Felix Salmon

On Friday, the LA Times published the of pay for Lehman Brothers’ top 50 employees in 2007.  That’s employees as in managing directors and below: pay for “named corporate officers” like Dick Fuld was publicly disclosed. This is how much you make if you’re not running the company, but just working there and making lots of money.

While LAT’s originals contain lots of interesting information like year-over-year comparisons, they’re not easy to read, and not searchable. So, as a public service, Ben Walsh put together the list in searchable form.

It’s worth noting a bunch of people with incredibly vague job titles like “MD, Executive Administration” (Benoit Savoret, $18 million in 2007.) These are managers — and pretty important ones, judging by their paychecks — yet not important enough that their pay needs to be disclosed to the SEC or to investors. Collectively, they’re more perpetrators than victims when it comes to the financial crisis: they can all live quite happily for the rest of their lives on what they made in that one single year.

To get into the Lehman Top 50 in 2007, you needed to be earning more than $8.2 million a year — that’s $158,000 a week. One man earned $9 million, six men earned $10 million, and four men earned $11 million, with no one earning anything in between: Lehman clearly found it easiest to round up or down to the nearest million. You know, as you do.

Of course, there’s nothing special about Lehman, in terms of pay. If we saw the Top 50 list for a really big investment bank, like JP Morgan or Goldman Sachs, it would have higher salaries and a higher cut-off, almost certainly north of $10 million.

The one thing which is most startling about this list is the number of women on it: exactly zero. (Update: It seems I missed one, Ros L’Esperance, #33.) One can’t help but suspect that the all-male culture at the upper reaches of Lehman was a corrosive and damaging thing, which in some way helped lead to the bank’s demise. Erin Callan, in 2007, was already a named corporate officer at Lehman, so she doesn’t make this list. (She was named CFO in September 2007.) From the outside, it looked as though Lehman had at least one woman in a senior leadership position. But looking at this list, it’s clear just how much of an exception Callan was.

Callan, it turns out, was the highly visible lone woman at Lehman, competing with and against nothing but men. I wonder what she thought, at the time, looking down this list, and seeing not but a single woman on it. At Lehman, it seems, in Dick Fuld’s immortal words, “the bros always wins”.

1. Millard, Robert B: $51,347,377 (MD, Global Trading Strategies)
2. Schwartz, Marvin C: $31,141,337 (MD, Asset Management)
3. Hoffman, Jonathan: $30,850,000 (MD, Trading – Global Rates)
4. Cassarini, John: $18,500,000 (SVP, Trading – US Proprietary)
5. Klein, Henry: $18,200,000 (MD, Global Trading Strategies)
6. Penkett, Paul Alexis: $18,000,000 (SVP Trading – Asia Proprietary)
7. Savoret, Benoit C: $18,000,000 (MD, Executive Administration)
8. Walsh, Mark A: $17,500,000 (MD, Fixed Income Administration)
9. Kirk, Alex: $17,000,000 (MD, Fixed Income Administration)
10. Glasebrook II, Richard J: $16,757,246 (MD, Asset Management)
11. Shafiroff, Martin: $16,495,404 (MD, Private Investment Management)
12. Bouzouba, Rachid: $15,000,000 (MD, Equities Administration)
13. Felder, Eric J: $15,000,000 (MD, Trading – High Grade)
14. Fee, Hyung S: $15,000,000 (MD, Fixed Income Administration)
15. Taussig, Andrew R: $14,085,000 (MD,  Retail/Transportation Investment Banking)
16. Donini, Gerald A: $14,000,000 (MD, Equites Administration)
17. Whalen, Patrick J: $13,005,000 MD, Equites Administration)
18. Kramer, Jeremy R: $12,875,403 (MD, Asset Management)
19. Amin, Kaushik: $12,500,000 (MD, Fixed Income Administration)
20. Fuchs, Benjamin A: $12,500,000 (MD, Global Opportunities Group)
21. Morton, Andrew: $12,500,000 (MD, Fixed Income Administration)
22. Mumphrey, Thomas P: $12,500,000 (MD, Fixed Income Administration)
23. Banchetti, Riccardo: $12,000,000 (MD, Executive Administration)
24. Nagpal, Ajay: $12,000,000 (MD, Equities Administration)
25. Thorkeisson, Sigurbjorn: $12,000,000 (MD, Equities Administration)
26. Weiner, David: $11,922,906 (MD, Asset Management)
27. Duramel, Olivier: $11,700,000 (SVP, Quants – US Systemic Trading)
28. Schneider, Gregoire: $11,700,000 (SVP, Quants – US Systemic Trading)
29. Shafir, Mark G: $11,500,000 (MD, Global M&A Investment Banking)
30. Weiss, Jeffrey L: $11,500,000 (MD, Financial Services Investment Banking)
31. Jotwani, Tarun: $11,250,000 (MD, Executive Administration)
32. Wickham, John R: $11,250,000  (MD, Equities Administration)
33. L’Esperance, Ros: $11,000,000 (MD, Financial Sponsors Investment Banking)
34. Parkor, Paul G: $11,000,000 (MD, Global M&A Investment Banking)
35. Rieder, Rick: $11,000,000 (MD, Global Principal Strategies)
36. Wieseneck, Larry: $11,000,000 (MD, Global Finance Administration)
37. Dauhajre, Munir: $10,000,000 (MD, Equities Administration)
38. Gatto, Joseph D: $10,000,000 (MD, Global M&A Investment Banking)
39. Higgins, Kieran Noel: $10,000,000 (MD, Trading – Global Rates)
40. Hoffmeister, Perry C: $10,000,000 (MD, Investment Banking Administration)
41. Meissner, Christian Andrea: $10,000,000 (MD, Investment Banking Administration)
42. Psaki, Jeffrey: $10,000,000 (SVP, Trading – High Grade)
43. Pearson, Thomas M: $9,000,000 (MD, Origination – Real Estate)
44. Ramallo, Henry: $8,579,023 (MD, Asset Management)
45. Assi, Georges: $8,500,000 (MD, Tradlng – Collaterallzed Debt)
46. Corcoran, Joseph: $8,500,000 (MD, Equites Administration)
47. Jordan, Nicholas: $8,500,000 (MD, Equities Administration)
48. Bacha, Mohamed-Ali: $8,250,000 (SVP, Trading – Volatility)
49. Mattu, Ravi K: $8,250,000 (MD, Fixed Income Administration)
50. Brewer, Paul E: $8,250,000 (MD, Global Trading Strategies)
51. Tarnow, Joshua R: $8,200,000 (MD, Global Trading Strategies)

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Less than a week ago, we suggested that austerity, Europe’s great experiment in cutting its way out of an economic slump, was coming to an end. Now every bit of economic data, including today’s news that Spain, like the UK, is officially back in recession, seems to come with a gigantic Scarlet A across it.

“The tide appears to be turning” on fiscal austerity, Reuters declares, as European Central Bank President Mario Draghi has called for a “growth compact” to complement the last two years of mass budget cutbacks. The ECB’s internal markets chief agrees and, in characteristically European fashion, is calling for a plan-to-make-a-plan for economic growth.

There’s a flood of anti-austerity op-eds. Larry Summers writes that Europe’s maladies were misdiagnosed: “High deficits are much more a symptom than a cause of their problems,” he argues – and calls for the world to make EU aid contingent on a plan for growth. Mohamed El-Erian slams austerity in Spain, and calls for a focus on both “the deficit containment (numerator) and growth (denominator).” Christina Romer, former top economic adviser to President Obama, argues for a “backloaded consolidation” version of budget cuts in Europe; essentially, spending cuts and tax increases that are slowly implemented as economic growth recovers.

Of course, all of this anti-austerity talk comes much too late. But there’s some reason for optimism: The European Investment Bank may get more funds for real, growth-driving investments. Marc Chandler lays out the early speculation, noting that EIB funds could rise to $264 billion, which could go to infrastructure, technology and renewable energy.

European spending of any kind is politically fraught, and the EIB’s is definitely not a quick fix. Compare, as Reuters did, the EIB’s reported size with the 1 trillion euros created by the ECB to prop up the economy. These are baby steps during a crisis, in other words.

And on to today’s links (scroll down for readers’ suggestions for Occupy Wall Street’s future):

Tax Arcana
How Apple sidesteps billions in taxes – NYT

#OWS
Occupy Wall Street now “fighting the man through the Byzantine regulatory process” – WashPost

TBTF
Your latest highly levered, possibly Too Big to Fail nonbank entity: Mortgage REITs – Bloomberg

New Normal
Welcome to housing’s “prolonged bottom” – WSJ

Crisis Retro
Dick Fuld, in an email: “The Bros Always Wins” – Dealbreaker

Welcome to Adulthood
Congress is rethinking the idea that student debt should follow you to the grave – WSJ
Dealing with student loans and a mortgage: It really, really sucks – NYT

EU Mess
Spain is the latest European country to fall back into recession – Macroscope
Spain is the new Greece, except possibly worse – EconoMonitor

Deals
Microsoft buys a 17.6% stake in Barnes & Noble’s nook unit – NYT
Microsoft enters the e-book wars – Felix

Charts
Our depressed fiscal situation in 4 charts – Krugman
2030: The world in 5 graphs – Finance Addict

Startups
The “no-revenue formula” for startups is a real, proven strategy that works (for investors) – Nick Bilton
Yes, there’s a tech bubble, but it’s not that simple – Chris Dixon

Takedowns
The Economist‘s exquisitely refined example of “globollocks” – Crooked Timber

Now He Tells Us
Kashkari: America needs to quickly figure out how to help homeowners – WashPost

Legalese
Madoff trustee’s legal fees are dwarfing the amount he’s recovered for Madoff Victims – Bloomberg

Financial Arcana
Models don’t cause crises, people do. And models help – FT Alphaville

Shocking
Romney fundraiser a large crowd of “older white people, mostly men” – The Daily Beast

Your Daily Outrage
NYC considering banning Happy Hour, for some reason – NY Post

Old Normal
A map of LA when streetcars, not freeways, dominated – Flickr

#OWS’s Second Act: Your reactions

Last Thursday, ahead of mass protests planned in hundreds cities on May 1, we asked Counterparties readers to tell us the one issue the Occupy Wall Street movement should hang its hat on. We’ve included the best responses below; they’ve been edited for length. We’ll be sending along books from Felix’s desk to the winners!

It seems pretty clear to me that Occupy should, at least for the moment, sharply focus on student debt and higher education financing. The iron is hot, with the issue in front of Congress right now, so there is an opportunity to push through a substantive political victory that Occupy never quite had during the first go-round…

That victory would also come on an issue that is acutely important to the constituency the movement is clearly going after – if you think back to a year ago, the “stereotypical” protestor was a recent graduate having trouble finding work, and weighed down by immense educational debts… By starting off the season with an issue of much more direct relevance to its strongest constituency, OWS can 1) make a difference, 2) demonstrate its commitment to effecting actual policy change, and 3) in the process, draw the people and positive media coverage that will give it serious political momentum moving forward.

I don’t even like the Occupy, but I think it’s plainly obvious what they need to do.

Roger writes that it’s still too early for Occupy to rally around a single cause:

OWS and Tea Party together have public support approaching 75%, though neither alone has the power to produce anything meaningful. The forces of the status quo will continue to prevail unless and until both movements unite on a common theme. The movements are so ideologically different that their only area of common ground lies in opposition to the status quo. “Opposition” must, at this time, be the one and only objective of all insurgents. We’ll deal with what replaces the status quo AFTER the status quo has been displaced from power, not before then.

The one single issue that the OWS movement should concentrate on is very simple, but at the same time controversial, and that is the idea of debt relief. By removing at least a large percentage of the outstanding personal debt pile, OWS would be able to have an issue that is controversial for most media outlets and a significant amount of the population, but at the same time a serious proposal that resonates with a large minority of the population and actually works to decrease the last decades’ increases in inequality.

Eli Broad’s new book comes out tomorrow, and the cover alone speaks volumes. The title is “The Art of Being Unreasonable: Lessons in Unconventional Thinking”. And the way that Broad has decided to illustrate how unreasonable and unconventional he is? He’s posing next to Jeff Koons’s Rabbit.

Now I happen to be a fan of Rabbit: I think it’s a genuinely excellent and important piece of 20th Century art. I’m also not alone in that view. Ingrid Sischy explained it well, back in 2001, writing of the “Neo-Geo” show where it was first exhibited:

The piece that grabbed the spotlight was Rabbit, his flawless stainless-steel casting of an inflatable bunny. It was a 41-inch-high art-bomb that thumbed its nose at the aesthetics of high art and yet at the same time embraced them, a fusion of Pop and Brancusi. With its wit, its physical simplicity, and its characteristically Koonsian reference to sexual symbols and childhood pleasures, Rabbit has become one of the artist’s most famous and enduring icons…

Kurt Varnedoe, today the chief curator of painting and sculpture at the Museum of Modern Art, is one of many viewers who stayed put when he saw that silver bunny. He recalls, “There are just a few occasions in my art experience in New York where I’ve been sort of knocked dead by an object instantly. This piece was just riveting. You wanted to laugh, you were shocked, you were planted to the floor. I was galvanized by the object. It has such an amazing physical presence… ‘Uncanny’ is the word that comes to mind. There were so many different things going on at once in the piece. It was hilarious, it was smart, and it was chilling… It had that kind of Utopian high-gloss modern clarity to it.”

In 2001, Sischy estimated Rabbit’s value at somewhere in the $2-3 million range; today, it’s probably closer to $100 million. (One Rabbit reportedly sold for $80 million back in 2008.)

Rabbit exists in an edition of three, plus one artist’s proof; Broad owns the artist’s proof, which he bought from Koons in the mid-1990s when the artist needed money to pay the enormous fabrication bills for his Celebration series. Of the other three, two are promised to museums — the Museum of Contemporary Art in Chicago, and MoMA in New York. It’s almost the perfect artwork for a financially-minded collector. Because it’s part of an edition, it’s possible for the piece to be owned by MoMA and by Eli Broad at the same time. Because it’s owned by MoMA, it has the best possible institutional legitimacy. And because there’s a “spare” privately-owned Rabbit out there somewhere, Broad can mark his Rabbit to a private market in the piece.

In the book, Broad says that “people often think it’s strange how briskly I go through museums”: he explains that “I’m there to learn and apply my knowledge to our collections. As much as I would like to stay, I have to move on.” Basically, the job of a museum, in Broad’s view, is to ratify Broad’s own collection. In that sense it’s very different from art fairs, where he can go shopping and build his collection: “While I may dash through a museum,” he writes, “I do give myself time to take in artists’ studios and art fairs in Miami, London, Venice, and Basel.”

All of which is to say that Broad’s Rabbit is an example of unconventional thinking in much the same way as a Saudi oil well is an example of an unconventional energy source. Broad’s famous for buying most of his collection from a single gallerist, Larry Gagosian; the piece he chooses to pose with for the cover of his book is the most valuable and recognizable object he owns. It’s a piece which has been ratified by both museums and the market; a piece which is about as mainstream as contemporary art gets.

The cover of Broad’s book does not depict a man who’s secure in his own taste. Instead, it shows a man who collects trophies and prowls museums looking to make sure that he’s collecting the right ones. Yes, Broad’s collection is extremely valuable. But there’s nothing unreasonable about it.

You think markets are efficient? Check this out: Barnes & Noble stock opened 2012 at $14.75 per share and falling fast; by January 5, the opening price was just $9.50. At that price, the entire company was worth just $550 million, and there was a very real fear that the entire company could go to zero, following in the footsteps of Blockbuster and other real-world retailers selling content more easily bought online.

Today, of course, all that has changed. Barnes & Noble has sold a 17.6% stake in its digital and college businesses to Microsoft, for $300 million — a deal which values B&N’s remaining 82.4% stake at $1.4 billion. And while the $300 million is staying in the new joint venture and therefore not available to help the bookstore chain with cashflow issues, the news does mean that Barnes & Noble won’t need to constantly find enormous amounts of money to keep up in the arms race with Amazon. That’s largely Microsoft’s job, now.

This deal is a bit like one of those high-profile investments by Warren Buffett in a distressed company: a vote of confidence by someone powerful enough to be able to fund the struggling firm through its troubles. Except in this case, the Microsoft investment is much bigger than that, since it comes with deep integration into the Windows 8 operating system. Barnes & Noble no longer needs to sell Nooks, or persuade people to download the Nook app on their iPad: everybody with a Windows 8 device will have the Nook reader built-in.

The e-book market is still young; if Amazon continues to be seen as the enemy, there’s no reason in theory why the Nook shouldn’t become just as popular, if not more so. It’s true that you can’t read Kindle books on your Nook, or vice versa, but over the long term, we’re not going to be buying Kindles or Nooks to read books. Just as people stopped buying cameras because they’re now just part of their phones, eventually people will just read books on their mobile device, whether it’s running Windows or iOS or something else. And that puts Amazon at a disadvantage: the Windows/Nook and iOS/iBook teams will naturally have much tighter integration between bookstore and operating system than anything Amazon can offer.

All of which has lit a real fire under the Barnes & Noble stock price, which opened at $25.79 this morning and looks as though it’s going to close somewhere between $20 and $25 per share. That’s an increase of much more than $300 million in market capitalization, and there’s upside, too: the valuation of the parent is now equal to the value of its stake in the subsidiary. So if the subsidiary rises in value, or if the rest of the company is worth anything at all, then the shares can rise further from here.

The one thing you can certainly expect, though, is volatility. Because Barnes & Noble is no ordinary stock. There are 60.2 million shares outstanding, but of that total the free float — the shares freely traded on various stock exchanges — is just 26.82 million. Meanwhile, at last count, the short interest in Barnes & Noble — the number of shares which had been borrowed by people selling them in the expectation that they would fall — was a whopping 19 million shares.

This, ladies and gentlemen, is what is commonly known as a short squeeze. All those shorts have lost a fortune today, and they’re going to have to cover sooner rather than later, driving the price up artificially. So at least for the next few days, it’s probably worth taking any market valuation for Barnes & Noble with a bit of a pinch of salt: technical factors are likely to overwhelm fundamentals until the shorts have retreated, licking their wounds.

After that, however, we finally have a real three-way fight on our hands in the e-book space, between three giants of tech: Apple, Amazon, and Microsoft. And that can only be good for consumers.

The final hour of Frontline’s Money, Power and Wall Street documentary will air on Tuesday; I’ll be participating in an online chat about the program with producers Martin Smith and Marcela Gaviria on Thursday at 1pm ET. I watched a preview this weekend, while also reading the World Economic Forum’s 92-page report on “Rethinking Financial Innovation”.

The two could hardly be more different. Frontline concentrates on international finance’s discontents, most of whom are convinced that no matter how assiduous financial-market regulation, the big banks will always find a way to extract enormous rents for themselves. The WEF, by contrast, is convinced that financial innovation is nearly always a good thing, and that a few tweaks to internal risk controls, and maybe a high-level council of graybeards thinking deeply about systemic risk, should suffice to protect us all from any downside it might have.

The WEF report is not an easy read. Literally: it’s printed in a light-grey sans-serif font on a white background. And for anybody hoping for an indication that the highest levels of the financial-services industry are taking the problems with financial innovation seriously, it’s particularly depressing. Taken as a whole, the report is a full-throated defense of financial innovation, says that substantially all financial innovations are good things, and downplays all possible downsides to the maximum possible extent.

The first words of the executive summary are “Financial innovation has a long history of success” — and that very much sets the tone for the rest of the report. Weirdly, the success of financial innovation is invariably asserted, rather than argued. For instance, on the left you can see the report’s list of financial innovations since the debit card. “Many of the historical examples of financial innovation listed in the timeline have at some point been misused and misapplied by market participants, and have contributed to significant financial system disruptions,” says the report. “Over time, however, most have been accepted as beneficial.” The passive voice is telling: nowhere are we informed who is accepting these things as beneficial, or what criteria they may be using.

Looking at this list, I can see three unambiguously good innovations: point-of-sale terminals, ACH, and CHIPS. All of them represent evolutionary improvements in the banking system’s payments and clearing architecture. With the rest, I certainly see a lot of innovations which resulted in banks and other private-sector finance players making lots of money. But was the publication of the Black-Scholes equation really a great thing for society as a whole? Are we better off now that we’ve moved from defined-benefit to defined-contribution pensions? Or, to take a slightly earlier innovation which the report dates to 1968, did the originate-to-distribute securitization model really help society as a whole?

It’s disappointing that over the course of its 92 pages, the WEF report never attempts to answer these questions. Instead, we just get lots of unsupported assertion, like the statement on page 40 that “most financial institution failures and insolvencies are not linked to financial innovations”. Well, I’m glad that’s cleared up. Eventually, we end up with a series of recommendations for regulators. The very first one? “Acknowledge the importance of innovation and its role in a competitive, free-market structure.”

From the point of view of someone who has been writing about the failures of various financial innovations for the past four years, there was very little in the Frontline documentary which was new to me. I would hope, similarly, that the documentary would also come as little surprise to any of the financial-services industry’s leaders. Reading this WEF report, however, I’m forced to conclude that they don’t actually have a clue how bad the 2008 crisis was; how closely the devastating global fractures coincided with various financial innovations; and how much it’s necessary to revisit all our priors in the wake of the worst financial crisis since the Great Depression.

The fact is that there’s almost nothing in the WEF report — beyond the simple fact of its existence — which demonstrates that anything at all has changed since 2008. The world’s most important bankers are desperately trying to convince themselves that they’re wonderful people doing God’s work, and that somehow the financial crisis was just one of those unpleasant hiccups along the way. Which it was, for the people who still have jobs at the top of the financial sector, paying millions of dollars a year.

All of which is to say that the WEF report suffers deeply from an unreliable-narrator problem: sometimes the people closest to an issue are the people who are the least trustworthy on that subject. The Frontline documentary might not talk about how it’s trying to “encourage dialogue among stakeholders” by providing “a taxonomy of potential negative outcomes”: that would be Swiss Re’s Stefan Lippe, a chief architect of the WEF report. But if you want to see what kind of damage the financial sector can wreak, you’ll be much better off with the TV show than with the WEF.

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As Mitt Romney pivoted toward the general election – and not for the first time – his chief economic adviser, Glenn Hubbard, ignited an econo-spat by slamming President Obama’s budget in the WSJ. It’s a wonky argument, but at issue is whether taxes will eventually rise on the middle class:

All these tax increases [proposed by the president] on upper-income taxpayers are projected to raise $148 billion per year. Viewed next to proposed additional spending of roughly $500 billion per year, or this year’s federal budget deficit of $1.3 trillion, the president’s budget faces an arithmetic challenge.

That challenge, Hubbard said, would require an across-the-board 11 percent tax increase on Americans earning less than $250,000. Tim Geithner shot back, calling Hubbard’s numbers a “completely made up, remarkably hackish observation for an economist”.

Larry Summers, formerly the director of the White House Economic Council, also stepped into the argument, accusing Hubbard of playing politics. President Obama’s budget, at least, was specific enough to be scored by the CBO, Summers says:

Hubbard constructs a budget plan he imagines that President Obama might propose someday, engages in a set of his own extrapolations and then makes a set of assertions about it.

Austan Goolsbee also waded in, slamming Hubbard’s logic. Hubbard then responded to Summers’s response with two points: that the president’s proposed tax increases would not raise enough revenue to close the budget gap and that spending was set to grow too fast without some sort of tax hike on the middle class.

How to sort through the online version of three econ PhDs arguing in the faculty lounge?

Ezra Klein points out that Romney’s budget “doesn’t make tough choices” about how to close tax loopholes, a fair point. But Josh Barro reminds us that all budgeting is an exercise in guesswork: Under Obama’s plan, our debt-to-GDP ratio would still be far too high by 2022. Considering the spending reforms in Obama’s budget, Barro writes, it makes sense that that gap can only be closed by taxes. – Ben Walsh

And on to today’s links:

Wonks
America was extremely innovative and inventive, “then the Internet happened” – Harvard Business Review

Takedowns
White House Correspondents’ dinner a vomitous, “shameful display of whoredom” – Gawker

EU Mess
Spain’s unemployment rate now worse than the U.S.’s during the Great Depression – Sober Look

New Normal
Multinationals are increasingly cutting U.S. jobs – and making more money overseas – WSJ

Crisis Retro
Lehman’s top 50 employees were paid nearly $700 million in the year before the bank collapse – LA Times
The SEC would like to remind you that it’s still looking into that whole “Lehman Brothers” thing – Reuters

Remuneration
Remarkably, nearly one-third of shareholders voted against Barclay execs’ pay packages – The Guardian
UK unemployment is over 8%, while real wages are lower than they were a year ago – Shewing the fly

EU Mess
Spain in “crisis of huge proportions” after S&P downgrade – Reuters
SocGen: Spain’s downgrade “a belated recognition of reality” – FT Alphaville

Primary Sources
U.S. GDP comes in at a disappointing 2.2% in 1Q – Bureau of Economic Analysis

Deals
Twitter made a secret offer for Instagram that forced Facebook to pay $1 billion – VentureBeat
Felix: Marc Andreessen’s “entire fortune has been built on the greater-fool theory” – Reuters

Tax Arcana
AIG is healthy again – as long it gets many billions in tax waivers – Bloomberg Businessweek

Long Reads
A great read on America’s massive (and growing) prison state – Jacobin

Wonks
“Policymakers, like all of us, are slaves to fashion.” – Project Syndicate

Servicey
Gawker’s handy tips on how to leak to them – Gawker

Concerning
30% of the workforce sleeps less than 6 hours a day – Centers for Disease Control and Prevention

Popular Myths
Obama hasn’t stacked the Fed, you know – WSJ

Investigations
Another Goldman exec is under investigation for Galleon-related leaks of confidential info – DealBook

Back in November, Alison Frankel had a very sensible and clear-eyed analysis of the lawsuit which a Cayman-based hedge fund, Fir Tree, is bringing against, essentially, the government of Ireland. In short, Ireland has sovereign immunity, so, no dice. Sorry, better luck next time.

Since then, there’s been no real new news in the case. But for some reason the Economist has decided all of a sudden that this is a terribly important case which “eviscerates law in New York” and which raises a host of worries:

If America’s legal system cannot be relied on for deals done in America, it will become a less attractive place to do business. Borrowing costs may rise, which could prompt non-American companies to take business elsewhere. At the very least, terms will be tweaked.

To make a long story short, the saga here is that Fir Tree wound up buying Anglo Irish debt obligations which were written under New York law. But then Anglo Irish got nationalized, so Fir Tree no longer has a simple commercial contract in New York, facing a bank: it’s now having to line up with other bank creditors of the Irish government.

That’s not a great outcome for Fir Tree, but it’s simply what happens when a bank gets nationalized. Fir Tree would have been no better off had Anglo Irish simply been left to go bust, which was the only other alternative. And any time anybody lends money to a foreign company, they know there’s a risk of nationalization — especially when that foreign company is a bank.

The law in New York, it’s important to emphasize, has not been eviscerated at all. The Foreign Sovereign Immunities Act is the law in New York, it has been the law in New York for as long as anybody can remember, and anybody writing contracts in New York knows about it. Does the existence of the FSIA make New York “a less attractive place to do business”? Not really: it’s been around for a long time, with no visible effect on New York’s attractiveness as a commercial center.

What’s more, you can’t “tweak” the terms of a contract to get around the risk that a foreign company will become nationalized and thereby subject to the FSIA. That’s a known risk for any lender, and there’s nothing anybody can do about it. Moving the contract to some other jurisdiction wouldn’t help, either: the world’s major commercial centers all have laws giving foreign sovereigns immunity on a very broad front. New York is in no way exceptional in that.

As we’re seeing in the saga of Elliott vs Argentina, any attempt to sue a foreign sovereign in New York court is going to be extremely fraught and difficult at best. Some market fundamentalists might have a problem with that: if “corporations are people too”, then why shouldn’t entire countries be people as well? But for the time being, and for the foreseeable future, foreign sovereigns are special in the eyes of the law. And that’s not an evisceration of anything.

It worked! Kinda. I took Matthew Bishop’s challenge, and tried to spend a gram of gold like I would any other currency. And, frankly, didn’t have a lot of luck — until I managed to find a small business where the owner just happened to be standing around. In the end, I got three lobster rolls (and free drinks, too) for one gram of gold. Which were very tasty — thank you Snack Box!

So, what did I learn on my expedition in Times Square?

• When I tell the Snack Box owner that the gold is real and that “you can tell by how shiny it is”, I’m not kidding. Pure gold is really shiny.
• The most surprising people turn out to know how much a gram of gold is worth, with an astonishing level of accuracy.
• Gold is not a currency. I’m reasonably sure that Andrew, the guy behind the counter at Snack Box, would not have accepted my gram of gold unless his boss was telling him to.
• If you do want to spend gold, then try your luck with small businesses, and don’t expect a good implied exchange rate.
• Also, bringing a film crew along is unlikely to help you at any big chain store.

Most interestingly, however, at least to me, was how much it actually cost us to obtain that gram of gold. For the purposes of the video, I was using the value of one gram of gold based on its market price per ounce. But if you go out and attempt to buy a gold bar, you’ll never be able to find one for a mere $53. In fact, my producer wound up paying double that, in Manhattan. Even if you do a lot of searching online, you’ll be hard pressed to find one for less than $80. We didn’t try to sell the gold — we wound up getting a delicious lunch instead — but my guess is that in most cities the effective bid/offer is absolutely enormous. And much bigger than for any major global currency.

Still, it was a fun — and tasty — experiment. If you try it yourself, do let me know the results!

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Occupy Wall Street is not calling May 1 a comeback. After bringing income inequality and economic fairness to the national conversation, the group’s organizers tell Josh Harkinson of Mother Jones that the demonstrations in 40 cities will be the “big kickoff of phase 2 of Occupy”.

In New York, Occupy will start May 1 in Bryant Park, before marching to Union Square and ending with a 5:30 p.m. march on Wall Street. Additional demonstrations could also shut down subways, tunnels, bridges and the NYSE.

But beyond greater numbers and bolder national action – like possibly attempting to shut down the Golden Gate Bridge – it’s unclear what precisely the second phase of OWS will look like. The organization has successfully focused its message at times, as its highly technical yet well-argued comment letter to the SEC on the Volcker Rule showed. But even if a bullet-pointed plan would capture short-term media credibility, this is still a movement built on the idea of protest-as-message.

If Occupy is searching for a way back into broader relevance, it’s already on the radar of their main target. Bloomberg’s Max Abelson looks at how banks are joining forces and working with police and private security firms to track OWS’s return act. Abelson gives his interviewees enough rope to hang themselves on their own tone-deaf quotes:

Banks cooperating on surveillance are like elk fending off wolves in Yellowstone National Park, [Brian McNary, director of global risk at Pinkerton Consulting & Investigations] said. While other animals try in vain to sprint away alone, elk survive attacks by forming a ring together, he said.

That concern, however poorly articulated, seems to rise to the top at financial firms. After offering to meet with OWS last October, Citigroup CEO Vikram Pandit hasn’t followed through, and the movement is asking him why. New York‘s Joe Coscarelli reports that Deutsche Bank is planning to close its public atrium at 60 Wall Street.

What single issue should Occupy Wall Street focus on? Email us at Counterparties.Reuters@gmail.com and we’ll post the best responses in tomorrow’s newsletter. If we include your comment, we’ll send you a book from the pile on Felix’s desk.  – Ben Walsh

And on to today’s links:

Tax Arcana
AIG is healthy again – as long as it gets many billions in tax waivers – Bloomberg Businessweek

New Normal
Big banks increasingly targeting low-income customers with glorified payday loans – NYT

Oxpeckers
Vogue has scrubbed its glowing profile of Asma Al-Assad – WashPost

Wonks
Why you should ignore the Bernanke vs. Krugman feud – The Economist
The detailed case against the Ryan budget plan – Gene Sperling

Good Pork
A much-derided, $250,000 government-funded study may have saved $20 billion – Wonkblog

Reuters Opinion
Who cares if Murdoch lobbied? – Jack Shafer
Apple and the innovation dilemma – John C. Abell
Stop blaming the statisticians – John Kemp
Can Silicon Valley fix the mortgage market? – Christopher Papagianis

Politicking
Both Obama and Romney have budgets that won’t work without middle-class tax hikes – Forbes
Glenn Hubbard’s controversial claim that Obama’s budget will lead to big tax hikes – WSJ

Remuneration
How big company boards justify “competitive” CEO pay packages by defining much larger companies as “peers” – Bloomberg

Indicators
How the labor-force-participation rate could deal a big blow to Obama – Fortune
We’ve now had three straight weeks of disturbingly high unemployment claims – NYT

More Returns/More Problems
Instagram investor defends himself for only making 312 times his money, quotes Ma$e – Ben Horowitz

Compelling
Memory as a durable good (or why you should go on vacation ASAP) – The Atlantic

Oxpeckers
The econoblogosphere: The totem that reminds Bernanke that the real world exists – Modeled Behavior

For the Record
Chesapeake: When we said we were “fully aware” of our CEO’s personal loans, we meant “generally” – Reuters

Startups
“It’s about more than underwear, it’s about redefining what it means to be made in America” – Kickstarter

Investigations
Ex-Morgan Stanley exec pleads guilty in conspiracy – Bloomberg

Shocking
Thoughts, jokes and honest emotion do little to help your Klout score – Wired

Inanities
“Marketing,” “Strategy” and “Big Ideas” are all dead, says purveyor of “Marketing,” “Strategy” and “Big Ideas” – The Drum

If you want an example of Kickstarter-as-QVC which is extremely likely to fail, look no further than Flint and Tinder. The brainchild of one Jake Bronstein, the idea is to create a new company making boxer shorts in the USA. “It’s about more than underwear,” he says in the video. “It’s about redefining what it means to be Made in America.”

My favorite bit of the pitch is when Mr Bronstein shows us a photograph of his rock-hard abs. (Sadly, those abs are spoken for: that’s a wedding ring you’re looking at.) My least favorite part of the pitch, meanwhile, comes in an update:

The last round of prototypes came from the factory on Friday and while they’re good, there’s still lots of work to be done…

It might sound obsessive, but the way I see it is this: So far, 300+ of you ponied-up for underwear that is made in America. What I’d like to send you instead, is the greatest pair of underwear you’ve ever worn… that just happens to be made in America. It’s the only way this thing is going to work.

Finally, I’ve put together a top-notch team to help realize this goal, but there are still several key roles to fill. Feel free to point me towards anyone you think I should be talking to.

This is a significant backtrack from the original post, where Bronstein said he had already got the designs and needed just $30,000 “to get it going”. As a result, at least one donor ponied up $3,600 and has been promised 365 pairs of premium men’s underwear.

It’s possible, of course, that Bronstein will end up with a genuine retail product at the end of all this. Possible, but unlikely. It’s also possible (and equally unlikely) that the people who have given him $45,882 to date are really just wanting to support an American entrepreneur, and don’t particularly care all that much about when or whether they’ll ever actually receive their briefs.

This project encapsulates my issues with Kickstarter. I’m not saying that Bronstein is a fraud, but I am saying that he seems to have little if any manufacturing or retailing experience*, and is going to face an enormous number of unforeseen obstacles before he ever starts selling this product online. What he wants to do is start a company; Kickstarter quite explicitly says that it does not exist to help people start companies, but that seems to be what it has become anyway.

The fact is that starting companies is hard, and that there’s a very high failure rate in such things. Bronstein has almost certainly underestimated his chances of failure; all entrepreneurs do. Meanwhile, Bronstein’s funders have similarly overestimated the chances that they’re actually going to receive underwear if they fund this project. It’s a deal based on delusion, and it has a high probability of ending in tears and frustration all round. I just wish that Kickstarter were much more honest about that.

*Update: Jake Bronstein replies in the comments, saying that he does too have manufacturing and retailing experience, as the founder of Buckyballs. (He also says that I could easily have discovered this fact by looking at his profile on Kickstarter; it’s true I missed that link.) His mention of Buckyballs, however, did remind me of this video, where Bronstein left an extremely aggressive and intimidating nastygram message for Zen Magnets, a smaller competitor.

The Kickstarter project seems to be gathering a lot of momentum, and at the margin the more money it raises the more likely it is to be able to deliver a product. Still, my broader point is less about Bronstein and more about Kickstarter. Sooner or later, a bunch of these product-related Kickstarter projects are going to fail. And at that point a lot of funders are likely to be extremely unhappy.

John Kemp has a timely reminder, in the wake of the news that the UK is now back in recession after posting a -0.2% GDP figure:

Modern societies have made a fetish of official statistics, particularly the national income and production accounting (NIPA) system developed by Nobel Laureates Simon Kuznets and Richard Stone during the 1930s and 1940s.

NIPAs, especially the top-line figure for gross domestic product (GDP), as well as monthly employment data such as U.S. nonfarm payrolls, have become the arbiters of economic policy and the success and failure of politicians.

In a strange way, Britain’s ONS, and similar agencies like the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) in the United States, hold the fate of politicians in their hands because they help write the political narrative.

It is only a slight exaggeration to say BEA is one of the most powerful agencies in the U.S. government. It may not have as many tanks as the Pentagon, but by measuring the success and failure of economic policies, it can make and break presidencies, as President George H W Bush could confirm and Barack Obama fears.

As Kemp points out, it’s silly to imagine that the UK’s Office for National Statistics can measure the entire economic output of the United Kingdom between January and March, hone it to within a single decimal point, and release an accurate figure before April’s even out.

But I do wonder about all those studies tying election results to various economic statistics like GDP growth or the unemployment rate. To what degree are voters responding to economic activity and joblessness, and to what degree are they responding to statistics? On an individual level, of course, no one has the kind of direct sensitivity to national economic growth which would make vote one way if it was low and another way if it was high. That’s why we need statistical offices. Still, in aggregate, it’s plausible to believe that the population as a whole will be happier, and more well-disposed towards incumbents, when the economy is growing and unemployment is low.

Certainly there’s a very strong way in which national statistics — rather than the underlying economy — drive the national conversation, especially in an election year: Jim Surowiecki’s column in this week’s New Yorker is a prime example. And the strongest word of all is “recession”: it’s incredibly hard for a politician to win an election so long as her opponent can correctly say that she has driven the economy into a recession.

That’s the real reason why there was so much anger when the ONS released its first-quater GDP statistic in the UK: the fact that everybody now knows (or thinks that they know) that the economy is back in recession is itself going to slow down the pace of economic activity in the second quarter.

None of which is to say that national statistical agencies are a bad thing, or that they shouldn’t release their data as efficiently and quickly as they can. It’s just to say that, in good Heisenbergian fashion, they affect the economy just by observing it. It’s even possible that all those lies told by the Argentine statistics office were more than just spin, and actually helped the real economy, somehow. Not that I’d ever recommend such a course of action.

It’s easy to see why Marc Andreessen is grinning on the front cover of Wired magazine this month. Inside, there’s an interview where he’s introduced as a “tenacious pioneer”, one of “our biggest heroes”, and someone who was so far ahead of the curve on his “five big ideas” that he had them “before everyone else”.

It’s easy to admire Andreessen, a man whose disarming and engaging blog was a must-read during the financial crisis, when he would provide some very smart perspective from the point of view of a wealthy man, thousands of miles away from the epicenters of the crisis, who had some very sharp insights into what was going on. He then launched Andreessen Horowitz, and the blog became more of a public seminar in how to be senior management, which is great if you like that sort of thing. And it’s true that the five big ideas in the interview are all pretty revolutionary things, although I don’t think he actually had them all first.

But Andreessen has never really been a public intellectual. His single greatest achievement — the creation of the world’s first web browser, Mosaic — took place under the auspices of the National Center for Supercomputing Applications at the University of Illinois. But ever since then he’s been a red-blooded capitalist, founding and funding a long series of for-profit companies, and becoming one of the wealthiest and most powerful men in Silicon Valley in the process.

And when you look at Marc the capitalist, rather than at Marc the ideas guy, the hero-worship becomes a bit more difficult. I certainly like the way that he’s dragging Silicon Valley into the world of philanthropy, where it’s historically been very weak. But a lot of my own Wired story, last month, can be read as a push back against the IPO culture which Andreessen, almost more than anybody else, has managed to create.

“Silicon Valley is full of venture capitalists who have become dynastically wealthy off the backs of companies that no longer exist,” I wrote in that piece, and Andreessen is Exhibit A if you want to look for such a person. His first company, Netscape, lost the Browser Wars and ended up getting sold to AOL. His second company, Loudcloud, was (to be charitable) too far ahead of its time, so it “pivoted” into something called Opsware; eventually Andreessen managed to sell it off to HP. His third company, Ning, was even less successful, and ended up buried somewhere in Glam Media. None of them exist today in any recognizable form; none of them ever made much money; and none of them even really made it as far as building anything approaching a permanent income stream.

The Netscape IPO, in 1994 1995, was in its own way revolutionary. It broke the rules by going public without ever having made any money, and it also had that eye-popping first-day rise, from the issue price of $28 to as high as $75 in the first day’s trading. For the first time, people in Silicon Valley understood that you could make enormous sums of money just by timing the markets — buying in at a low valuation and selling at a high valuation — even if the underlying company never made any money at all.

Andreessen’s current company, Andreessen Horowitz, is devoted to doing exactly that. Andreessen Horowitz does provide a bit of expert advice and name recognition, but at heart it doesn’t make anything at all; its sole predictable income stream is the management fee it skims off while investing other people’s money. Those investors, in turn, are not particularly interested in creating long-lasting standalone companies which have large profits and create jobs. Instead, they’re primarily interested in buying into any company, no matter how flash-in-the-pan, where Andreessen Horowitz can exit its investment for a large multiple of whatever it bought in at.

After all, that’s how Andreessen made his money. I’ve never met anybody who thought that Netscape was a good acquisition for AOL, or that HP gained much from buying Opsware beyond getting Andreessen to sit on its famously-dysfunctional board. (He became the semi-official spokesman for the board in 2010, which did almost nothing to improve the board’s reputation, but did quite a lot to hurt Andreessen’s.) In many ways, Andreessen’s entire fortune has been built on the greater-fool theory: if you build something trendy enough, there’s probably going to be a huge lumbering company out there somewhere willing to overpay for it. Hence the buzziness of the Wired interview — clouds! social! SAAS!

Andreessen’s also very shilly, when it comes to his own businesses: when Ning finally died, for instance, he put up a blog post all about how the team there had “brilliantly executed a dramatic transformation of the company”. The fact is, as a close reading of the Wired interview will attest, that while Andreessen does have a lot of good ideas, brilliant execution is not at the top of his list of abilities. His own social-media company went nowhere, and his consolation prize — a seat on the Facebook board — is so important that Mark Zuckerberg didn’t even bother to consult him before dropping $1 billion on Instagram. His main job there is to ensure that Mark can do whatever he wants, to provide a layer of insulation between Zuckerberg and shareholders. Meanwhile, the Twitter guys didn’t let Andreessen Horowitz invest in their company, forcing AH to buy its stake in the shadowy secondary market instead.

While Andreessen is very good at making money, then, he’s much less good at creating lasting value for the long-term shareholders of his companies. In his world, buy-and-hold public shareholders are the patsies, the people left holding the bag when the fast money has long since departed. He’s smart; the rest of us are chumps. I guess it makes perfect sense that he’s recruited Larry Summers as a Special Advisor.

Update: I should have mentioned (I was going to, and forgot) that Mosaic 0.9b is, to this day, my favorite-ever web browser. It was a beautiful thing, which worked wonderfully. And yes, in large part it was responsible for The Internet As We Know It today. Andreessen’s influence is felt far beyond the companies he started. But there’s another thing that Netscape started, which is the monster funding round which is so big that no one (except a true giant like Microsoft) will dare compete. A correspondent writes:

Firms such as his have been leading truly insane rounds lately, sometimes in excess of $100 million. This is a different kind of investment than traditional venture capital. Under the old model, a hundred companies raised a million dollars each. Market competition then (theoretically) selected the best. Under this new model, kings are made, and there is no competition. Who would compete with a company that just raised $100 million in a day? Who would invest in a company that would dare to compete with such a sudden colossus?

This kingmaker strategy (also at work in the payments world, see Square) is the opposite of portfolio diversification. It encourages the formation of massive bubbles. And it locks out true innovation to the extent that the kingmakers choose incorrectly–which they often do.

Update 2: Chris O’Brien, writing in 2009 when Andreessen Horowitz was launched, made much the same points in a more rigorous and quantitative way. It’s a really good post, you should read it.

Many thanks to everybody who responded to my provocation yesterday, where I suggested that the NYT could sell advance access to its stories. John Gapper summed it up well, in a tweet: “If scoops don’t matter to most readers, as the digerati claim,” he said, it’s logical to sell them to those who do value them. Which, in this case, would be hedge-funds capable of front-running the news and making a profit when the news moves markets.

In a sense, there’s something very economically inefficient about scoops like this one. The NYT story came out in the middle of the weekend, when markets were closed; when they opened on Monday morning, both Walmart and Walmex had billions of dollars shaved off their market capitalizations, but no one was given the opportunity to short those stocks at their prior level. After many months of diligent and valuable work on this story, one would think that a genuinely capitalist economy wouldn’t just leave money on the table like that. After all, buy-side institutions pay millions of dollars to analysts who research companies like Walmart in depth; isn’t that exactly what the NYT was doing?

For years, short-sellers have briefed journalists when they find out something damning about a company: think of Jim Chanos, for instance, putting Bethany McLean on to Enron and other companies. More recently, a group of people ranging from Mark Cuban to John Hempton to Muddy Waters to Anonymous Analytics has merged the shorting and the reporting functions, putting on short positions before releasing their own research on a company in the hope of seeing that company’s shares fall as a result.

But while the world doesn’t seem to have blinked very much at shorts helping reporters, there’s a much more visceral opposition to the idea that reporters might ever help shorts. If the NYT were to give any hedge fund an advance peek at its reporting, goes the argument, well, that would be bad.

The journalism-ethics angle to this hasn’t really been fleshed out, though. Mathew Ingram, for instance, says that if news is being put out in the public service, then it shouldn’t be “just another commodity”; if the NYT were to go down this road, then “that would make it a very different type of entity than it is now”. It’s all very vague and hand-wavey.

The Epicurean Dealmaker, in the comments to my post, is a bit more on point:

Why in God’s name would you want to give the reporters and editors of the New York Times even more of an incentive to break market-moving news. Surely you know there are many sides to any story; emphasis is critical. Why would news consumers trust editors and journalists who could directly profit by making a complicated story just a little more controversial, by shading facts and presentation to put a company in a worse light, by selectively releasing (or suppressing) information? Newspapers like the Times have always relied on a not quite accurate but nevertheless crucial image of impartiality for their authority. This would disappear if they were seen to be tools of Steve Cohen or Ken Griffin.

The fact is that the reporters and editors of the NYT already have an incentive to break market-moving news. Talk to pretty much any business reporter, and they’ll tell you the same thing: the story everybody wants to get is the scoop which moves markets. If you develop a reputation as someone who can get those scoops with any regularity, you’ll rise far and fast. It’s not uncommon for business news services to even put out charts of a stock price, showing when a story came out and what happened to the price after it did. Those charts can mean real money in terms of new subscriptions, and also in terms of pay rises for the journalists in question.

So journalists already indirectly profit from moving markets, and my suggestion was that the relationship should remain indirect: the NYT would sell advance access to its feature stories as a package, ex ante, just like other high-end news services. If a hedge fund wanted to pay a very large amount of money for that package, then it could then do with the information as it wished. But in any case if the hedge fund wanted information to flow the other way, and wanted to influence the NYT’s journalists at all, then it would have to do that the old-fashioned way, just like Chanos did with McLean.

But the real problem with my idea, it turns out, has nothing to do with journalistic ethics at all. Instead, it’s the insider-trading rules of markets around the world.

I wrote about insider-trading rules back in 2008, and came to the conclusion that while I wouldn’t necessarily implement such laws if they didn’t exist, I’m not a huge fan of abolishing them, either. Certainly there are well-formed arguments why insider-trading laws should be abolished, but let’s ignore the philosophical arguments for the time being: they haven’t been abolished, they’ve been in force since the 1960s, and everybody has to abide by them.

And the effect of substantially all insider-trading laws is to, in effect, ban precisely the kind of thing I’m suggesting, where a small group of people can take advantage of information asymmetries to make money. The way that most (but not all) stock markets are set up, the ideal is a level playing field, where all players get exactly the same information at exactly the same time, and then act accordingly; attempts to act on information before it’s public are criminalized.

One thing that both the ethical and the legal approaches have in common, however, is the concept of “public information”: both of them object to my idea because the NYT is in the business of putting out public information, and giving hedge funds advance access to that information — before the rest of the public gets a look — would in some way be fundamentally unfair.

The concept of “public information” is not a well defined one, and probably can’t be well defined. Certainly it’s not a function of price: once a piece of information hits the Bloomberg wire, it’s public, even if you need to pay Bloomberg $20,000 a year to see it. Josh Benton raises the example of Footnoted Pro, which costs $10,000 a year — but that service is explicitly based on the analysis of public information which is released to and by the SEC. Michele Leder’s product simply provides a smarter way of finding the needles in the haystack of EDGAR filings.

Is a tweet public information? Yes. Is a Facebook status update? I don’t know, but I suspect it probably isn’t. But here’s something which definitely isn’t public information: hours of interviews with a former Walmex executive detailing exactly when and where the company paid bribes.

In the comments to my post, Daniel Davies makes an impassioned argument that what I’m suggesting would almost certainly be illegal in many markets, even if it might be allowed, in some circumstances, in the US. He also says that hedge funds would never pay $1 million a year for this service. These two things are related. The value of advance notice of NYT stories, to a hedge fund, is inversely proportional to the number of other hedge funds who are also getting that advance access. And here I think is one of the key ways to distinguish between public and non-public information.

Let’s say the NYT prices the service at $100,000 per year, and you’re a hedge fund wondering whether the service is worth paying for. It’s way more than you normally pay for public information, so you’re inclined to say no. On the other hand, if everybody else makes the same calculation and you end up being the only fund to subscribe, then at that point the $100,000 might well be worth it: you could make many times that on one trade. The problem is that if you’re the only fund to subscribe, then the information can’t be considered public any more. And if it’s non-public information, then you risk putting yourself in legal jeopardy by acting on it.

In other words, if the information is public then it’s worth very little, and if it’s non-public then it might be illegal to trade on.

This also explains why it’s so common for executives to complain that what short-sellers are doing is illegal. Jim Chanos had information about Enron which was damning, and he acted on it before it was made public by Bethany McLean. That looks like material non-public information to me. What he did was legal, if he didn’t have any insider sources within the company. But McLean certainly talked to a lot of people within Enron, and she was also talking to Chanos all the while. Which raises some legal grey-area issues.

My feeling is that it would be astonishing, in practice, to see an insider-trading prosecution based on information which the New York Times Company had sold on a subscription basis. It’s the NYT’s business to sell information; doing so can’t sensibly be considered illegal. And similarly, once someone has legitimately bought that information from the NYT, it’s a bit crazy to say that they can’t act on it.

Similarly, I’d be equally astonished to see Sharesleuth, Mark Cuban’s operation, ever prosecuted for insider trading, even if they quite explicitly had sources inside the company they were reporting on. Sharesleuth’s model is not intrinsically unethical; the problem with it is rather that the model just doesn’t seem to work. Still, I’m sure that if and when it does work, the company being targeted would try extremely hard to get Cuban investigated for insider trading. And that’s almost certainly a risk that potential subscribers to any advance-news NYT product have no interest in taking.

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Two government agencies. Two completely different narratives of the bailouts.

Roughly a week after the Treasury Department extolled the virtues of America’s crisis-era bailout measures, a government watchdog has a very different story to tell. SIGTARP, the office created to oversee the Troubled Asset Relief Program and headed by Christy Romero, has released its latest quarterly report to Congress [PDF].

If you’re struggling to understand the financial crisis and its aftermath, don’t read them back-to-back. One is a story about an against-all-odds victory; the other is about the one that got away.

Last week Treasury estimated that TARP investments, excluding its housing programs, would yield “an overall positive return for taxpayers.” SIGTARP, clearly pushing back against Treasury, says: “It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion.”

In statements to Politico’s Ben White and HuffPost’s Mark Gongloff, Treasury sticks by its story that the bailouts may turn a profit, telling Gongloff “most of the remaining projected cost [of TARP] ($46 billion) is related to foreclosure prevention aid, which was not intended to be recovered.”

It’s worth looking, then, at how foreclosure prevention money is actually being spent. In January, Treasury announced plans to significantly expand its widely maligned HAMP program for struggling homeowners.

SIGTARP’s recommendations for this HAMP expansion are pretty simple – they’re things like setting clear goals and making borrowers prove that they’re actually renting second homes rather than vacationing in them. But Romero complains that Treasury has largely refused to implement these recommendations. “Taxpayers and lawmakers, the office writes, “have an absolute right to know what the Government’s expectations and goals are for using billions of TARP dollars they’ll never get back.”

Regardless of which bailout narrative you believe, we can do better than spending billions without specific goals or accountability. That sounds a bit too much like the first round of bailouts.

And on to today’s links:

EU Mess
The UK is back in recession – Guardian

Billionaire Whimsy
Buffett pushed for higher taxes on the rich; Berkshire lobbied for cuts in private jet fees – WSJ

New Normal
Debt collectors are now “embedded” as employees in emergency rooms – NYT

Apple
A breakdown of Apple’s latest amazing quarter – Asymco

Walmexgate
Wal-Mart lobbied aggressively to water down anti-bribery law – WashPost
Wal-Mart appoints global anti-bribery watchdog – Reuters

Reuters Opinion
The triumph of the social animal – Chrystia Freeland
When credit cards go social – Felix
When Europe goes to extremes – John Lloyd
Wal-Mart’s bribery is sadly unsurprising – Robert Boxwell
The IMF’s Euro conditions are not what they seem – Hugo Dixon

Unintended Consequences
The basic flaw in our massive disability program that discourages people from working – NYT

Alpha
“Hedge Funds Perform Better And Cost Less Than Previously Thought, Say Hedge Funds” – Dealbreaker

Sad But Probably True
Netflix is both beloved and likely doomed – Felix
Netflix’s stream of bad news – NYT

Reversals
Credit Suisse’s net profit falls 96% – and that’s a “sharp turnaround” – WSJ

Fail
How the SEC blew the cover of a Wall Street whistleblower – WSJ

Try Again
The new face of private equity, obligatory hard hats included – NYT

Yikes
“The best fight I’ve ever seen”: Brawl breaks out at elite NYC club – NYT

Regulations
Esther Dyson: The JOBS Act is just “magical thinking” – Project Syndicate

Tracked Changes
Parsing the Fed: How much the statement changes from March to April – WSJ

Remember the murky finances of Cooper Union, which went from healthy to disastrous in no time at all? There’s a lot of controversy about what went wrong, where exactly the problems lie, and what’s the best way to fix them. But one thing’s abundantly clear: the management and trustees of Cooper Union have been unhelpfully opaque about the college’s finances for years, and the college’s students and alumni are fed up with the “trust us, we’ve worked it out this time” approach.

The first thing that’s needed, before any big decisions about things like tuition fees, is transparency about Cooper Union’s finances, and generally much more openness and clarity from management. After all, this is the place where contractor Jonathan Rose got a $2 million contract to oversee the new flagship academic building, while before* his mother Sandra Priest Rose sat on Cooper’s board of trustees — all without any kind of disclosure as to how he was selected. Was Sandra Priest Rose’s pledge of $5 million towards the building contingent on her son getting that contract? No one knows.

But transparency, it turns out, is exactly the opposite of what we’ve ended up getting. Yesterday, Cooper Union’s president, Jamshed Barucha, posted a “framework for action” on the college’s website. In it, we’re told that something called the Revenue Task Force has released an “interim report” which has “recommended” that Cooper “explore” charging fees for “academic programs that build on our unique strengths”, which “may include master’s and other professional programs”.

All of which sounds rather tentative, but in principle the timing here is propitious. Tomorrow sees the Second Community Summit at Cooper Union where the Task Force’s report could be discussed and debated.

Except, discussion and debate isn’t really what Cooper is looking for here. Barucha has not released the Task Force report, and shows no sign of doing so. And for all the qualifiers in his note, it’s quite clear that the decision has already been made. “Cooper Union to Charge“, says the WSJ; “Cooper Union Will Charge Tuition for Graduate Students“, says the NYT.

The WSJ is a good guide to the official Cooper Union line:

The school’s economic troubles date to the early 1990s, when rent it received from the land it owns under the Chrysler Building decreased from $13 million to $11 million while school expenses increased.

It’s far from clear that this is even true: Barry Drogin, for one, who has looked into this issue very deeply, says quite unambiguously that “the Chrysler Building rent and payments in lieu of taxes (PILOT) have risen steadily every year, with large increases scheduled every ten years starting in 2018.” In any case, the Chrysler-building-rent problem is long solved. Revenue from the building will be $32.5 million in 2018, $41 million in 2028, and $55 million in 2031. Cooper’s fiscal problems have nothing to do with insufficient income from the Chrysler Building, and the fact that Cooper still seems wedded to that storyline is worrying.

And then there’s this:

Mr. Bharucha said he has received backing for the plan in recent discussions with faculty and alumni nationwide. “There is very strong, if silent, majority who are highly supportive of a plan that energizes the institution,” he said.

I love the idea of a “very strong” majority which is “highly supportive” of this plan — and yet, for all their incredible support, are somehow completely silent. Bharucha might as well have said that pigs fly when you’re not watching them: his statement might be unfalsifiable, but at the same time it’s also completely implausible. Cooper’s stakeholders are incredibly mistrustful of Bharucha and the trustees, and it’s hard to see how even a silent majority could be supporting a plan which exists only in the vaguest possible form.

After all, we’ve been here before. In 2006, Cooper Union filed something called a cy pres petition, in a successful attempt to get New York to allow it to borrow money against the Chrysler Building. That petition only came to light years later: the whole process, at the time, was shrouded in secrecy. And you can see why that might be: even as Cooper was loudly proclaiming its health in public, the petition was saying that “The Cooper Union currently faces the possibility that it will become unable to carry out its statutory mission in the not-too-distant future”; that it “currently faces a grave fiscal crisis”; and that even faced a real risk of losing its academic accreditation.

As part of that petition, Cooper committed to implementing something called a Master Plan, which involved cutting spending, raising $250 million, increasing the amount that alumni donate to the school, and other things, none of which really happened. As the board of trustees reported in 2011, “three key components of the Master Plan were not achieved as anticipated” — all of which were vastly more germane to the current fiscal crisis than any change in Chrysler Building rents in the early 1990s.

In other words, there’s really no reason why anybody should trust Bharucha or the trustees — to have any faith that they’re being fully truthful with the rest of the school, or that they’re in any position to successfully execute on their promises.

And what of the huge new $160 million (ish) academic building? The trustees still say that it has nothing to do with the fiscal crisis, despite the fact that it’s responsible for some $10 million a year in interest payments:

It is also important to state that 41 Cooper Square was not the cause of the current financial dilemma. Its construction relieved Cooper Union of the costs that would have had to be incurred to renovate the old engineering building and the Hewitt Building to make them acceptable sites for a 21st century education and meet accreditation standards.

This just doesn’t pass the smell test. There’s some small possibility that it’s true, but unless and until the trustees show how they arrived at this conclusion, I have no reason to believe them. The engineering faculty actually voted against the construction of the new academic building, saying that they were more than capable of staying where they were at significantly lower cost. (This fact was, of course, not included in the cy pres petition.)

More to the point, there’s never been a coherent account of how exactly Cooper Union ever intended to pay off the massive $175 million loan it took out to construct the new building. It needed its income from the Chrysler Building to pay its annual costs; and of course it doesn’t have any tuition revenue, since it doesn’t charge tuition.

This is the main thing that has never been adequately explained — by constructing the new building, Cooper Union added on a permanent $10 million annual expense, without any stated means of being able to cover that expense. The new academic building is a sunk cost at this point, of course. But until the trustees explain their logic surrounding its construction, it’s going to be extremely difficult to trust them to do the right thing going forwards.

*Update: Finally, some clarity on the Jonathan Rose/Sandra Priest Rose question. Tellingly, it comes from Roxanne Donovan, a representative of Jonathan Rose Companies, rather than from Cooper Union. She says that Jonathan Rose was hired more than a year before his mother was invited to join Cooper’s board; she also says that there was a formal RFP process for the selection of Jonathan Rose Companies.

Why Cooper Union wasn’t able to be transparent about this itself simply baffles me, and really makes my point. Just because you’re being secretive doesn’t mean you have something to hide.