Self-Aggrandizement: October 2008 Archives

Kerouac
Filed October 31, 2008 1:00 AM.

Realize I should have mentioned as much before going AWOL, but I've been on the road nonstop of late, hitting Maine, Denver, and now Boston, with barely enough time to sleep, much less to blog.

I miss my bed.

Takes the Cake
Filed October 23, 2008 3:09 PM.

We picked up our wedding photos yesterday, and while we've just started sorting through them, we're already exceedingly impressed with Annabel's work:

Like a Goldfish
Filed October 22, 2008 4:23 PM.

This weekend, Jess and I headed out to the Brooklyn Flea, a large and quirky crafts fair and flea market in Fort Greene.

Jess is in her element at such places - she has strong taste, obsessively tracks style trends, and can somehow spot the single gem buried in a table of piled crap. She'll pick up a necklace for $20 one week, and the next we'll be in Henri Bendel, seeing the same thing on sale for $2000.

My own flea market duties, on the other hand, don't really involve item selection. Instead, I'm left with bargaining down the prices of purchases, vetoing anything ill-fitting or overly terrifying, and - most importantly - navigating.

The layout of the Brooklyn Flea, much like nearly every other flea market (and perhaps the minds of most of the vendors), is a convoluted mess. So it's my job to make sure our wandering path nonetheless takes us past all of the stalls.

This weekend, however, I slacked off on that navigation duty, following Jess rather than directing her at each turn.

Jess stopped, for example, at a large booth full of earrings, and exclaimed that this guy actually had really great stuff.

To which I replied that I knew he did. Mainly because Jess had purchased a pair of earrings from him about ten minutes earlier.

And it occurred to me then that perhaps my directing us was robbing Jess of a large percentage of the fun. Left to her own devices, any flea market would seem several times as large; given even a few minutes in between, she could apparently return to the same stalls again and again, each time excited to rifle through them as though for the first time.

Important Update
Filed October 20, 2008 1:28 PM.

Aforementioned picture found:

Undercover Operative
Filed October 17, 2008 11:56 AM.

My brother David wanted me to meet a loose acquaintance of his, who runs a billion-dollar real estate investment trust, and who he thought might be interested in some of the financial things we're up to at Cyan.

Problem was, the only time he knew the guy would be free to chat during his pass through New York City would be at a McCain fundraiser this past Tuesday night.

Fortunately, David's girlfriend's good friend is a deputy director of fundraising for the McCain campaign, and got us in to the event free, exempting me from the moral calculus of whether it might be acceptable to donate money to a candidate you fervently hope won't win, just because it might yield some personal avaricious gain.

But, it turns out, she didn't just get us in, she got us in with VIP-room passes that implied we'd each donated $25,000 to the event. Which is how, despite my good San Francisco uber-liberal roots, despite my current political leanings which could best be called either free-market socialist or tax-and-spend libertarian, I ended up the night before the Presidential debate sandwiched between Sarah and Todd Palin and Cindy and John McCain for a photo I'm in equal parts fervently hoping I can find a copy of and that nobody ever finds a copy of.

Life is never dull.

How to Read the Market
Filed October 12, 2008 1:08 PM.

Thoreau observed that the mass of men lead lives of quiet desperation.

Let that mass buy and sell on an open market, however, and their desperation seems far less quiet. Instead, as they panic and blindly follow each other around, we reach situations like our current, ridiculous stock market mess, with the Dow dipping below 8000.

Before we go on, let's be clear on exactly what that means. Eight thousand points is just about half of this year's highest price. Which means that everyone who's buying or selling stock, collectively, has come to the agreement that the thirty companies that make up the Dow Jones Industrial Average - thirty of the largest companies in the world, like Walmart, Coca-Cola, ExxonMobil, and Pfizer - have just lost 50% of their long-term value.

Which, obviously, is ridiculous. Sure, we're looking at some sort of recession ahead here. But do we really foresee a permanent 50% decrease in bargain shopping, soda drinking, gas buying and prescription medication taking? Certainly, the Dow should have dropped. But only by a relatively small amount - probably less than 10%. Which means that, if we've instead dropped 50%, we clearly have so many idiots involved in determining the price of the Dow that the price tells us a lot about panic and perception, but pretty much nothing at all about the actual state of the underlying market itself.

In fact, as we've all heard countless times, the real problem to fear isn't even the price of stocks in the first place - it's the potential seizing up of world credit markets. Companies large and small depend on short-term credit to smooth out their inherently unpredictable day-to-day cash flow; individuals need it to buy houses and cars, to go to college, or to simply charge groceries. All of which is to say, while a low-priced Dow might reflect something about the economy (or not, in our current case), a lack of credit would cause something in the economy - namely, to cause it to grind to a halt.

So, if that's the problem, how to monitor it? And, if not the Dow, which numbers to follow obsessively from day to day?

In short, LIBOR and short-term Treasury yield.

Allow me to explain.

The first thing we want to know is, are banks willing to make loans? Do they trust that people can pay those loans back? And, most crucially, do they trust each other? Because, basically, the credit crisis kicked off when banks started to realize that, after a string of bank defaults, any number of other banks might similarly be teetering near collapse. So, reasonably, they simply stopped loaning money to other banks. If you don't know what's on any other bank's balance sheet, don't know if they're healthy or exceedingly sick, probably better to play it safe and simply not lend to them at all.

So the number we'd want to know is, how much would banks, on average, charge to lend to other banks? Much like with an individual credit card, where banks charge people with bad credit much higher interest rates than people with good credit, so would banks charge higher interest rates to other banks if they thought that most had potentially bad credit.

To measure that, you'd probably have to call around from bank to bank, asking how much they'd charge to lend to other banks. Fortunately, a couple of blokes in the UK do that for us on a daily basis, then publish that number as the London Inter-Bank Offered Rate, or LIBOR.

If LIBOR goes up, banks are trusting each other less, and the credit crisis is getting worse; if LIBOR goes down, they're trusting each other more, and things are getting better.

You can follow LIBOR data in the first chart on this page. But, in short, the three-month LIBOR is currently at about 4.82%; a month ago, it was 2.82%. A trend, again, in the 'not good' direction, though one I suspect to see reverse itself this coming week.

But LIBOR only paints half of the picture. It gives us a sense of what banks think about the state of other banks, and therefore of the credit market as a whole. But it doesn't tell us how they're acting on that information. Are they actively making loans, investing in stocks, and generally putting capital into the market in a way that will ease up the credit crunch? Or are they playing it safe, and hanging on to their cash?

Fortunately for us, there's a good metric here, too. Because when banks hold on to 'cash' what they actually do (at least the lion's share of the time) is buy Treasury Bills. Treasury Bills are exceedingly safe - since they're backed by the US Government, if T-Bills start defaulting, we don't have a US Government, and dollars themselves aren't worth anything anyway - but they also pay out at least a small amount of interest, and are therefore better than simply stuffing money under a very large bank mattress.

So, in short, banks put unused cash in Treasury Bills. And, much like with any other kinds of lending, the more people willing to make a loan, the less interest any of them can charge. Since a Treasury Bill is essentially a loan to the US Government, if lots of banks have lots of cash, and are willing to make such loans, the interest rate the US has to pay out on those Treasury Bills - the 'yield' - goes down. Conversely, if banks put their money in other, more lucrative places, the government needs to pay more on their Treasury Bill loans to compete for that money, so the yield goes up.

In other words, if banks are still freaking out and holding money in cash, Treasury yields go down. If the credit market starts to thaw out, and they start to make the wide array of loans we need to power the economy, Treasury yields go up.

Fortunately for us, the US Treasury tracks these numbers themselves. Currently, the 30-day Treasury Bill yields just 0.06%, down from 3.98% one year ago (a 98.5% drop!), and a price so low it's basically equivalent to giving money to the US Government for free.

Here, too, I expect at least some degree of turnaround this week, but it certainly paints a picture of how bad the credit mess actually is.

So, to recap:

1. The Dow is a worthless number to follow at this point, because too many idiots panicking have made it excessively low, and mindlessly volatile.

2. LIBOR is a better measure, as it shows how much banks trust each other. If LIBOR is going down, things are looking up for the global economy.

3. Similarly, Treasury yield is a better measure, as it shows whether banks are actually making loans and investments, or just sitting on cash. Treasury yields going up would be an excellent sign for a credit market thaw.

Told You So
Filed October 11, 2008 4:36 PM.

About a week back, I suggested that a smarter approach to a bail-out - rather than buying toxic assets from banks - would be to simply invest directly in those banks themselves.

At the time, I assumed Paulson - due to long-standing investment bank allegiances - was unwisely unlikely to take that smarter route. But, apparently, there's nothing like a solid week of clusterfuck to put all the options back on the table.

Because, as of yesterday evening, that's exactly what they're doing.

Pair that with a recent call from the Deputy Director of New York State's Office for Motion Pictures and Television, who had read my entry about the film provisions of the bail-out bill and hoped I could answer some questions about them, and it appears this blog really might be, as the intro paragraph has long hyperbolically claimed, one of the best sites on the internet after all.

Today's Quote
Filed October 9, 2008 11:39 PM.

"Rabbi Simha Bunam of Pzysha once asked his disciples, "how can we tell when a sin we have committed has been pardoned?" His disciples gave various answers but none of them pleased the rabbi. "We can tell," he said, "by the fact that we no longer commit that sin."
- Martin Buber, Tales of the Hasidim

502
Filed October 7, 2008 2:58 PM.

A few years ago, concerned about the number of film shoots heading up to Canada, the US Congress included a smart provision in the Jobs Creation Act, Section 181, which made investing in independent films in the US a 100% tax write-off until dollar back.

This should have been huge. But because Congress did a really terrible job of informing the film industry about the change, it didn't seem to have much impact. At least until just recently, when in the last year or two some of us in the indie film finance world started to catch on. And, just when we did, we also discovered that the provision was set to expire at the end of this year.

At Sundance last year, our VP of Finance, Alex Burns, spent some time saying as much, while on a panel about film finance. Then, at a party that evening, he ran into several folks from the MPAA.

"Oh," they said. "Cyan Pictures. You guys are the ones leading the push to extend Section 181, right?"

To which Alex responded, "uh... absolutely."

So that's how we got tied, unintentionally, into congressional lobbying. And that's also why I nearly wet my pants with excitement when I learned that, tucked deep into last week's bail-out bill, way in on page 298, was Section 502., Provisions Related to Film and Television Productions.

Not only does that provision extend the 181 write-off for another year, it also includes clarifying language that makes explicitly permissible some of the more arcane tax structure stuff we've been doing here at Cyan over the past 18 months.

Which is good, because, as one of our attorneys said at the time, it's the kind of stuff you want to discuss carefully now, lest you get to discuss it for three to five years later on.

Go Shorty
Filed October 6, 2008 4:56 PM.

Whenever she sings "Happy Birthday", Jess belts it in a deep, operatic baritone, replete with furrowed brow and sweeping hand gestures.

It's just one of her many distinctive singing styles, which range from quiet improvised lyrics about how she's feeling ("Jessie is hungry and needs more sleep...") hummed under her breath while typing emails, to an approach that could probably best be described as 'bellowing', and which tends to occur either in the shower or very close to my ear (the latter invariably sending her into fits of nearly tearful laughter).

Jess frequently accuses me of being obsessed with her, which is pretty much true. Since we've started dating, I've become perhaps the world's premier Jessmologist, and I'd be happy to pen out daily, extended, painfully earnest blog entries about her and her singing and how wonderful she is.

I will, however, spare you. Instead, I'll only share that the morning I really fell in love with Jess, after we'd been dating for a couple of months, was when she turned to me and said, "it's nice to have a friend."

And she was totally right. So, to Jess, my best friend and singing instructor, happy birthday wishes and all my love.

xxx

Bail
Filed October 5, 2008 11:33 AM.

So, the bail out.

The thing about unregulated markets is, on the one hand, they really are the most efficient economic system. But, on the other hand, that efficiency comes at two kinds of costs: screwing some bottom segment of the population on an ongoing basis (c.f., the percentage uninsured in the US insurance system), and screwing some now outdated segment of the population during any transition (c.f. US auto workers as we increasingly outsourced manufacturing).

Basically, then, US economic policy is a balancing game between two competing desires: we want our system to be efficient, but we also want it to be 'fair', by which we mean that we want to somehow protect any of those bottom segments and transitional segments we see getting screwed.

And, last week, it became clear that the segment getting screwed during the current transition was, more or less, all of us. A whole lot of different factors had made the financial system into a total mess, and letting the market work that mess back out (which, indeed, it would, eventually) would have probably led to a massive recession, huge unemployment, and a lot of other similar stuff we'd much prefer to avoid in the process.

So, in essence, who we were bailing out was not just some guys on Wall Street, but ourselves. If we wanted to avoid all that ugly recession / unemployment / etc. stuff, we didn't have much choice.

Of course, there are better and worse ways to handle things, and I suspect highly that Paulson's investment banking background and ties led him to a bail-out approach that's messier than it needs to be, and one that relatively few economists favor.

The bill that just passed gives the government the ability to buy bad assets from banks. As NPR's Adam Davidson analogized, that would be sort of like giving the government the right to come in and buy the junk from your basement.

The other, and in my opinion smarter, approach, would be a stock injection plan. Instead of letting the government buy the bad assets from banks, it would instead let the government buy a part of the banks themselves. This one, by Davidson's analogy, like giving the government the right to actually buy part of the house. And then possibly to move in.

In the first case, we face a sticky short-term question - how much is a basement full of junk worth? In the current crisis, if we pay too much for banks' bad assets, we flush money down the drain; if we pay too little, we don't save the banks.

In the second case, however, we don't have to figure out a price for the junk, and we already know the price for pieces of the bank - it's called the stock price. Further, because of a number of complicated issues (like capital requirements), a single dollar spent in a stock injection probably equals many more - as many as twelve dollars - spent in buying bad assets. And finally, as when we did something similar a few weeks ago with AIG, owning a big chunk of a bank would let us shit-can the CEO and other management, limit executive pay, and generally effect the sort of 'you get what's coming' justice that most Americans think would make a lot of sense.

Though, and here's the part that bothers me, it probably makes less sense to you if all of those CEOs and execs are your long-time friends and golf-buddies, which is to say if you're Hank Paulson.

Therefore, our bill mainly provides for that first kind of 'buy the junk' bailout.

Though, at the same time, tucked deep inside the actual bill - a much revised 451-page expansion of Paulson's original three-page draft - are a couple of sections (106, 107 and 113) that would also give the treasury secretary the right to take the second, smarter, better for taxpayers but less good for bank executives, stock-injection plan.

I'm not sure if there's anything we the people can do to convince Paulson to take that path. And I'm not even sure if electing Obama would mean a new Treasury Secretary, one who might be more likely to err towards that more populist approach.

But, either way, even if we just take the 'buy the junk' approach, it's something we should all be happy about. Because, otherwise, we're left solely to a market solution, and all of us are totally screwed during the transition.

We'd be to this current financial meltdown as Flint, Michigan is to globalization. Which, if you've seen Roger & Me, you know would totally suck.

New Crisis, Old Wisdom
Filed October 2, 2008 1:32 PM.

"It is an old maxim and a very sound one, that he that dances should always pay the fiddler. Now, sir, in the present case, if any gentlemen, whose money is a burden to them, choose to lead off a dance, I am decidedly opposed to the people's money being used to pay the fiddler...all this to settle a question in which the people have no interest, and about which they care nothing. These capitalists generally act harmoniously, and in concert, to fleece the people, and now, that they have got into a quarrel with themselves, we are called upon to appropriate the people's money to settle the quarrel."

- Abraham Lincoln, 1837

Kerouac Filed October 31, 2008 1:00 AM.

Takes the Cake Filed October 23, 2008 3:09 PM.

Like a Goldfish Filed October 22, 2008 4:23 PM.

Important Update Filed October 20, 2008 1:28 PM.

Undercover Operative Filed October 17, 2008 11:56 AM.

How to Read the Market Filed October 12, 2008 1:08 PM.

Told You So Filed October 11, 2008 4:36 PM.

Today's Quote Filed October 9, 2008 11:39 PM.

502 Filed October 7, 2008 2:58 PM.

Go Shorty Filed October 6, 2008 4:56 PM.

Bail Filed October 5, 2008 11:33 AM.

New Crisis, Old Wisdom Filed October 2, 2008 1:32 PM.