Felix Salmon

James Hagerty is cautiously optimistic about the new, standardized good faith estimate form which has been mandated by the Department of Housing and Urban Development. If you get one of these forms from three or four different lenders, and they all fill out this table, then being able to choose the best mortgage for you is going to be much easier than it has been until now.

It might have been nice to include “adjusted origination charges” along with “total estimated settlement charges” on this form, because a conscientious consumer should shop around in any case for things like title insurance. Still, bundling everything into one figure at least gives lenders an incentive not to rip off their borrowers too much on those fees.

Is this going to make a big difference in practice? Are homebuyers going to spend as much time comparing different mortgages as they do comparing different televisions? Or are all those numbers always going to be so confusing that many people will end up just doing what they’ve historically done, which is trust a mortgage broker?

My hope is that a few big lenders are going to take a leaf out of Progressive’s book, and encourage homebuyers to shop around, making it as easy as possible to compare different offers. But one thing’s for sure: if your mortgage broker doesn’t show you different options in this kind of ultra-clear standardized format, find a different mortgage broker.

Mike Mandel has four nominees for his “Economic Statistic of the Decade” award, including home prices (obvs), Chinese growth, and global trade. But the most startling one, for me, is US household borrowing:

I like the time frame that Mike has chosen here, since it shows not only the huge increase in borrowing during the credit boom and the stomach-churning plunge thereafter, but also, for much of the 1990s, what “normal” should look like.

Mike notes that the data for this chart includes domestic hedge funds, so it shouldn’t be taken entirely at face value. But it’s the best visual representation I’ve seen of the credit boom and bust.

Vanity Fair says it handles a combined five snail mail letters or faxes a month — WWD

“Let’s say we move from 0% to 3% short-term expected inflation” – how exactly is the Fed meant to do that? — MR

Luke Mullins with a 2-years-in-the-making, 13,000-word labor of love about an incredible kid named Joey Graziano — HuffPo

The 20 Top Philosophers of All Time: Happy to see Hume at #4, and Frege’s in the top 10! — Leiter Reports

How much does a Kiwi honorary knighthood cost? Ask Julian Robertson — Stuff

I can’t tell you how much it sickens me that this fugly Tom Otterness playground toy sold for $1.2 million — NYT

What is worth giving up our right to not be seen naked by strangers? The ability to see celebrities naked. Duh — NYMag

Larry Summers’ visitor log, Sept. 16-30, 2009 — Google

NM Rothschild profit +82%, but parent group profits down 48% — FT

Looks like Time Warner is losing those Fox stations — LAT

Worst decade ever, politics edition — Atlantic Wire

Richard Diebenkorn “Ocean Park” show at OCMA postponed for second time; no new date set — LAT

Steve Brill has a very interesting 8,500-word story in this weekend’s NYT magazine, all about Kenneth Feinberg and the process he went through to determine the pay packages of companies the US government had bailed out.

The funniest part of the story is the bit where Feinberg reflexively tries to pay AIG executives in stock — which was trading at more than $40 a share at the time — only for both AIG and Treasury to tell him that really wasn’t fair, because AIG stock is, yes, fundamentally worthless. They were right on that point: Feinberg actually would have been foolish to pay AIG executives in common stock, because that stock only has any long-term value at all in the event that AIG takes enormous risks and they pay off. And that is not something we want AIG’s leadership to be doing, so I’m sad that Feinberg agreed to stock-based compensation at AIG “in appropriate cases”.

But Brill, who is a multi-millionaire in his own right, is not always a reliable guide to what constitutes fair pay. He’s got a friend who works at AIG Financial Products, and who he lets “make the case” for that company’s crazy retention-bonus plan. He quotes another friend talking sympathetically about how “really hard” these people are working, and a lawyer saying that “if people in these industries see that Congress can jerk them around whenever they want, they’re going to stop going into these businesses, just the way people have stopped becoming doctors”. He’s happy talking about how half a million bucks a year “is considered piddling” on Wall Street, and how a low six-figure salary doesn’t mean anything to people who are already millionaires. And he talks a lot about the risk that people will quit, or not work hard, if they aren’t paid lots of money — without giving a single example of that actually happening.

He also covers at length and with a perfectly straight face about the bizarre creature invented by Feinberg and called “salarized stock”:

For base cash salaries, Feinberg suggested a sum that, on Wall Street, is considered piddling — typically no more than $500,000 a year. He also said there would be no cash bonuses. But he tempered that with a compromise: The firms could provide additional annual salary compensation if paid in company stock — stock that the executive would receive every payday but could not sell immediately.

This last provision came to be called “salarized stock.” It sounds like jargon only an M.B.A. could love, but it became a key element of the negotiations and a clever way for Feinberg and the bailed-out companies to work around a law passed in the early weeks of the Obama administration. Back in February, Senator Christopher Dodd, the Connecticut Democrat who is the chairman of the Senate Banking Committee, inserted what is now called the Dodd amendment into the President’s economic stimulus bill. A provision in that amendment limited any bonus compensation to 50 percent of the executive’s salary…

Because Feinberg’s salarized stock would be dispensed every payday, it could therefore be considered salary under the Dodd amendment.

How clever of Feinberg to “work around” a clear law like that! Of course “salarized stock” is simply a guaranteed bonus, payable in stock; since it vests over a period of years, it’s neither here nor there whether it’s paid annually or whether it’s paid monthly. But because Feinberg didn’t like the optics of guaranteed bonuses — and because Dodd had clearly made guaranteed bonuses illegal — he created this Frankenstein monster instead, waving his magic terminological wand and turning a bonus into salary, to the delight of Brill, who as a lawyer loves this kind of sophistry.

To be fair to Brill, he does show quite clearly that Feinberg ended up paying lots of money to senior executives in practice, while trying as hard as possible to make it look as though he was being very harsh. That’s probably what the government wanted all along: the main thing it was worried about was headlines. Feinberg’s job wasn’t to rein in pay, it was to rein in outrage about pay.

Brill’s also excellent at uncovering the silly game that Feinberg played with the banks: he invited them to submit their own proposals as the basis for negotiation, with the predictable result that the banks spent millions of dollars on compensation consultants paid to conclude that senior executives were all above average, and had to be paid as much as $21 million a year, in the case of BofA. Feinberg could then announce multi-million-dollar pay packages as a low percentage of what the banks originally asked for, and seem tough in so doing.

But what Brill never really addresses is the question in the headline of his piece: how much are these bankers actually worth? And he also never addresses the question of the degree to which seven- and eight-figure salaries caused the crisis in the first place, or whether we actually want greedy people in these positions who won’t do their jobs unless they’re paid a hundred grand a week.

In Brill’s world, the only downside to an enormous salary is the optics of the thing: how it looks to the rest of us. “Business common sense,” he writes, “dictates that because the government owned them, these were the last companies the government should want to undercut with unilateral pay disarmament”. Does he give a single example of a company underperforming because it can’t pay well enough? Of course not: it’s just obvious to Brill that banks which pay modest salaries (like, say, most credit unions) will do worse than banks which pay enormous bonuses (like, say, Lehman Brothers or Bear Stearns). Well, it’s not obvious to me. Just like it’s not obvious to me that people have stopped becoming doctors.

Update: Thanks to reader Anthony Bongiorni for picking up on this:

Feinberg consulted regularly with Deputy Treasury Secretary Neal Wolin and others at Treasury, Wolin says, though he met with Geithner only three times. “We pushed back with him on some issues,” Wolin recalls, referring to Treasury’s desire to make sure that the companies would be able keep talented employees — and eventually repay the government.

It seems it was Wolin, at Treasury, who was pressuring Feinberg to pay more, rather than less. Wolin, in turn, entered Treasury straight from a senior executive position at The Hartford, which took $3.4 billion in federal bailout money, and surely wanted to be able to continue to pay its executives lots of money in future. Maybe they should send their friend Neal a thank-you note for helping to keep salaries high at bailout recipients.

Ryan Avent worries about the incentives built into the 2010 repeal of the estate tax:

This is a much happier state of affairs than is likely to prevail a year from now, when families are struggling to hurry grandpa off this mortal coil by the time the ball drops in Times Square.

I’m looking forward to a covert market in death certificates at the end of 2010: doctors willing to formally decree an individual dead, which event would be swiftly followed by a small cremation ceremony with immediate family only. And then a mysterious resident in the guest house on St Bart’s, whom nobody ever talks about.

Emanuel Derman wins the day with this:

I had a fantasy in which the Fed and the TSA (Transportation Security Administration) switched roles.

If a bank failed at 9 a.m. one morning and shut its doors, the TSA would announce that all banks henceforth begin their business day at 10 a.m.

And, if a terrorist managed to get on board a plane between Stockholm and Washington, the Fed would increase the number of flights between the cities.

Yesterday, I asked Megan McArdle how much of one’s life’s savings should be given to the bank before they take one’s house. She answers, gratifyingly, that in the particular case I was writing about, “obviously he should have walked away immediately.” Good, we’re in agreement on that. If you’re going to lose your house, best just to lose your house, rather than to lose your house and your savings.

But then, puzzlingly, Megan asks “what Felix thinks this has to do with people who decide to default on their mortgages so that they’ll have more money to spend on cruises and new furniture”.

Um, everything? If you have savings, you can spend that money on cruises or new furniture or anything else you like. If Tom Vellucci had walked away immediately, as Megan says he should have done, then he would have thousands of dollars in the bank. And good libertarian that she is, I’m sure she wouldn’t mind him then spending that money on a cruise, if that’s where he thought his money would be best spent. Once he’s saved his money, it’s up to Tom Vellucci, and no one else, where he spends it. Or is Megan saying that he should walk away from his mortgage obligations only if he doesn’t spend his savings on furniture or cruises?

Martin Dickson wins the day with his fabulous tale of bankster excess, in rhyming couplets no less. Go read the whole thing, but here’s a taster:

Exuberant beyond all reason
(For this or any other season)
Fired up by dreams of starter castles,
Sardinian yachts and vineyard parcels,
They built themselves a strange device –
A ticking bomb, to be precise.

The trouble was they did not know,
It was a bomb ’twas ticking so.
They thought it merely marked the beat
That called them to stay on their feet
And dance away – to really bop –
To music that would never stop.

Now, if only someone would make a YouTube video of this, complete with music and visuals.

(HT: Daniel Lippman)

I’m noticing a theme chez John Hempton: a few weeks ago he was writing about the dangers of shorting frauds, and now he’s writing about the dangers of shorting an industry in terminal decline. At least he’s not doing this kind of thing at book length: David Einhorn spent 380 pages detailing the dangers of shorting Allied Capital.

The general idea here is that no matter how perspicacious and intelligent a short seller is, he can still be entirely correct and lose lots of money. As Hempton writes today:

If you understood the implications of digital photography in 1991 you were – at least on that item – the smartest guy in almost any room. And it did not help you make (much) money.

Well, yes. And, good. Hempton’s talking about an episode where Warren Buffett was talking to Bill Gates in 1991, and Gates said that Kodak was toast. Neither Buffett nor Gates thought that, even if Kodak was toast, they should go out and short the stock. But because Hempton’s a short seller, that was the first idea that sprang to mind.

Bill Gates, of course, had much better things to do in 1991 than short Kodak: he was using his intelligence and perspicacity to build Microsoft into a global giant which has fundamentally changed the lives of billions of people. Short sellers, by contrast, are what Adair Turner would call socially useless.

Let’s say I’m an intelligent and perspicacious short-seller who correctly believes that Kodak shares are going to fall. Kodak has shares in the first place, remember, because it needed to raise equity capital to build a global company capable of changing the world in fundamental ways. A large number of long-term investors then bought those shares, becoming part-owners of a then-successful real-world company. I then approach one of those large, long-term investors, and ask them to lend me their shares for a short while. I’ll pay them a modest interest rate for the privilege, and they’ll end up with just as many shares as they started with, so they agree.

The next thing I do is to immediately sell those shares on the open market, to someone else who believes in the future of Kodak. I then sit back and wait, as Kodak shares fall in price. Eventually, I buy them back cheap, return them to the original long-term investor, and pocket my profits.

Now I don’t think that this exercise is particularly harmful on a societal level, and at the margin it can help to make markets more liquid and efficient. But I can’t help but think of the opportunity cost of having all these intelligent and perspicacious people playing around on stock markets, rather than going out and putting that intelligence and perspicacity to more socially-beneficial use.

It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world. Old-fashioned lending is important, and I’d say that stock markets in general also count as a positive financial innovation, since they make it vastly easier for companies to raise equity capital. But in my ideal world, people working for real companies like Kodak would make more money, in general, than people working for more parasitical financial-services companies. The fact that it’s the other way around worries me. While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.

Yves Smith has another long broadside today against Goldman Sachs, Morgan Stanley, and any other bank which made money on synthetic CDOs. She links approvingly to yesterday’s NYT editorial, which concludes:

Unsavory and dangerous practices like firms betting against their clients need to be thoroughly investigated. They won’t end until Congress adopts ambitious financial reforms.

Narrowly speaking, this is false on both counts. What we’re talking about here is simply the world of structured products, in which broker-dealers use derivatives (always referred to in the press as “complex derivatives”, whether they’re complex or not) to create financial products for which their clients have some need or demand. Because derivatives are a zero-sum game, it’s trivially true that any bank selling such a product to its client is, at least in the first instance, betting against that client. If the client wins, the bank loses, and vice versa. Such practices may or may not be unsavory and dangerous, but they don’t need to be thoroughly investigated: everybody knows how derivatives work.

What’s more, such practices aren’t going to end if and when Congress adopts ambitious financial reforms. Structured products are with us, and they’re here to stay. Personally, I consider the overwhelming majority of them to be part of the enormous bucket labeled “harmful financial innovations”, and I would be very happy if they disappeared. But both the banks and their clients are utterly convinced that these derivatives are very useful things indeed, and as a result the only question is how they’re going to be regulated, not whether they’re going to exist.

Now it’s true that at the margin, the synthetic CDOs put together by Goldman were more unsavory than many other structured products, because of the information asymmetry involved: Goldman knew what the sausage was made of better than its clients did. But it’s worth noting, here, as Gillian Tett has explored at book length, that most banks putting together synthetic CDOs actually lost billions of dollars on those instruments. Now that we’ve pilloried Merrill Lynch for being so stupid as to get synthetic CDOs spectacularly wrong, we’re moving on to pillorying Goldman Sachs for the equal and opposite crime.

Remember that while Goldman did indeed retain a large short position in these synthetic CDOs, most of the shorts who fueled the market were not broker-dealers at all, but rather fund managers: Michael Lewis wrote a much-celebrated story about one such manager, Steve Eisman. Eisman was a client of the investment banks just as much as the investors on the long side were, and just as prone to problems of information asymmetry.

By far the most systemically-devastating decisions made by Wall Street over the course of the credit boom were the ones which ended up losing banks billions of dollars — and the ones which involved lending real money to real individuals buying real homes they couldn’t afford. Side bets in the derivatives market were ultimately a secondary or even tertiary phenomenon, and it’s easy to overstate their importance.

Yes, it would be good if the derivatives market were regulated somehow: I hope it is. But so long as there are profitable investment banks playing in this market, those banks are at heart going to be making money by betting against their clients. The banks know it, the clients know it, and most of the time all of them are happy — until, of course, they’re not. If bankers’ behavior in the the derivatives market ever changes, it’s more likely to be a function of having to deal with an increasing number of Chinese clients who get upset if they lose too much money, rather than a function of financial reforms being pushed through Congress.

Mick Weinstein, the editor-in-chief of Seeking Alpha, has unveiled his latest side project, the Daily Curator. And I love it. Mick says it’s a “pre-pre beta”, but I hope he doesn’t change too much besides the range and depth of content, because the gorgeous simplicity of the site makes it a joy to use.

The Daily Curator is basically a TechMeme for business and finance: Mick is scouring his Twitter and RSS feeds for the buzziest stories of the day, and aggregating the smartest discussions surrounding those stories. His Twitter list alone is invaluable; the Daily Curator homepage itself is like a beefed-up, real-time version of daily link blogs like Tadas Viskantas’s Abnormal Returns.

I suspect that this kind real-time, human-powered aggregation and curation (see also: Atlantic Wire) is going to become increasingly popular over the next year or two: it’s powerful, it’s relatively cheap (compared to the cost of sites producing original content), and there’s an increasing number of early-stage investors looking to make bets on disruptive content, especially as big financial sites like wsj.com and ft.com remove themselves from the conversation by putting up paywalls. I very much look forward to seeing sites like this one evolve, thrive, and multiply.

Update: Well, it was fun while it lasted. It’s down now.

Prosecutors of white-collar crime are a bit like investigative journalists, trying to connect dots. But reading Susan Pulliam’s account of how the Galleon case was put together, I’m struck by how unprepossessing some of the most crucial dots were.

Andrew Michaelson was buried in paper, millions of pages of it…

When Mr. Michaelson’s team found the needle in this haystack of documents — a single text message — it pointed them toward Raj Rajaratnam himself. The writer urged him not to buy video-conferencing firm Polycom Inc.’s stock “till I get guidance; want to make sure guidance OK.”

The cryptic note was sent by Roomy Khan, a former Intel Corp. employee whom authorities had suspected in the past of sending inside information to Mr. Rajaratnam. People familiar with the matter say those few words hidden among millions of others proved a turning point in what would become the biggest insider-trading case in two decades.

By November 2007, Ms. Khan, confronted with the text message, agreed to cooperate and record her phone calls with the hedge-fund tycoon…

Ms. Khan — who has since pleaded guilty to conspiracy, insider trading and obstruction of justice in connection the Polycom, Hilton and Google trades — agreed to record phone calls between her and Mr. Rajaratnam. Before Ms. Khan dialed him on Jan. 14, 2008, FBI agent B.J. Kang walked her through how she should quiz her old friend.

“What’s going on with earnings this season? Are you getting anything on Intel?” she asked, according to a person familiar with the situation. Mr. Rajaratnam answered that Intel’s revenue would be up 9% to 10% and that profit margins would be “good,” according to the person.

Mr. Rajaratnam was right: The next day, Intel reported revenue up 10.5% for the period and profit margins above the company’s earlier prediction.

That was enough for prosecutors. Using evidence from the Intel call and other recordings Ms. Khan made, they asked a Manhattan federal judge in March for permission to eavesdrop on Mr. Rajaratnam’s phone calls.

We have two seemingly smoking guns here. The first is a text message from a hedge fund consultant saying that she was looking to get guidance on Polycom earnings; the second is a phone call with Raj Rajaratnam himself in which he was reasonably good at guessing what Intel’s earnings were going to look like.

Isn’t this what stock-picking hedge funds like Galleon do? They try to anticipate corporate earnings — that’s their job. And while it’s always possible that people who are right about earnings are right because they have inside information, there are lots of other possibilities too. After all, people who are right about earnings often don’t have inside information, and people who are wrong about earnings sometimes do.

But in both key cases here — the text message and the phone call — talk of upcoming earnings was taken as prima facie evidence of some kind of crime. In the first case, it sufficed to turn Roomy Khan into a government informant.

I feel there must be something I’m missing here — or is this really all that’s needed to persuade a judge to approve a wiretap?

I’m enjoying Brad’s new book. But arguably he’s even better as a photographer — DeLong

The suggested user list makes a huge difference in number of followers, but no difference in retweets, replies, or clicks — Dashes

24 things that were true on this day in 1999 — Foreign Policy

Deep geopolitical thinking from Ben Stein: “They’re psychos, same as all terrorists and murderers”. (Forward to 6:30) — Politico

Nick Denton explains how he turned into “a goggle-eyed moron” after moving to NYC and starting to watch TV — PVRBlog

Nokia says most Apple products violate its patents — BBC

A wonderful Tierney column on delayed gratification — Tierney

Next Decade Will Be Good One for Stock Investors — Bloomberg

David Levine, RIP — NYT

Postrel is very good on the freelancer ethics dilemma facing the NYT — but doesn’t Tripsas also get speaking fees? — Dynamist

Andrew Vanacore has a long and sometimes confusing overview of the state of play in the television industry, which concentrates on the possibility that one or more networks might convert into cable channels sooner or later. But there seem to be lacunae in the story — not least the large number of cable channels which pay for the privilege of being featured in the cable-TV lineup, rather than being paid by the cable companies.

Also missing is any indication of the effects of the move to digital broadcasting. Reader William Wang notes that this vastly increases both the quantity and the quality of free-to-air television stations, which, combined with Hulu and Boxee and YouTube and all the other free sources of TV, should put a lot of pressure on cable companies who have historically had local monopolies and the ability to raise their prices every year with impunity.

The networks are increasingly fighting with the cable operators, now that the likes of Rupert Murdoch have decided that network TV, just like newspapers, is something which should have more than one revenue stream. Now free-to-air digital broadcast TV does not, of, course, come with any kind of monthly subscription stream from a cable operator desperate to still be able to serve up American Idol to its loyal customers. But the networks still reach vastly more viewers than any cable channel, and so if they started adding their in-house cable channels, like Fox News, to the digital broadcast spectrum, they might be able to get a significant bump in viewership.

I still think that by far the best outcome for most constituencies would be a la carte pricing, where viewers — rather than cable companies — decide what’s worth paying for. Every television station on cable could then charge as much as it liked, with an eye to maximizing the sum of subscription revenues and advertising revenues. But what’s clear is that we’re moving to a world where the number of options is multiplying, and corporate strategy is going to get extremely complex extremely quickly.

The latest round of fights between producers and distributors smells like the dying gasp of a 20th-century TV business model to me, with essentially only two sides in the game. The consumer is left out in the cold, shivering as cable bills rise much faster than inflation. Pretty soon, the consumer is going to have a lot more power, and that’s going to change the game in profound and fundamental ways.

Michael Powell has real-world examples of why it’s really just better to walk away than it is to try to deal with evil and/or incompetent mortgage servicers:

Aurora, which has a $116 billion loan portfolio, was a subsidiary of Lehman Brothers before that firm went bankrupt…

Tom Vellucci, 54, is one of the four plaintiffs in the lawsuit, and a soldier in this army of the potentially dispossessed. Once a maintenance man for an insurance company, with a modest home in Floral Park, Queens, he lost his health and then his job. When a tenant stopped paying rent, he fell behind on his mortgage. A so-called rescue firm offered to negotiate better terms and wheedled Mr. Vellucci and his wife, Maria, out of $8,000 in fees.

When the inevitable foreclosure notice arrived in March, the Velluccis called Aurora Loan Services and asked for a break. The company, he said, responded by piling on legal fees and giving them a four-month trial agreement that did not reduce their monthly payment.

The Velluccis say they drained their savings making payments. Then the couple asked Aurora if they could revise their mortgage terms under the Obama rescue plan. They say the company refused, saying their mortgage was not eligible because it was owned by investors.

Aurora makes a similar statement about investor-owned mortgages on its Web site. These claims are not true. The Obama program requires companies to make an effort to modify such mortgages.

Sitting on a bench in the Queens courthouse, where he has become a regular, Mr. Vellucci ran his fingers through thick black hair and shook his head. “We kept trying to pay on faith, all faith, so we could prove we were honest people,” he said. “Now all we look like is stupid.”

I can’t find the statement on the Aurora website, but I don’t doubt that it’s been as obstructionist as it possibly can be:

Leonard N. Florio, a court-appointed referee, oversees such sessions in that dusty room in Queens. He is a chatty man and punctilious about not taking sides. But as he watched Mr. Ali, the Ozone Park homeowner, load his piles of bills and receipts back into his shopping bags, he could not help noting a pattern.

“I have yet to see an attorney for a servicer cut a deal,” he said. “Update this, update that. I mean, what’s the holdup?”

What we’re seeing here is the mortgage equivalent of credit-card sweatboxes: servicers who make sure to drain homeowners’ savings before they foreclose, since they know that they won’t chase homeowners after foreclosure, even in recourse states. By holding out the promise of a modification tomorrow, they make sure to squeeze every ounce of blood out of the homeowner before finally snatching the home away anyway.

So this is what I’d like to ask Megan McArdle, and others who like to extoll the moral virtues of paying one’s debts: just how much of your life’s savings should you give these snakes before they take your house?