Felix Salmon

The double dip in the housing market — with house prices nationally now back to their 2002 levels — stands in stark contrast to what’s going on in the stock market, and a lot of people, myself, included, are puzzling over why that might be.

A few charts would seem to be in order here. First of all, the Case-Shiller house-price index, the blue line on this chart:

It’s pretty clear from this chart that house prices are going down rather than up, and have been doing so for a good five years at this point.

Next there’s houses priced in stocks:

This is particularly interesting because it dates the big decline in housing as a worthwhile asset class all the way back to the early 1980s. You can see the housing bubble and bust in the spike at the end of the chart, but you can also see that this is a very volatile series, and that houses can and probably will become much cheaper still, relative to stocks.

Cullen Roche, looking at these charts, concludes:

Despite all the attempts to manipulate the real estate market, the government has largely failed in attempting to stabilize prices. In other words, it’s undergone a much more natural price discovery process. The equity market, of course, has been intervened in at every step of the way and the government has undoubtedly succeeded in propping up this market.

I don’t agree here at all. The government has done much more to intervene in the housing market than it has in the equity market, to the point at which the government at this point guarantees the overwhelming majority of mortgages. There’s nothing natural about the housing market price discovery process, and there won’t be anything natural about it for the foreseeable future, unless and until banks start taking mortgage risk again. And the large number of houses which have been sitting on the market for well over a year now is proof that this market isn’t clearing and that a lot of homeowners are still pretty delusional when it comes to what they think their home is worth.

But still the question refuses to go away: why is there such a difference between the housing market and the stock market? It’s something to do with investability, I think, because if you look at ways to invest in the housing market, they turn out to behave pretty much like stocks, rather than like houses. Here’s the Vanguard REIT ETF, overlaid with the S&P 500:

The point here is that houses are largely insulated from the kind of capital flows which drive everything from the stock market to the price of gold. There was a brief speculative bubble in housing from about 2000 to 2006, but even then the capital being deployed was largely borrowed rather than invested. Real estate is and always will be a game of debt: it’s almost unheard-of for people to buy up investment properties for cash.

The other weird thing about the housing-stocks disconnect is that it seems to be peculiarly American. There have been gruesome property-market crashes in other countries too, of course — look at commercial property in Ireland, or speculative beach resorts in Spain. But in general, countries with much larger property bubbles than we saw in the U.S. have seen property prices fall much less during the bust. And indeed there are brand-new property bubbles popping up all over the Pacific Rim: what is it that’s causing huge demand in Sydney and Hong Kong and Shanghai and Vancouver which doesn’t seem to have any effect on San Francisco?

I don’t have any good answers here, except to say that if housing is getting cheaper, in many ways that’s a good thing. Sure, it’s bad for banks, and it’s unpleasant for anybody who bought a house as an investment. But in general, the less money we Americans spend on housing every month, the more money we have to spend on more productive sectors of the economy, and the higher our disposable incomes. Falling house prices don’t make people richer. But they can make you feel richer than if you were spending hundreds of dollars more per month on a mortgage.

Peter Lattman follows up today on the only-in-New-York story of Paul Weiss partner Steven Simkin, who wants to claw back money from his ex-wife on the grounds that he was invested with Bernie Madoff when they got divorced:

Mr. Simkin’s lawyers — his colleagues at Paul Weiss — described their partner in court papers as “gravely damaged” and suffering “extreme hardship” as a result of the Madoff fraud.

The annual profits per partner at Paul Weiss are about $3 million, according to The American Lawyer magazine. Last October, Mr. Simkin sold his Scarsdale home for $5.7 million and bought another in nearby Mamaroneck for $4.1 million, according to state real estate records. Paul Weiss, a law firm renowned for its litigation department, is representing Mr. Simkin free of charge.

There are two outrageous things going on here. First is the claim of “extreme hardship” — a claim that Paul Weiss is actually making with a straight face.

Does anybody at Paul Weiss have the slightest notion what “extreme hardship” actually is? Or any hardship at all, for that matter, beyond the hardship involved in drafting SEC shelf registrations at 3 am? Notably, the complaint in this case doesn’t actually give any concrete indication of what Simkin’s extreme hardship entails, probably because any such indication would be ludicrous on its face. (He had to give up his dreams of a third home in the Caribbean!)

More scandalous still, however, is the fact that Paul Weiss’s lawyers are working pro bono for their multi-millionaire colleague and client. The New York City Bar Association’s statement of pro bono principles, which is meant to be available here, seems to have disappeared from the web, but Noah Kazis summarized it when writing about Gibson Dunn in February. Pro bono clients should be confined to:

• persons of limited means,
• charitable, religious, civic, cultural, community, governmental and educational organizations committed to serving the needs of persons of limited means and/or in matters which are designed primarily to address the needs of persons of limited means,
• individuals, groups or organizations seeking to secure or protect civil rights, civil liberties or public rights,
• individuals, groups or organizations who have been harmed by a natural disaster or public emergency or who are providing assistance to persons harmed by a natural disaster or public emergency, and
• charitable, religious, civic, cultural, community, governmental and educational organizations in matters in furtherance of their organizational purposes, where the payment of legal fees would significantly deplete the organization’s economic resources.”

It’s pretty obvious that Simkin doesn’t fall into any of these categories.

A few questions, then, for Paul Weiss: What are the grounds on which you decided to take on Simkin as a pro bono client? Do you represent all your partners for free when they get into litigation with their exes? Does the work you’re doing on the Simkin case count towards the total pro bono hours that you’re reporting to the New York City bar? And what, exactly, is the “extreme hardship” that Simkin is suffering?

I’ll be very impressed indeed if Paul Weiss even attempts to answer these questions. But given that they refused to comment to the New York Times, I’m not holding my breath.

Dave Altig, who wonderfully moved Macroblog over to the Atlanta Fed when he took a job there, is very unimpressed with Bob Ivry’s Bloomberg piece on that obscure short-term loan scheme by the Fed.

Altig’s main point is that the ST OMO scheme was not secret at all: to the contrary, it was publicly announced! This is true — but it’s also true that Ivry linked, in his story, to the exact same announcement. (Click on the word “adapted,” in paragraph eight.)

Here’s Ivry Altig:

These transactions were hardly, in my view, “secretive.”…

While it is true that specific transactions with specific institutions were not published in real time, the overall results of the auctions (both total purchases and the lowest interest rate paid) were posted each day (as noted in the Bloomberg article), and the list of potential counterparties (the primary dealers) was (and is) available for all to see. I suppose we could have a reasonable debate about how much information is required to support the claim that “details” were made available. But I have a hard time with the notion that publicly announcing the program, offering details on size and prices in each day’s transactions, and providing general information about the entities in the game constitutes “secretive.”

With some of this I come down on the side of Altig, and would actually go even further than he does: Ivry does not say that the Fed posted the results of the auctions each day. There are only two points in Ivry’s article where he hints at what information the Fed did make public. The first is when he hyperlinks the term ST OMO on first use, sending readers to a Federal Reserve search page. And the second comes in a discussion of Goldman Sachs:

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, tapped the program most in December 2008, when data on the New York Fed website show the loans were least expensive. The lowest winning bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New York Fed data show. At the time, the rate charged at the discount window was 0.5 percent.

Stephen Cohen, a spokesman for Goldman Sachs, declined to comment.

You have to read this very carefully indeed to get the point that information about individual loans was published on the New York Fed website, rather than to simply get the main thrust of the passage, which is about Goldman Sachs.

On the other hand, Altig makes the Fed seem a lot more transparent than it actually is. For instance, he produces this chart:

Generating this chart is decidedly non-trivial. But still, there’s no indication in Ivry’s piece that putting this chart together would even be possible.

In order to generate a chart like this, you need to go to that NY Fed search page, and type in the dates March 2008 to December 2008. When you do that, a very long page appears, giving you a long list of the temporary open market operations the Fed conducted in that period. You can export that data in Excel format, where column I shows you the operations which were 28 days long — the ones that Ivry was writing about. So you then sort by column I (Term-CD), and then by date. You can then show the size of each operation (column AG, “Total-Accept”), and the average interest rate charged (column AC, “MBS-Wght Avg):

From reading Ivry’s story, I had no idea I could put together this chart. But the fact is that this data is highly inaccessible: unless you have someone like Altig holding your hand and explaining exactly what you have to do, you’re very unlikely to be able to find it.

And certainly the Fed gives no information at all about which banks took advantage of the ST OMO scheme. Altig is a bit disingenuous when he says that the list of primary dealers is public: yes, it is, but as we saw with Ivry’s article, there’s a huge difference between the primary dealers, who were eligible to participate in the scheme, and the list of European banks who actually used it.

More to the point, after formally announcing the program at inception, and dutifully ensuring that hard-to-parse data was buried on its website somewhere, the Fed did nothing to help public understanding of ST OMO, or even to help the public know that it existed. Transparency isn’t just about clearing some theoretical bar of public disclosure: it’s about ensuring that the public knows what you’re doing. And until Ivry’s article came along, the public — including Barney Frank — did not know about this scheme. Instead, they were told about it in the kind of way which seems designed to make sure that nobody notices. And when Bloomberg started asking for extra details about ST OMO, the Fed fought all the way to the Supreme Court in an attempt to avoid providing that information, for no good reason at all.

The Fed has a deeply-ingrained culture of secrecy, and virtually everything which goes on at the New York Fed (as opposed to at the level of the Board of Governors in Washington) is made public only begrudgingly, in an opaque and unhelpful manner — if, that is, it’s made public at all. That helps to set up an adversarial relationship between the New York Fed, on the one hand, and reporters, on the other. If Altig wants to know why Ivry was less than generous to the Fed in his story, that’s why. Maybe if the New York Fed cooperated more with requests for help and information, instead of fighting those requests in the courts, Altig would find less in the press to complain about.

Prince Philip: Ninety gaffes in ninety years — Independent

There are more people over 35 making $200k than there are people under 35 making $100k — TBI

The Startup Genome Project’s empirical research on startups — Steve Blank

Your tax dollars at work. “At a training session, ‘most attendees dressed like hippies’” — NYT

Dancing protestors arrested at the Jefferson Memorial — WTOP

What the British say, What the British mean, and What others understand — LL

Obama’s meta-joke about the Queen, the Pope, and Nelson Mandela — YouTube

Paul Romer to NYU — NYT

This is a photo of the NYSE trading floor. It was taken on March 3 by Reuters photographer Lucas Jackson, and Reuters holds the copyright. The only permission I need to run this photo is that of Reuters. The NYSE, however, thinks otherwise:

NYSE has common law and Federal trademark rights in and to NYSE’s name and images of the Trading Floor… Moreover, NYSE owns Federal Trademark rights in one depiction of the Trading Floor and common law rights in the Trading Floor viewed from virtually any angle (collectively, “Trademarks”). Accordingly, NYSE has the right to prevent unauthorized use of its Trademarks and reference to NYSE by others.

That’s from one of the most ridiculous nastygrams I’ve seen in a long time, sent by NYSE chief counsel Kendra Goldenberg to Talking Points Memo. If Goldenberg really believes what she’s saying here, none of us is even allowed to mention the name NYSE if we’re not authorized to do so by the NYSE itself — let alone show a photograph of it.

The back story here is that TPM used a photo of the NYSE trading floor back in November, and then suddenly got the cease-and-desist note a couple of days ago, after everybody had forgotten about their story. At no point in the intervening months did the NYSE bother asking TPM nicely whether the photo was really relevant to the story or the right way to illustrate it. Instead, they just came out with a ridiculously tardy — and legally extremely dubious — c&d:

We demand that TMP remove all images of the Trademarks immediately. If we do not receive your response and written confirmation of the removal of all Trademarks within ten (10) days of your receipt of this letter, we will have no choice but to pursue further remedies.

This is an outright lie from the NYSE. TPM did the right thing, and stood its ground, refusing to take down the photo it had every right to use. That’s the end of the story: there’s no way that the NYSE will “pursue further remedies” at this point, they’ve made themselves enough of a laughingstock already. Rather than pursuing further remedies, then, Goldenberg and the NYSE are going to lick their wounds and slink quietly away.

The lessons here are clear: always publish any c&d you receive — it’s the best possible response. Don’t be intimidated by legalese; know your rights. And encourage other publishers to do the same thing: if big companies know that their nastygrams are likely to be ridiculed across the internet, they might be less likely to send them out.

I am a bit worried by the bit of Josh Marshall’s blog post where he says that “TPM is represented on Media and IP matters by extremely capable specialist outside counsel”. You shouldn’t need expensive lawyers to stand up to bullies — and in fact you don’t need expensive lawyers to stand up to bullies. In the vast majority of cases, a c&d is the only bullet these companies will ever fire: if it doesn’t do the job on its own, they won’t take things any further. Unless and until you get an actual lawsuit, there’s no need for lawyers.

Meanwhile, it’s worth wondering how many other publications have started receiving nastygrams from Kendra Goldenberg when they portray the NYSE in an unflattering light — and how many of them have simply folded rather than risk a legal battle with a multi-billion-dollar multinational corporation. That’s why c&ds should always be published, even if you comply with them.

If NYSE knows that even successful c&ds will always be accompanied by widespread ridicule, it might start respecting everybody else’s right to talk about them in any way they please. And it might instead start using the much more intelligent tactic of simply asking nicely if it thinks that it deserves some kind of change or edit.

Speaking personally, when I get a request for an edit or correction or update, I nearly always comply. Blogs are iterative; I make mistakes; I like to correct them. But the one time I don’t make corrections is when there’s been a legal letter sent straight to my superiors or to Reuters’s in-house counsel. At that point, things are immediately adversarial, and out of my hands. So if you want some changes, ask me nicely, directly. It’s much more effective than setting the likes of Kendra Goldenberg on my lawyers.

File under “things you never knew the Fed did during the financial crisis”: an $80 billion loan scheme known as ST OMO, which was so obscure that even Barney Frank had no idea it existed when he required the Fed to turn over its lending data in his Dodd-Frank bill.

In any case, Bloomberg’s Bob Ivry has the details, thanks to a FOIA which went all the way to the Supreme Court. As with most of these things, it’s impossible to work out what the Fed was so worried about — but it’s easy to see how the Fed made it as hard as possible for Ivry to get information on ST OMO. Not only did they refuse to give him the information he was asking for, but then, when they were ordered to, they dumped 29,000 pages of documents on him. Hidden in which we find charts like these:

What we’re looking at here is the pink bars, which are labeled ST OMO; the height of each bar corresponds to the billions of dollars that each bank had borrowed from the Fed that day.

These loans were insanely cheap — the interest rate on them was as low as 0.01%, even as the Fed’s main bank window was charging 0.5%. Ivry has looked at these charts very carefully, and by measuring how tall the bars are he’s worked out how much money each bank borrowed at any given time; Credit Suisse topped out at $45 billion, for instance.

Why was the Fed so reluctant to discuss this program? After all, Fed spokesman Jeffrey Smith had nothing but great stuff to say about it to Ivry, gushing about how it “helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses”. You’d think if it was so great, the Fed wouldn’t be so quiet about it.

One possible reason is hinted at in the charts above. They cover four banks: Credit Suisse, Deutsche Bank, BofA, and RBS. (RBS is still referred to, quaintly, under its old name of Greenwich Capital, the shop bought by NatWest before NatWest was bought by RBS.) The three European banks all borrowed 11-figure sums from the facility, while the one American bank barely used it.

And that fits the overall usage pattern of ST OMO very well. If you look at the charts, only one U.S. bank was a big user of the facility: Goldman Sachs. And even Goldman was very late to the ST OMO game, with its big borrowings taking place at the very end of the program, in December. All the other big borrowers were European: Credit Suisse, Deutsche, RBS, Barclays, BNP Paribas, UBS.

Why did the Fed set up a short-term lending program which seems to have been aimed overwhelmingly at European banks? And how does lending $45 billion to Credit Suisse support the flow of credit to U.S. households, in any but the most circuitous manner? It’s probably not worth asking the Fed these questions. But it does seem that the governments of Switzerland, Germany, France, and the UK should all be sending thank-you letters to 33 Liberty Street if they haven’t already done so: it’s entirely possible that the New York Fed bailed out their banks without those governments even knowing about it. That’s just how generous we are, in this country.

This Jim Dwyer column would be much better if it actually tried to answer the question in its headline — NYT

“Richard Phillips would like to thank the Chateau Marmont” — Gagosian

SEC Charges Former NASDAQ Managing Director Donald L. Johnson with Insider Trading — SEC

“This year I’ve basically become a vegetarian since the only meat I’m eating is from animals I’ve killed myself” — Zuckerberg

iMac puzzles — Tumblr

Jaw on floor, Tetris edition — Kottke

Dan Frommer leaving Business Insider — TBI

The dreadful story of how Reuters journalist Suleiman al-Khalidi witnessed Syria’s torture chambers — Reuters

Not Cool, Urban Outfitters — Tru.che

The entire HBO movie ‘Too Big To Fail’ condensed into 80 seconds — Vimeo

Dominique Strauss-Kahn’s $50,000/Month Tribeca Rental — Curbed

Skype Goes Down, App’s Crashing For Many — TNW

As I secretly hoped that he might, Guan came to the rescue and provided me with exactly what I was looking for — and with Thomson Reuters data, no less! (It comes from SDC Platinum, I should probably befriend someone there.) I wanted a chart of the ratio of foreign IPOs to domestic ones, for U.S. companies, on a rolling five-year basis, to see whether the current level around 10% constitutes a big spike upwards. And the answer is that yes, it does:

Guan cautions that the data from before 1980 or so might not be particularly reliable, since it’s hard to know when a U.S. company lists abroad unless you’re a truly global company. But that doesn’t really matter: the proportion of IPOs of U.S. companies which took place abroad only cracked 2% for the first time in 1999. It stayed between 1% and 2.5% all the way from 1998 through 2004, and then it suddenly started spiking: 7.1% in 2005, 8.4% in 2006, 9.3% in 2007, and a whopping 15.7% in 2008, when 6 companies had IPOs abroad and only 38 managed the feat domestically.

On an absolute rather than percentage level, the record year was 2007, when there were 24 foreign IPOs; there’s a three-way tie for second place, with 17 foreign IPOs in each of 1999, 2005, and 2006.

In any case, the thick blue line is what I was looking for, and it’s going up and to the right about as fast as any five-year moving average is ever likely to.

My next project, which maybe I can find someone at SDC Platinum to help me with, is to have a look at all those U.S. companies which had an IPO abroad — there are 157 of them, altogether — and work out how many of them ended up getting a fully-fledged US listing. Could a listing on, say, London’s AIM end up being a reasonably common bunny slope for U.S. companies which want a cheaper and gentler introduction to the world of being public than a major listing on the New York Stock Exchange?

Martin Feldstein reckons that the market is pricing in a “massive” Greek default:

Even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.

And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability. More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again.

I don’t think this is true. The Greek yield curve is odd: 3-month T-bills yield about 6%, the 30-year bond yields about 10.8%, and the big spike is at 2 years out, where the yield is about 25%. Clearly the market isn’t pricing in any kind of massive default over the next three months. But let’s look at that benchmark 2-year bond, since if any instrument is pricing in a massive default it’s that one. The bond carries a coupon of 4.6%, and is trading at 71 cents on the dollar.

Now what would happen to that bond if there was a massive default? Let’s be conservative and say that Greece’s debt-to-GDP ratio will be about 150%, and let’s take Feldstein’s target ratio of 60% as where the country is going to end up. In that event, the face value of Greece’s debt would have to fall by at least 60%, and probably more, given the hit to GDP which normally accompanies a big default.

Clearly, traders pricing the 2-year note at 71 cents on the dollar are not pricing in any kind of event in which Greece will swap that note out for an instrument worth only 40 cents on the dollar.

In fact, any priced-in default looks decidedly modest to me. Let’s say that Greece defaults before the next coupon payment, which is due on May 20, 2012. And let’s say that traders in this risky asset want a return of at least 10% if there’s a default. Then someone buying the bond at 71 cents now is betting that it’s going to be worth at least 78 cents post-default. Which implies a pretty modest haircut of just 22% — something which would bring Greece’s debt-to-GDP ratio from 150% to a still-unsustainable 117%.

In fact, any priced-in haircut is even lower than that, since the post-default bonds aren’t going to trade at par.

My point here is that although yields on Greek debt are indeed high, they’re not anywhere near the really distressed levels that we’d expect to see if the market was expecting a massive and imminent default. If you buy a bond at 71 cents on the dollar, that’s cheap, to be sure, but there’s also an enormous amount of downside: if Greece does default in anything but the gentlest possible manner, then you’ll end up losing money.

The current price of Greek debt, then, says to me that traders are requiring hefty returns of 25% in order to pay them for taking the risk that Greece might default. They know that they’ll lose money if that happens, but they reckon that, more likely than not, Greece will muddle through — in which case they will make very good money.

The further you go out the curve, of course, the higher the default probability becomes. According to Thomson Reuters analytics, the CDS market is pricing in a 71% probability of a default in the next 5 years, and an 83% probability of a default in the next 10 years — both assuming a recovery rate of 41.5 cents on the dollar. But the Greek single-name CDS market is small and speculative; we have to be a bit careful about drawing too many conclusions from where it’s trading. If you want to protect yourself against default, you’re going to pay through the nose: this particular insurance market is very expensive. But if you’re buying Greek bonds at these levels, you’re not expecting a massive default. Quite the opposite.

Christine Lagarde’s international campaign to become the next head of the IMF is an attempt to maximize her credentials as the choice not only of Europe but of the rest of the world as well. The job is hers, at this point: once the US falls in behind Lagarde there’s no question that Lagarde will get the job, and with Hillary Clinton now waxing enthusiastic about how “we welcome women who are well qualified and experienced to head major organizations such as the IMF”, it’s going to be hard for the US to support anybody else. So Lagarde’s latest world tour should be seen as maneuvering to make her life as easy as possible when it comes to dealing with increasingly-powerful shareholders such as China and Brazil, after she starts in her new role.

Meanwhile, Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, took it upon himself to come out in public and say just how bad the Greece situation has become. The key date we’re counting down to is June 29 — that’s the day on which the IMF is due to disburse its next tranche of aid to Greece. But before that can happen, the “troika” — the IMF, the ECB, and the EU — have to agree that all of Greece’s funding needs for the next 12 months have been covered or guaranteed by someone. Which they haven’t. “I don’t think that the troika will come to this result,” said Juncker.

If the IMF doesn’t come up with the money, Greece is in real trouble:

“If the Europeans have to acknowledge that the disbursement from the IMF on 29 June cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF’s portion of the financing,” Juncker said.

“That won’t work, because in certain parliaments — Germany, Finland and the Netherlands and others too — there is no preparedness to do so,” he said.

Why is Juncker saying this? Neil Hume quotes David Mackie of JP Morgan, who reckons that Juncker is twisting the arms of various Eurocrats to ensure that Greece gets access to the European Financial Stability Fund sooner rather than later. If EFSF terms get agreed before June 29, then that’s exactly the guarantee that the IMF is looking for, and the IMF’s funds can get disbursed.

But there’s another possibility: maybe Juncker is pressuring the euro zone to install Lagarde as IMF managing director before June 29. Lagarde has “earned a reputation as the most uncompromising opponent of a Greek debt restructuring among euro zone ministers,” according to Daniel Flynn, and it’s pretty much impossible to imagine that her very first act as managing director would be to throw the euro zone into crisis by denying Greece its scheduled tranche of IMF aid. After all, the tougher that the IMF becomes on conditionality, the more likely a Greek restructuring becomes.

The deadline for installing a new managing director at the IMF is June 30; I’m sure that a lot of Europe would like to see Lagarde get the job a few days earlier than that. And so maybe that’s what Lagarde’s jet-setting is all about: shoring up enough global support that she can sail through the nomination process very quickly. The G20 countries will be asking her about a possible double standard: why should the IMF be generous to Greece, when it’s been so tough on many other countries in the past? Lagarde, I imagine, will give an answer along the lines of Daniel Davies’s comment here:

The purpose of defaulting on the debt would be to improve Greece’s access to credit? And by putting its deficit funding at the caprice of international capital markets rather than other EU governments, Greece gains political independence? I suppose it is the land of the Pyrrhic victory, but even so; I am unconvinced that gaining the sort of freedom to set its own fiscal policy enjoyed by, say, Ecuador is really worth all that much.

btw, I don’t really know what the difference is between a liquidity problem and a solvency problem in this context, and I don’t believe anyone else does either.

What Davies misses here is the distinction that the markets make between ability to pay and willingness to pay. Once a country has defaulted on its debt, its ability to pay on new debts naturally goes up — it becomes more creditworthy, not less. But just as your credit score goes down rather than up after you declare bankruptcy, so do the markets tend to punish countries which have recently defaulted, on the grounds that if a country is prone to default, it’s not a good idea to lend to that country.

In the case of Greece, the markets would be utterly unconvinced by a “soft restructuring” which left the country’s debt-to-GDP ratios looking unsustainably large for the foreseeable future, and which kept alive the risk of a second restructuring — or even devaluation — down the road. And there’s no realistic chance of a coercive “hard restructuring” which would involve outright default on existing debt — not in the next year or so, anyway.

But still, I do think that there’s a difference between a liquidity problem and a solvency problem in Greece. The solvency problem has been apparent ever since this Greek government came into power and came clean on the country’s finances; the liquidity problem is the kind of thing which Juncker is talking about. Defaults are generally caused by liquidity issues rather than solvency issues, which is why Greek bond yields are so much higher now than they were at the beginning of 2010. But solvency is still important, and Lagarde faces a stark choice the minute that she becomes head of the IMF.

Either Lagarde will attempt to persuade both her shareholders and the markets that Greece’s debt burden is actually sustainable, or else she’ll have a Nixon-in-China moment and announce that in order to bring Greek debt down to a manageable level, there will need to be a broad restructuring of its liabilities. My guess is that by the time she’s finished her current tour, Lagarde will have a very clear idea of whether Plan A — the muddle-through-and-hope approach — has any chance of success at all. And if I were the Chinese, or the Brazilians, or the South Africans, I’d be trying to impress upon her in the starkest possible terms that it doesn’t. It’s not the job of the IMF to facilitate a state of denial in Europe and Greece. Indeed, that’s one reason why I’m uncomfortable with Lagarde getting the job in the first place. Despite the fact that she seems certain to get it.

Aaron Lucchetti takes a detailed look at the US decline in global stock-market listings today, and finds a bunch of US companies deciding to list overseas:

In all, 74 U.S. companies have done IPOs in foreign countries since 2005, raising about $13.1 billion, according to Dealogic. That is a small fraction of the more than 650 U.S. companies that have gone public on U.S. exchanges since 2005. Still, such capital raising abroad was much less common before.

The numbers here seem high to me: if you’re a US company which has gone public since 2005, there’s a greater than 1-in-10 chance that you’re listed overseas. 74 companies is a lot of companies: we’re clearly not talking about one or two exceptions here. And if you look at the example given in Lucchetti’s piece, the Seattle-based but London-listed water-purification company HaloSource, there’s no obvious reason to discount it as some unique outlier.

I would love to see a quantitative comparison here, however, rather than the qualitative “much less common.” Did some small but significant proportion of US companies always list abroad? I guess what I’d really like to see here is a chart of the ratio of foreign IPOs to domestic ones, for US companies, on say a rolling five-year basis, going back as far as there’s data. Does the current level around 10% constitute a big spike upwards?

What seems certain is that the US stock markets just aren’t particularly interesting when it comes to new listings any more. LinkedIn made a big splash, yes, but mostly just because of its huge opening-day pop. And it wasn’t even the biggest IPO last week — Glencore raised much more money, has a much higher valuation, and chose to list in London and Hong Kong. And as Bob Greifeld noted when he announced Nasdaq’s bid for the NYSE, In 2010 the US generated only 16% of the capital raised worldwide and attracted only one of the 10 largest global IPOs.

Meanwhile, this week’s big share offering — of AIG — is looking decidedly sluggish, as though the US stock market really isn’t capable of digesting such things. (To be fair, the syndrome is global: the same thing seems to be happening to Glencore as well.)

Lucchetti waves his hand vaguely at the economic implications of all this, quoting a venture capitalist as saying that “we’re losing the ecosystem that has helped buoy the US economy over decades.” But a venture capitalist would say that — she just wants as many ways to exit as possible.

The more immediate implication, I think, is for individual investors. Even today, most US investors think of stocks in terms of US listings and tickers; if you watch CNBC all day, you could be forgiven for thinking that nothing matters unless it has a US ticker. But realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook. And while millions of investors still get their hands dirty with individual US stocks, buying this one rather than that one, trying to do anything remotely similar with global stocks is a non-starter. Just buying them is hard enough; doing real homework on them and picking between them is almost impossible, given the huge size of the global stock-market universe.

As a result, investing is going to have to become much more index-driven than it is right now, dominated by top-down global asset-allocation decisions rather than bottom-up stock-picking. And that in turn is going to drive correlations higher and increase the amount of systemic risk in global markets. I also suspect that the decline in US listings presages a relative decline in US markets. As US investors begin their exodus out of domestic stocks and into global stocks, the US stock market is likely to underperform its foreign counterparts. As they say, follow the money. It’s not here, any more. It’s there.

If you want to keep your revolutionary payments system top secret, here’s a piece of advice: launch it in Arizona. That’s what Bank of America and Wells Fargo did in April, with their new clearXchange system; nobody noticed, until they put out a press release today.

ClearXchange really could be a game-changer, though. I spoke to Mike Kennedy, the Wells Fargo executive who’s leading the project, which right now is a joint venture between Wells, BofA, and Chase; he reckons that by this time next year, the program will not only be rolled out nationwide but will also be available to pretty much anybody with a bank account. (For the time being, both the sender and the receiver of the money need to be a customer of one of those three banks, and right now the sender needs to be in Arizona.)

ClearXchange is a clear competitor to the likes of PayPal and Popmoney, but it’s not an existential threat to those companies. Instead, the reason I like it is just that it brings peer-to-peer payments where they belong, to the level of the bank account. And it’s likely to set a new benchmark of $0.00 for the cost that consumers pay for such payments.

Up until now, most payments mechanisms, including PayPal, necessitated opening a new account. PayPal is now moving away from that system, and is trying to do deals with banks where its technology can get integrated directly into the banks’ own software and mobile apps, allowing people to send money to each other even if they don’t have a PayPal account. ClearXchange works much the same way: if I want to use it to send money to you, I just pull up my own bank’s mobile-banking app and use that. I don’t need to go to some separate clearXchange app. The first time you receive money from it, you’ll get a text message or an email telling you that you need to link your email or phone number to your account; after that, the money should just automatically appear in your checking account.

None of these technologies are cost-free, as far as the end-user banks are concerned. But processing checks isn’t cost-free either, and banks do that for free. In general, as a matter of public policy, there’s a strong interest in having the $865 billion which changes hands between Americans every year clear at par: the amount the sender is down should be exactly equal to the amount the receiver is up. That’s one of the reasons why so much of that $865 billion is transacted in cash, and it’s a big annoyance with PayPal and Square and other services which have a tendency to charge money for the service of facilitating payments.

What I’m hoping is that clearXchange will help make that service a basic part of what banks do whenever you open a checking account — that electronic peer-to-peer payments will just get added to the list of free services along with electronic bill payments and fee-free check clearing.

But that doesn’t mean that all banks will encourage their customers to use clearXchange technology instead of PayPal, Square, Popmoney. If those vendors can come up with a way of sending money which is cheaper and easier and safer and more efficient for the banks, then the banks will use those services rather than clearXchange. In any case, it’s all going to be pretty much invisible to the end user, who just sees their own bank’s website or app.

So I hope that the other big payments providers stick around, to provide competition for clearXchange and act as a force preventing the banks from charging for the service once it reaches ubiquity. We want this to be like bill pay, which is generally free at both ends of the transaction, and not like debit-card usage, with its fast-rising interchange fees (until Richard Durbin came along). And now that clearXchange has launched, I’m more optimistic than ever that we might actually achieve that goal.

Joe Weisenthal says I’m wrong about the Ira Sohn conference. But that doesn’t mean he thinks that David Gaffen is right. Gaffen reckons that people go to these events so that they can trade in and out of stocks in the space of 10 minutes. Weisenthal, by contrast, sees value somewhere else entirely:

It’s not often that you get to hear the thought process and reasoning employed these financial professionals. Within the broader scope of financial media, you hear a lot of managers and pundits making their arguments in broad strokes, with lines like “We’re bullish on US banks because of low rates, yada yada yada…“And that kind of stuff really is useless. But these are professionals who usually have portfolios of just a handful of stocks, who have done a tremendous amount of research on each one before pulling the trigger, and frequently they do have original insights.

So you shouldn’t go out and by MBIA just because a manager likes it. But if you’re looking for original thinking on stock selection, the speeches, presentations, and letters of big hedge fund managers is frequently some of the best stuff around.

This is a good point. The best way to extract value from Ira Sohn presentations is to concentrate not on the stocks that the hedge fund managers are talking about, but rather on their methodology. At the very least, you’re likely to learn a few ways of looking at a company that you hadn’t thought of before. These fund managers, then, can improve the way that investors do their own research on companies, even if they’re not going to be delivering up great investment ideas on a plate. Use their methodology on a stock which none of them are looking at, and you might just be able to find a hidden gem.

There’s another way to look at the fund managers’ investment techniques, and that’s as a way to evaluate the managers. The idea here is that the managers who have the smartest techniques are likely to be the best managers to invest in. On this front, I’m far from convinced: as I told Gaffen, the analyses presented to the Ira Sohn conference are really sales pitches more than they are transparent views into how hedge fund managers think and invest in the real world. For all their joined-up thinking at Ira Sohn, most successful fund managers in reality use techniques which they would hesitate to admit to in public.

But in any case, you’ll never get the important nuance about how these fund managers think from reading news reports about the conference. So I still don’t see the point in sending a bunch of reporters to cover it.

Amid all the convoluted explainers and analysis of the deal that Newt Gingrich and his wife had with Tiffany, one crucial point seems to have been missed. So well done to SpyTalk for picking up on this:

At the same time Tiffany & Co. was extending Callista (Bisek) Gingrich a virtual interest-free loan of tens of thousands of dollars, the diamond and silverware firm was spending big bucks to influence mining policy in Congress and in agencies over which the House Agriculture Committee–where she worked–had jurisdiction, official records show…

Tiffany’s annual lobbying expenditures rose from about $100,000 to $360,000 between 2005 and 2009, according to records assembled by the Center for Responsive Politics, a nonpartisan government watchdog organization.

There’s enough confusion over the Tiffany’s deal that it certainly looks unusual — while Tiffany’s does extend interest-free loans of up to one year to top clients, Gingrich’s account was open for two consecutive years, despite the fact that Gingrich claimed to be paying no interest on it. And in any case it seems unwise, to say the least, to accept an interest-free loan of more than $250,000 from a company which is lobbying your committee — no matter how rare or common such loans might be.

There’s an irony here: we only know the loan was interest-free because Newt Gingrich went on TV to say so, in order to try to portray himself as fiscally prudent. But now we do know that, the loan begins to look more like an undisclosed lobbying expenditure on the part of Tiffany. Which in many ways is even worse for Gingrich. There must be official rules about accepting interest-free loans from companies lobbying your committee. Is there a case to be made that Callista Gingrich broke those rules?

Update: I just spoke to Newt Gingrich’s press secretary, Rick Tyler. He said that the deal the Gingriches got was the same one that Tiffany’s offers to anybody else: interest free financing for 12 months. And that all debt with Tiffany’s was paid off within a 12-month period. If there was hundreds of thousands of dollars of debt outstanding for a second consecutive year, which there was, then that was new debt, associated with new jewelry purchases.

Is it OK for a Congressional staffer to accept an interest-free loan from a company which is lobbying that staffer’s committee, just so long as the same offer is available to the public generally? I’m not sure about that. But Tyler, for one, sees no problem there.

Update 2: Tiffany spokesman Carson Glover emails to say that the company’s lobbying was aimed at the Natural Resources Committee, which has jurisdiction over mining, and not the Agriculture Committee, where Callista Gingrich worked. This is more persuasive to me than what Tyler is saying: if SpyTalk is wrong that Ag has jurisdiction over mining, it’s much harder to say that there’s anything scandalous here beyond the sheer amount of money that the Gingriches spend on jewels annually.

I’m a little late to this, but Shanken News has the latest Bordeaux export league tables, and they’re quite astonishing. The US is now only Bordeaux’s sixth-largest export market, in both price and volume. Meanwhile, the top spot on the dollar league table — held since time immemorial by the UK — has now moved to Hong Kong.

The numbers: in 2008, the US imported 1.75 million cases of Bordeaux, at €141 per case. By 2010, imports were down to just 1.36 million cases, and the average price per case was a mere €72. That’s wholesale, to be sure, but even at wholesale it’s hard to find decent Bordeaux at €6 per bottle.

China’s just a little bit cheaper. It imported 771,000 cases of cheap Bordeaux at €69 per case in 2008; by 2010 its 2.5 million cases were averaging €65 apiece.

And Hong Kong is a whole different world. In 2008 it imported 381,000 cases, which were worth €197 each on average. By 2010, imports had risen to 791,000 cases — still a fraction of the other countries on the league table. But the average price per case was a whopping €371. That’s well over four times what American importers are paying.

At the very top end of the market, the same thing is happening. “Last year, Hong Kong became the worldwide center of wine auctions,” Shanken News reports: total auction sales there outgrossed London and New York combined. To a first approximation, of course, wine auctions are Bordeaux auctions, especially in Hong Kong.

My feeling is that this is a positive development for the wine world more generally. Bordeaux is no longer the benchmark of quality that it once was: it can’t be, if an entire generation of non-Chinese wine drinkers is growing up never drinking the stuff. Instead, the world of wine is becoming more heterogeneous, and wine lovers are exploring many different regions, from California to Italy to Australia to Spain, as well as the Rhône and other bits of France far from the Garonne River. Such areas won’t attain cult status in Hong Kong for a while, if ever. But they’re just as easy to fall in love with as Bordeaux, and variety is always a good thing, with wine.

(Via Veseth)