year bonus. It is called a bonus, but a large portion of it is deferred salary. Even if they perform their job at a hum-drum level, they will still expect and get a sizeable “bonus”, because, however you want to put it in technical terms, the simple fact is that when they receive their bi-weekly paycheck, some of their pay has been held back. Taking away their year-end bonus would be like telling workers on a weekly pay cycle to return the second and fourth payment they received each of the last twelve months.

Now there are good reasons for having a bonus system: it incentivizes profitable work, and it makes it easy for banks to pay less money in lean years. But as Bookstaber writes, there’s definitely an implicit minimum bonus at investment banks — a sticky level below which it’s hard to cut bonuses any further.

There are reasons to have a minimum bonus, rather than baking that money into base pay: it’s not included in pay-rise calculations, for starters. But when banks start getting multi-billion-dollar government bailouts, it looks really bad if they then just turn around and spend a similar amount of money on bonuses.

And it really doesn’t help when the arguments in favor of bonuses look like this:

For an operations worker whose pay comprises $75,000 base and an expected 20 to 30 percent bonus, that final $20,000 or so may bridge the gap to owning an apartment, or sending his or her child to private school.

I’m sure it’s nice to be able to send your child to private school, but there’s no way you should be getting taxpayers’ money to do so: the government is, after all, already spending good money to allow you to send your child to public school, and in fact, at the margin, your local public school would probably be improved if it had a few more parents making $95,000 a year.

For any bank employees making less than say $250,000 a year, then, I’d encourage a policy of beefing up base pay and taking it out of bonus, to the point at which the bonus becomes genuinely, rather than merely nominally, discretionary. Beyond that level, bankers are grown-up enough to be able to negotiate their pay packages on their own, on the understanding that a bonus really is just that — a bonus — rather than something which has to be paid out, even in a year when your bank loses tens of billions of dollars.

Posted in banking, pay | 2 Comments

How Deaccessioning Rules Doomed the Rose Art Museum

Posted on January 30, 2009 by Felix

Shortly after posting my blog entry on Brandeis and the Rose Art Museum this morning, I received a series of unsigned emails, demanding that I take the blog down, asking that I hand over not only my own phone number but that of my editor, and accusing me of "multiple" (if unspecified) "factual errors".

Eventually the man behind the emails called me: he wouldn’t identify himself except for as a "concerned friend of the university", but in fact he’s David Nathan, director of communications in the Office of Development and Alumni Relations at Brandeis.

He attributed to me many things I never said, including the idea that it’s "simple" to spend Brandeis’s endowment funds. (To the contrary, I said that "endowments are complicated things, made up of thousands of separate and earmarked bequests; they’re not big monoliths which can easily and simply be spent down in the event of a fiscal crunch".) But he did confirm for me that the reason the Rose Art Museum is being closed has everything to do with deaccessioning rules.

Brandeis has been saying that it’s not going to be selling off all of the Rose Art Museum’s art at once — or even, necessarily, any of it at all. So I asked Nathan why the musem needed to be shut down, if the university is going to hold on to the vast majority of its art for the near future.

Nathan told me that the reason is that selling art which is part of a museum is very difficult indeed. Clearly, Brandeis has come to the conclusion that by shutting down the museum, it can ignore all rules pertaining to deaccessioning, and worry only about the strings attached by donors to individual artworks.

Nathan also said something else which was extremely interesting to me: apparently all of the Rose Art Museum’s artworks are considered to be assets of the university endowment, valued at $1 each. All the proceeds from the sale of any artwork, then, is automatically a desperately-needed capital gain for the endowment.

On NPR Wednesday, Brandeis’s president, Jehuda Reinharz, said that he’d received a phone call from the donor of a Warhol worth over $1 million, saying that the university came first, and giving Brandeis full permission to sell the painting if it needed to.

But even if the donor was perfectly happy for Brandeis to sell the Warhol, the Association of Art Museum Directors would not have been, and neither (understandably) would the museum’s director. So it seems that for the sake of doing an end-run around the objections of the AAMD and the museum’s executives, Brandeis decided to close the museum entirely.

Had it not been for the deaccessioning rules, then, the Rose Art Museum might well have lived. There’s a good chance that its director would have resigned in protest at his art being sold from underneath him, but then he would simply have been replaced by someone more complaisant, a bit like the publisher of the LA Times. It would have been a deplorable outcome, but still one preferable to what we’re facing today. (Sorry, Tyler, but the loss of a few artworks — especially if they’re sold to other museums — really is preferable to the loss of an entire museum.)

And Brandeis should really reconsider its public-relations strategy here. I have no problem with Brandeis officials taking issue with my blog entries; I do, however, have a problem with them trying to bully me into taking them down. And I have a very big problem indeed with them trying to do so anonymously, without revealing their affiliation to the university.

Posted in art | 2 Comments

FT.com vs Blackstone

Posted on January 30, 2009 by Felix

When I had lunch with the FT’s Rob Grimshaw, we spent all of our time talking about two sources of revenue: advertising, on the one hand, and subscriptions, on the other. Little did I imagine there was a third coming just around the corner: lawsuits!

In what will go down as one of the more bizarre (and unintentionally hilarious) lawsuits we’ve seen in quite some time, the newspaper filed a lawsuit against Steve Schwarzman’s Blackstone Group on Wednesday for sharing an FT username and password instead of setting up separate accounts for its employees.

The suit claims that the "FT is entitled to actual and/or statutory damages; those defendants’ profits arising from infringements", and "increased statutory damages" owing to the willful nature of the infringments.

This could be one instance where Blackstone is thankful for not having made much money of late: it might even be able to say that its infringements led to losses rather than profits.

But the lawsuit does shed some light on how successful FT.com has been at getting its user base to register: it says that the site has 7.1 million unique visitors each month, and just 1 million registered users. Which means that only 14% of FT.com’s visitors have registered.

This is actually a natural downside of the subscription model. When faced with a subscription firewall, people who know subscribers are going to ask those subscribers if they can use their username and password to get past the firewall. It’s an inevitability, no matter how many lawsuits the FT files. And as a result, those users will never register themselves. If you want to maximize the number of unique users who register, it’s a good idea not to have a subscription model at all.

Posted in Media | 2 Comments

Brandeis and Rose: The Numbers Emerge

Posted on January 30, 2009 by Felix

Many thanks to Paddy Johnson for tipping me off to an astonishing article by Judith Dobrzynski at the Daily Beast, who’s managed to get the COO of Brandeis University, Peter French, to go on the record about his decision to close down and sell off the contents of the Rose Art Museum.

There was precious little sympathy for Brandeis before this piece came out, but I imagine that there will be even less now. French and Dobrzynski are talking about Brandeis’s "financial collapse", but here are the numbers: the Brandeis endowment was $712 million in June, and is $530 million now. On top of that, there’s an ongoing capital campaign that has raised $820 million of its $1.2 billion goal; much of that money will be used to construct new university buildings. And the university’s projected deficit for the next six years is just $79 million — less than half the losses that the endowment suffered in just six months.

French honestly seems to be asking us to believe that faced with a deficit of $13 million a year, he can neither simply spend that money out of the $530 million endowment, nor use any of the money from the capital campaign, but rather has no choice but to sell off a magnificent collection of artworks last valued at $350 million:

By Massachusetts law, French said, Brandeis can only spend gains, not capital, from the endowment–and it will be some time before there are any of those. Brandeis’s reserve fund, which is included in the endowment for management purposes, is projected to run out in about 18 months.

Borrowing money was out of the question, French explained; Brandeis already has $256 million in debt, and as he put it, “If we take out more debt, what would service it?”

Fine, don’t borrow the money. Just spend what you’ve got. The whole point of having an endowment is that when you run into bad times, there’s money there to tide you through. Turning around and saying that you’re not allowed to actually spend the money largely defeats one of the key reasons for having the endowment in the first place.

As for Massachusetts law, it’s complicated. Yes, there are laws against spending sums of money once the endowment falls below the original amounts donated. But then again, there are also laws against selling off artworks donated to the museum, especially if they were restricted gifts. And whatever Brandeis does, it will have to be signed off on by the Massachusetts attorney general.

I talked this morning to Jack Siegel, an expert on such matters who runs Charity Governance Consulting in Chicago. He blogged the scandal on Wednesday, and told me about the legal doctrine of cy pres, whereby state attorneys general can bend the laws binding endowments in order to prevent the entire institution from failing.

Now endowments are complicated things, made up of thousands of separate and earmarked bequests; they’re not big monoliths which can easily and simply be spent down in the event of a fiscal crunch. But on the other hand, paintings are just as much bequests as cash endowments are, and are subject to very similar restrictions.

The problems at Brandeis are purely financial, and have nothing to do with the Rose Art Museum, which, at the margin, actually subsidizes the university. The solutions should be financial too, and not involve shutting down an excellent museum which is not losing any money at all.

So what does Brandeis think it’s doing? Richard Lacayo says that there’s a good chance this entire decision was made largely to get around silly deaccessioning laws. The idea seems to be that an active museum can’t sell off artworks, but that if the museum has been closed down, then deaccessioning rules no longer apply, and Brandeis can get to work tactically selling off bits and pieces of its collection as and when it needs the cash.

Donn Zaretsky is thinking along similar lines. He speculates, in an email to me:

They want to sell a few paintings without getting hassled by the museum groups. I think, at the end of the day, we’re going to end up with a research and study center plus art gallery that looks remarkably like the Rose Art Museum, except it’s not subject to the museum ethics rules.

I think Donn is being overly optimistic here. The museum’s being closed, the art is going to be quietly put up for sale, and the university is going to sell off major works piecemeal as and when it needs some cash. I suspect it had been counting on getting a substantial bequest from Carl Shapiro when he died, and now that Shapiro’s money has been evaporated by Bernie Madoff, Brandeis has decided that the Rose’s collection will replace it as a source of future cashflow. It’s shameful.

Posted in art | 1 Comment

Nationalizing Bank Losses

Posted on January 30, 2009 by Felix

Tyler Cowen has a new argument against nationalization:

Say that banks are in the red by $2 trillion for ever and all eternity. Taking over the banks simply means that the government picks up these losses as owner. Government ownership makes it less likely, not more likely, that bank creditors will "take a haircut."

There’s a certain amount of truth to this: nationalizing banks means nationalizing their net losses. But on the other hand, overpaying for their toxic assets means nationalizing their gross losses.

The problem with Tyler’s argument is that he’s dealing in extremely small probabilities — specifically, the chances that the creditors of too-big-to-fail banks will end up taking a haircut. And I’m not even sure his statement is true.

On the one hand, it’s possible that the government will impose a haircut on those creditors when it nationalizes the banks. On the other hand, how else can bank creditors take a haircut? To-big-to-fail banks, by definition, can’t default: the government won’t let them. And they’re too big to have their assets transferred to a larger institution, as happened to WaMu.

So unless you have a plan for fixing the banking system which clearly does involve bank creditors taking a haircut, I’m not sure this argument carries much weight. Meanwhile, nationalization has lots of good arguments in its favor: it give the government future upside, it allows the government to split the banks into small-enough-to-fail chunks, it minimizes the risk to the dollar, it doesn’t involve sticking your finger in the air and coming up with a hard price for highly-illiquid assets, and so on and so forth.

The one argument no one is making in favor of nationalizing the banks is that doing so will somehow make the banking sector’s losses go away. It won’t. But that’s not a reason not to do it.

Posted in bailouts, banking | 1 Comment

Crunched

Posted on January 30, 2009 by Felix

nythomepage.jpg

There’s a small silver lining of good news in today’s atrocious GDP report: the New York Times has started linking to primary sources from its home page. And this isn’t one of those open-in-a-new-window links, either: it’s a proper link, which takes you away from nytimes.com and lands you at bea.gov.

This is a much more important step towards proper external links on the homepage than the silly Times Extra. And even if nytimes.com draws the line at primary sources and never links to other news sources’ stories, this is an important step towards truly embracing the web.

As for the GDP report itself, it might comes as little surprise — or even as a pleasant surprise to economists expecting a 5.5% drop — but it still underlines just how bad the economy is looking. Worse, I don’t see any sign of a recovery any time soon: America’s culture of competitive consumption has disappeared entirely, and it’s not coming back.

I walked past a brand-new high-end casual menswear store last night, and it struck home to me how much things have changed in the past few months. It was always a bit weird that anybody would pay hundreds of dollars for a flannel shirt, but somehow, such shops managed to survive during the boom years. I certainly wouldn’t want to be the owner today, though, or even in the years to come, should the store survive that long.

Posted in economics, Media | 2 Comments

Extra Credit, Thursday Edition

Posted on January 30, 2009 by Felix

A Rich Income in ’06 Was $263 Million: With an effective tax rate of just 17%.

ISDA Announces Agreement to Make J.P. Morgan’s CDS Analytical Engine Available as Open Source: Which makes it more dangerous, I think.

Bush War on Roquefort Raises a Stink in France: Abolish the Roquefort tariff now! America needs more stinky cheese, not less!

Probing the Improbable: Methodological Challenges for Risks with Low Probabilities and High Stakes

Posted in remainders | 1 Comment

Davos Datapoint of the Day

Posted on January 29, 2009 by Felix

Alan Rappeport, who’s 4,000 miles away in New York, does some real reporting while the crowds of journalists at the schmooztastic gabfest play spot-the-mogul in the Kongresszentrum:

ExecuJet, which is handling private business jets flying to the World Economic Forum at surrounding airports, said there have been more requests for private flights than ever this year and they are already servicing more aircraft than the record 325 in 2008.

In its own way, this is even more damning than the bonuses. At least those are down on the year. Can nothing burst the Davos bubble?

(HT: Knobel)

Posted in Davos 2009 | 1 Comment

When Buying a Hybrid Isn’t Green

Posted on January 29, 2009 by Felix

If I were ever to have a nice little place in the Hudson valley (a chap can dream), I’d need a car to keep at the train station while I was in the city and to run me into the nearest town when I was in the country. As a good environmentalist, what car should I buy?

I’m pretty sure the answer is an old gas-guzzling pickup truck or, something along those lines, rather than a sexy new Prius or Smart. So long as the old gas guzzler is going to be driven by someone, it should be driven by ultra-low-mileage me, rather than someone who will burn up loads of gasoline driving it.

In general, from an environmental point of view, the best place to keep things like Porsche Boxsters and Land Rovers is in a garage, unused, rather than on the road, belching carbon. Paul Wilmott explains, at the expense of Iain Banks:

The Scottish author Iain Banks, a famous petrolhead, recently sold his collection of classic cars and replaced them with a single hybrid. He used to have a Porsche 911 Turbo, a Porsche Boxster S, a BMW M5 and a Land Rover Discovery. And he bought a Lexus SUV hybrid instead.

Am I alone in thinking this counterproductive?

First he says that he’s getting about 28.5mpg out of the Lexus as opposed to the "low 20s" he got from Porsches and the BMW. See what I mean? The marginal improvement probably did not outweigh the damage caused by the manufacture of the Lexus in the first place.

And, second, it is not humanly possible for Iain Banks, brilliant author though he may be, to drive more than one car at a time. So now there are five gas-guzzling cars on the roads, possibly all at the same time, when before there was just one.

Pay no attention to the mileage figures, which use UK gallons rather than US gallons and which therefore can lead you astray: the argument doesn’t rest on them.

But if you see two drivers in Berkeley, and one’s driving a Prius while the other one is driving an old second-hand gas-guzzling Volvo, it’s not at all obvious which one has made the greener choice of car. After all, if you sold the Volvo and bought a new Prius, wouldn’t total emissions rise, thanks to the carbon footprint of the Prius itself as well as the continued emissions from the Volvo?

Posted in climate change | 1 Comment

Let the Government Buy Corporate Bonds

Posted on January 29, 2009 by Felix

What’s the difference between spending hundreds of billions or even trillions of dollars on loans, on the one hand, and loaning out the money directly, on the other? All of the "bad bank" proposals have one thing in common: that the government buy up a huge quantity of loans of some description — and take on the associated credit risk. So why not start lending money in the real economy, especially if that can be done without taking on any credit risk?

That’s the idea of Tyler, over at Zero Hedge, who notes that companies like John Deere and Casino Guichard are issuing new bonds at spreads hundreds of basis points wide to where their credit default swaps are trading. The government — or a state-owned bad bank — could easily lend at lower rates than that, and fully hedge all the associated credit risk in the CDS market.

Politically, it might be hard for the government to get involved in the demonic CDS market. But on the other hand, the government’s money would be going straight to companies which need the money and will spend it, rather than to banks which are likely to just sit on it.

Obviously, all such hedging would have to take place on a new CDS exchange, but that’s no bad thing: it would help the exchange to get going. It would even be legal under the draconian standards being mooted by Collin Peterson, the chairman of the House Agriculture Committee, which would not only ban all off-exchange CDS trading but would also require ownership of the underlying bonds.

What reason is there to believe that this arbitrage will continue to exist even once the CDS market has moved to an exchange? Isn’t the negative basis entirely a function of counterparty risk?

The answer to that is yesbut. The real reason for the CDS basis is a kind of counterparty risk, but it’s not the counterparty risk that we normally think of in the CDS market — the risk that a bank will write protection and then go bust before it can pay out on it. Instead, it’s an illiquidity premium in the cash bond market. The people playing the CDS basis trade tend to be banks, who tend to fund their cash bond positions in the overnight repo market — and that is where their internal cost of funds has skyrocketed.

An institution with limitless liquidity, like the government, doesn’t have that problem, and can happily hold cash bonds without having to pay a hefty Libor-OIS premium. If the government were to buy credit protection from banks, the market-rate counterparty-risk premium it would charge would be much smaller than the negative CDS basis. And if it were to be buying protection from an exchange, the counterparty risk involved would be smaller still.

A lot of the discussion surrounding the stimulus package has involved setting up new state-owned banks, whether they be infrastructure banks or bad banks or whatever. Surely one of these entities will find itself able to go out and lend money to the companies who are currently having to pay an enormous illiquidity premium when they issue new debt. It will be good stimulus spending: you can be sure the money is needed. And when there’s an almost-perfect hedge for the taking, which locks in profits for the taxpayer, it would be silly not to do it.

Posted in bonds and loans, derivatives | 1 Comment

Disaster Datapoint of the Day

Posted on January 29, 2009 by Felix

From Charles Kenny’s paper, "Why Do People Die in Earthquakes?":

There is absolutely no overlap between the top twenty most costly insured disasters worldwide

1970-2005 and the top twenty worst catastrophes in terms of lives lost. All of the most costly

events in terms of property damage hit wealthy countries (where the density of economic activity

is higher), all of the most deadly hit developing countries. In addition, eighteen out of twenty of

the most costly were hurricanes, typhoons and storms, eleven out of twenty of the most deadly

were earthquakes. Why is this? Earthquake deaths in particular can be

prevented by engineering approaches that are widely applied in wealthy countries but rare in the

developing world. It is more difficult to comprehensively prevent flood and wind damage using

similar approaches.

In all of the developing world, there are much cheaper ways of saving lives than trying to make buildings more earthquake-proof. But that just means we should spend much more effort trying to find cheap and reliable ways of strengthening buildings.

Posted in development | 1 Comment

The Nonprofit Newspaper

Posted on January 29, 2009 by Felix

Steve Coll, reacting to

David Swensen and Michael Schmidt, picks up the nonprofit newspaper meme and runs with it:

Not to pick on any one institution, but, from a constitutional perspective, how did we end up in a society where Williams College has (or had, before September) an endowment well in excess of one billion dollars, while the Washington Post, a fountainhead of Watergate and so much other skeptical and investigative reporting critical to the republic’s health, is in jeopardy? I’m sure that Williams-generated nostalgia in the emotional lives of wealthy people is hard to underestimate, but still …

I don’t think that raising substantial endowments for genuinely important newspapers like the New York Times or the Washington Post would be particularly hard. The more difficult bit is how do we get there from here, given the fact that they’re for-profit companies right now, with fiduciary responsibilities to their shareholders.

My idea is to dilute the current shareholders to the point of irrelevance by essentially raising the funds for the endowment through the sale of new shares. There are probably other ways to achieve this too. The downside, of course, is that the family owners of the newspapers in question would see their own net worth — or at least the part of it tied up in the paper — also brought down to zero.

The government could encourage newspapers’ move towards nonprofit status by tweaking the nonprofit laws a little. Here’s Swensen and Schmidt:

One constraint on an endowed institution is the prohibition in the same law against trying to “influence legislation” or “participate in any campaign activity for or against political candidates.” While endowed newspapers would need to refrain from endorsing candidates for public office, they would still be free to participate forcefully in the debate over issues of public importance. The loss of endorsements seems minor in the context of the opinion-heavy Web.

Newspapers must be able to influence legislation — that’s one of the central reasons for their existence. And the last thing we need is politicians who are angry with a given paper threatening to investigate its nonprofit status.

Posted in Media | 1 Comment

Where’s the Nationalization Debate?

Posted on January 29, 2009 by Felix

geithnerwarren.jpg

There’s a lot of words but less actual news in the NYT’s big report today on Tim Geithner and his plan for the US banking system. But one thing does interest me, given the extent to which Warren has been demonized by bank shareholders: financial stocks surged yesterday on the same day as the above photo was taken, with Geithner and Warren looking very friendly indeed.

I do like this quote from Chuck Schumer, which I think sums up the debate quite well:

“None of the solutions are very easy,” Mr. Schumer said. “All of these proposals sound very appealing until you start to examine them in detail. And then you find that all of them have problems. The good bank-bad bank idea — the problem, first and foremost, is how do you value the assets? No one knows how to do that.”

But the nationalization idea still seems to be stillborn:

[Geithner] discouraged speculation that the plan would include the nationalization of some banks.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he said.

Such sentiments will certainly make Jamie Dimon happy:

"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks … we’ve got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.

Sorry, Jamie, but I’m going to keep on talking about it, just because it solves at a stroke the problem of valuing the bad assets that the government is thinking of buying at an absolutely astonishing cost of $3-4 trillion. It would also help address Larry Summers’s concern:

Mr. Summers privately expressed concern last week that spending too much to buy bad assets could cripple the dollar, according to a person who spoke with him.

This is a real concern. If you give the banks trillions of cash dollars in exchange for their toxic assets, there’s simply no way of forcing them to keep that money in the USA. Even if they lend it only to US companies — which is improbable — those companies will surely take advantage of the strong dollar to buy cheap imports.

Nationalization, by contrast, doesn’t involve monetizing bad assets, which means it poses much less of a risk to the dollar. I’m glad that Geithner isn’t in a mad rush to decide what to do, but I’m less happy that some kind of bad-bank solution seems to be a foregone conclusion at this point, while nationalization has not been properly debated. If you don’t want to call it nationalization, fine — but at least take seriously the idea that the problem can be solved without a huge up-front transfer of government money to the banking sector.

Posted in bailouts, banking | 1 Comment

Bonus Scandals Begin to Emerge

Posted on January 29, 2009 by Felix

The issue of Wall Street bonuses in general, and Merrill Lynch’s bonuses in particular, is only just beginning to heat up. The NYT is scandalized today that bonuses in New York are going to total $18.4 billion — the sixth-largest year on record — and frankly I too am quite shocked that the average bonus award fell only 36.7%, even as profits simply evaporated.

The situation at Merrill is particularly bad. In recent days there’s been a lot of unhelpful finger-pointing between Merrill and Bank of America: BofA seems to be upset that Merrill moved its bonus payments up to December, while Merrill says that BofA was kept entirely within the loop at all times. But now the WSJ adds a new twist:

Mr. Cuomo also wants to know if Merrill’s board knew about the deepening losses last month, which resulted in a net loss of $15.31 billion in the fourth quarter. That information may have led Merrill’s compensation committee to readjust the bonus payouts, the person familiar with the probe said.

Some Merrill directors have said they didn’t know of the losses or that the losses threatened to derail the Bank of America deal. Mr. Thain has said Bank of America knew about the bonuses. Bank of America has said Merrill’s compensation committee made the decision on amount and timing of year-end compensation. A person close to Bank of America said it had "no input" on when the bonuses would be paid.

If it’s true that the size of Merrill’s bonus pool was set before the magnitude of the fourth-quarter losses became apparent — and I suspect it probably is true — then there’s a huge scandal here. The optics of Wall Street bonuses generally are bad, no doubt. But the sight of Merrill executives awarding themselves monster multimillion-dollar sums without the compensation committee even having the opportunity to pare them back in the light of that $15 billion loss? That’s just unadulterated greed.

Posted in banking, pay | 1 Comment

Black Mail

Posted on January 28, 2009 by Felix

I think it’s safe to say that the USA is the only major country in the world where people still regularly send checks in the mail. Which is one reason this is so shocking:

Saying the U.S. Postal Service "is in a severe financial crisis," Postmaster General John E. Potter is asking Congress to allow him to cut mail delivery from six days to five days a week.

Sure, Potter, go to five days a week. But not until we have an easy and universal way of making payments to companies and individuals.

Posted in banking | 1 Comment

Extra Credit, Wednesday Edition

Posted on January 28, 2009 by Felix

Nationalize the Banks? Analyst Urges Other Options: Although it’s worth remembering that if they’re nationalized, Mike Mayo won’t have a job any more.

Citi, BofA Show Investors Can’t Bank on Capital: Beware regulators touting capital ratios.

Ecuador’s Dangerous Game: Abby McKenna on Ecuador’s bond default.

Losing Harvard’s Billions: No one knows how much Harvard has really lost.

Posted in remainders | 1 Comment

Is Google Too Big To Fail?

Posted on January 28, 2009 by Felix

Robert Cottrell has a provocative post about the cloud today. Is the future of information in the cloud? Robert has his doubts:

I’d be on the pro-cloud side, were it not for the crash of cloud banking. The message from the banking cloud is that, the more trust you put in a system you don’t understand, the bigger the blow-out you get in the end. For basically cultural reasons, not technical ones.

Fertile analogy, no? Coming soon: "Is Google Too Big To Fail?"

I think this is exactly right. Yes, Google is too big to fail. If Google went down tomorrow, the loss of $100 billion in stock-market value would only be the tip of the iceberg in terms of the total economic loss associated with such an event. Between AdSense and AdWords, Gmail and Blogger, Google Docs and Google News, the company has built itself into an indispensable counterparty which would take many years and hundreds of billions of dollars to replace.

I think there’s definitely something to the theory that Nassim Taleb thinks the way he does partly because he grew up in Lebanon, where you couldn’t trust the banks. By contrast, most of the US and Europe grew up in a culture where banks were old and venerable and were to be trusted implicitly: even if they only had single-A credit ratings, you could happily enter into a long-dated swap contract with them because it was just in the nature of banks to be reliable and be around for ever.

Today, much of that trust is gone — but we still have trust in something more precarious still, which is the cloud, and the internet generally. I’ve been writing this blog for almost two years now — 3,872 entries and counting — and I have no local copy of my work. If the website disappeared tomorrow, for whatever reason, I would be genuinely traumatized.

So far, the internet has worked smoothly through the financial and economic crisis. But we’re alive to the possibility of black swans, now, and there’s no guarantee that our implicit trust in the internet and the cloud is well-placed. If we can’t trust the world’s biggest banks, why should we trust Google?

Posted in technology | 1 Comment

The FT’s Online Business Model

Posted on January 28, 2009 by Felix

I just had a long lunch with FT.com managing director Rob Grimshaw. He’s been in the job for about six months now, and I was interested to hear his take on everything from subscription firewalls to RSS feeds. It was clear, by the end of the lunch, that we’re not going to get anything revolutionary from the FT: he’ll tweak things here and there, and he’s possibly more open to new ideas than his predecessors, but in general he’s perfectly happy with his weird and unintuitive business model.

Grimshaw, it’s safe to say, loves the idea of charging for content. He was very taken by the fact that the FT’s print circulation didn’t fall when the cover price rose, and his general inclination is to believe that if access to FT.com is mispriced, that’s because they’re charging too little rather than too much. He used the phrase "genuinely unique content" many times, and he’s a big fan of the fact that a huge proportion of his readers get their company to pay for their subscription, which makes them pretty price-insensitive. (It’s the same phenomenon which led us to have lunch at a very expensive midtown restaurant, so I can appreciate it.)

We’ve known for a while that the market for web display ads is slowing down or even getting smaller, even as the amount of inventory continues to rise dramatically. That makes a standard advertising-driven web strategy a recipe for shrinking revenues and disappearing profits. Grimshaw has a two-pronged approach to this problem, and half of it is very clever.

By requiring registration from his readers, Grimshaw gets demographic information on some of the most important individuals in the world. And by loading cookies onto those readers’ computers, Grimshaw can target very specific ads at them. An advertiser can go to Grimshaw and ask to create a campaign designed only for CEOs and CFOs. Grimshaw can then serve those ads only to CEOs and CEOs: anybody else viewing the same pages will see some other ads.

According to Grimshaw, this business of selling ads targeted at specific groups of readers — managers in the transportation industry, say, or people with control of the budget at big technology companies — is growing fast, and CPMs are actually rising, with some advertisers paying almost $100 per thousand impressions if they know they’re reaching such a specific audience.

As a result, Grimshaw is keen on getting his readers to give him more and more demographic information, and he’s willing to give them an increased number of free pageviews in order to incentivize them to do so.

I asked if there wasn’t an easier way: couldn’t he just use Facebook’s open API, for instance, and allow his readers to sign in with their Facebook username and password, while agreeing to let FT.com access some of their Facebook information? I believe LinkedIn offers something similar, too. Grimshaw seemed intrigued by the possibility, but also resigned to the fact that since the FT has gone so far down the road of building its own database of registered readers, it wasn’t about to start complicating matters by embracing new open standards. There are certain things that Grimshaw is willing to try to outsource, but I got the distinct impression that you’re going to need an FT-specific username and password to access all the FT’s content for the foreseeable future.

Aside from targeted advertising, Grimshaw is also a big proponent of subscription revenues. Because many of his readers would pay more to read FT.com, he thinks, they should pay more. And he made some cryptic comments about soon launching a newsletter product, written by a senior FT editor, which will carry an annual pricetag well over $1,000.

That kind of thing is fine: newsletters have been around for decades, and will surely survive for decades hence. But it’s an explicit move away from consumer-focused media and into the professional/trade space. What’s more, it signals to even the FT’s most premium subscribers that there’s stuff they’re not getting, that far from being valued customers, they’re pretty much the huddled masses compared to the most exalted readers.

Grimshaw’s a fan of the incomprehensible pricing models used by airlines — yes, he actually used this example — where someone who paid $45 for their ticket can be sitting next to someone who paid $945 for the same service. He was vague about how he was going to achieve this, although he is a fan of iTunes, and specifically its success in getting people to pay small amounts of money for content. He does understand that if you just want to read one article more than your free quota, you’re not necessarily going to want to pay an entire year’s subscription. But I’m not sure that he understands just how difficult it is to get anybody online to pony up that very first penny for anything.

It did occur to me, though, that there’s a nice potential business here for Apple: it could open up its iTunes payment system, and allow people to pay for everything from FT articles to funny videos using their iTunes username and password.

Grimshaw paid no little lip-service to openness: while FT.com launched as a classic walled garden, he said, it’s now embracing the web in full. I’ll believe it when I see it, and in general I just don’t see how any subscription site can possibly do that. An open website needs both inbound and outbound links; to date FT.com has few of the former, because neither Google nor bloggers are particularly inclined to link to subscription websites, and it has confined the latter mostly to its blogs.

Grimshaw likes, in principle, the idea that the more you send people away, the more they come back; I, for one, would be quite happy to use the FT.com homepage as a launching pad which points me to the best financial news and analysis, both on its own website and elsewhere. But if people are wary of coming back, for fear of using up their precious free quota, I doubt that model will ever really work.

And there are definitely limits to Grimshaw’s appetite for openness. When I asked him about making his website’s videos embeddable, he seemed well-disposed towards the idea. But when I asked him (as I had to, I have a reputation to protect) to start serving up a full RSS feed for Alphaville, he bristled a little. That might not work, he said: FT.com makes its money through subscriptions and through ad sales, and serving up a full RSS feed serves neither purpose. I disagree, but that’s not really the point: the point is that Grimshaw seems to embrace openness only insofar as it directly boosts his bottom line. Less quantifiable metrics, such as brand value or the ability to stay relevant to future generations of potential readers, are much less important, it would seem.

That, in turn, probably explains why the FT still doesn’t have an iPhone app; Grimshaw says that one’s in the works, but probably won’t arrive for a few months yet. Such an app would have to be free, and so it’s not about to make any real money for the FT in the foreseeable future. And the FT’s brand-new mobile website, which it launched today, seems pretty bare-bones to me, not because it lacks "interactive mobile charting", but just because navigation is done only by endless scrolling.

In general, then, FT.com still seems to be a creature of Pearson, the FT’s bottom-line-obsessed parent. Grimshaw is clearly focused on maximizing short- and medium-term revenues, rather than the long-term value of his franchise. He said more than once that he was targeting the website at a very small group of readers: the 440,000 print subscribers, and maybe a couple million more international business executives. Of course he’s happy that tens of millions of people visit his website every month, but he’s staying focused on the expense-account crowd. And at a time when there’s more demand than ever for top-quality business and finance news and analysis, that seems like a short-sighted decision to me.

Posted in Media | 1 Comment

More on Lehman Revisionism

Posted on January 28, 2009 by Felix

I’ve been thinking a bit more about the Lehman Brothers revisionism coming from the likes of Bernanke, Paulson, and Geithner: the fact that although they were quite clear about letting Lehman fail at the time, they subsequently have backtracked on that, and said that although they tried very hard to rescue Lehman, they simply weren’t allowed to do so.

I still think that’s probably bullshit, and that in this crisis, as we’ve seen, where there’s a will, in government, there’s a way. Paulson, for one, was not the type of person to let a bunch of Federal Reserve lawyers stop him from doing what he thought needed to be done. But what if he’s telling the truth, and rescuing Lehman really was illegal? How can that be squared with contemporaneous statements?

I think the answer might lie in market psychology. When Lehman failed, it did so with clear indications from its regulators that they wouldn’t continue with Bear-style bailouts, and that there was no kind of Paulson Put, where failed banks automatically get rescued by Treasury.

If the sun rose the following morning and the world didn’t come to an end, that would be an astonishingly strong signal about market resilience in the face of government inaction, and would help boost sentiment a very great deal.

On the other hand, if Lehman’s failure really was going to have nasty systemic consequences, then a few statements from Treasury were unlikely to make things substantially worse: an apocalyptic meltdown is an apocalyptic meltdown either way.

So I can see why Paulson and Bernanke said what they did in the immediate wake of Lehman’s collapse: there was substantial upside to saying it if markets went up, while if markets went down the downside was so big either way it made very little difference whether they said it or not.

Posted in regulation | 1 Comment

John Thain’s PR Expenditures

Posted on January 28, 2009 by Felix

When Maria Bartiromo asked John Thain about his notorious office, he replied:

Well, first of all, it– it is true. This was a

year ago or actually a little bit more than a

year ago in a very differ– different– ec–

economic environment and a very different outlook

for Merrill and the financial services industry.

It was my office. It was two conference rooms

and it was a reception area. But it is clear to

me in today’s world that it was a mistake. I

apologize for spending that money on those– on

those things. And I will make it right. I will

reimburse– the company for all of those costs.

This answer raised two obvious questions.

The first was why Bartiromo didn’t immediately come back pointing out that although Merrill’s $15 billion loss in the fourth quarter of 2008 was particularly gruesome, its $10 billion loss in the fourth quarter of 2007 was hardly full of happiness and sunshine. Does Thain really think that if Merrill was losing only $10 billion a quarter, that made the bank’s outlook "very different"?

The second question was who on earth advised Thain that repaying the $1.2 million was a good idea, from a PR perspective. After all, the damage had been done already. And the fact that Thain just had $1.2 million lying around to repay Merrill, despite the fact that he didn’t get his bonus for the year, just makes him seem even more disconnected from the real world.

Page Six today answers the second question, and might even answer the first as well:

MARIA Bartiromo scored the first post-axing interview with booted Merrill Lynch chief John Thain Monday – but CNBC’s "Money Honey" kept viewers in the dark about the little business arrangement that may have helped it happen. Turns out she and Thain both pay public relations guru Ken Sunshine to represent them, and he apparently helped set up the exclusive. "It’s a huge conflict of interest. It’s incredible she didn’t disclose this over the air, but she thinks she’s above it all," one broadcast insider told Page Six. "And she was really kissing Thain’s ass during the interview."

I’d love to know when Thain hired Sunshine, and how much Sunshine has cost him to date. It’s at least $1.2 million, if you include the costs of reimbursing Merrill for the office expenses. Which is a lot of money to pay for seeing your reputation implode in a matter of days.

Posted in banking, defenestrations, Media | 1 Comment

When Gift Cards Trade Over Par

Posted on January 28, 2009 by Felix

Dealbreaker finds a $75 Amazon gift card which sold on eBay for $75.76.

Interestingly, if you look at the auction history of the winning bidder, it’s pretty much all gift cards — this is someone who knows what they’re doing. I can think of money-laundering reasons why someone might want to do this, but is there any legitimate reason for it?

(HT: Tubin)

Update: One reader suggests that the buyer might be getting some kind of discount on the deal. This could take multiple forms: using a cashback credit card for payment, for instance, or having a separate coupon from eBay or PayPal giving a percentage off the winning price, or somehow setting up a system whereby they essentially get a commission for referring themselves to eBay. There’s not a lot of profit in it, but there might conceivably be some.

Posted in consumption | 1 Comment

Schwarzman’s Bailout Wishlist

Posted on January 28, 2009 by Felix

There’s a severe shortage of finance honchos in Davos this year. They probably thought that turning up for the schmooztastic gabfest would send the wrong signal to their new lords and masters making $191,300 a year. On the other hand, they’re leaving something of a vacuum, and Steve Schwarzman abhors a vacuum:

Mr. Schwarzman is already making a splash. At a discussion panel on Wednesday, hopped off his stool during a debate moderated by CNBC’s Maria Bartiromo, grabbed the microphone, and boldly called for what private equity loves: More leverage!

Mr. Schwarzman argued that banks should be allowed lower capital ratios, freeing money normally laid away against losses for new lending. He also called for the end of accounting rules that forced lower and lower asset valuations. And, oh yes, the government should guarantee securitizations to help the market get moving.

And a pony, Steve. Don’t forget the pony.

Posted in Davos 2009 | 1 Comment