Geithner isn’t Rubin

Posted on November 30, 2008 by Felix

Edward Helmore, of the (London) Observer, provides this weekend the neatest distillation of the "Geithner is Rubin" meme that I’ve yet seen:

For Obama, the selection of Rubin acolytes suggests vulnerability. Yet defenders of the Rubinistas say it is not policy that binds them but their braininess.

But for Obama, who promised ‘change you can believe in’, the selection of Rubin protégés – what one critic called the ‘essence of the Washington-New York finance axis of power’ – has raised eyebrows.

Wow. In the space of three sentences, we’ve got "acolytes", "Rubinistas", "protégés", and a quote from Ben Stein!

In what way is Geithner meant to be a protégé of Rubin? Here’s his official bio:

Mr. Geithner joined the Department of Treasury in 1988 and worked in three administrations for five Secretaries of the Treasury in a variety of positions.

Yes, Rubin was one of those five Secretaries. But if I recall correctly, Summers always stood between Geithner and Rubin on the Treasury org chart. Rubin and Summers were fully-fledged members of the Committee to Save the World; Geithner was one of the key people charged with implementing their plans. I don’t see how that makes him a Rubin protégé.

After all, when Geithner left Treasury and moved to the IMF, he immediately started defending, in a most forthright manner, the sovereign-bankruptcy proposals of his new boss, Anne Krueger — proposals which Treasury was always lukewarm about, at best. Does that make him a Krueger protégé too? Or does that just make him a good public servant who does what his bosses ask of him?

It’s even more ridiculous to think of Summers as a Rubin acolyte — when Summers arrived at Treasury, he was already an academic superstar with a John Bates Clark medal to his name — and he’d been chief economist of the World Bank.

I think what we’re seeing here is the last vestigial impulses of the days when Rubin was considered some kind of god among men: after all, if anybody ever walks in the same circles as such a divine being, surely he must be a protégé. And when the divine being is revealed to have feet of clay, the hit to his reputation redounds even unto his acolytes.

Sometimes, the protégé label is fair: think Paulson-Kashkari, or Rand-Greenspan. But I think it’s a bit of a stretch to say that just because Rubin has screwed up at Citigroup, one should think less as a result of Summers or Geithner or Orszag.

Posted in Politics | 1 Comment

Ben Stein Watch: November 30, 2008

Posted on November 29, 2008 by Felix

Ben Stein, last week, was all in favor of the government spending vast amounts of money.

A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.

This week, however, he’s not at all sure that the government should embark on projects which will "cost some real money":

Will the new administration be prepared to require that public works employees be union members? If so, of what union?

No matter how this is handled, someone will be unhappy. It will cost some real money if they are union members, and will cause some anger if they aren’t. Business won’t like it if wages rise in an area where it has flourished with low-wage workers.

It’s quite astonishing, what Stein can contrive to be worried about when it comes to a stimulus package. He’s saying that such a package might be spent on public works. And if it’s spent on public works, the employees might be unionized. And if the employees are unionized, they might get paid more. And if they’re paid more, wages generally might rise. And if wages generally rise, that might hurt other businesses’ profit margins. That’s four "ifs" and five "mights" right there — all for the seeming purpose of worrying about a world in which the Obama administration has magically solved the problem of rising unemployment. (Never mind, of course, the fact that most businesses actually like it when their customers earn more money, or the fact that most normal people consider a pay rise to be a good thing, or the fact that any area which competes on the basis of "low-wage workers" has much bigger things to worry about, in this age of globalization, than federal public-works projects.)

Stein’s also weirdly grumpy about the choice of Tim Geithner as Treasury secretary, even though he is "the world’s most ardent fan of Paul A. Volcker and Lawrence Summers". Maybe he should ask Volcker and Summers what they think of Geithner — but no, he’s already decided that Geithner is "the pre-eminent careerist of old-time finance":

In what sense is he “change you can believe in”? How is he part of the solution, not part of the problem?

It might be instructive, here, to remind ourselves of George W Bush’s choices of Treasury secretary. First there was the former CEO of Alcoa, then there was the former CEO of CSX, and finally there was the former CEO of Goldman Sachs. All of them businessmen who had become hugely wealthy in the private sector before being charged with taking that experience and applying it to the economy as a whole.

Does Geithner represent a significant change from that patten? Absolutely, yes: he’s been in public service for essentially his entire career. We now have the regulator, not the regulated, in charge: the gamekeeper, not the poachers. He might be a careerist, but only in a Washington sense: he’s never accepted any of the high-paying private-sector job offers which have undoubtedly come his way.

Stein then starts attacking the idea of public works as an intelligent way to spend a fiscal stimulus, without giving any indication of what might be a better alternative. I suspect he’s thinking a policy of tax cuts — a blunderbuss which will have no legacy of improvements to national infrastructure and which would be very difficult to target in a strategic way.

Stein ends off by implying that Ben Bernanke is being influenced by the appointments that Obama has announced to date:

Mr. Obama will have some fine economists on his staff, including Mr. Summers, the powerful Mr. Volcker and Christina D. Romer of the University of California, Berkeley. They can help figure out what works and what is fantasy. Already, their waiting in the wings is jolting the current administration’s team into a giant-sized monetary stimulus.

Ah, wait a minute, I think I understand what Stein’s issue with Geithner is: he’s not an economist. (Well, he does have a Master’s in International Economics and East Asian Studies, but never mind that.) Stein fancies himself an economist, remember, and that probably explains why he loves Summers so much yet has so little time for Geithner — a man who worked hand-in-hand with Summers during the latter’s tenure at Treasury.

In any event, Stein declares, after admiring all these fine economists, that he has "hope" for the Obama administration. Which is one endorsement I’m sure they all could do without.

Posted in ben stein watch | 1 Comment

Rubin’s Teflon Finally Wears Off

Posted on November 29, 2008 by Felix

In one of the most ill-advised pieces of PR I can remember, Bob Rubin has given an on-the-record interview to the WSJ, in which he takes no blame or responsibility for anything which has gone wrong at Citigroup. The reaction in the blogosphere has been, predictably, swift and brutal, helped along by the fact that Rubin’s famous charm clearly hasn’t worked on his interviewers, Ken Brown and David Enrich. Here’s their lede:

Under fire for his role in the near-collapse of Citigroup Inc., Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank’s main operations even though he was one of its highest-paid officials.

It just gets worse from there: by refusing to admit to any mistakes at all, Rubin has garnered himself zero sympathy. Rubin has been surprisingly bulletproof until now: while he’s had many critics, his reputation has largely remained intact. But with this interview, it’s disappeared at a stroke: no one can read it and think of him as anything other than a pompous and out-of-touch plutocrat, puffed up with much more self-regard than common sense.

For instance, he’s quick to the not-my-bailiwick defense:

Mr. Rubin said it is a company’s risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. "The board can’t run the risk book of a company," he said. "The board as a whole is not going to have a granular knowledge" of operations.

But board members don’t get paid $115 million. If he wasn’t playing a central role when it came to Citi’s risk book, what was he doing for the money? It’s not clear, but his comments don’t help much:

Mr. Rubin said his pay was justified and that there were higher-paying opportunities available to him. "I bet there’s not a single year where I couldn’t have gone somewhere else and made more," he said.

Justified? What does that possibly mean? And as for making more money elsewhere, I suspect that many Citigroup shareholders wish that he’d done precisely that. But not only was Rubin incredibly well-paid, he also had to all intents and purposes tenure at Citigroup: as a member of the board, he was an employer of the CEO rather than an employee, so there was really no one who could fire him.

The most astonishing instance of Rubin failing to justify his salary, however, comes later:

Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup’s competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager…

At the time, Mr. Rubin was saying in speeches that most assets were overvalued. He would quote a noted investor he knew as saying that "the only undervalued asset class in the world is risk."

But it wouldn’t have been right for the board to act on his concerns, Mr. Rubin said in the interview: "I wouldn’t run a financial institution based on someone’s view about what markets would do."

The cognitive disconnect here is simply staggering. Rubin’s going around saying that institutions are taking on too much risk, but he’s also telling the Citi board that it should take on even more risk. He had no problem with the board following his lead when he said he wanted Citi to take extra risks, but he says that he would have had a problem with the board listening to his concerns about doing so. For this he thinks his $115 million is justifiable?

The board of any bank can and should always err on the side of conservatism. Given Rubin’s warnings about markets, it would have been easy to hold off on taking on more risk at the height of the credit bubble, especially since few board members had any real experience in risk management. It’s therefore entirely reasonable to blame Rubin personally for the board’s decisions in 2004-5. But all Rubin can say is that he doesn’t "know what would have happened" if the decision had been different. Which is so far from any kind of apology for tens of billions of dollars in losses that it’s laughable.

Wonderfully, the WSJ article ends with this:

Asked about what he feels he’s accomplished, he responded: "It’s a funny way to think about it. I think I’ve been a very constructive part of the Citigroup environment. That has become particularly manifest since August ’07. I have been very involved."

Yeah, after paying someone $115 million, it’s a bit funny to ask what that person has achieved. Shouldn’t simply being very involved — in a company which has lost nearly all of its value — be enough?

In reality, Rubin failed even at the one job he was actually given, which was to be chairman of the executive committee of the board. As such, Rubin was instrumental in choosing two new CEOs for Citigroup. But in both cases, he found himself rushed into the choice, since he’d utterly failed to put in place any kind of well-thought-through succession plan. And right now, with Vikram Pandit’s job security looking rocky, it looks like he might end up making the same mistake a third time. The wreckage that is Rubin’s legacy at Citigroup hasn’t come to an end yet.

Posted in banking | 1 Comment

Understanding Synthetics

Posted on November 28, 2008 by Felix

Over the past few days, two very smart people have asked me about a passage in Michael Lewis’s cover story for Portfolio in which he talks about synthetic CDOs without actually using the term. They said that they didn’t quite understand it, so I’m going to try to explain what a synthetic bond is. Once I’ve done that, the Lewis passage should be a lot more comprehensible.

Let’s start with a simple single-credit synthetic bond. You’re an investor, and looking at the credit markets, you see that IBM debt is trading at attractive levels, especially around the 5-year mark, where they yield about 150bp over Treasuries. You’d really like to buy $100 million of IBM bonds maturing in five years, but IBM isn’t returning your calls (they have no desire to borrow money at these spreads), and there aren’t any IBM bonds with exactly the maturity you want. What’s more, even the bonds with maturities nearby are illiquid, and closely held: there’s no way you can just blunder into the market and buy up that many bonds without massively skewing the market, since the overwhelming majority of the bonds are just not for sale.

So you buy a synthetic IBM five-year bond instead, taking advantage of the much more liquid CDS market. Essentially, you take the $100 million that you were going to spend on IBM bonds, and you put it into a special-purpose entity called, say, Fred. (In reality, it’ll be called something really boring like Synthetic Technology Invetments Cayman III Limited, but Fred is easier to remember.) First, Fred takes the $100 million and invests it in 5-year Treasury bonds.

Next thing, Fred goes out and sells $100 million of credit protection on IBM in the CDS market, using the $100 million of Treasury bonds as collateral. The buyer of protection will pay $1.5 million per year (150 basis points) to Fred, and in return Fred promises to pay $100 million to the buyer in the event IBM defaults, less the value of IBM’s bonds at the time. The buyer knows that Fred is good for the money, because it’s already there, tied up in Treasury bonds.

So long as IBM doesn’t default, you get not only the $1.5 million per year from the buyer of protection, but also the interest on the Treasury bonds. You wanted to buy IBM bonds yielding 150bp over Treasuries, and that’s exactly what you’re getting: the 150bp from the CDS counterparty, and the Treasury interest from the Treasury bonds. At maturity, assuming IBM still hasn’t defaulted, you get your $100 million back, the CDS contract has expired, and Fred has no contingent liability any more.

The effect is identical to holding an IBM bond — and you can even sell your interest in Fred, just like you could sell an IBM bond. If IBM defaults, you lose your $100 million, but you get back the value of an IBM bond — which again is the same outcome as if you’d bought an IBM bond for $100 million and IBM defaulted.

But the key thing to note is that IBM itself is not involved in the transaction at all. It doesn’t matter how few bonds IBM has issued, there can be many times that amount in synthetic IBM bonds, just so long as there are enough people out there willing to buy and sell credit protection on IBM.

And just as you can create a synthetic IBM bond, you can create a synthetic bond portfolio, made up of credit default swaps on any number of corporate names or even mortgage-backed securities. The special purpose vehicles in those cases sometimes sell protection on a lot of different names; sometimes they just sell protection on a liquid CDS index. Either way, the returns that those vehicles offer are basically the same as the returns on buying the underlying securities — if those securities were easily available.

Now that we’ve understood all that, we can return to Michael Lewis’s piece, where he’s talking about a chap called Steve Eisman, who was buying protection in the CDS market, and is sat at dinner next to one of his counterparties, who was selling protection.

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ßø”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

What Eisman is saying is that there were mortgage-backed securities, and then there were synthetic mortgage-backed securities; when the banks ran out of actual MBS to sell to investors, they sold them synthetic MBS instead. And yes, that was allowed.

There is some hyperbole here, though. While there were undoubtedly a lot of synthetic MBS issued, they weren’t a large multiple of the real MBS issued, as the "one hundred times over" quote would suggest. Which is quite obvious, if you think about it: there weren’t a lot of people like Steve Eisman willing to short the MBS market — and you need them, to take the other side of the trade.

In fact, most of the synthetic MBS issued were issued by banks which kept the underlying mortgages on their own balance sheet. Rather than put the mortgages directly into a CDO and sell that to investors, they kept the mortgages themselves and bought protection from the CDO on them — creating a synthetic CDO which mirrored (and which they could sell to hedge) their own holdings. Why did they do that? That’s the story of the super-senior tranche, and will have to wait for another day.

Posted in bonds and loans, derivatives | Comments Off on Understanding Synthetics

When a Publicly-Listed Hedge Fund Blows Up

Posted on November 28, 2008 by Felix

For the overwhelming majority of investors in hedge funds — and fund-of-funds managers, and hedge-fund consultants, for that matter — it’s really hard to get a solid grasp of any given fund’s risk management procedures. All funds will tell you that risk management is their first priority, but as a result of that such protestations are not very useful.

One consequence of this is that the hedge-fund universe is increasingly dominated by large professional managers: their relatively long histories of managing money and a large number of employees mean that their protestations about risk management start to ring true. Some of those managers, such as Fortress and Man Group, have taken the extra step of going public, which opens them up to more scrutiny and reassures current and future investors even more. Not only do such investors know that there are a lot of eyes on these managers, but they also know that the managers have every internal incentive to avoid blow-ups, since one big failure at one of these groups will adversely effect all of the other funds in the group as well. After all, if there was clearly insufficient oversight when it came to the managers of Fund A, there’s not much reason to trust in the managers of Fund B, and so the failure of Fund A is likely to have nasty effects on all the other funds in the group.

Which is why today’s news comes as something of a surprise.

Simon Treacher, a fund manager at publicly-listed BlueBay Asset Management, has been fired from his job for "breaching internal valuation policy", and his fund, the BlueBay Emerging Market Total Return Fund, is being closed down after losing 53% year-to-date.

Treacher was in many ways the face of BlueBay, an emerging-markets veteran who was at BlueBay from its inception and who was previously a key executive at the enormous and widely-feared Moore Capital; before that, he had run the largest emerging-markets fund in Europe, at Deutsche Asset Management. He’s no rogue trader, and neither is he a fresh-faced kid who’s only known up markets and who had no idea that EM investments can ever go down.

Paul Murphy thinks that Treacher’s being thrown under the bus in a desperate attempt to save the company, and notes that the FSA is investigating what’s going on. But all the same, Treacher was running a long-short fund: there’s really no excuse for its losing more than half its value this year — and probably much more than that, by the time it’s unwound.

Clearly there are problems at BlueBay which are bigger than Treacher — especially since BlueBay admits that Treacher’s mismarks "were too modest to make any difference to the overall net asset value figure" and didn’t cause him any personal gain.

BlueBay’s woes could infect publicly-listed hedge-fund managers more broadly. If it can happen to BlueBay, it can happen to any of them. And if even the big publicly-listed managers aren’t immune from weak risk controls and blow-ups, then there’s really no such thing as a safe hedge-fund investment.

Obviously this one piece of news doesn’t mean the end of hedge funds as an asset class. But it certainly won’t do anything to reassure hedge-fund investors that it’s possible for them to have any real reassurance that their money is safe.

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Extra Credit, Wednesday Edition

Posted on November 26, 2008 by Felix

Record U.S. CDS: 56 bp Things to be thankful for tomorrow: That we can pay real money for financial instruments insuring against the end of the world, which have almost zero chance of paying out if the end of the world actually happens, and even less chance of doing much good even if they did pay out.

Buffett Serving Free Lunch? (Part II): "The writing of catastrophe insurance has no significant effect on the occurrence of natural disasters. Financial trades are completely different."

Futures on Intrade’s Future: Is this a bit like selling a credit default swap on yourself?

SEC Outlines Its Reasoning For Shutting Down P2P Lender Prosper. Kedrosky is unimpressed.

What A Bear Market Might Teach Us: A very odd column from Jason Zweig. "Every August, almost like clockwork, the well ran dry. My brother and I then had to fetch water from the pond, which we boiled for drinking and cooking… As I look back on my childhood, it seems amazing that anyone could possibly regard it as having been poor." Yes, thrift is a virtue. But it’s hardly going to help the economy right now.

AIG Using Taxpayers’ $150 Billion To Annoy Comedy Blog

A Talk With: Joe Thompson: Parts 1, 2, 3. About the spectacular new Sol LeWitt installation at Mass MOCA. Wonderful stuff.

Big weekend: It’s Thanksgiving. A four-day weekend. Do you know where your Treasury secretary is?

Atlas Shrugged Updated for the Current Financial Crisis

Posted in remainders | Comments Off on Extra Credit, Wednesday Edition

Blogonomics: Blodget’s Shopping List

Posted on November 26, 2008 by Felix

At the end Daniel Roth’s profile of Henry Blodget and Alley Insider, he reveals that Blodget and his main shareholder, Kevin Ryan, might want to go shopping:

Blodget is broadening beyond tech to get ready for what he sees as a coming shakeout in the news-blog industry. He says he might even start making acquisitions if the price is right. Ryan’s suite of companies has raised $50 million in the past few years, possibly enough to buy out some other interesting small blogs.

Possibly enough? I’ll say: I doubt there’s a small blog in existence, interesting or otherwise, which wouldn’t be for sale for that kind of money.

But frankly I’m not sure that there are really enough for-profit news blogs for them even to count as an industry. Certainly when it comes to blogs which would fit with Alley Insider’s financial focus, I can think of very few outside the tech space which even have employees: Seeking Alpha, Dealbreaker, maybe Housing Wire and a handful of others.

For much less than $50 million, Blodget and Ryan could do something slightly more interesting, I think, than buying up news blogs. They could start approaching small one-person shops like Abnormal Returns, Naked Capitalism, or Footnoted, and offer to pay them for the privilege of hosting the blog, selling ads on it, and incorporating it into the Alley Insider network alongside blogs such as Clusterstock. The rights to the blog entries would have to be worked out, but my guess is that a model with both Alley Insider and the individual blogger having such rights could reasonably easily be put together.

Blodget and Ryan have shown that they’re great at getting traffic, both organically, through putting up good content, and also by doing deals with Yahoo. It makes sense that they’re now hungry to start beefing up their inventory to a point at which big media buyers will be very interested in them. Any one small blog might not move the needle very much, but if they put together a well-curated shopping list, they could come up with something great.

There might be some difficulty in persuading advertisers to take out ad buys across a range of disparate blogs — in which case the content from the various properties might need to be aggregated somehow, without losing the different blogs’ identities. But the result could be a formidable rival to Seeking Alpha, especially among bloggers who would love to make some money directly from their blogging.

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Did Citi Suffer a Run on Deposits?

Posted on November 26, 2008 by Felix

Vikram Pandit was on Charlie Rose last night, and was asked point-blank whether there was a run on Citi’s deposits last week. Here’s the exchange, at around the 10:40 mark:

Charlie Rose: So you go to them and decide that we need to do something because there’s a loss of confidence, maybe people were taking their deposits out. Were there? Was it a significant run, in terms of deposits?

Vikram Pandit: As of Friday, which is really when we started talking to the regulators, there was only noise.

CR: "Noise" means what?

VP: Noise in the sense of deposits coming in, there’s deposits going out, meaning the usual kind of activity.

 

CR: But not a significant number of people of significant wealth coming and saying I’m worried about Citibank, I’ve seen this stock collapse, and we’d better get our deposits out of there.

VP: That’s right. And so from that perspective, again, with 300,000 people around the world knowing exactly the strength of the bank, we did a pretty good job of making sure we had informed our clients about the strength of Citi.

This falls short of an emphatic declaration that there was no run on the bank — but it goes much further than any official communication I’ve seen from Citi about what’s been happening to its deposit base. It’s information which is very important to the market, and Citi stock is up another 11% today, possibly partly as a result.

So, well done to Charlie Rose, for getting this much out of Pandit. But if Pandit was willing to say this on national TV, one wonders why Citi’s communications team couldn’t have said much the same thing officially, before the bailout, when the markets were much more worried about the deposit base.

(HT: Kedrosky)

Update: Dealbook has the full transcript.

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Is Volcker the Man for This Job?

Posted on November 26, 2008 by Felix

In theory, I like the idea of an

Economic Recovery Advisory Board which will provide to the President "a ground-level sense of which programs and policies are working for people, and which aren’t". But I’m not at all convinced that Paul Volcker is the right person to chair such a thing. Volcker is a pointy-headed policymaker, and Obama has more than enough of those already, in the likes of Geithner, Summers, and Orszag.

The stated raison d’être of the ERAB is that "that sometimes policymaking in Washington can become too insular", and that therefore government occasionally needs someone from the real world to slap some reality-based sense into it. Great idea. But Volcker is an old Washington hand and not the right person for this job; I fear that he’ll just be another voice among the rapidly-multiplying ranks of Obama economic advisers. Between Treasury and the CEA and the NEC and the DPC and the OMB and of course his own chief of staff, Obama was hardly lacking for economic advice — but now the ERAB will just be added to the end of an already-long list.

Volcker’s a giant, in more ways than one, and I’m glad he’s going to be playing a role in the Obama administration. But I don’t think that this role suits him well. I’d rather have seen someone more connected to the public mood: Oprah Winfrey, perhaps. Or maybe Obama asked, and she said no.

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The Downside of Falling Mortgage Rates

Posted on November 26, 2008 by Felix

I’m scared by the latest uptick in mortgage financing. Mortgage rates fell sharply yesterday, which is good news for people with good credit. But it might also be good news for people with bad credit — and very bad news for the US taxpayer.

Go read BusinessWeek’s excellent investigation of subprime lenders who are now originating FHA-guaranteed loans, and you’ll see what I’m talking about. The only obstacle standing between these lenders and massive government-guaranteed riches, until now, was that mortgage spreads were still high, and that therefore mortgage rates weren’t following risk-free rates south. If that’s now changing, the US taxpayer might be funding — and, worse, guaranteeing — a brand-new subprime bubble.

The rise of the originate-to-distribute model destroyed enormous amounts of institutional knowledge on the subject of responsible underwriting, as bad lenders drove out good ones. And while there’s an inchoate impression out there that underwriting standards have tightened up sharply, I suspect that in reality they haven’t, and that what we thought was higher underwriting standards was in fact simply a lack of money to lend.

If the Fed’s latest liquidity facility does in fact manage to get the mortgage market lending again, I fear that the new loans will be doled out just as indiscriminately as the old ones were — more so, in fact, given those FHA guarantees. Good loan officers willing and able to say no to people wanting to borrow too much money simply don’t exist in sufficient numbers — and in any case there’s no shortage of bad loan officers who will say yes, given funding availability.

In the first half of 2007, after subprime default rates had already started soaring, I was shocked by how underwriting standards were failing to tighten. Loan officers haven’t changed since then. The last thing we want is to reward the same irresponsible lenders who caused the last bubble — but that seems to be exactly what we’re doing.

Posted in bonds and loans, housing | Comments Off on The Downside of Falling Mortgage Rates

When Banks Retain Depositors by Cutting Rates

Posted on November 26, 2008 by Felix

After Citibank confirmed to me that it was reducing the interest rates on its checking accounts to qualify for unlimited FDIC insurance, it’s now put out a big email to that effect — without quite coming out and saying so:

Dear FELIX SALMON,

We previously communicated that through December 31, 2009 all of your non-interest and interest bearing checking deposit account balances are fully guaranteed by the FDIC for the entire amount in your account.

We wanted to send a clarification as to why your interest bearing checking accounts at Citibank are and will continue to be covered to an unlimited extent through December 31, 2009. Citibank interest checking accounts are classified as Negotiable Order of Withdrawal (NOW) accounts and will pay an interest rate within the guidelines set by the FDIC through December 31, 2009. These features qualify your Citibank Interest Checking Accounts for current and continuing coverage with unlimited insurance under the Transaction Account Guarantee Program.

"An interest rate within the guidelines set by the FDIC" means that none of these accounts will pay more than 0.50% interest at any point in 2009.

Clearly, Citibank has determined that it will lose fewer deposits if it slashes the interest rates on its current accounts than it will if it leaves deposits over $250,000 uninsured. I think that’s a reasonable determination, especially since anybody who wants a higher interest rate can just move their cash into a savings or money-market account. But it does say something that Citibank is protecting itself against bank runs.

It will also be interesting to see in Citi’s next report what’s happened to its foreign deposit base. Some of that is insured by foreign governments; most of it isn’t. An erosion of that deposit base would not be fatal, given Citi’s access to unlimited Fed funding at very low rates. But it would certainly not be pleasant.

P.S. If I was responsible for this latest round of Citispam, I hereby apologize. I only asked Citi if there was something on their website I could link to; I didn’t ask them to spam all their customers!

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Extra Credit, Tuesday Edition

Posted on November 25, 2008 by Felix

A tsunami of hope or terror? How synthetic CDOs might end up saving the banking system.

FHA-Backed Loans: The New Subprime: Those subprime lenders never went away, and the FHA is outmatched.

The Brad DeLong question – and how to design a bailout that works: "It was pretty easy to stop believing in Citigroup because nobody (at least nobody normal) can understand their accounts. I can not understand them and I am a pretty sophisticated bank analyst. I know people I think are better than me – and they can’t understand Citigroup either. So Citigroup was always a “trust us” thing and now we do not trust."

Big Bank Watcher: JP Morgan is worth more than Bank of New York, Citi, Goldman Sachs, and Morgan Stanley — combined.

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Why We’re Ignoring Big Stock-Market Moves

Posted on November 25, 2008 by Felix

Megan Barnett notes today that extraordinary volatility is being met with shrugs. It’s true that it’s something to which we’re getting accustomed; I think there are two main reasons.

The first is that in normal markets, a huge swing tends to actually mean something. People pay attention to 500-point moves in the Dow mainly because of what they bespeak, and right now 500-point moves in the Dow can mean anything, or nothing.

The second reason is that volatility numbers are exaggerated as a result of the distance that stock markets have fallen. A 500-point move in the Dow is a 6% swing, these days; back when the Dow was at 14,000, it was only a 3.5% swing. If the absolute moves remain constant, and prices fall, then volatility rises. A lot of the recent spike in the VIX, I think, is largely a function of lower prices: if it was somehow measured in dollars rather than percent, it wouldn’t have risen so much.

Put those two together, and exercises along the lines of wondering whether we’ve ever before had two back-to-back 6% up days in the Dow become largely academic. I think at this point we’re all painfully aware that volatility is at unprecedented levels. If you want to find a few anecdotal datapoints to illustrate that, fine. But big stock-market moves aren’t really news any more, or particularly interesting.

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The Difference Between Rubin and Paulson

Posted on November 25, 2008 by Felix

The Economist compares two Goldman Sachs chairmen turned Treasury secretary:

Mr Rubin rose to the top through risk arbitrage. As a trader, he knew that the important thing was to understand the big picture, and get big calls right. He knew to keep his mouth shut: talking about your ideas might let someone else steal your profits. This may be the perfect skill set for a Treasury Secretary, which is why the trader currently running Goldman, Lloyd Blankfein, might one day make a good one.

Mr Paulson, by contrast, rose to the top of the firm through investment banking, which is largely about dealmaking. The caricature of a dealmaker is someone who only wants to get the deal done, and cares not one fig for the consequences. Indeed, a lot of investment-banking deals involve undoing mergers put together by previous dealmakers.

The meltdown in the financial markets was arguably due in large part to dealmaking while ignoring the bigger picture. And Mr Paulson has stumbled from one crisis to the next, often fixing one in a way inconsistent with his approach to the next, with little indication of having a bigger strategy.

This is both clever and facile, in a very Economisty way: it’s the sort of thing which reeks of Oxford Union debates. Still, it’s cute, and it might even have a glimmer of truth to it. Although at this point I think we’ve had more than enough Goldman chairmen as Treasury secretary, thankyouverymuch.

Paulson is proof positive that having run an investment bank does not qualify you to run Treasury: the Washington job requires a deeper understanding of policymaking — how to do it, how not to do it — than Paulson, for one, has. Remember that Rubin spent three years as head of the National Economic Council before moving to Treasury. I suspect that was a much better training for the job than his years as an arbitrageur.

Incidentally, does anybody have a copy of Andrew Sullivan’s TNR cover story on the Economist from June 1999? It’s one of those things I’d like to have lying around, and for some reason it doesn’t seem to be online anywhere.

Update: Here it is. Thank you to Dave, in the comments, for finding it.

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Wall Street CEOs vs Geithner

Posted on November 25, 2008 by Felix

The single most important job on Tim Geithner’s impressive resume, in terms of qualifying him to be Treasury, secretary, is the job he holds now: president of the New York Fed. As such, he’s the Fed’s chief liaison to Wall Street, and he works closely on a daily basis with the heads of America’s largest banks.

If you want to ask the people who know Geithner best, then, whether he has the right stuff for his new job, among the people you’d be most interested in hearing from would be Wall Street’s CEOs. Andrew Ross Sorkin talked to some of those CEOs, and came back with a surprising report:

Mr. Geithner’s involvement in several ultimately ill-fated efforts to buttress the American financial system is the very reason some Wall Street C.E.O.’s — a number of whom spoke on the condition of anonymity for fear of piquing the man who regulates them — question whether he’s up to the challenge.

I’m not a fan of the way this information is being presented by the New York Times. The NYT business section has a much blurrier line between reporters and columnists than the rest of the paper, and this story is pegged as a column rather than as a news report. As such, it can be read as Sorkin’s own opinion — this is what I think of Geithner, after talking to Wall Street CEOs — rather than as a more objective and frankly more interesting story about what Wall Street CEOs think of Geithner.

I also fail to see the point of the unnecessarily coy "number of whom". Why does Sorkin feel unable to tell us how many CEOs he talked to for this column? Even if it’s only two, that’s still two more CEOs than most reporters have talked to since Geithner’s appointment was announced — it’s hardly a figure to be ashamed of.

That said, read in context, the column is very interesting. Sorkin often uses his column as a platform for Wall Street CEOs to get opinions off their chests, and in this case they seem to be sending a message that they haven’t been particularly impressed by Geithner’s tenure at the New York Fed. Who might they be sending that message to? Obama and Summers, is my guess: this is a way of giving Summers the upper hand when it comes to setting policy decisions. Why the CEOs would want Summers in charge rather than Geithner, however, I couldn’t say.

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Berkshire’s Puts: Not Such a Great Idea

Posted on November 25, 2008 by Felix

Andrew Clavell delves into the murky world of Berkshire Hathaway’s equity put contracts, and concludes:

The put owner has been forced into purchasing a lot more credit cover in a nasty cross gamma effect. No wonder BRK’s credit spreads have gone bananas; they will likely remain volatile as there is a short cross gamma hedger out there for the next 20 years.

Moreover, as a result of the credit hedger’s scramble for CDS protection, his mark to market on the original option is potentially worth only half the value had he been fully collateralised.

And you thought Warren Buffett was clever. In hindsight, he clearly never hedged against the impact of creating a short cross gamma hedger.

What’s more, there’s a good reason for the hedger to be cross: thanks to his hedging, his $4.5 billion put is today worth only $5 billion, despite the fall in the market and the rise in volatility. If only he’d got some collateralization, it would be worth $10 billion, and he’d be much more likely to get a hefty annual bonus.

It’ll be interesting to see how the details of how Buffett values the put in his next annual report. Although Berkshire’s CDS spreads make the put worth only $5 billion to the hedger, it’s still a $10 billion liability to Buffett, at today’s volatility levels. What’s more, the $4.5 billion that Buffett received for selling the put is almost certainly worth substantially less than that today, especially if Buffett invested it in Goldman Sachs.

Whitney Tilson still thinks this was a spectacular deal for Buffett:

We don’t know the details of how the puts are structured, but let’s assume the payouts are on a straight-line basis, such that if the indices are down 50% 13.5 years from now – another 17% from today’s levels – then Berkshire will have to pay $18.5 billion (half of the $37 billion maximum). That would be a painful loss, to be sure, but one that Berkshire could easily afford: the company’s earning power today exceeds $10 billion per year and, as of the end of October, its net worth exceeded $111 billion, both figures that will be much higher more than a decade from now.

It’s also important to understand that the loss in this doomsday scenario would not be $18.5 billion minus $4.85 billion because Buffett can invest the $4.85 billion for the entire period. If he earns a mere 7% return for 13.5 years, $4.85 billion becomes $12.1 billion (at a more likely 10% annually, it would be $17.6 billion).

I find this unconvincing, because Tilson ignores the fact that Buffett’s investments are highly correlated with the stock market as a whole. Even the biggest Buffett fan, I think, would have a certain amount of difficulty swallowing the idea that Buffett can get a +10% annualized return on his $4.85 billion over a long period of time in which the stock market falls by 50%.

I don’t think the equity puts come anywhere near to threatening the future of Berkshire Hathaway. But equally, I’m not at all sure they were such a great deal for Buffett: not only did he write puts at the top of the market, but he also invested the up-front premium at the top of the market as well, raising a significant possibility that he would lose money on both the puts and his investments simultaneously.

Posted in derivatives, insurance | 1 Comment

Art World Cost Saving Datapoint of the Day

Posted on November 25, 2008 by Felix

According to Alexandra Peers, the trendy way to economize these days is to increase Champagne consumption: at Art Basel Miami Beach, she says, "many events are doing just Champagne, to cut out the bartenders."

I can’t make the sums work here. Champagne at $30 per bottle works out at $5 per glass. A bartender serving 100 drinks an hour and making $40 an hour would cost just 40 cents per drink. Given that just about anything will cost less than Champagne when it comes to the per-glass cost of liquor, I can’t see how this is any economy at all.

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Shrinking Outstanding CDS

Posted on November 25, 2008 by Felix

Good news on the CDS front: Markit and Creditex are quietly and efficiently netting out contracts, bringing down notional amounts in single names alone by more than $1 trillion at this point.

This is a sensible way to reduce risk in the CDS market: instead of trying to net out a huge number of contracts in one big session, bring down notionals slowly, week in and week out. Here’s the chart showing how many CDS have been compressed on a week-by-week basis: as you can see, if anything the amount is rising over time, with last week seeing a record $224 billion compressed. As this process continues, systemic risk is reduced and positions are helpfully clarified. It’s not an alternative to an exchange, but there’s a lot to be said for doing something now rather than hoping to do something bigger later.

notionals.jpg

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The Broken Treasury Market

Posted on November 25, 2008 by Felix

If you want to worry about naked shorting, don’t worry about the stock market, where it’s vanishingly rare. Worry instead about the Treasury market, where it’s a major problem.

Helen Avery has a huge and important story up about failures-to-deliver in the Treasury market. It’s crucial that there be trust in the Treasury market, but right now, with fails reaching the trillions of dollars, the market is looking increasingly broken.

Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under.

The problem is that there’s little incentive for brokers to deliver bonds they’ve sold but don’t own, since the only penalty for failing to deliver is to pay the Fed’s overnight interest rate, which is less than 1%. If that broker goes bust before it can deliver the bonds, then the person who thought they were buying Treasury bonds ends up with nothing but a few days’ worth of nugatory interest.

The Bond Market Association seems to be the villain of this story, consistently pushing back against attempts to impose steeper penalties on brokers who fail to deliver Treasury bonds they’ve sold. And of course there’s the general deregulatory trend of recent years, which has mitigated against new regulations. But this should be a top priority for Treasury and the Fed, now. This is not something to wait until January.

(HT: Matt Tubin)

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Demonic Short Sellers

Posted on November 25, 2008 by Felix

Jim Surowiecki says, quite rightly, that short selling can cause viciously self-fulfilling downward spirals, especially in financial stocks. But reading the WSJ’s long and alarmist tale of what happened to Morgan Stanley in September, I’m more convinced than ever that short-sellers, be they in the stock market or the CDS market, are not the cause of current problems.

I’m with Jim Chanos on the subject of the WSJ story: he writes that

The WSJ piece, despite its sensationalist headlines, actually confirms what we have been telling Washington for some time now. That is, that most of the "short activity" in the banks/brokerages, was to hedge embedded long exposure to these institutions, often by other banks/brokerages! These were NOT "bear raids", but prudent fiduciary-related decisions made by these entities to protect their capital/investors. An important story to the Financial Crisis narrative so far.

The bulk of the WSJ story concerns the activity of September 17, which precipitated the SEC’s short-selling ban. But then, at the very end, comes the kicker:

The cost of insuring its debt has come back down from its peak, but its stock remains in the doldrums. On Friday, it was trading at $10.05 a share in 4 p.m. composite trading on the New York Stock Exchange — less than half of the $21.75 close on Sept. 17.

Even now, after yesterday’s massive rally and a further uptick this morning, Morgan Stanley stock is trading at less than $15 a share. Clearly the stock price is not being driven down by manipulative speculators taking advantage of an illiquid CDS market to sour sentiment. Robert Teitelman says that the WSJ story tells the tale of "the hellish tangle of unforeseen consequences of certain derivative instruments" — yes, he’s jumping on the CDS demonization bandwagon as well.

In fact it tells a much simpler tale: Morgan Stanley’s counterparties were forced to buy CDS protection to hedge their exposure to the bank, and Morgan Stanley’s hedge-fund clients withdrew a lot of money, not in a bear-raid attempt to kill it off, but because prudence demanded that they do so, and also because they were understandably upset about John Mack’s role in getting the short-selling ban put in place. That ban devastated many hedge-fund relative-value and convertible-arbitrage strategies and caused a lot of anger in the hedge-fund community.

Short sellers are known by many names: right now, the WSJ seems to like to think of them as "speculators", which carries a tinge of opprobrium. But they’re also known as "noise traders" and "liquidity providers": the people who ensure that there’s so much volume in the stock that bid-offer spreads are very narrow and large trades don’t move the market very much. Check out the biggest single short-selling trade named in the article:

Third Point, after seeing the surge in swaps prices, made a substantial bearish bet, selling short about 100,000 Morgan Stanley shares, trading records indicate. Third Point quickly closed out that position for a profit of less than $10 million, says one person familiar with the trading.

In other words, as Morgan Stanley shares were reaching their intraday lows, Third Point was buying, rather than piling on and selling more. And in general, as any stock-market trader will tell you, large short interest tends to drive stock prices up, not down.

So yes, it’s possible that those demonic short-sellers were responsible for the fall not only in Morgan Stanley’s share price, but also in Citi’s at the end of last week. But it’s also possible that it was just old-fashioned sellers, who weren’t selling short but were rather selling down their existing long positions. And it’s also possible that it wasn’t selling at all, but simply a lack of buyers willing to place bets on a fragile institution with a possible leadership vacuum. We simply don’t know — which is why it’s silly to assume that short-sellers were to blame.

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Citi: Will the Bailout be Enough?

Posted on November 25, 2008 by Felix

The WSJ has details of how the Citi bailout was structured:

If the U.S. were to take another equity stake, Treasury Secretary Henry Paulson wanted it to be small, since otherwise the government would end up owning Citigroup. The officials worried that appearing to nationalize the company would further roil markets. They agreed that $20 billion was the limit for what they would invest.

The policymakers also discussed whether Mr. Pandit should remain CEO, say people familiar with the talks, and agreed that removing him would send a bad signal to the markets and potentially destabilize the company.

Somehow, they are sure this will be sufficient to cure what ails Citi:

Some officials involved in the rescue are hopeful that they finally got it right by creating a template for future efforts, if needed. They say the decision to guarantee $306 billion in troubled assets — a first among all the implemented rescues — will help ward off the short sellers who led the way in driving down Citigroup’s stock last week. They say their main goal right now is shoring up confidence in institutions, and that the weekend effort seemed, at least Monday, to have succeeded at that.

Color me unconvinced. If there’s one thing we’ve learned during this crisis, it’s that just-enough is never enough.

Now is not the time to worry about optics: how it would look to nationalize Citi, or to squeeze out Pandit. Paulson would have done well to call up Gordon Brown for advice: if you’re putting in the kind of money which gives the government a majority stake, then so be it. And the owner naturally has the right to choose the CEO.

What’s more, I can’t think of anybody whose confidence in Citi has been shored up by the weekend’s cash injections, especially since the mechanism — weird second-loss asset guarantees on a small part of Citi’s balance sheet — is so opaque. If it was short sellers who "led the way in driving down Citigroup’s stock last week", I don’t for a minute believe that they will have decided that Citi is now untouchably secure. No bank with as little tangible common equity as Citigroup counts as secure — and its official communications are also helping to reinforce the sense of panic.

I asked Citi about the email I received yesterday morning, but ended up even more confused than before. It says quite explicitly that interest-bearing checking accounts containing more than the $250,000 FDIC maximum will be guaranteed by the Temporary

Liquidity Guarantee Program — but that doesn’t seem to be true, since Citi’s interest-bearing checking accounts with that much money in them yield more than 0.50%. Unless Citi starts slashing its deposit interest rates sharpish, I’m not sure how they can justify the email’s claims.

Update: And that’s exactly what Citi is doing! Per an email I just received from them:

In order to continue the unlimited account coverage during the FDIC’s

Temporary Liquidity Guarantee Program, Citibank has made the decision to

reduce all interest rates on interest checking accounts to no more than

.50% and will commit to maintain all of the interest checking accounts

at a rate no higher than .50% through December 31, 2009. Citibank chose

to participate in this program on behalf of its customers to provide the

benefit of additional FDIC insurance coverage.

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Extra Credit, Monday Edition

Posted on November 24, 2008 by Felix

The 7 Who Could Have Saved Citi: "Sandy Weill’s dream of creating an impenetrable financial colossus really has been realized." At JP Morgan, under Jamie Dimon.

Headline du Jour: Move Along — No Rescue Talks Here: Apparently the White House had no idea there were any rescue talks going on.

Conversations From the Shop Floor: Beware Long Term CRAP.

Assembly Line: Debunking The Myth Of The Exceedingly Well Paid U.S. Autoworker.

Executive Offices of the President: Know your Councils! NEC, CEA, DPC, NSC — and, of course, the CEQ.

And finally, this is what passes for financial punditry on the television these days:

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Art Market Datapoint of the Day

Posted on November 24, 2008 by Felix

There aren’t many minimalist artworks with their own Wikipedia page, but Carl Andre’s Equivalent VIII is one of them, thanks to the uproar it caused in the UK press in the 1976. To this day, a huge proportion of the UK population would know exactly what you were talking about if you referred to "the bricks".

Equivalent VIII is one of eight works comprising 120 fire bricks: they’re all two bricks high, and this one is six brick headers wide by ten brick stretchers long. Much of Britain was outraged when the Tate spent £7,000 on the work in the 1970s.

One of the other works, Equivalent V (12 brick headers wide by six stretchers wide), recently came up for auction at Sotheby’s, and was bought for $1 million by MoMA, in an act of bargain-hunting: MoMA was the only bidder, and got it for significantly less than its $1.2 million to $1.6 million estimate.

I’m not surprised that there’s no controversy at all about MoMA buying a pile of bricks for $1 million, while there are to this day Brits who think that the £7,000 spent by the Tate was a waste of money. But it’s interesting that interest in the work fell away substantially the minute that the market started falling, leaving the window open for MoMA to snap the work up on the "cheap". In a recession, people want paintings to hang on walls, not icons of minimalism.

I am glad though that the Tate’s bricks will have a sibling at MoMA. They can be a bit like Cleopatra’s Needles — one on the Thames, the other in midtown Manhattan. Make sure you see them both!

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Why Citigroup Imploded

Posted on November 24, 2008 by Felix

Brad DeLong and Prince Alwaleed both have theories on why Citigroup imploded as it did. Brad thinks its a combination of factors — bad modelling of tail risks; bad modelling on the subject of house prices; an unprecedented spike in risk premiums — all mixed up with the inherently levered-and-unstable banking business model. Add in some bad luck and lumbering size, and you get what we got.

Prince Alwaleed, on the other hand, thinks it’s all Chuck Prince’s fault.

I come down in the middle on this one. Yes, banking is inherently risky, and susceptible to bank runs and other tail risks. But all good career bankers understand that, on a very fundamental and intuitive gut level — which is exactly why banking and bankers have historically been so boring.

What happened at Citigroup was that the good career bankers, as typified by John Reed, were pushed out. Sandy Weill and Jamie Dimon, for all their aggressiveness, did have a gut-level understanding of the banking business, and in hindsight it’s pretty clear that Sandy’s Citigroup did not take on the kind of crazy model-based risks that Prince’s Citigroup seemed very comfortable with. Neither, for that matter, did Dimon’s Bank One, or Dimon’s JP Morgan.

But Prince was not a career banker, he was a lawyer, brought in to be strong where Weill was weak — which was mainly in dealing with regulators around the world. But when Tommy Maheras and other big swinging dicks from Salomon Smith Barney started making enormous sums of money in structured debt products, Prince considered his role to be cheerleader rather than risk manager, and told them all to keep on dancing. I think it’s fair to say that if Dimon had been in charge rather than Prince, a lot of those mistakes would never have happened.

What about Rubin and Pandit? They’re investment bankers, and investment bankers often have a naive faith in the powers of dynamic hedging and risk management to be able to protect large institutions from enormous unexpected losses. At Goldman Sachs and Morgan Stanley that might even be the case — but at Citigroup, with its super-senior CDO tranches and its liquidity puts and its off-balance-sheet investment vehicles, the only coherent way to manage risk is to be very conservative at every point in the chain.

At Goldman, you can have the mortgage desk taking one type of risk and the CDS desk taking another type of risk and a very clever risk manager overseeing them both, often the CEO himself, ensuring that the risks they take cancel each other out. At Citi, just as at all commercial banks, that could never happen: once the risk is on the bank’s books, it just sits there, festering, until it either matures away or it blows up. That’s why commercial banks are more boring than investment banks. And that’s why it’s fair to pin a fair amount of Citi blame on managers from the investment-banking side, such as Rubin and Pandit and even Prince, who ran the investment bank before he was elevated to CEO.

Prince Alwaleed says that he’s looking for Citi’s share price to soar quickly back to its former heights, just as quickly as it fell. With shareholders like that, I’m not optimistic about Citi’s long-term prospects. This company is not amenable to quick fixes; rather, it has to get back to its commercial-banking roots, and start doing boring things like training up good loan officers and taking full responsibility for underwriting the asset side of its balance sheet. If it takes on more risk in an attempt to boost the share price, things are likely to continue to deteriorate.

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Obama’s Real Economic Team

Posted on November 24, 2008 by Felix

On Saturday, the WSJ knew exactly who would be joining Tim Geithner in Barack Obama’s economic team:

Congressional Budget Office director Peter Orszag will be Mr. Obama’s budget director. Jacob Lew, a former Clinton budget director, will head the White House’s National Economic Council. Jason Furman, the economic policy director of the Obama campaign, is likely to be Mr. Lew’s deputy. And Austan Goolsbee, a University of Chicago economist and long-time policy confidante, is expected to chair the Council of Economic Advisers.

Today, the official announcement was made. And it features none of the names on the WSJ’s list.

It turns out that the NEC director will be not Lew but Larry Summers; the CEA director will not be Goolsbee but Christina Romer. So far there’s been no mention of Furman, either; the WSJ is surely hoping that Orszag’s appointment will be announced tomorrow, as Jonathan Weisman, one of the authors of the original report, claims today.

This misstep doesn’t make the WSJ look good, of course, but it also reflects badly on the Obama-Biden transition team, which seems to be significantly leakier than the Obama-Biden campaign was, and not in a good way. If I were Lew or Goolsbee I’d be furious at the WSJ report, and at whoever the sources were for it, because now they both look as though they had the jobs in question until someone better came along.

Summers and Romer are both first-rate economists who will serve Obama very well. But let’s just hope they have better message control than Obama’s current team.

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