Felix Salmon

Commenter Stevensaysyes asks if I could reassess my take on Pimco’s Total Return Fund, given its underwhelming performance year-to-date. Always happy to take requests!

So, first, and most obviously, you’d have to be an idiot to exit the Total Return Fund on the basis of its performance over the past nine months. This is a long-term investment vehicle, and has still comfortably outperformed nearly all of its peers over any reasonably long-term time horizon. Everybody is human, even Bill Gross, and Gross is more than happy to fess up to his mistakes and learn from them.

But of course it’s also important to look at exactly what Gross’s mistake was, and whether it was stupid or reasonable. And the answer is that it probably falls in the “reasonable” category.

The big picture here is that the Total Return Fund does what it says on the tin: it’s a fixed-income fund which tries to maximize the total return to investors. Fixed-income instruments come with a certain yield; all else being equal, the higher the yield, the higher the return to investors. And as a rule, Treasury bonds have the lowest yield of any fixed-income instruments. As a result, then, you’d expect the Total Return Fund, in normal times, to own no Treasury bonds at all.

When bond investors turn bearish, they do a couple of things. One is to reduce duration: sell bonds with long maturities and buy bonds with shorter maturities, which are safer. And the other is to reduce credit risk: to sell riskier bonds which are more likely to default, and buy safer bonds which are less likely to default. The safest bonds of all, in this respect, are Treasuries, which is why Treasuries tend to rally when the rest of the market is falling or bearish.

Buying Treasuries, then, is not something you should do every time you think they’re going to rise in value. If there’s a broad-based environment of falling interest rates, with yields on corporate bonds falling at the same rate as yields on Treasuries, then you’re still better off in the higher-yielding corporate bonds than you are in Treasuries.

So the only time that you’re wrong to sell out of Treasuries is in advance of a time when rates fall even as spreads rise. Holding corporate bonds makes sense over the long term, but in the short term, if credit spreads are rising, that’s likely to mean that prices are going down and you would have been better off waiting to buy. And, according to a handy S&P research note from earlier this month, credit spreads have been rising for most of this year.

This chart, in a nutshell, is why Gross’s decision was a bad one — he didn’t expect spreads to rise nearly as far or as fast as they did. And they did so in exactly the worst way possible for Gross — as Treasury yields were falling. Here’s what’s happened since the beginning of July:

That’s the kind of environment you very much want to be long rates and short credit — the one environment where owning lots of Treasury bonds makes you look smart.

Over the long term, though, I’d rather my bond-fund manager erred on the side of credit rather than on the side of caution. Pimco is one of the few fixed-income investors which does a huge amount of credit research; it should take advantage of that, and buy bonds which are trading cheap compared to their probability of default. Yes, it should play the rates game too. But as a general rule, if I want to maximize my total return, I don’t want to be holding vast quantities of low-yielding Treasury bonds. Gross is guilty of bad timing here. But I don’t for a minute think that this is the beginning of the end of the legend of Bill Gross, bond-market guru. Especially since he’s managed to do the one thing asked of all fixed-income managers, which is preserve value. His fund might be up less than those of some of his peers. But it’s still up for the year. Which counts for something.

You might well have seen, this morning, the news that 25 of the 100 highest paid US CEOs earned more last year than their companies paid in federal income tax. The Reuters version of the story was linked to by the WSJ and retweeted by David Leonhardt; the NYT version already has 120 comments. Both versions, it seems, were based on embargoed copies of this report from the Institute for Policy Studies; because the reporters were given a copy of the report before it went up online, they were unable to link to it from their stories.

But if you do manage to find the IPS website and follow the links to download the full 46-page report, you’ll see that there’s less to it than meets the eye. Certainly it doesn’t come close to demonstrating that its title — “The Massive CEO Rewards for Tax Dodging” is justified. Yes, CEOs get paid vast sums of money. And yes, a lot of corporations pay very little in taxes. But what the report doesn’t do is demonstrate that CEOs who reduce their corporate tax rates get paid more. This kind of thing, from the NYT story, notwithstanding:

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

There are lots of ways that the authors of the study could have tried to back up that assertion. For instance, they could have taken a set of CEOs and split them into two groups: those who are paid more than their companies pay in taxes in Group A, and those who are paid less than their companies pay in taxes in Group B. Then they could have compared whether CEO salaries in Group A were higher than CEO salaries in Group B.

But they didn’t do that.

Instead, they did this:

Of last year’s 100 highest-paid corporate chief executives in the United States, 25 took home more in CEO pay than their company paid in 2010 federal income taxes.

These 25 CEOs averaged $16.7 million, well above last year’s $10.8 million average for S&P 500 CEOs.

Do you see what they did there? The initial set of CEO was the 100 highest-paid CEOs in the country. They then took 25 of those CEOs, and instead of comparing their pay to the pay of the other 75 CEOs in the group, they compared their pay to the average pay for a CEO in the S&P 500. This proves nothing: any subset of the 100 highest-paid CEOs in the country is going to have higher average pay than S&P 500 CEOs in general.

As for the central conceit of the paper — the one which made the Reuters and NYT headlines — that’s pretty silly too. 25 CEOs make more than their companies pay in taxes? Wow! Except, it turns out that only five of those 25 companies are paying any taxes at all, by IPS methodology. The lowest-paid janitor, at those 25 companies, makes more than the company pays in taxes. The driving force behind the IPS result is entirely a function of how IPS calculates the corporate effective tax rate, and the ease with which that can go negative. It has nothing at all to do with CEO pay. (The IPS ignores deferred taxes, which is justifiable; it ignores taxes paid to foreign governments, which is less so, in an era of global corporations operating in dozens or even hundreds of tax jurisdictions.)

This is one good reason, then, for every news organization to link to reports they’re writing about — doing so gives their readers the opportunity to see for themselves whether the report stands up to scrutiny. After all, the world of embargoed reports is clever that way. If you’re a think tank, you send them out to lots of journalists. Some will look at them and see little news there; they will ignore the report. Others will buy it, and write the report up. So the only stories you see about the report are from journalists who buy into its thesis. That’s a bias right there. And always linking to the report is one good way of helping readers and news organizations overcome that bias.

The Justice Department’s official complaint seeking to stop AT&T from taking over T-Mobile minces no words:

T-Mobile in particular – a company with a self-described “challenger brand,” that historically has been a value provider, and that even within the past few months had been developing and deploying “disruptive pricing” plans – places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition… unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger. Because AT&T’s acquisition of T-Mobile likely would substantially lessen competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, the Court should permanently enjoin this acquisition.

One thing which fascinates me is the way in which neither the complaint nor the press release makes any mention of the fact that the proposed deal would give the merged company substantially all of the market in GSM cellphones — the only ones which work in most of the rest of the world. Americans who travel internationally pretty much have to get their cellphone service from one of these two providers — and they’re highly sensitive to exorbitant international roaming fees. Which would almost certainly go up in the event of this merger.

The noises coming from the FCC in the wake of this suit are supportive, with FCC chairman Julius Genachowski saying that he too has “serious concerns about the impact of the proposed transaction on competition.” He adds for good measure that “vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile.”

AT&T hasn’t officially given up, but I can’t see it winning this particular fight with the law. This, then, is a good day for the American consumer, not to mention a great day for Sprint and Verizon. AT&T and T-Mobile have both put enormous amounts of management time and shareholders’ money into putting this merger together, all of which will now be for naught. Rather than fight the inevitable, they should go back to fighting each other where it matters: in the marketplace.

Some companies are in growth businesses; the stock market, as a rule, tends to love them. Other companies are in an inexorable secular decline; they tend to get punished by equity investors. There’s a good reason for that: stock-market investors are looking for stocks which go up over time, rather than stocks which are going to zero while paying out as much in dividends as they can along the way.

If you want an example of a business which is in a certain secular decline, it’s hard to come up with a better one than AOL’s hugely profitable dial-up business. And so it makes a lot of sense that, as Claire Atkinson reports today, AOL is looking at the idea of going private — perhaps with a sale to KKR. This is not a particularly revolutionary idea: Jonathan Berr has pushed it, and Bloomberg called it AOL’s “last, best hope”. AOL is on the record as having hired the most high-powered M&A advisors in the world; they’re no idiots, and only idiots wouldn’t look at a buy-out option for a company trading at a significant discount to its book value.

If I were a potential private-equity buyer, though, I’d do a sum-of-the-parts analysis and rapidly come to the conclusion that Tim Armstrong’s strategy is too much risk for too little potential reward. Take AOL, and sell off the non-core assets — things like Moviefone, MapQuest, AIM, and Advertising.com. What’s left? The AOL/HuffPo traffic-and-content monster, on the one hand, and the dial-up business, on the other. Armstrong’s idea is that you use the cashflows from the latter to beef up the former, so that when the dial-up revenue eventually disappears, the dial-up caterpillar has transformed itself into a glorious web-publishing butterfly. (Sorry, MSN.)

The problem is that the transformation from caterpillar to butterfly is extremely inefficient — there’s a lot of work and energy involved, to achieve a result which can be fleeting and fragile.

Now private-equity shops are actually a good place to quietly work hard on putting exactly that kind of strategy into effect. Without being distracted by the need to produce strong quarterly results, executives can concentrate on building businesses which are going to be worth lots of money over the long term.

But there’s no precedent for the idea that throwing hundreds of millions of dollars at a web content company will make it big and strong and self-sufficient. Expensive web content is expensive, especially when you’re trying to build out a network of thousands of locally-staffed sites. Meanwhile, profitable websites tend to be run on the cheap — including HuffPo, before it was bought by AOL. If I wanted to make a long-term for-profit investment in a website built on the genius of Jonah Peretti, I’d choose BuzzFeed over HuffPo any day.

So the ruthless logic of the market would seem to imply that the best thing to do with the dial-up business and the content business is to tear them apart. The dial-up business, on its own, is ripe for a managed decline, where you extract as much money as possible before it finally dies. Private equity companies do that kind of thing very well.

Meanwhile, the content business is still attractive, to someone — probably Yahoo, is my guess.

There’s a lot of deals to be done here, then. But the easy way to do it would be to simply sell all of AOL to KKR right now, at an attractive premium to the current share price. Then let KKR sell off all the content bits and pieces to Yahoo and/or others, leaving it with a dial-up business throwing off lots of juicy, high-margin cash.

Would Tim Armstrong do such a deal, though? That’s the big question. AOL’s share price — $15.68, this morning — is well below the $27 at which he took the company public at the end of 2009; his tenure there, if he sold the company for a price somewhere in the $20s, is likely to be considered a failure. So then it’s worth looking to how tough-minded AOL’s board is. Any insights on that front?

The bounty that law firms pay for a Supreme Court clerk is up to $280,000. That’s a lot of money: more than any of the justices make, but less than Warren Buffett, whose Chief of Staff has the best business card ever.

Fox News’s Bill O’Reilly tried to get his wife’s boyfriend investigated by the police, Gawker claims.

Robert Shiller argues we can do stimulus without adding to debt.

Groupon’s unique visits fell 8.9% to 30.6 million in July, says Compete. LivingSocial saw an even faster decrease of 28% to 10.6 million.

The US is often so big and lumbering that it lags well behind the rest of the world in terms of adopting new technology. Cellphones were one such; chip-and-pin technology on debit and credit cards is another. And more generally, as a comprehensive new Chicago Fed paper from Bruce Summers and Kirstin Wells shows, the US is and will for the foreseeable future lag most of the rest of the planet when it comes to immediate funds transfer, or IFT.

This is the problem that resulted in the founding of PayPal: the banks were so bad at doing anything about allowing people to send money to each other that they allowed PayPal to rise out of nowhere. And now there are roughly a gazillion startups like Dwolla and Square which also want in on the act. Even though the banks, if they just got their act together and put a basic and universal mechanism together, could put everybody else out of business pretty much overnight.

So, what are the chances of that happening? Slim to none, say Summers and Wells:

Within the last few years, IFT has become a fully functional nationwide means of payment in a number of countries, including four that we have examined in detail in this article. International experience with IFT shows that technology is a necessary but not sufficient condition for innovation in payments and that enabling real-time and universal access to deposit accounts at banks is the key to meeting the public’s needs for more certain, faster, and universal payment services. Perhaps the most critical enabling factor is strong sponsorship by a national body with the responsibility and motivation to stimulate continuous improvement in the national payment system. This body might be a consortium of private banks collaborating through a national payment association, a public authority such as the central bank, or a public–private partnership. It is not clear that such sponsorship can be readily found in the U.S., at least not at the present time, because there is no national body that takes responsibility for the development of the national payment system. As a consequence, IFT and other national payment innovations are likely to progress in a halting and incomplete manner and at a pace that lags innovation that is observable in other countries, such as those examined in this article.

What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.

Still, it’s about time that someone — if not the Chicago Fed, then either the New York Fed or the people in Washington — should take this issue seriously and start dragging America’s thousands of banks into the 21st Century. Because they’re not going to organize themselves. And that just means that the US is going to become more and more behind the times, in a world where everybody else is increasingly capable of transferring money immediately and securely to pretty much anybody they like.

Ben Berkowitz has a big report on the the National Flood Insurance Program — something which is a veritable bucket of fail. In a nutshell, it undercuts private insurers and therefore is the only game in town; it insures only a small minority of homeowners; and it loses gobs of money. In September 2005, the NFIP was $1.5 billion in hock to the federal government; that number has now ballooned to $21 billion, and is certain to rise further.

There’s a simple answer to all these problems: let the NFIP raise its rates. And I don’t understand why it’s not being allowed to do so. If the rates rose, then that might allow private insurers into the flood-insurance game, giving consumers a choice and helping to get the word out about how insuring your home against flood damage is a really good idea. The NFIP could become profitable, and thereby start paying back all the money it owes. And while homeowners are quite price sensitive when it comes to flood insurance, the fact is that so few homeowners take out flood insurance right now that the number would be unlikely to fall dramatically if rates went up to a reasonable level.

The NFIP, then, is in a fundamentally much better place than, say, the Post Office, which is also losing billions of dollars but which doesn’t seem to have any way out of its present quandary. And I’m still very unclear on what the problem is here — what vested interests are preventing the NFIP from raising its rates. It’s not that people couldn’t afford flood insurance if the rates went up — the rates are very low right now, and in any case most people aren’t paying them anyway, with 95% of homes uninsured.

Are the 5% of homeowners who take out this insurance people with particular political clout, fighting hard and successfully to prevent even a modest increase in their modest premiums? Is the political opposition coming from legislators who don’t want to vote for anything which smells as though it might be related to global warming? Or is this just general low-level government dysfunction? Whatever it is, the problem seems to reside, weirdly, in the Senate rather than the House — a plan to allow NFIP to raise its rates has already passed the House by a vote of 406 to 22. If that lot can come to bipartisan agreement, what could possibly be the holdup here?

Nikos Tsafos has a fantastic post at his Greek Default Watch blog entitled “Ten Surprising Facts about the Greek Economy”. I normally hate listicles, but this one’s very good. For instance: it’s bad enough that Greek GDP won’t go back to its 2008 peak for the best part of a decade. But it’s worse that the two big drivers of Greece’s economy — tourism and shipping — are down 28% and 27% respectively in real terms since 2000.

Other parts of the list are equally surprising. Did you know that Greece’s 2011 budget deficit is just 40% of the size of its official tax arrears? Or that Greece has only really gone on a massive borrowing binge twice? Once between 1980 and 1993, and then again between 2007 and today. I, for one, didn’t know that Greece has the lowest level of private-sector debt in the eurozone — only about 150% of GDP, compared to well over twice that in Portugal.

One endgame for Greece is a managed departure from both the euro and the EU, with the ECB coming up with a mechanism for protecting depositors in Greek banks — George Soros, for one, says that “the Greek problem has been sufficiently mishandled by the European authorities that this may well be the best solution”. But that day is still a long way off. There’s no appetite in the EU generally for such a move, and even less in Greece. After all, the costs associated with ejection would be enormous — on the EU side for the bank deposit guarantees, and on the Greek side from the loss of all the benefits that come with EU membership. Meanwhile, the benefits on both sides are more amorphous and unpredictable. Argentina suddenly started growing after it devalued; Greece might not.

For the time being, then, the best we — and Greece — can hope for is more plans along the lines of “maybe if we tie two rocks together, they’ll float”. That, and continued austerity and stagnation. Joining the euro was, in hindsight, a really bad idea for Greece. But it’s one which is very unlikely to be reversed any time soon.

Andrew Ross Sorkin takes a look at the private life of Apple’s chairman today, passing on rumors about activity he clearly doesn’t want publicized, in the face of stony silence from Apple. But hey, Sorkin’s a journalist, I guess that’s what journalists do.

The column is headlined “The Mystery of Steve Jobs’s Public Giving,” but really there’s no mystery at all: there is no public giving from Steve Jobs. Sorkin isn’t happy about this. “Most American billionaires have taken up philanthropy in a public way and helped inspire future generations of charitable giving,” he writes, concluding that “perhaps” in future years Jobs might “inspire his legions of admirers to give.”

Some of Sorkin’s points are good ones. There’s no good reason, for instance, for Jobs failing to reinstate Apple’s philanthropic programs, which he cut on the grounds of wanting “to restore the company’s profitability.” Similarly, Apple’s failure to match its employees’ charitable giving does make it stand out — and not in a good way — from its Silicon Valley peers.

I think this is maybe a downside of Jobs’s famous micromanaging: if he’s personally not interested in something, then his entire company becomes uninterested in it.

Now there are good reasons why Jobs might not be much of a philanthropist, at least in public. For one thing, it’s far from clear that seeing billionaires give away lots of money and put their names on hospital wings does any good at all in terms of inspiring other people to make charitable donations. So if a private man like Jobs wants to make his charitable donations privately or anonymously, I don’t see much if any harm in that. And the coverage of Jobs in recent days is proof positive that he’s hardly in need of good press.

On top of that, effective philanthropy is hard work. Just ask Bill Gates. If it’s as difficult to give away money as it is to make it, and if you’re already stretched between making Apple insanely great, spending time with your family, and dealing with personal health issues, then it’s reasonable not to even try on the philanthropy front.

The sad fact of the matter is that Jobs’s wife, Laurene Powell Jobs, will almost certainly outlive him; what’s more, she is more familiar with the philanthropic world than he is, sitting on the boards of Teach for America and the New Schools Venture Fund, among others. Jobs is a technology visionary; that doesn’t make him a great philanthropist. Maybe he’s simply and lovingly trusting his wife to be able to take care of such things after he’s gone. That would be a very admirable and selfless act.

American Banker runs this eye-opening chart today, showing what’s happened to the availability of free checking over the past couple of years. In a nutshell, at small and medium-sized banks, and at credit unions, things are little changed. It’s down a bit; it’s not down a lot. But America’s biggest banks, behaving in a pretty cartel-like manner, have nearly all abolished it in unison. Two years ago, 96% of them had free checking; now, only 35% do.

“Free checking”, of course, has always been a bit of a misnomer; as I wrote last year, checking is never free. It’s just that in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.

Still, for the time being, credit unions and smaller banks seem to be able to retain their free-checking services even as the big banks have abolished theirs. Some of this can be seen as a simple marketing expense:

Some community bankers see free checking as their latest opportunity to set themselves apart from the purportedly “Too Big to Fail” banks that have become lightning rods for public criticism since the financial crisis. The ultimate goal, of course, is to poach those big banks’ customers…

Marcus Schaefer, CEO of Truliant Federal Credit Union in Winston-Salem, N.C., calls free checking “an opportunity for us to have another way of differentiating ourselves from large financial institutions.” … he says the policy would change only as a last resort.

At heart, though, what we’re seeing here is the simple fact that there are no economies of scale in retail banking, once you get past a deposit base of a couple of billion dollars or so.

Big banks actually spend more on average to operate each deposit account than small banks, and they have long relied on overdraft fee income to help subsidize free checking. But a 2009 regulation restricted banks’ abilities to charge overdraft fees, which prompted the first wave of cutbacks in free checking.

Conversely, it costs less on average for smaller banks to operate checking accounts and they historically relied less on overdraft fee income, according to Moebs.

“Those that are in this huge bank group, they are truly beyond their economies of scale, and their expenses are usually high in processing areas,” he says.

In any case, I realize it’s now time for me to revisit the wager I offered Patrick Adams, the CEO of St Louis Community Credit Union, last year. Here’s what he wrote, about the Durbin Amendment:

Here’s another surefire lock of a bet. You will be more frustrated than ever. Your costs at the bank will be up. Your costs at the retailer will be up. You will be confused as to which retailers accept your debit card and which ones don’t. You will have no clue what the minimums and maximums of your debit card activity will be because there will be no consistency among retailers.

As a result, you will carry more cash and more checks… And, what about this double-dip possibility? You’ll use more checks at the check-out counter and the retailer will charge you a processing fee for doing it. (See, their handling of checks and cash are more expensive than debit cards.) You’ll pay for that, as well.

If this legislation is passed, I will mark my calendar to re-visit this issue a year after enactment. If I am wrong, I will eat the biggest piece of humble pie ever, including a public apology to everyone – starting with Senator Durbin. I must tell you that I’m extremely confident that an apology won’t be forthcoming.

It’s been over a year now since the Durbin Amendment was signed into law, and it’s time for Adams to re-visit this issue. Are his customers more frustrated than ever? Are their costs at the bank up? Are their costs at the retailer up? Are they confused as to which retailers accept their debit card and which ones don’t? Are they carrying more cash and more checks?

I offered Adams a specific wager — if he’s processing more checks per checking account today than he was at the time the legislation was passed, I said I’d donate $100 to his credit union. And I’ll honor my side of the bet, even though he didn’t formally agree to his side, and so I won’t expect a $100 check to come to Lower East Side People’s if he isn’t. So, Patrick, there’s a $100 bill lying on the table. Are you able to pick it up?

Update: Adams has replied, and we’ve agreed to push the bet back to July 2012, the one-year anniversary of when the Durbin rule was enacted, rather than just signed into law. The bet is on!

Steve Jobs is a believer in the liberal arts. He’s also the biological son of an eighty-year-old workaholic vice president of a casino in Reno.

The CEO of Sino-Forest has resigned, presumably because his company is a fraud. Vindication for Muddy Waters, which always sounded like an old-time Bluesman to me. One such Bluesman, David Honeyboy Waters, has just died at 96. Don’t feel bad about all people, though: here’s a scientist who gave back $240,000 in stock, presumably out of a feeling of moral responsibility.

Peter Kaplan, inspirer of three imitation Twitter accounts, is out of the gate with the first of what is sure to be too many meditations on the tenth anniversary of 9/11. It very well could be the best-written one we’re going to read. At the other end of our decade of disasters, Nate Silver argues that Hurricane Irene was not over-hyped.

Cheney biographer Bart Gellman has discovered an untruth in Dick Cheney’s upcoming biography. Meanwhile, Glenn Hurowitz argues that drilling in Canada’s tar sands is bad for American national security, a belief probably not shared by our former Veep.

The two most popular free e-books are the Kama Sutra and The Adventures of Sherlock Holmes. Somehow that makes perfect sense.

And here’s a map of the price of marijuana across the country. I am completely baffled by what’s going on in the Colorado/Kansas/Nebraska borderlands.

Going into the Jackson Hole conference, everybody was breathlessly awaiting Friday’s speech from Ben Bernanke, which turned out to be incredibly boring. The most important speech of the meeting, by far, came on Saturday, and came from the new head of the IMF, Christine Lagarde. In decidedly undiplomatic prose she came right out and said what needed to be done:

Two years ago, it became clear that resolving the crisis would require two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties… the actual progress on rebalancing has been timid at best, while the downside risks to the global economy are increasing…

I would like to delve deeper into the different problems of Europe and the United States.

I’ll start with Europe…

Banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns…

The United States needs to move on two specific fronts.

First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.

The diagnosis of what needs to be done in the U.S. is spot-on. Revenues have to be raised — in the future, not yet. Mortgage principal needs to be reduced. And the government needs to help the private sector translate low interest rates into growth, because right now it’s looking like a deer in the headlights and refusing to take advantage of them.

But it’s Lagarde’s diagnosis of her native Europe which is proving highly controversial. Anonymous “officials”, quoted in the FT, rapidly said that she had it all wrong:

Officials said Ms Lagarde’s comments missed the point of banks’ current difficulties. “The key issue is funding,” said one experienced central banker. “Banks in some countries have had trouble securing liquidity in recent weeks and that pressure is going to mount. To talk about capital is a confused message.

This is simply delusional: anybody who knows anything about banking knows that the distinction between a liquidity problem and a solvency problem is not nearly as clear-cut as this makes out. Indeed, if there weren’t any worries about European banks’ solvency, then they wouldn’t have any kind of liquidity problems. If a bank has “trouble securing liquidity,” any responsible regulator must take that as a message that the markets are worried about that bank’s solvency — especially if the problems are happening, as these ones are, in a broader global context where liquidity remains abundant.

And if the markets are worried about a bank’s solvency, then that bank’s solvency is what must be addressed — perception is reality in such matters.

Elsewhere in the FT, other anonymous officials said that the European stress tests were already doing what Lagarde was calling for. This despite the fact that only nine European banks failed those stress tests. Where Lagarde sees a huge systemic problem, European officials, it seems, still thinks it can patch things up by triaging the worst banks and applying band-aids.

All of which, in and of itself, makes Lagarde’s concluding words ring rather hollow:

We have reached a point where actions by all countries, doing what they can, will add up to much more than actions by a few.

There is a clear implication: we must act now, act boldly, and act together.

Obviously, that’s not going to happen. It’s not going to happen in Europe, where officials immediately rejected her proposals. And it’s certainly not going to happen in the US, where she’s significantly to the left of the Obama administration and where her policies could never, ever pass either the House or the Senate.

This is depressing — but the FT does manage to find a sliver of a silver lining: Lagarde, they write, “has said publicly what most policymakers have avoided addressing since the crisis began”. Maybe she’s just leading from the front, here: even if policymakers don’t embrace her position immediately, they might come round to her way of thinking as the world’s developed economies continue to stagnate and financial markets continue to fret over a possible sovereign crisis. If such a crisis starts looking imminent, then at least Lagarde has already laid out a plan for how the banks — a crucial vector of contagion — might be turned instead into a kind of firebreak.

Certainly one can’t ever imagine Lagarde’s predecessor, Dominique Strauss-Kahn, giving a speech like this. He was the consummate behind-the-scenes diplomat; he wasn’t given to big set-piece public speeches. Lagarde, in that sense, is a breath of fresh air at the IMF, and quite un-French in how she’s operating. I do suspect, though, that it’s going to take little a while before Europe’s leaders to come around to her point of view.

When the NYT killed off its famous 111-111-1111 caller ID, one stated reason was “an expected change to federal law that will require legitimate caller ID signatures”. And the video above explains why such a change to the law makes sense — caller ID spoofing, up until now, has been easy, legal, and a great way of getting access to other people’s voicemail accounts.

Kevin Mitnick, in the video, says that to protect yourself from this sort of thing, the best thing to do is force yourself to type in your passcode every time you access your voicemail, even if you’re accessing it from your own phone. This is a standard move in the escalating war between hackers and civilians — the civilians are asked to make their own lives more difficult just in order to make potential hackers’ lives more difficult. And in aggregate, the amount of aggravation spent setting up and typing in passwords on cellphones will surely exceed the amount of aggravation caused by hacked voicemails.

A better solution is to get off antiquated mobile-phone voicemail systems entirely. Most of them are designed to rack up airtime minutes, and even the iPhone’s revolutionary visual voicemail system lacks basic modern features like voice-to-text transcription — something which comes in extremely useful when the number calling you isn’t in your address book and you therefore have no idea who it is. My own iPhone voicemail has 37 messages I’ve never listened to, which I daresay is not uncommon.

I don’t think that journalists or anybody else is likely to get much juicy information by hacking into voicemails these days: people don’t leave juicy information in voicemails, just because they know there’s a good chance the voicemail will never actually be listened to. But if for some reason you still like or use voicemail, then I can recommend moving to Google Voice, which keeps all your voicemails in one place, sends you emails with sometimes-adequate transcriptions, and is pretty much impossible to hack unless the hacker has your email password. In which case you’ve got much bigger problems than a hacked voicemail account.

Every so often, Andrew Ross Sorkin will ask me when I’m going to write something nice about him. It doesn’t happen very often, because I’m more likely to feel the need to disagree with someone on the internet than I am to feel the need to agree with them. It’s called Siwoti syndrome, and it’s endemic to the blogosphere.

And so it’s fitting that the impetus for me saying nice things about Sorkin’s baby, DealBook, is the ridiculous column from the NYT’s ombudsman public editor, Arthur Brisbane, this week. It begins thusly:

WILL readers of The New York Times in print get less because The Times must invest to compete for readers and advertisers in the digital medium?

The DealBook business news product may offer an early indication. DealBook, which was greatly expanded last fall, is a prominent presence on NYTimes.com, offering up-to-the-minute news and trivia about Wall Street deals, regulatory issues, venture capital and personalities. In print, meanwhile, it owns a half-page inside Business Day four days a week — a much lower profile than online.

This is utterly bizarre. DealBook, one of the highest-profile expansions of the NYT in recent years, is indeed a digitally-native project. It would be pretty idiotic if most of the NYT’s new sections weren’t digitally native. But as Brisbane notes, DealBook exists in print as well, taking up two full pages per week. Therefore, thanks to DealBook, readers of the NYT in print are getting more than they were before — not less.

Much more importantly, DealBook content isn’t confined to the half-page DealBook ghetto; many of DealBook’s best stories have appeared on the front page of the newspaper. When you hire reporters like Sue Craig, you run her stories big — and that’s exactly what the NYT is doing.

Different types of news work best in different formats. The Sunday magazine is better in print than it is online; DealBook is better online than it is in print. This is cause for celebration: the NYT is proving that it’s nimble enough to use whatever format works best for given content. It has dozens of blogs; I haven’t seen Brisbane complaining that they’re not available in print, or referring to their contents as “trivia.”

But Brisbane has his mind made up.

DealBook has a strangely precrash feel to it.

We can all remember what things were like before 2008: Wall Street was king, New York was the center of the financial universe, the titans of finance were gods. DealBook’s offerings remain closely aligned with that paradigm, even though the titans have lost their shine, markets have been shifting away from New York, and the postcrash world is determined far more than before by China and the broader global economy.

Despite this shift, DealBook’s reporting is about deals, hedge fund news and the doings of people on the Street.

It’s worth following Brisbane’s links, and not only because the first one goes to Reuters. His datapoints proving that Wall Street is irrelevant are (a) the fact that Lloyd Blankfein has hired a criminal defense lawyer; and (b) the megamerger between Deutsche Börse and the NYSE. Both stories, of course, have been extensively covered by DealBook; they’re right in its wheelhouse. And neither of them shows what Brisbane seems to think they show — that DealBook is an anachronistic throwback because Wall Street is less relevant than it used to be. Wall Street has always had lawyers and mergers; they’re what it’s built on.

Brisbane seems to think of Wall Street, and/or DealBook, as some kind of recondite island, insulated from bigger economic forces:

When the world economic system shuddered and stock markets dropped, I was left wondering whether The Times should have spent its money not on expanding DealBook but on enlarging its stable of journalists aimed at the wider subjects of international banks and sovereign debt.

This is just bizarre. For one thing, there’s no conceivable sense in which this is an either/or choice — Brisbane adduces no evidence whatsoever that absent extra DealBook reporters, the NYT could or would have hired more experts on the international-banks-and-sovereign-debt beat. And he ignores the screamingly obvious fact that DealBook’s new recruits know substantially more about international banks and sovereign debt than the overwhelming majority of existing NYT journalists, and therefore add to and improve the NYT’s coverage of such matters.

As Larry Ingrassia says, DealBook journalists have indeed been covering the big global and national issues in the world of finance.

Brisbane, by contrast, wants to see “in-depth investigating of a complex ecosystem” in Europe, and wants the NYT to help its readers “understand deep crises like European debt” by having journalists “step up and look at things systemically.” Brisbane reckons that DealBook is doing none of these things; that’s a matter of opinion. But he goes further than that: he says that the NYT’s investment in DealBook “meant forgoing an opportunity to strengthen reporting elsewhere.” And by “elsewhere”, Brisbane clearly means “elsewhere on the international-business-and-economics beat.”

Brisbane offers no evidence whatsoever that this might be the case. And common sense says that the opposite is true. If the NYT is pouring money into deep analysis of international finance, that’s surely an indication of resources going in the right direction, not the wrong direction. Meanwhile, if you want to point to wasted resources, DealBook stories on George Soros’s girlfriend pale in relation to the kind of things regularly called out by the @NYTOnIt Twitter stream. Is DealBook setting up email addresses dedicated to reporting the names of bodega cats? It is not. Is DealBook breathlessly reporting that Facebook makes it easy to wish your friends a happy birthday? It is not. Has DealBook uncovered the astonishing fact that women wear dresses in the summer? It hasn’t, sorry. But Brisbane points to none of these things as evidence of resources being wasted on frivolity rather than being put to good use in serious investigations of Europe’s financial woes.

More to the point, DealBook is being funded generously precisely because it represents an opportunity to bring new advertisers and new money to the NYT. Brisbane, far from disdaining the DealBook party featuring “charter advertisers like Goldman Sachs and Barclays Capital,” should be celebrating the fact that “in today’s straitened circumstances” — his words, not mine — the NYT has managed to identify a deep-pocketed source of new revenues. If Brisbane wants to fund in-depth investigations of the possible global spillovers from a European collapse, then using new revenues from DealBook might be an obvious way of doing that, no?

In any event, as an assignment editor, Brisbane is pretty weak:

Just as the 2008 crisis was largely explained after the fact by The Times and other publications, the current situation feels like a replay in which we may learn only later how the tumbling dominoes were arrayed. Perhaps most important to Times readers, little is being written about the consequences that a catastrophic event in Europe could have on the United States and the world economy.

Perhaps The Times will yet jump in and expose the linkages between Europe’s institutions and the American economy and markets — before the other shoe drops.

Well, yes, Arthur, that’s the way that events in the news get explained — after they happen. You can’t explain the consequences of a catastrophic event before that catastrophic event happens, because we live in a highly complex and interconnected world which is inherently unpredictable. Was there any way of predicting, before the subprime bubble burst, what a collapse of the US housing market would do to international markets and economies? No, there was not. For instance: it caused massive losses in obscure German state-owned banks, it caused a strengthening of the dollar, and it also caused a flight out of alternative markets like Brazil. In hindsight, it’s possible to explain all of these things. But you need to see how the tumbling dominoes fell in order to be able to explain how they were arrayed.

Markets aren’t all-knowing, and they can be spectacularly wrong at times. But journalists are certainly worse at predicting the future than markets are.

Arthur Brisbane might be right about the cause of the next global crisis, but even if he is, there’s no good reason to believe that an investigative piece at this point would prove to be remotely prescient or useful for the NYT’s readership. That’s why journalists much prefer to do what they’re best at, which is reporting and analyzing the news — stuff which is happening now, or which has already happened. DealBook does that in a fast and readable and webby way, making smart tactical inroads onto a field being slowly abandoned by Rupert Murdoch’s WSJ. What’s more, DealBook — in contrast to the rest of the NYT website — is completely free.

So let’s celebrate the fact that DealBook is doing something successful and new under the auspices of the NYT. Criticisms of the form “you wrote A, but I think that B is more important and germane, so you should have written B instead” are always silly and demeaning. If Brisbane is forced to resort to that argument when criticizing DealBook, the inevitable result is that he just ends up looking particularly off-target himself.

Has Groupon created an inherently profitable industry? Or is it one of the most effective means ever invented of taking investors’ money and setting fire to it? Since I wrote my big post on Grouponomics in May, the optics surrounding Groupon have changed considerably. Jeff Bercovici, for one, is convinced there’s nothing there:

Could the fastest growing company in history sputter out just as quickly? At this point, the better question may be: How could it not?

Jeff quotes Rob Wheeler, who’s equally adamant:

Groupon’s fundamental problem is that it has not yet discovered a viable business model. The company asserts that it will be profitable once it reaches scale but there is little reason to believe this…

Groupon’s venture investors and executives need a way to cash out before everyone realizes that the emperor has no clothes. I will probably buy a Groupon every now and again — I have no problem letting investors finance my cheap consumption. But as far as an investment goes, Groupon is looking about as profitable as giving away your merchandise for 90% off.

But the problem here is that neither Bercovici nor Wheeler seems to understand what Groupon is doing. I have my own doubts about whether Groupon will be able to achieve long-term success without running into a short-term liquidity crunch, but there’s nothing inherently illogical about Groupon’s cash-burning drive for growth.

For smart analysis of Groupon, you’re much better off reading Vinicius Vacanti and especially Henry Blodget — but be sure to read them carefully. Both of them are being quoted by the likes of Bercovici and Wheeler, who are drawing broad and simply false conclusions from what they’re reading.

At heart, what Groupon is doing makes sense. Its core business, I’m pretty sure, is profitable — although no one knows just how profitable it’s likely to prove over the long term. If you give Groupon a large number of subscribers in some given city, and a team of sales people in that city, those sales people will be able to sell deals to local merchants in such a way as to more than cover their own costs. That’s the model at the heart of Groupon’s business, and historically it has worked spectacularly well. It’s worked so well, in fact, that Groupon has found it incredibly easy to raise new equity capital and to grow faster than any other company in the history of the known universe.

Groupon has used all of its profits from selling deals to expand aggressively — to sign up new customers and launch in new cities and countries. This costs money, but it makes sense, given the substantial first-mover advantages available in the space. Groupon wants to be first to any given market, and it aspires to become a kind of corporate shorthand, like Hoover or Kleenex or Xerox, where the company name is used to refer to the whole class. Growing as fast as Groupon has done is expensive, but Groupon is convinced that the more money it spends up front, the more money it’ll ultimately end up making in any given market.

All this makes a lot of sense, and nothing we’ve seen with respect to Groupon’s losses invalidates any of it: there is no reason to believe that Groupon is in an inherently unprofitable business. Contra Wheeler, Groupon did discover a viable business model. And it’s just silly to think that when you buy a Groupon, that in some way Groupon’s investors are financing your cheap consumption: the cost of your cheap consumption is borne wholly by the merchant in question.

In fact, one of the two problems with Groupon is that its investors aren’t financing Groupon’s growth. As Blodget points out, of the $1.1 billion that Groupon has raised from equity investors, fully $942 million has been used to cash out its early investors and executives. If Groupon had held onto that cash and used it to finance its growth, it wouldn’t be facing a cash crunch right now. Groupon should be able to use the proceeds from its IPO to cover any potential cashflow crunch — but it’s nice to have the option not to IPO, if the market’s looking weak. Groupon should be able to tap its current private investors in the event that its IPO gets postponed or canceled — but right now they’re looking to make money on their investment, rather than throw more cash at it.

The other problem with Groupon is that its fundamental business model is looking less profitable than we might have once thought. This is Vacanti’s point: in mature markets, Groupon is making less money per subscriber, and less money per merchant, than it has ever done in the past. The latter decline is particularly precipitous:

Now this isn’t necessarily as bad as it looks. The number of merchants that Groupon has in a town like Boston is a cumulative number: we’re looking at quarterly revenues, here — a flow — divided by a steadily-growing stock of merchants. Even if you haven’t done a Groupon offer in years, you’re still part of the denominator; my guess is that even merchants which have closed down entirely are included.

What really matters, in Boston and elsewhere, is whether Groupon can stay substantially profitable in such mature markets. And that’s why it’s a little sad and indeed a little worrying that Groupon is getting rid of its ACSOI profitability measure — something which is at heart, as Groupon CEO Andrew Mason explains, was always an attempt to try to work out the steady-state underlying profitability of the company’s operations. Maybe Groupon got rid of it because of all the criticism — but it’s also possible that Groupon jettisoned ACSOI because it was worried that it was falling sharply and maybe even headed into negative territory.

Over the long term, I suspect that Groupon will succeed or fail based on the perceived quality of its offers. It has grown fast based on the simple tactic of offering great deals to consumers — giving them things for much less than they would normally pay. But at some point, it would do well to start concentrating more on quality rather than just price. Here’s Ryan Sutton:

Have you ever heard of Amber on the Upper East Side or Mambo in the West Village? Nope. Yeah, well neither have I. They’re just two random sushi joints. But Groupon ran a special on both last week, and they sold over $85,000 in California rolls, tuna rolls and other fake forms of sushi. That in itself is a travesty…

What’s going on here with Groupon, a national brand is giving national attention to a local joint that doesn’t deserve it, and as a result, a lot of people’s money is being misallocated. It’s anti-economic. Groupon is the invisible hand of capitalism sucker punching good restaurants that deserve to succeed and helping out mediocre venues that deserve to fail.

The thing to pay attention to here is the perception of Groupon: that it’s a desperation move for mediocre merchants. If that reputation spreads, then Groupon will find it increasingly difficult to move its product, no matter how wittily-written its emails are. So if I were thinking of investing in Groupon, one thing I’d be looking out for would be the quality of the merchants being featured. If it’s high or rising, that’s good news; if it’s low or falling, that’s bad news.

Qualitative judgments, of course, aren’t particularly tractable, or easy to chart; analysts hate them. But ultimately the success of great companies like Apple comes down to precisely the quality of their products. And that’s something that might well end up determining the long-term fate of Groupon, too.