The Audit
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November 20, 2009 05:46 PM
Friday Links: Smart Money, Rodney King, Dilution
Remember that $500 million program for small businesses Goldman Sachs announced along with its apology earlier this week? It was splashed on C1 of The Wall Street Journal and A1 of The New York Times, which wrote that "the bank said Tuesday that it would spend $500 million — or about 3 percent of the $16.7 billion it has so far set aside to pay its employees this year — to help thousands of small businesses recover from the recession."
But Smart Money went and checked the numbers. After tax writeoffs and interest earned on loans, the Goldman program will cost it less than a third of that, or about $150 million.
Nice work.
— Cringeworthy lede of the day, in a Wall Street Journal news column:
As Rodney King once said, famously and in a quite different context, "Can we all get along?"
Mr. King, the victim of a police beating in Los Angeles, was referring to race relations, of course. But the same plea now could be applied to relations between the Obama administration and the business community.
— Here's something much better from the WSJ: Some nice reporting on a bit of shareholder unhappiness with Goldman Sachs on compensation.
Despite record net income and compensation at Goldman as markets rebound and the firm outmuscles weakened rivals for business, analysts expect its 2009 earnings per share to be 22% lower than in 2007 and roughly equal to its 2006 earnings, according to Thomson Financial.
That's because Goldman (an Audit funder) issued 100 million new shares to recapitalize itself, the Journal reports. That had the effect of diluting existing shareholders—but not the pay of Goldman's bankers.
— The New York Times takes a look at the looming problems at the FHA, which has become a sort of lender of last resort for the housing market. Its lending was much better than the private sector's during the bubble, but it's still had serious problems. A 3 percent down payment is hardly enough equity to cushion any sort of price decline.
— And Dow Jones's Michael Rapoport (story is not on the Web) tallies up the number of banks in danger of failing. It's not pretty: The number has surged 30 percent just since August to 489. The FDIC's official troubled-bank count comes out next week. And he names some names:
One of the biggest is Frontier Bank, an Everett, Wash., institution with $3.8 billion in assets owned by Frontier Financial Corp. (FTBK). A whopping 25% of Frontier's loans are nonperforming, and its capital ratios are well below the "well-capitalized" levels--total risk-based capital is 5.35%, a level that regulators consider "significantly undercapitalized."
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November 20, 2009 05:31 PM
Bloomberg Finds the Fed on Bubble Watch
Bloomberg gets a nice scoop that the Federal Reserve is apparently worried about the new bubble it's inflating.
Federal Reserve officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices, according to people with knowledge of the matter.
Global stocks are up 71 percent from March. At the same time gold is soaring. So is oil.
Much of that rebound is due to the diminished possibility of near-term apocalypse, but many, including "finance officials in Asia," say that the rapid increase is speculative excess. It would have been nice if Bloomberg had said which officials. One was the top banking regulator in China, which is more important than, say, an official at some bank.
The Fed's kind of damned if it does and damned if it doesn't here. Keep rates low and risk further inflating a bubble that will someday burst or raise rates and hurt the already-shattered economy, which is undergoing the process of deleveraging.
Evidence for that comes as Bloomberg drops in that lending is down at Bank of America and Wells Fargo by 6 percent and 14 percent, respectively. This information isn't properly contextualized in the story, but I think it was included because it could indicate that the big banks are trying to preserve capital in case of a downturn.
Of course, not borrowing as much money and spending it now will reduce current economic growth, but it will boost future sustainable economic growth rather than a mirage now.
But Bloomberg does well to include the Quote of the Month here, relevant as it is:
John Mack, chief executive officer of Morgan Stanley, said banks’ behavior justified a Fed crackdown.
“We cannot control ourselves,” he said yesterday at a panel discussion hosted by Bloomberg News and Vanity Fair at Bloomberg LP’S headquarters in New York. “You have to step in and control the Street.”
Goldman apologizes and Morgan Stanley shows humility all in one week. How about that?
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November 20, 2009 10:12 AM
WSJ Editorial Scrutinizes Geithner on AIG Counterparties
I wrote twice on Tuesday about the bizarre Tim Geithner quote that "the financial condition of the counterparties was not a relevant factor" in his decision to bail out AIG. I called it a "stunner" and said it ought to be "second-day-story number one."
Now we're to the fourth day and it's just us and now The Wall Street Journal editorial page that have even reprinted the quote (Reuters's James Pethokoukis quotes the WSJ quoting it today), which the WSJ's news side had in its first-day story but didn't flesh out.
The Journal leads Review & Outlook today with an editorial on the quote, which Neil Barofsky, the Special Inspector General of the TARP, included in his AIG report released Tuesday.
In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.
That pretty much blows a hole in Geithner's—remember, he headed the New York Fed then—argument, which at best seems like a bumbling headfake to draw attention away from the big banks, foreign and domestic, he bailed out by paying full price for their trash.
Why would the Fed bail out those CDS contracts if the financial condition of the counterparties was not a relevant factor"?
Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?
The Journal uses this screw-up for its deregulatory agenda, which it's perfectly fine to do, noting that Geithner has said that he was worried about the insurance part of AIG, which unlike its CDS was regulated. Maybe so.
But it sure would be nice to see some news reporting explore what's going on here.
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November 20, 2009 09:08 AM
What’s a News Brief Worth?
The Journal Inquirer, of Manchester, Conn., which over the summer forced its larger rival, the Hartford Courant, to admit to plagiarizing some of the JI's local news coverage, took its dispute a step further yesterday, suing the Courant for copyright infringement and seeking unspecified money damages.
The JI has never been a shrinking violet when it comes to taking on the Courant, so the hardball approach can been seen as part of a long-running David-and-Goliath competitive saga.
And, to be sure, the sight of one newspaper suing another doesn’t exactly make journalists want to throw hats in the air. Newspapers have enough problems without dragging each other into court.
But there is something heartening about a new organization aggressively defending its rights to its work product, no matter how pedestrian and unglamorous that work product might be. In this case, the copy in dispute consists of local news briefs—the short items that most readers skim over without a thought to where they came from.
The JI’s lawsuit (PDF) provides a partial inventory of items it says were plagiarized. These stories are not exactly Watergate:
JI: “Bolton Lakes Sewer Project Denied Funding for Next Phase of Work,” July 31.
Courant:
“Sewer Project Funding pulled by USDA,” Aug. 4.JI:
“Construction of Regional Emergency Center Gets Grant,” Saturday-Sunday, Aug. 1-2.Courant:
“Emergency Center Gets Grant for Equipment,” Aug. 6.JI:
Greenway Trail Plan Gets Green Light from East Windsor Selectmen,” Aug. 5Courant:
“Grant Would Fix Bridge, Help Fund Greenway,” August 7.The stories all had bylines of reporters at the respective papers. The fact that the Courant took the facts from the JI stories and wrote its own version, without attribution, made it plagiarism, as the Courant itself admitted last summer.
But the JI’s main point, as expressed in lawsuits and columns, is that it’s not fair for one paper to have to pay to send reporters to gather news for meat-and-potatoes stories only to have the salient facts lifted by another, even with attribution.
It's another wrinkle to the larger question of whether one publication is doing another one a favor by using its content with attribution, a link, or whatever. The answer is that it depends on the context, but the answer certainly is not an automatic yes.
In this case, the JI says the borrowing was a simple cost-saving ploy by its rival:
The Courant is accused of using its competitor’s work to make up for the work formerly done by the Courant’s own reporting staff, which was cut in half in the last two years as the economy weakened and the Courant’s parent company, national media corporation Tribune, fell into reorganizational bankruptcy.
(As an aside, I enjoyed the Jackie Chiles-esque language of the suit:
The Courant’s theft of the JI’s stories was, the suit says, “immoral, oppressive, unethical, and unscrupulous” and “caused substantial injury to readers, competitors, and advertisers.”
A Courant spokeswoman had no immediate comment this morning.)
The Courant, to its credit, has runs stories on the suit. A Courant spokeswoman declined to comment to me.
If the question is what local news briefs are worth, the JI’s answer is clear: they're worth suing over.
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November 19, 2009 07:44 PM
Thursday Links: Custard Ken, (More) Media Layoffs, Chainsaw Guy
The Wall Street Journal has a very good page-one leder on Ken Griffin's giant hedge fund firm Citadel, which is not as giant as it was, cratering 55 percent last year (it's made up a decent amount of it back this year). The Journal gets inside the company to put some color on its well-known woes.
It reports that the "dethroned hedge-fund magnate" is reduced to "cold-calling investors" to drum up business. Oh, and there's this: "He occasionally dispatches his driver on a 200-mile round trip to fetch milkshakes from LeDuc's Frozen Custard in Wales, Wis., near where Mr. Griffin grew up. The folks at LeDuc's refer to the financier as "the man of a thousand shakes," based on a birthday order in 2004 that was so big, it got shipped to Chicago in a truck."
And the Journal gets a pretty big scoop here, though it buries it somewhat that Citadel, with just $20 billion in assets at its peak, was considered too big to fail (emphases mine):
The speed and depth of the global crisis, ironically, may have helped Citadel pull through.
So many other firms were folding that some lenders -- worried about ripple effects if a giant like Citadel were forced to sell big chunks of assets into the dysfunctional markets -- were reluctant to make moves that might have imperiled the firm, according to people involved in those discussions. In particular, regulators pressed Wall Street firms including Deutsche Bank AG not to make drastic changes in their dealings with Citadel, according to these people.
Good work by the WSJ.
— It was another dismal day to be a professional journalist. There was the Bloomberg BusinessWeek massacre today, with layoffs begun that will reportedly total a hundred—one quarter of the news staff. Stephanie Clifford of The New York Times writes that there may be a pattern:
“If you think about voice, they seem to be getting rid of it,” said a BusinessWeek employee who spoke on condition of anonymity. “Every indication we have from Bloomberg people is their model is The Economist, which has a singular voice, not multiple voices.”
So far the layoffs include media columnist Jon Fine and personal-technology columnist Stephen Wildstrom. This comes after the killing of the Maria Bartiromo and Jack Welch columns—no loss.
Meanwhile, the Associated Press is gutting its newsroom. Gawker has a running list of layoffs, which total at least seventy-one so far.
— The New York Times posted a pretty good story today on the egregious regulatory "lapses" that enabled the bubble.
But, hey, NYT: You might want to note the political environment these regulators were working in. George W. Bush—remember him? Remember that whole ideology of deregulation thing? Remember the chainsaw guy at the OTS? It's not a regulatory lapse if you don't regulate intentionally.
And yikes:
Of the nation’s 8,100 banks, about 2,200 — ranging from community lenders in the Rust Belt to midsize regional players — far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators, according to Foresight Analytics, a banking research firm.
About 600 small banks are in danger of collapsing because of troubled real estate loans if they do not shore up their finances soon, according to the firm.
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November 19, 2009 02:18 PM
Prospect’s Take on Too Big to Fail
The British magazine Prospect has one of the better explainers on too big to fail I've yet seen. It's a very good overview of the problem—a one-stop shop if you still haven't figured out why we're always calling on the press to emphasize it.
It starts with an excellent lede recalling analyst Dick Bove's "buy" recommendation of Citigroup several months ago—a call made despite its loan portfolio being "one of the poorest ever written." But Uncle Sam had backstopped it, so it had more upside potential than downside. Heard that phrase "socialize the losses, but privatize the gains"? There you go.
And it lists some of the stunning growth of banks over the last decade:
As recently as 1999, Royal Bank of Scotland had assets of just £89bn. By the time it was rescued last autumn, its balance sheet—boosted by the takeover of Dutch bank ABN Amro a year earlier—had swelled to almost £2.4 trillion.
RBS is now 84 percent owned by the government.
Jonathan Ford and Peter Thal Larsen do a good job of debunking the excuses for TBTF:
Why did the banks expand so fast? Apologists have advanced two possible explanations. One is that the globalisation of capital flows has created the need for large financial institutions that can operate around the world. The second is that very large banks are more efficient.
The first is difficult to accept. If you spool back ten years, Goldman Sachs was considered to be a strong global bank. Its balance sheet is now almost five times bigger. It is simply hard to believe that the ideal size for a global bank should have risen so sharply in a single decade.
The efficiency case is also weak. Much of the academic evidence contradicts the idea that size itself makes a bank more efficient. A 2002 report for the US Federal Reserve looked at banking mergers in the US, Europe and Japan and concluded that scale provided advantages only up to a low level of total balance sheet assets (about $50bn). Beyond that there were disadvantages in greater size arising from the complexity of running such large organisations—especially multinationals.
Plus:
Companies would prefer to have more, smaller banks so that they can spread their business to ensure they get the best deal. Most large commercial or investment banking transactions, after all, involve a syndicate or group of banks to divide up the risk.
So why do the masters of the universe care so deeply about scale? For one, masters tend to prefer big universes rather than small. But, of course, it's a pay thing:
But while bigger banks add little for the customer or shareholder, they have proved lucrative for top executives. Individual bankers have had an overwhelming incentive to pursue size for its own sake.
Prospect doesn't go into it, but if you've got fewer companies in an industry, those at the top will get paid more. It's pretty simple.
It's when Ford and Thal Larsen get to the possible fixes that they run into a little trouble. They dismiss out of hand "arbitrarily setting caps on the size of banks." But who's suggesting that? Surely there's a way to study what might be an optimal limit on concentration rather than just pulling a number out of a hat.
And they dismiss reinstating the Glass-Steagall separation of trading from traditional deposit banking as not making the system safer (although there's plenty of room to disagree with that), since it would still allow for giant investment banks like Goldman Sachs and Morgan Stanley. Well, it's not like Glass-Steagall II would have to be the limit of any new regulation. It could, of course, be combined with those limits on size and leverage for all financial institutions—whether Goldman, Citigroup, Bank of America, PIMCO, or Citadel.
Here's what Ford and Thal Larsen recommend:
Restoring Glass-Steagall may be a step too far, but banks should be forced to separate risky activities and fund them without recourse to the guaranteed parts of the institution.
What's the difference—if that was really a sturdy firewall? Does anybody believe it would be?
And would raising capital requirements really be a way to rein in Giganto banks? The European banks themselves were the prime examples of how capital requirements aren't exactly airtight. PBasically, They bought credit insurance from AIG that enabled them to account for higher capital reserves than they actually had, since the credit risk had supposedly been offloaded to AIG. Haven't heard of regulatory capital arbitrage (and who doesn't love digging into the arcana of such things)? Joe Nocera had a nice column explaining it a few months ago in The New York Times. Policing such things would require smart regulators, a fix the authors rightly question earlier in the piece.
But this is interesting:
Lastly, to deal with the risk of global banks becoming too big to rescue, such institutions should be organised into a confederation of national subsidiaries, each with its own reserves of capital. In a crisis, governments would then be responsible for bailing out their local subsidiary. This would prevent the full costs of rescuing a large bank from falling onto the taxpayers of the bank’s home country.
Which might help prevent a repeat of the spectacle of the United State government bailing out Deutsche Bank, UBS, and Société Générale with tens of billions of dollars through AIG.
Even if their solutions might not be quite bulletproof, no one's are, and it's a good thing that the authors include them in their piece. This one's highly recommended.
(h/t Felix Salmon)
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November 19, 2009 10:23 AM
A Good Bloomberg Profile of Elizabeth Warren
Bloomberg this morning posts a really good profile of Elizabeth Warren, who, despite much of the press's dismissal of her earlier this year, has become one of the most influential people in Washington. Her Consumer Financial Protection Agency is very likely to become law soon, and it's quite possible she could be picked to head it.
This has the once all-powerful, now just all-but-all-powerful banking industry sputtering:
If Congress creates the watchdog, the director should have “a working knowledge of how financial institutions operate,” said Scott Talbott, the financial roundtable’s chief lobbyist.
Translation: The industry wants somebody it can regulatory-capture. You know, like I said yesterday about Josh Tyrangiel taking over at BusinessWeek, Someone who’s not been schooled (and blinkered) in “this is how it’s done” is more likely to see problems in how it’s done. Warren infuriates the press's Church of the Savvy, as Jay Rosen calls it, that says "you can't do that"—play between the 40 yard lines.
Bloomberg doesn't buy into that and I've seen a loosening in the derision of the press toward Warren as it's become clear how influential she has been—remember that Bloomberg story recently opening with President Obama asking if Larry Summers and Tim Geithner had read Warren? Bloomberg adds here that she pow-wows with Barney Frank, head of the key House Financial Services Committee, twice a week on the CFPA legislation.
There's some really sweet color in this story, too. Warren, like me, is an Okie, so in her Wall Street internship "At first, she said she thought she was being made fun of as a rookie from the sticks" (I can sympathize):
“I got out my little notebook, and the senior partner started talking about frozen pork belly futures,” Warren said, recalling an early meeting. “How dumb do they think I am? I wasn’t going to fall for it because I am a sophisticated person. It finally occurs to me that he is serious, and that there is a market for pork bellies.”
Reporters Mark Pittman and Bob Ivry correctly use the term "populism," unlike so many others in the press, in referring to Warren's ideas. Basically, it's prioritizing the interests of the vast majority of the population, left and right—“We were out in Colorado at a hearing for rural finance and people came up to her,” Silvers said. “That wasn’t exactly Obama country out there, if you know what I mean"—over the narrower interests of the entrenched elite. Also: common sense.
For instance:
“Credit cards are like snakes: Handle ‘em long enough and one will bite you,” she said. “You have to remember what are incomes to banks are outgoes to families.”
Or:
“I made a decision at the beginning that the experts wrecked this economy and the public has a right to know what’s going on,” she said. “It’s our economy on the line and the experts can’t be trusted. I want everyone to be part of the solution to how we want to change our economic world. If it’s risky or makes me look stupid to someone, so be it.”
And you just have to step back and admire this:
Warren, who graduated from high school at 16 and said she prefers Coors Light beer over iced tea.
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November 18, 2009 08:03 PM
Wednesday Links: Philly’s Mod Policy, Fraud Force, WoW
The New York Times looks at Philadelphia's way of dealing with the foreclosure crisis: Forcing homeowners and lenders face to face to try to hash out a modification before the bank can foreclose. This is good reporting that remind us how heavy this stuff is. This third generation owner of a home got a reprieve with the help of the city-provided attorney:
“Thank you so much,” Mr. Hall said softly, his body shaking with pent-up anxiety now tinged with relief. “It’s a lot of weight off of my shoulders.”
What's stunning about this is how small the amounts in question can be. For Mr. Hall, an out-of-work roofer, the total balance on his note is $63,000, but he got into an adjustable-rate mortgage and his interest rate has skyrocketed, nearly doubling his payments to $950 a month. The Times doesn't give us the information, which would have been nice, but that would imply an interest rate approaching 20 percent, which is just nuts when you can get a 30-year note for under 5 percent.
You'd think a bank would be smart enough to figure out it's better to knock this guy's interest rate back down to where it started so he has a good chance of paying it, rather than for sure losing most of its money through foreclosure costs. Philly's policy forces them to consider these things, unlike Obama's:
... in Philadelphia there is one crucial difference: the mortgage companies have no choice but to participate. They have to attend the conferences and negotiate in good faith or they cannot proceed with a sheriff’s sale.
Good story.
— Here's interesting news that the Obama administration is setting up a task force to investigate the "unscrupulous executives, Ponzi scheme operators and common criminals" that helped unleash the financial crisis. Betcha this will turn out to be a plentiful source of stories.
— Anne Holland, whom Alan Mutter interviews here, reckons Americans shell out $15 billion a year for content. Little of that goes for journalism, of course. But I'm pretty sure World of Warcraft is not a health site, however broadly she defines that category.
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November 18, 2009 02:27 PM
Tyrangiel Takes Over at BusinessWeek
Bloomberg surprised just about everybody by picking Josh Tyrangiel of Time to helm the newly acquired (and newly gutted—it's sacking a quarter of the staff) BusinessWeek.
All of the stories made sure to note prominently in a sort of raised-eyebrows way that Tyrangiel is but a wee lad of 37 years and has never been a business journalist.
Well, sounds good to me.
First, having been relatively young when the Web dawned and having helmed Time.com, he's more likely to really get the Web. Sorry, I'm not being ageist or sympathetic to a contemporary, I'm just being realistic. Here's how Tom Lowry reports his eye-popping numbers at Time.com:
During his tenure at Time.com, Tyrangiel boosted the Web site’s traffic from 400 million page views in 2006 to what could be an estimated 1.8 billion page views this year.
But getting the Web means understanding its weaknesses, too. You can get that it's awesome for many things and sucks for many others—like reading anything that takes more attention than 30 seconds or so. Evidence Tyrangiel understands this comes from this flyby interview with Lowry, one of his new charges:
“Listen, the big mistake magazines made was trying to imitate the Web,” he said. “Magazines are read reclining, and that lends itself to longer, more in-depth stories.”
Pretty simple: Do Web things on the Web and do print things in print (or e-reader, which is the same thing). It sounds like Tyrangiel is doubling down on reading, which pretty much means in-depth reporting and analysis. We like that stuff, though admit to fears about the demand for it.
As far as never having been a business journalist, that's a feature, not a bug, as Tyrangiel implies with his "I wasn’t hired to be the great business editor" quote this morning in The New York Times. Someone who's not schooled in "this is how it's done" is more likely to see problems in how it's done. We've criticized the business press for being too narrow in its scope and for focusing too much on investors' short-term interests and too little on how those interests affect everybody else (which is ultimately in investors' long-term interest. See: current crisis).
I've got no idea if Tyrangiel can pull such a feat off, but he's got a head start: BusinessWeek has been less inside-the-bubble and more aggressive than its competitors. I wrote this when the false dollar-for-BW story was making the rounds this summer:
BusinessWeek does the best journalism of the three major business magazines. It’s scrappier and less enthralled with Wall Street and CEOs and Capitalist Tools and the like. Okay, it prints columns by Maria Bartiromo and Jack Welch. You can’t win ‘em all.
But it does real, hard-nosed investigative reporting and its news stories are more detached and skeptical of the powers that be than most other business publications.
Now, Bloomberg has gotten rid of the Bartiromo and Welch columns. Good start!
We've said before there's an opportunity here to marry the massive resources of Bloomberg News with BusinessWeek's editorial polish—something Bloomberg's copy too often lacks, to the serious detriment of its reportage.
Here's hoping Tyrangiel can pull it off. As Stephanie Clifford of The New York Times points out, they're two, um, different cultures:
The culture clash between Bloombergians and BusinessWeek staff will be interesting to watch. Bloomberg tracks when its employees come and go, monitors whether employees are at their terminals and has all of its writers make their calendars accessible to anyone in the building. Bloomberg says it makes it easier to find people, but employees say they can feel constantly monitored. And instead of an easygoing magazine culture, where editorial meetings are rarely held before 10 a.m. because no one would show up, Bloomberg News staff begin arriving before 6 a.m., and there’s a long line to get into the elevators by 8 a.m. The elevator only stops on a couple floors of the building, making staffers crowd through open areas and onto escalators to get to their floor, creating a sense of activity and intensity.
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November 18, 2009 01:31 PM
Trains, Planes, and Carbon Offsets
Times keeps a needed eye on green premiums
This week, The New York Times published two much-needed articles questioning the value of programs that let consumers pay a small fee to ostensibly reduce their carbon footprints.
The first, by Kate Galbraith, focused on renewable energy certificates, which allow utilities to offer their customers the choice of paying a small premium on their electricity bills for clean energy from wind or solar.“About a quarter of the country’s utilities offer green power programs, and the way they are structured varies,” Galbraith reported:
In practice, no big utility delivers 100 percent renewable power to any customer, since electricity from all sources — coal plants, wind farms, solar panels — is mingled in the same wires. The utilities are essentially collecting extra money that they promise to use to support the development of renewable energy, a pitch that some customers find persuasive.
But a key question—“Do these programs really cause more renewable energy projects to get built?”—remains unanswered, Galbraith found. While some think the trade in renewable energy certificates makes clean-energy cost competitive, others think it’s just a waste of money. An audit of a cancelled green power program in Florida, for instance, found that “the vast majority of homeowners’ payments went into marketing and administration.”
The second Times article casting doubt on voluntary carbon-reduction schemes, by Elisabeth Rosenthal, focused on carbon offsets—specifically those offered by airlines. In theory, the small, extras fees paid by guilty-feeling passengers go toward tree planting or hydropower projects that reduce greenhouse-gas emissions.
“Offsets have played a growing role in the greening of travel because carbon dioxide emissions from airplanes are growing so quickly and there is currently no technological fix that would drastically lower them,” Rosenthal reported. “But it has proved difficult to monitor or quantify the emissions-reducing potential of the thousands of green projects financed by customers’ payments, and there are no industrywide standards.”
For that reason, Responsible Travel, one of the first travel companies to offer customers the option of buying offsets, cancelled its program this year. Likewise, groups like Yahoo and the U.S. House of Representatives have stopped buying them. Even Paul Dickenson, chief executive of the Carbon Disclosure Project, a consortium of companies that have pledged to report and reduce their emissions, told Rosenthal that he’s not biting. Dickenson would prefer that consumers actually reduce their air travel instead, by taking trains or conducting meetings by phone or teleconference.
Rosenthal’s article ends with a somewhat suspect quote from Dickenson, however. Referring to Warren Buffett’s recent purchase of Burlington Northern Santa Fe railroad, he said, “What does it tell you that the world’s most successful investor is investing in trains?”
Well, most analysts seem to think that Buffett’s investment tells us that he’s betting big on the future of coal. According to The Wall Street Journal, “Burlington Northern carries coal that generates about 10% of all U.S. electricity,” and coal shipments accounted for almost a quarter of the company’s freight revenue last year.
Despite that awkward conclusion, however, both Rosenthal’s article and Galbraith’s are the kind that we hope to see more of in the coming weeks, months, and years. Renewable energy credits and carbon offsets are just two of the sketchy financial products emerging from the burgeoning global carbon market. Unregulated, they threaten to discredit the very idea of sustainable commerce.
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November 18, 2009 10:19 AM
WSJ Zeroes in on Goldman Collateral
The Wall Street Journal fleshes out the Goldman Sachs backdoor bailout part of the Special Inspector General of the TARP's AIG report issued yesterday.
Basically, the SIGTARP says Goldman was bailed out by the AIG bailout, something the firm (an Audit funder) has denied until now, as you can see from this GS statement (emphasis mine):
"Goldman Sachs has consistently said its exposure with AIG was collateralized and hedged and therefore we had no direct credit exposure. Given the hedges, collateral and government backing as a result of the bailout, the additional risks of declining market values in the event of an AIG default are a moot point."
But it's not a moot point, it's the whole point. Goldman had credit exposure in the event the government let AIG fail, which it didn't, in large part to keep companies like Goldman Sachs upright. See?
In other words:
Goldman's trading position with AIG centered on $22.1 billion worth of such insurance the firm had purchased from AIG. In a separate series of trades, Goldman itself had sold protection against losses on the same assets to other trading firms.
The problem for Goldman: If AIG collapsed and markets continued to swoon, Goldman would have had to make payments to the other trading firms and been unable to collect on protection it had bought from AIG.
The SIGTARP points out that $4.3 billion of Goldman's collateral was comprised of collateralized debt obligations, not exactly the most liquid collateral in the event of a run on the bank. And it says that another $5.5 billion of collateral would have faced "declining market value" in the event of an AIG failure.
It's unclear from the story what made up that $5.5 billion in collateral, but it's clear it wasn't cash (the dollar may have tanked since, but at the time it was up).
The WSJ's language also isn't the clearest here:
For example, Goldman believed that it controlled $4.3 billion in assets—pools of fixed-income securities that require complex computer modeling to design and understand—that would have been used to counter an AIG default, the audit said.
It "believed" it controlled them? Does that mean it thought it controlled the assets but may not have or that it thought their value was $4.3 billion? I think it's the latter based on a quote a couple of paragraphs down, but I'm not totally sure. It's just a nit, but "Goldman valued" would have worked better if that's the case.
But good for the Journal for focusing on this issue.
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November 17, 2009 06:48 PM
Tuesday Links: Lowballing OSHA, Lowenstein, SIGTARP
The New York Times reports that employers systematically under-report workplace injuries, citing a new GAO report. It says OSHA will adopt the GAO's recommendations, including "requiring inspectors to interview employees during all audits to check the accuracy of employer-provided injury data." Also:
But the G.A.O. report cited several academic studies that found that OSHA data failed to include up to two-thirds of all workplace injuries and illnesses.
Would that it would have cited some journalistic studies, or were there any? Also, it would have been nice if the Times had fleshed out the studies' findings some.
— Bloomberg's Roger Lowenstein has some suggestions on six reasons for the crisis and six ways to fix them, and notes that "Financial reform seems to be flailing. Legislation has been proposed, but it is complicated and diffuse. Most of the proposed fixes are incremental changes that don’t seem likely to prevent a future bubble."
— The Epicurean Dealmaker disagrees with that Yves Smith post I pointed to earlier on what she called the weakness of the TARP overseer's report on the AIG fiasco:
I read the SIGTARP report and find complete confirmation of two important points. First, the New York Fed, led by our current Secretary of the Treasury, botched the rescue of AIG so completely and so pathetically that it does border, as Yves says, on criminal incompetence. Second, the Fed had enough negotiating leverage in the entire affair to have substantially lessened the amount of taxpayer funds it ending up paying to AIG's counterparties, to the tune of billions and billions of dollars. A competent and motivated negotiator could have extracted billions of dollars in concessions with little else.
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November 17, 2009 05:22 PM
The Debt Privilege
We all know too much debt is at the root of the economic crisis. And we've seen lots of step-back pieces on the conditions that created the environment for that debt creation—monetary policy, of course, but also the advent of securitization, the credit-default swap, etc.
But we haven't seen much in the news pages on another 30,000-foot-view reason: The tax code preference for debt over equity. Commentators like Felix Salmon and Steve Waldman have been talking about this for months.
As Salmon says:
We want to move away from over-reliance on debt finance, and towards a world where equity finance becomes much more common and much more boring.
Now James Surowiecki takes up the mantle in The New Yorker (emphasis mine):
The government doesn’t make people go into debt, of course. It just nudges them in that direction. Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. This gives the system what economists call a “debt bias.” It encourages people to make smaller down payments and to borrow more money than they otherwise would, and to tie up more of their wealth in housing than in other investments... Jason Furman, of the National Economic Council, has estimated that tax breaks make corporate debt as much as forty-two per cent cheaper than corporate equity.
That, obviously, incentivizes companies to lever up, which makes them more susceptible to a blowup, which scales, meaning "A debt-ridden economy is inherently more fragile and more volatile," as Surowiecki says.
This perverse-incentives tax-code thing seems like a fertile area for reportorial inquiry, and a critical one. What I as a reader would like to know: Was it always thus, or when did it change? Can you pinpoint any correlations? How much total debt does this add to the economy that would otherwise not be there if debt and equity were treated similarly?
What would be the pluses and minuses of changing the status quo? Surowiecki mentions that Brazil and Belgium don't privilege debt over equity, and that Germany and Denmark have recently lessened debt's advantages. What do these experiences show us, if anything?
Salmon says when he writes about this he invariably hears, "yes, great idea, not gonna happen." What his respondents are talking about is the impotence of opposing the debt lobby—meaning the banks, PIMCO, et al—always ripe for stories, which the press has noticed this year. Remember James Carville's quote? "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
Which conjures Simon Johnson's Atlantic piece from this spring on "The Quite Coup," in which he writes about the financial oligarchy has re-emerged in the U.S. with "a weight not seen in the U.S. since the era of J.P. Morgan (the man)."
Such a brick wall of a lobby may make change nigh impossible, but it sure makes for good stories, as does the broader topic.
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November 17, 2009 01:32 PM
Misplaying the SIGTARP Report
Did the Federal Reserve have any leverage in its negotiations with AIG counterparties, the ones it paid one hundred cents on the dollar to for stuff worth far less? And if it did have some, how much?
That's the nut of the whole question, flared anew today by the release of a report on the deals by the Special Inspector General of the TARP (see our look at the press coverage from this morning).
Yves Smith of Naked Capitalism is hot at SIGTARP's Neil Barofsky and now-Treasury Secretary "Turbo Timmy" Geithner, and says the press is misplaying this story:
The press is treating the report as if it was tough. I was sputtering with anger when reading it on how soft it was on the Fed. The positioning and framing of the issues was almost without exception far too forgiving. It read as if the findings had been negotiated with the Fed (and SIGTARP lost the negotiations as the “shape of the table” stage), but I am assured not, not by SIGTARP, but by those, as they like to say, in a position to know. That says SIGTARP is almost as badly cognitively captured as the Fed is.
It's true the press is treating this as tough. That's evidenced by the section-front treatment it's given by The Wall Street Journal and New York Times (although that's counterbalanced, as Dean Baker points out, by the A24 placement in the Washington Post.
Smith makes an awfully good case that the press overplayed it, and damns it for "uncritical reportage":
Remember, the GAO covered this ground in a report in September. The SIGTARP did come up with some details, and did weigh in on where it thought the Fed went awry, but there is less new here than today’s headlines suggest.
Look, let’s get real here. The Fed paid out 100% on these contracts. AIG was trying to negotiate them down. Who knows how far they would have gotten, AIG went into crisis mode pretty quickly. There was absolutely no reason to pay 100%. Companies that get into trouble renegotiate their obligations as a matter of course. You cannot get blood from a turnip. And the fact that the Feds stepped in to prevent the financial system from collapsing is NOT THE SAME as an open-ended commitment to honor the obligations of a dead company.
Smith points to an Epicurean Dealmaker post from three weeks ago, which pointed out the lack of leverage AIG had. Remember, the SIGTARP report says the Fed had leverage but gave it up, or something:
What moronic financial entity—fully hedged or not—would really risk global financial catastrophe by throwing AIG into bankruptcy, even if it had the contractual and legal right to do so? Because it insisted on receiving 100% of the proceeds due to it by contract? Even though parties to financial contracts renegotiate existing terms under normal market conditions all the time? What good, for example, would those extra five billion clams—not collected, by the way, until the bankruptcy judge wound the company down, if ever—have done Goldman Sachs if it, Morgan Stanley, and every other major investment and commercial bank were in liquidation too?
Furthermore, what foreign or domestic bank CEO in his right mind has the balls to threaten the government of the United States of America with financial meltdown if it doesn’t cough up another couple billion dollars out of the public purse?
That makes sense, doesn't it?
Smith also raises a very, very good point here on why the government deemed the sophisticated AIG's counterparties worthy of a bailout but the less-sophisticated auction-rate securities holders not:
For instance, the report uncritically repeats (page 14) the excuse that the Fed was worried about the impact of an AIG BK on stable value funds. AIGFP had written $38 billion of them. First, did you see any Federal official run to the rescue when the $200 billion auction rate securities market collapsed? That was a retail market, and the users mistakenly regarded it as a near money market equivalent. Loss of access to these funds was far more catastrophic to many investors than taking a haircut on an investment provided by a dud company (those stable value fund investors should have been delighted to get even 60 cents on the dollar. They were so lucky as to have Goldman as a fellow creditor Does anyone think for one nanosecond that the Fed would have rescued AIGFP if its only creditors were stable value fund investors? Please.
This would be a good question for the press to put to officials. There are a couple more potential stories just in the quotes above.
Also, I'll reiterate from this morning: Why did Geithner say that the "the financial condition of the counterparties was not a relevant factor" in making banks whole? That was uncritically reported by the Journal this morning, but at least it was smart enough to report it. I didn't see anybody else pick up on that. Anyone want to take that on?
ADDING: Floyd Norris asks another very good story-worthy question: Who wrote the credit-default swaps that Goldman Sachs and Merrill Lynch bought to protect themselves from an AIG collapse? They are also big recipients of the bailout. (h/t Felix Salmon)
Audit Feature
Nieman, Galbraith on the Power Problem
Nieman Watchdog asks "Where's the reporting on the fraud that led to the crash?" Funny, The Audit, and especially Audit Lead Prosecutor Dean Starkman, has been wondering that for a long while now. John Hanrahan writes that economist James Galbraith of—I can barely bring myself to write this on such a week—the University of Texas is calling the press on the carpet for not reporting out the crimes associated with the greatest financial crisis in eighty years.
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Audit Arbiter
Audit Arbiter is CJR's Ombudsman for the business press: if you feel you've been wronged, write us and we'll weigh in on the matter.
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