Felix Salmon

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What do you do with $137 billion? That’s actually a serious question. David Einhorn is technically suing Apple over its voting rules — here’s the full complaint — but his real target is its ungodly cash hoard. What he ultimately wants is simple: Apple’s money. (His hedge fund owns more than $590 million in Apple shares.)

Apple’s long been criticized for sitting on its money. Its cash pile, the WSJ notes, is bigger than the market cap of all but 17 companies in the S&P 500. Apple announced a dividend plan last year, but Einhorn’s not satisfied. He’s been making the media rounds today, finding an upside to Steve Jobs’ death and comparing the company that invented the iPhone and iPad to a timid old lady. Here he is on CNBC:

People who’ve gone through traumas… they sometimes feel like they can never have enough cash. I remember my Grandma… she was a Depression-era woman from her childhood, and she wouldn’t even leave me a message on my answering machine because she didn’t want to get charged for the phone call.

To Einhorn, Apple is badly undervalued and he just wants to help “unlock the value” of Apple’s balance sheet, which is a hedge fund-y euphemism for “pay me”. To do this, he wants Apple to issue a new class of “high-yielding, tax efficient preferred stock to existing shareholders at no cost” that pays 4% per year (Apple’s common stock would still exist and trade separately). According to Einhorn, the new shares would let Apple keep most of its cash hoard, and would boost its stock price by attracting “more value-oriented investors” — like, presumably, himself.

Why isn’t Einhorn angling for Apple to do something more traditional like boost its dividend or buy back shares? The WSJ spoke to James Angel, a Georgetown professor, who said it may boil down to taxes. Apple would likely take a big tax hit if it had to bring back its estimated $120 billion in overseas cash back to the states through a dividend or buyback; in fact, Einhorn mentions this in his filings. Create a new class of stock, avoid new taxes, and pay shareholders. Presto chango, $30 billion in value created!

Henry Blodget called all of this “financial engineering” and then something amazing happened: he and Einhorn got into an email debate over the theoretical value of money. Einhorn thinks the market is undervaluing Apple’s cash pile and that it should be getting a better return than, say, the 0.77% it earned in fiscal 2011. To Einhorn, Apple’s value should be based on how much all of that cash should be earning.

To Blodget, cash is cash: “Apple is the single-most-scrutinized public company in the world, and I think the market is, in aggregate, very much aware of how much cash Apple has”. He also wondered why wouldn’t every company simply introduce a preferred/common stock structure and boost its value? Jim Cramer wasn’t as clear about Einhorn’s plan: “What the heck is he talking about?”. Ironically, Cramer was the one who sounded like the voice of reason on Apple’s future: “I want growth, I’m sorry, I’m a traditional investor.” — Ryan McCarthy

On to today’s links:

Right On
“And now let us praise, and consider the absurd luck of famous men” – Alexis Madrigal

China
Chinese accounting scandals are so simple they’re almost brilliant – Quartz

Ouch
So God made a banker – MarketWatch

JPMorgan
Lawsuit docs say JPMorgan ignored quality controls on mortgages (just like everyone else) – Dealbook

Takedowns
The latest attempt defend TBTF “is not credible and should not be taken seriously” – Simon Johnson

Popular Myths
While CEOs complained about ‘uncertainty’, hiring, capital spending, and sales rose – Caroline Baum
The day the uncertainty myth died – Joe Weisenthal

Wonks
The .03% solution to raise $350 billion in ten years – Jesse Eisinger
We’ve badly underestimated just how helpful fiscal policy can be - Econobrowser
Great, we’re not in a “post-growth” world – Ashok Mody

Euphemisms
“Long European vacation” – Gothamist

Self-Awareness
White dude declares racism over in tech – Nitasha Tiku

Sad
“Some people go to school to learn… I went to get a job” – Kevin Roose

Alpha
“Around half of surveyed investors weren’t even aware the market had gone up each year post-crisis” – Business Insider

Compelling
The environmental benefits of working fewer hours – Matt Yglesias

For me, the most interesting part of Liaquat Ahamed’s Tim Geithner exit interview is this bit:

LA: You spent thirty years working on economic statecraft both internationally and domestically. You’ve been involved in just about every major financial crisis of this era, starting with Japan, the Asian crisis, Mexico, 2008, now the euro crisis. Each one seems to be worse than the other. What lessons have you learned from dealing with all these crises? You alluded earlier to the idea of taking political costs upfront. Can you amplify on that?

TG: Well, they’re all different in their contours and causes. But they usually have this common feature, which is a huge increase in leverage in the financial system. When the shock hits or the tide turns, as people bring their borrowings down, it puts enormous pressure on the economy as a whole. These things tend to reinforce each other, amplify each other. The financial deleveraging feeds on the economic weakness, the economic weakness forces more financial deleveraging, and you have this vicious spiral.

And I think what we have all learned from history, mostly from mistakes that we and others have made is that confronted with that, you need to apply a lot of force, with a lot of speed across the full spectrum of the policy tools we have. Which means monetary policy has to be very aggressive. You need to make sure that fiscal policies are very supportive of growth so you’re compensating for the huge collapse in private sector demand. And you need to be incredibly aggressive in making sure that you recapitalize the financial system. If you do those things incrementally, where you do one but not all three, then you’ll be left with much more damage. You have to do all of them. None of them is effective individually.

That line about the “mistakes that we and others have made” is about as close to an apology as we’ve seen from Tim Geithner, for anything that he’s done. It doesn’t go nearly far enough, of course. As the president of the New York Fed from 2003 to 2009, he sat on the FOMC, happily signing off on Alan Greenspan’s bubble-inflating policies, and also ran the most important of the many institutions charged with regulating American banks and reining them in when they got too ebullient. Clearly he did badly in both respects.

But the most obvious case in which Geithner has done a complete U-turn from his former views is that of Indonesia. The great Australian financial journalist Peter Hartcher explained this very well back in 2009, when Geithner took over as Treasury secretary. He quoted former Australian president Paul Keating explaining in a nutshell exactly what Geithner did wrong: “Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.” With hindsight, Geithner did the exact opposite of what he is now prescribing in the event of a crisis:

Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia’s problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans – Thailand, South Korea and Indonesia – all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century.”

Indonesia in 1998 had a problem not dissimilar to what we saw in the US 20 years later: a sudden credit crunch afflicting a country whose government finances were fundamentally sound. Geithner’s solution, now, is for the government to “be very aggressive” spending money, and for the central bank to provide its own monetary support, all in the service of “compensating for the huge collapse in private sector demand”. But that’s not what he thought in 1998, when he forced the Indonesian government to cut spending and raise interest rates — precipitating a recession much larger than anything the US saw during the financial crisis.

Now that Geithner is going to write a book, I very much hope he goes as far back as Indonesia, and covers his two-year tenure at the IMF as well, rather than glossing over those episodes on the way to the juicy stuff about the more recent crisis. For one thing, it will be fascinating to see when and how his mind changed on such issues. And for another thing, it’s conceivable that the book might shed light on the how this consummate career government technocrat thinks — and thereby shed light on much of the system of global governance.

For Geithner has always stood foursquare in the center of economic orthodoxy, wherever it might be at the time. He’s no bomb-thrower, and will never think of himself as someone who speaks truth to power, in the way that the likes of Sheila Bair and Neil Barofsky do. Rather, he epitomizes power: yesterday, for instance, he rejoined the Council on Foreign Relations, the American perma-Davos on Park Avenue, where the great and the good mingle self-importantly and (mostly) in smug and well-cushioned secrecy. There he will work closely with (and was probably recruited by) Bob Rubin, setting up Advisory Committees and Workshops and Independent Task Forces and Plenary Sessions and Invitation-Only Roundtables, all the while mingling with the bankers and policymakers and politicians who might delude themselves that they’re working for the greater good, but who are convinced that the rest of us just couldn’t handle being exposed to what goes on behind the CFR’s expensively-paneled doors.

Geithner’s book would never be so indiscreet as to reveal what happens at meetings of, say, the Group of 30, which he joined in 2006. But if I have any hope for it, it’s that we’ll somehow be able to read between the lines to understand just how the international technocratic consensus reshapes itself over time, even as its practitioners remain certain, at any given time, that they’re advocating the clear best course of action. Geithner — just like his mentors Rubin and Summers — is not a man given to much self-doubt, except perhaps when it comes to his political skills on Capitol Hill. He’s a thoughtful and intelligent man, but at the same time he seems never to worry very much about the unavoidable uncertainties inherent in all economic policymaking. Given how spectacularly wrong he was in Indonesia, I’ll hold out just one hope for Geithner’s book: that it might explain how his ilk exhibit the pre-eminent skill of global technocrats — the way that they can hold two diametrically opposed views at two different times, without ever even realizing that they’ve changed their mind.

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There’s a certain inevitability to RBS’s $612 million Libor-rigging settlement and the Justice Department’s civil charges against S&P for faulty ratings. Like at Barclays, Goldman Sachs, Standard Chartered, and UBS, RBS and S&P’s scandals come complete with how-could-they-put-that-in-writing electronic communications.

RBS’s contributions to this now-venerable tradition come courtesy of the CFTC and FSA, and are wrapped up nicely by Dealbook and FT Alphaville. One trader asked that the rate set be at a certain level by writing to the submitter that “if u did that i would come over there and make love to you”. Another said  “its just amazing how libor fixing can make you that much money”. Believing that the US dollar Libor was being watched by the Fed, a Yen trader said “dun think anyone cares the JPY Libor”. Scattered throughout is the requisite amount of trading floor profanity, along with a decent number of emoticons.

S&P’s written record was more metaphorical and sarcastic. One exec wrote that “this market is a wildly spinning top which is going to end badly”. An analyst said he had “no complaints” about his job, “aside from the fact that the MBS world is crashing, investors and the media hate us and we’re all running around to save face”. And then there’s the extended re-write of the Talking Heads’ “Burning Down the House”. That was immediately followed by another email warning “for obvious professional reasons, do not forward this song”.

Given that the probability of finding something stupid or profane in millions of pages of records approaches certainty, what regulator or prosecutor could resist using such material? In RBS’s case, it appears that the bank’s own traders sealed the outcome of the CFTC’s investigation.

S&P, which says that it did not “deliberately keep ratings high when we knew they should be lower”, may be different. While the documents are embarrassing, Matt Levine says that “picking some individual things that they could have done differently doesn’t seem even related to proving fraud”. And John Cassidy acknowledges that each side is taking a risk by going to trial. But given S&P’s decisions to delay implementing new models, and to pick and choose which ones it used, he applauds the risk the DOJ is taking. — Ben Walsh

On to today’s links:

Apple
The case that Apple is overvalued (and a classic “value trap”) – Bethany McLean

Oxpeckers
Is AOL’s CEO the “king of cocktail-napkin” innovation – or just a good salesman? – Jason Del Rey

Deals
HP “intends to keep the company together”, unless it’s a better idea to break it up – Quartz

New Normal
Some of the richest colleges are suing their poorest graduates – Bloomberg
Millenials: the frugalist generation – Amir Sufi

Wonks
Freedom requires us to live in a periodically psychotic “economic-chance” world – Steve Waldman
The great rotation is not so great, and not even really a rotation – FT Alphaville

Transitions
Tim Geithner is now a “distinguished fellow” – WSJ

Yikes
The brain-frying effects of “acoustic shadow zones” (for homing pigeons) – The Atlantic

Best and Brightest
Life insurance CFOs wished financial modeling required no time or thought – WSJ

Politics As Usual
Marco Rubio thinks rap should be mimetic – BuzzFeed

Big Numbers
The largest prime number ever discovered is 17 million digits long – Scientific American

Tax Arcana
How the Dell buyout works as a tax-avoidance scheme – Quartz

The fight between the Post Office and Congress is a very peculiar one. Normally, when the government owns some incredibly profligate business, it’s Congress which tries to impose efficiency gains and fiscal discipline, while the business insists that all of its spending is absolutely necessary and that it has already cut to the bone. In this case, however, the roles are reversed: the Post Office wants to change, and it’s Congress which is stopping it from doing so.

The latest move from the Post Office is a bold one: to abolish Saturday delivery unilaterally, starting August 1. This is a bit like Citicorp announcing that it was merging with Travelers: it’s illegal, but that’s not going to stop them, and the clear expectation is that somehow Congress will make it legal, before or shortly after it happens in reality.

As Jesse Lichtenstein details in his amazing 10,000-word Esquire story about the Post Office, the organization does actually have a detailed plan for becoming fully self-reliant over the next few years. Abolishing Saturday delivery is just one small part of that plan; all of it, by law, requires Congressional buy-in. The plan may or may not be successful, but, as they say, plan beats no plan. The big problem is simple, but huge: Congress isn’t playing along, and instead is just making matters worse, unhelpfully micromanaging everything from postage rates to delivery schedules to health-care contributions.

That’s why I love the idea of the Post Office doing something that’s clearly illegal, putting the ball squarely in Congress’s court. The idea is both delicious and dangerous: go ahead an implement the plan whether Congress likes it or not. And then dare them to bring down the hammer, or simply capitulate to the inevitable. They might not like the latter option, but the former would surely be worse for all concerned.

Today’s announcement says to me that relations between the Post Office and Congress have deteriorated so much that the Post Office has given up on getting Congressional buy-in for its plans. At the same time, the plans are necessary (sufficient is a different question) if the Post Office is going to survive for decades to come. And so the Post Office is just going ahead with what needs to be done, and has decided to treat Congress as an adversary, rather than as a key partner in its evolution.

The risks of this move are obvious: Congress is the government, and has awesome powers, should it choose to use them. But there’s a very good chance, here, that Congress will blink first, and end up giving the Post Office at least some of what it wants. Including five-day delivery. Sometimes, you’ve got to get tough with those legislators.

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If you aren’t terrified about the coming bond bubble, you should be, according to those who have taken it upon themselves to play interest-rate Paul Revere. Finance heavyweights like Lloyd Blankfein, Gary Cohn, Bill Gross, and Jeff Gundlach have each voiced their concern. Fitch has chimed in too.

There’s nothing particularly new about these warnings. Businessweek’s Roben Farzad charts the “many cautionary, even alarmist, headlines” that have appeared over the last six months. Quartz’s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.

The Washington Post’s Neil Irwin can’t find much evidence of a bond bubble, concluding that “rising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasons”. All the worry is “peculiar legacy of the financial crisis”. “Among the financial commentariat,” he writes, “there is a tendency to see a bubble whenever the market for a particular asset rises”. Calculated Risk’s Bill McBride agrees: “I don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubble”.

There might not be a bond bubble, but that doesn’t mean bonds are a safe place to invest. On PIMCO’s website, Bill Gross has an “investment outlook” that’s more detailed than his CNBC appearances. He makes the case that rising rates aren’t themselves what scares him. Instead, it’s the increasing amount of debt required to generate growth: “In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result”. That, Gross says, is a problem akin to a supernova expanding by consuming itself. It’s also far beyond the limits of a bond bubble, and closer to arguments about the end of growth itself.

If that sounds a little far-fetched, look at the latest estimates from the Congressional Budget Office, which project years of depressed growth and high unemployment in the US. That’s a far bigger problem than too many people buying bonds at low rates — in fact, low growth and high unemployment, as the BIS noted in December, are most of the reason why rates are low. — Ben Walsh

On to today’s links:

Regulators
The SEC’s “chronic” enforcement problem: conflicts of interest that prevent enforcement – WSJ

Deals
For $24.4 billion, Dell will spend some private time with Michael Dell and Silver Lake – Businesswire
Why Dell is going private – Felix

Primary Sources
The full text of the US suit against S&P – Reuters

Fiscally Speaking
The full CBO budget outlook – Congressional Budget Office

EU Mess
“It is all untrue, except for some things” – Spain’s prime minister on corruption charges – El Pais

Charts
Goldman predicts an unprecedented decline in government spending – Matt Yglesias
The global youth unemployment crisis, visualized – IMF

Alpha
Underperforming Fidelity target date funds stuffed with underperforming Fidelity funds – NYT

Tautological But True
Successful management-led buyouts “successfully enrich management at shareholder expense” – Steven Davidoff

Plutocracy Now
JP Morgan advises wealth management clients to become neo-feudal lords – Bloomberg

FYI
Debt collecting via Facebook is probably illegal – American Banker

Distinctions
Illegal immigrants “break the law in the sense that everyone breaks the law” – Slate

Cephalopods
Goldman releases app to help applicants understand the jobs they probably won’t get – Goldman Sachs

Wonks
Yep, banks “use laxer standards to underwrite loans” that are securitized – Liberty Street Economics
How the IMF could save millions of jobs – Joseph Gagnon

Oxpeckers
An exhaustive etymological investigation into where the horrible term “Big Data” came from – Steve Lohr

Why are Michael Dell and Silver Lake taking Dell private at a valuation of $24.4 billion? Christopher Mims explained his theory a few weeks ago: it’s all about a company that Dell acquired last year for roughly $500 million. Wyse makes PCs-on-a-USB-stick: everything is in the cloud. According to Mims, if you combine Wyse’s technology with Dell’s ability to talk the kind of language that corporate IT buyers love, Dell is now well position to disrupt itself:

A privately held Dell, shielded from the pressure to post continual growth on a quarterly basis, could refocus itself on thin clients and cloud computing, which could set itself up for a breathtaking turnaround.

This raises an interesting question. Right now, Dell has about $9 billion of debt; that number is going to rise substantially post-buyout, with a $2 billion loan from Microsoft and a $15 billion financing package from Wall Street. The cost of servicing all that debt is going to weigh heavily on any company trying to grow fast in the highly competitive and extremely capital-intensive world of cloud computing. Wouldn’t it be easier to just stay public, announce a new cloud-based strategy, let the stock find its level, and then execute with an eye to the long term?

After all, private equity shops like Silver Lake have a clear time horizon and exit strategy: they want to come in, turn the company around, and then sell out at a substantial profit within 5-10 years. Public equity, by contrast, is permanent capital, and has an infinite time horizon — in theory, it should be better suited for people with a long-term vision.

But two things are going on here. Firstly, Dell is incredibly cheap. It has revenue of roughly $60 billion per year, gross profit of almost $14 billion, and net income of more than $2.5 billion. That means Silver Lake is paying less than 10 times earnings for the second-biggest PC manufacturer in the US, and the third-biggest in the world. And secondly, debt is incredibly cheap as well. Financing terms haven’t been disclosed, but I doubt Dell is paying more than 6% for its money. 6% of $15 billion is less than $1 billion a year, which still leaves a lot of money left over for investing in the cloud.

Winning a significant share of the cloud-computing pie is not going to be easy: both Google and Amazon are formidable competitors. But I can absolutely see what Silver Lake is thinking here. For many years, the big money in technology has been in fast-growing early-stage companies — but those companies are being increasingly boxed in by a few large firms who each hold key patents in just about every area. Dell has patents — it acquired more than 180 of them with the Wyse acquisition alone; it has the ability to invest and to reach enormous numbers of customers; and it also has a large number of boring-but-viable business units which can be sold off to generate even more capital if needed.

The valuation curve in the technology space has never been as steeply inverted as it is right now: while there are dozens of billion-dollar startups with negligible profits or revenues, the giants in the sector are trading at a significant discount to the stock market as a whole. For a company like Silver Lake, which is based in Silicon Valley and exists to turn around mature technology companies, this can be seen as a once-in-a-generation opportunity combining cheap debt with low valuations and enormous upside potential if they get it right. Frankly, if Silver Lake didn’t buy Dell at this point it should probably just pack up and liquidate.

This buyout might well fail — private equity is an inherently risky business. But it’s pretty obvious that Silver Lake has a much greater risk tolerance, right now, than the public equity markets have. If public shareholders don’t want to touch Dell, and Silver Lake sees an opportunity, then it makes perfect sense for Silver Lake to buy the company — especially since they get to keep Michael Dell himself as a key partner in the deal. If you’re a big company wanting to take big risks in technology, it seems, these days you have only three choices. You can be Amazon, you can be Google, or you can go private. Dell’s choice was clear.

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Two years after the endlessly delayed Volcker Rule was first passed, there’s been a slow, rough convergence in how the world treats too-big-to-fail banks.

Today, George Osborne, the UK’s chancellor of the exchequer, announced a series of new powers that will force banks to separate their trading and lending operations — or face being broken up.  This is the year, Osborne said in a speech, “when we re-set our banking system.” In France and Germany, something similar is going on: both countries are considering Volcker-ish proposals to that would force banks to silo off everyday banking from things like prop trading and financing hedge funds.

Building off of a government commission’s 2011 recommendation, Osborne’s approach, which he calls an “electrified ring-fence”, relies on four elements: the Bank of England will soon take over responsibility as a “super cop” for the economy; banks’ trading activities will be severed from their retail lending operations; the UK will somehow go about “changing the whole culture and ethics of the business”; and there will be more choice in a banking system which “verges on an oligopoly”.

The FT suggests Osborne’s words are a threat; Lex wonders if that threat is mostly empty. Reuters quotes a government source saying the move was intended “to send a signal to Europe” to move faster on reform (it also says Osborne was “bowing to political pressure”). And the British Bankers Association says a clear separation between trading and banking would create “uncertainty” for the industry.

“Behind closed doors”, bankers say they are not particularly worried about Osborne‘s fence. Much scarier for the banking industry is a growing chorus that’s arguing big banks may need to be broken up — a group which includes bank critics like Michael Lewis, free-market adherents like Alan Greenspan, and ex-bankers like Sandy Weill. In the US, new rules on big banks are being “absolutely driven by a sense that Dodd-Frank did not end too big to fail”, a Cato Institute staffer told Bloomberg. — Ryan McCarthy

On to today’s links:

EU Mess
Spain’s prime minister is embroiled in a scandal over secret cash payments – Telegraph

Long Reads
The crazy rise in health care spending is good for the economy — but only in the short-term – National Journal

Bold Moves
The economics of Netflix’s new $100 million show – Atlantic Wire

TBTF
Michael Lewis: financial institutions should be “so dull” that no one wants read about them – New Republic

Level Playing Fields
Organized crime fixed 680 soccer games – Guardian
If you can buy a gun, you should probably be allowed to bet on the Super Bowl – Felix

#OWS
8 good questions for Mary Jo White – Occupy the SEC

Peak Podcast
Carlyle co-founder releases debut podcast – Carlyle

Says Science
Dumb individuals can become smart crowds – Ed Yong

Currencies
Canadians are officially penniless – Canadian Press

Leaders
Richard III delivers definitive, yet lifeless, performance – NYT

Oxpeckers
Conde Nast’s intern’s big learning experience was learning what it’s like to be an intern in the magazine business – NYU

Awful
America has averaged one mass murder per month since 2009, study says – Brad Plummer

Wonks
The good news from Japan – Paul Krugman

Growth Industries
“Unemployed Reporter Porter”, it’s as “dark and bitter as the future of American journalism” – Hartford Advocate

Alpha
A reminder that Wall Street hates you – Aleph Blog

FYI
WE’RE HIRING – Felix

Crisis-Retro
Department of Justice will file civil suit against S&P for CDO ratings – Reuters

Andrew Ross Sorkin and Peter Lattman have uncovered an interesting wrinkle in the SEC’s case against Mathew Martoma, the most promising part of its huge investigation into Stevie Cohen. The SEC made quite a big deal of the fact that Martoma didn’t just sell his position in two pharmaceutical companies ahead of a big negative announcement; he even kept on selling after that, building up a substantial short position.

But as Sorkin and Lattman have worked out, that’s not really the case: SAC was flat going into the announcement, rather than being short.

The NYT’s spin on this news is that it suggests “a possible line of defense for the portfolio manager”, but it’s not entirely obvious from the report what that possible line of defense is, so let me spell it out.

First, it’s worth stating quite clearly that profits are the same as avoided losses in the eyes of the law. The SEC says that Martoma made $75 million in profits and avoided $194 million in losses as a result of the trading, for a total of $269 million; in the light of the NYT’s new information, that should probably just be $269 million in avoided losses, and nothing in profits. The total amount of money is the same, so the severity of the charges is unchanged.

But here’s the thing: if your trading book is long ahead of a big announcement, you’re basically making a bet on that announcement. Similarly if you’re short. But if you’re flat, that’s the one way of not betting on the announcement. And it now seems that SAC was flat, rather than short.

Of course, if Martoma traded on inside information, then he’s guilty whatever the final position of SAC’s trading book was. But if that position was flat rather than short, it’s no longer circumstantial evidence that SAC thought the announcement was going to be negative.

And there’s another line of defense here, too. As the NYT says, “SAC is well known for its aggressive, rapid-fire trading style, and several former employees say that there is nothing unusual about the fund’s exiting a large position over just a few days.” And this is the defense that has now been opened up. SAC was sitting on substantial paper profits, on its position in Wyeth and Elan. It knew an announcement was coming, and it knew that announcement could move the stocks substantially. If it made the sensible determination that the downside was bigger than the upside, there was every reason for the fund to move to a flat position ahead of the announcement, whether it had any inside information or not.

If I were a defense lawyer here, I’d be coming up with hundreds of previous cases where SAC exited a large position in a short amount of time, ideally ahead of some big announcement. Some of those exits will have been smart, in hindsight, while others will have been silly: SAC would have been better off holding onto its position rather than going flat. But the decision to go flat and take profits (or cut losses) is a common one within SAC, and can happen at any time for any of a million reasons. And as a result, SAC’s trading activity is not in and of itself prima facie evidence of insider knowledge.

Frankly, this isn’t much of a defense. Trading activity is what the SEC uses to try to find possible abusers of inside information; it’s not what the SEC uses to try to prove such cases. In this case, the SEC is relying on the testimony of Sid Gilman, the doctor who leaked the trial results to Martoma before the official announcement.

But the news does help insulate Cohen, even if it doesn’t help Martoma very much. No one knows what Martoma told Cohen before Cohen made the decision to go flat, but SAC’s trading action is entirely consistent with a simple declaration that Martoma wasn’t comfortable being long any more. (The rest of SAC was already making a strong case against being long at this point.) If Cohen knew that an announcement was imminent, and that the one person who wanted to be long no longer wanted to be long, then it would have made sense for him to go flat ahead of the announcement, even if he had no inside information at all. And there’s no particular reason to believe that Martoma would have admitted to Cohen that he had illegal insider information.

As Sorkin and Lattman say, the statute of limitations on this trade is rapidly running out: if the SEC will have to either bring charges against Cohen soon, or not at all. And so long as Martoma is refusing to cooperate with the SEC, it increasingly seems as though the SEC’s best chance yet to nail Cohen is going to slip through its hands.

Jim Surowiecki’s column about sports betting has appeared at roughly the same time as two important news reports. Firstly there’s a big Lucy Kellaway piece about traders in the City of London who become addicted to sports betting, with disastrous consequences for their careers and marriages. And secondly there’s the results of a 19-month international investigation, uncovering match-fixing in a mind-boggling 680 high-level soccer matches, including World Cup and European Cup qualifiers as well as a Champions League match in the UK.

Surowiecki paints sports betting as being an issue of states’ rights: New Jersey voters have spoken, and there’s no good reason why they shouldn’t have the same rights as residents of Nevada, Delaware, Oregon, and Montana. In those states, sports betting is legal, having been grandfathered in under a 1992 federal law making it illegal in the rest of the country. Sports betting also thrives illegally, with varying degrees of local tolerance.

There’s no doubt that the current jurisprudence surrounding sports betting (or any kind of betting, for that matter) is messy. But even if the 1992 law was declared unconstitutional, that wouldn’t much clean it up. Surowiecki says that allowing sports betting in one state would have “no obvious negative effects on other states or on the national economy”, and that “gambling has typically been a state issue, not a federal one” — but I don’t think that’s true any more, and it almost certainly won’t be true in future.

While the New Jersey law only allows sports betting in Atlantic City casinos and the state’s four horse racing tracks, for instance, it also allows people to place their bets at those venues over the internet. If the law is ever declared constitutional, the chances have to be high that pretty soon everybody in the US will have access to web apps offering spread betting — the kind of highly-addictive product that got those UK traders into deep trouble, and which promised huge riches to the Asian crime syndicate in the soccer scandal. Good luck to anybody trying to keep all gambling to New Jersey residents once that happens.

I’m an occasional gambler myself, although not on sports, and I’d probably avail myself of the opportunity to indulge in some spread betting were it easily available online for things like election outcomes or Oscar winners or the chances of the eurozone breaking up. But I don’t kid myself that such activity, once legalized, can or should be confined to individual states or individual casinos within states.

All of which is to say that we should really start a grown-up discussion about gambling, whether it should be legal, and whether paternalism can or should override the freedom to indulge in such activity. We should be open about the fact that if we legalize gambling, then the incidence of harmful gambling addiction will rise, as will the incidence of people trying to game sporting matches. And we should also be open about the fact that gambling will still be a lot less societally harmful than, say, gun ownership, or cigarettes, or alcohol, and that there’s no particularly compelling reason to be so much more prohibitive on the gambling front than we are elsewhere.

But it seems to me silly, in the online era, to try to confine legal gambling to certain physical locations, be they states or casinos within states. And it also seems silly to try to confine betting to certain things (sports) and not others (like, say, the Academy awards). If you’re going to allow it, then allow it. Make sure everybody offering it is clearly regulated and taxed — at the federal level, to avoid a regulatory race to the bottom. And make a clear determination that if you’re mature enough to be allowed to buy a gun, then you should probably be allowed to be able to bet on the Super Bowl, too.

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America is producing less of something, and for once, that’s good news: US carbon emissions are at their lowest level since 1994.

A decrease in emissions is definitely welcome, given the undeniable reality of global warming. And America did a bit more than just cut emissions. As a report from Bloomberg’s New Energy Finance details, the US invested $44 billion in renewables in 2012. That’s an 11% decline from the year before, but there’s still more money going into renewable energy than into any other energy source. Overall, US clean energy capacity is largely stagnant, while energy use has declined 6.4% since 2007.

America cut its carbon output without any help from federal legislation, and despite a largely symbolic energy secretary. Economics is taking the place of legislation: energy production from natural gas, wind, and solar is getting cheaper, and saving energy is easier than ever. New Energy Finance notes that gas consumption has dropped 5.7% since 2007, and buildings use 40% less energy per square foot than they did in 1980. US manufacturing is doing well (take a look at the latest ISM and GM sales numbers), so you can’t simply chalk up America’s carbon reduction to structural changes in the economy.

America is also burning less coal, which is terrific. Coal isn’t just carbon intensive: mining it destroys mountains, burning it is terrible for human health, and the ash is converted into a particularly toxic slurry.

A more mixed development is America’s increasing reliance on natural gas. That means lower emissions  compared to coal or oil, but fracking has plenty of environmental problems that we know about, and likely still more to be uncovered.

The bad news, as ever for the environment, is China, which remains an economy powered by coal. As China’s skies show, throwing large amounts of money towards renewable energy can’t offset an addiction to coal. China might not be able to get its act together, but as Cass Sunstein smartly pointed out, that’s all the more reason for the US to do so. — Ben Walsh

On to today’s links:

JPMorgan
JPMorgan’s London Whale trader tried to warn his bosses about his “scary” trades – WSJ

RIP
Former mayor Ed Koch dies, he is “survived by New York City itself” – NYT
Koch on the suburbs: “It’s sterile. It’s nothing. It’s wasting your life.” – Business Insider

Primary Sources
US adds 157K jobs in January — as revisions reveal 400k+ jobs we didn’t know existed – BLS

Popular Myths
Debunking the myth of the “hidden prosperity of the poor” – Tom Edsall

Awesome
Amazon, Apple and the simple genius of a low margin business – Eugene Wei

TBTF
Deutsche Bank will cap (immediate) bonuses at $400,000 – Bloomberg
Deutsche’s strange, lonely fight with the Fed over bank capital – Peter Eavis

Quote of the Week
“Facebook is a large, inefficient engine for transforming electricity and programmers into a down-market place to sell low-value advertising” – Christopher Mims

Financial Arcana
Relax, banks’ risk measurements are rarely off by much more than a factor of 10 – Matt Levine

Wonks
We’re maybe, possibly entering an era of new American progressiveness – Jeff Sachs

Hope/Change/Etc.
Obama’s Jobs Council disbanded, after possibly accomplishing some stuff – WSJ

Oxpeckers
Consumer Electronics Association cuts ties with CNET – Brian Stelter

Alpha
Herbalife’s 10-K actually doesn’t say that it’s a pyramid scheme – Grumpy Old Accountants
The only thing markets have to fear is lack of fear itself – Bloomberg

Cephalopods
Since December 2012, Goldman Sachs has been 100% less Fab – WSJ

Justin Fox has a great little post called “How Amazon Trained Its Investors to Behave”:

When Amazon reports below-consensus earnings, as it did Tuesday, and the share price jumps, as it did after-hours Tuesday and again Wednesday morning, the reaction isn’t quite the puzzle it seems. Slate’s Matthew Yglesias cracked that “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.” But what’s really going on is that Jeff Bezos has trained elements of the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off, not signs of trouble.

The weird thing here is the Jeff Bezos training regimen, when it comes to shareholders, is really no different to the Mark Zuckerberg training regimen, or the Steve Jobs training regimen, or even for that matter the Jimmy Dolan training regimen, of Cablevision infamy. In each case the CEO treats his shareholders exactly the same way: disdainfully, by ignoring them. And it turns out that investors, in turn, react in very different ways, depending on the CEO and the company which is doing the ignoring.

Fortune’s Philip Elmer-DeWitt has a good overview of what he calls the “bizarro valuations” of Apple and Amazon, and how it makes very little sense that Apple is selling for 10 times earnings even as Amazon is selling for more than 3,000 times earnings. On the other hand, who cares about such things, beyond stock-market speculators? The one thing that Jeff Bezos and Tim Cook have zero control over is their own stock price; they’re focused instead on the things they can control. Indeed, they probably have much more control over their companies than the vast majority of other CEOs.

Or, to put it another way, both Bezos and Cook are secure enough in their jobs (unusually, for CEOs these days) that they can afford to ignore what investors think, most of the time. Neither is acquiring companies with stock, or otherwise in need of a high stock price, and neither is going to get fired by their board. It’s fascinating to see how an almost-identical attitude towards investors, at two companies which have grown to dominate their respective markets, has resulted in such widely differing valuations.

Which leaves the question: does the stock price matter at all, to Bezos or Cook or Zuckerberg or any other CEO of that ilk? The answer is yes, for one big reason: talent acquisition and retention. If you’re running a tech company, you’re going to be handing out a lot of equity as part of your compensation packages, which mean that your employees are highly interested in seeing the share price rise — a lot. When it’s rising, they’re happy; when it’s falling, they’re not. And so even if you don’t give two hoots about your institutional shareholders, you still have to care about that share price.

That said, while “rising” is always good, in terms of the share price, “stratospheric” is less so. If you’re Jeff Bezos or Mark Zuckerberg, handing out RSUs, it’s pretty hard to make the case that you have a huge amount of upside — just because the share price is already so expensive, and your company is already so fully valued. At Apple, by contrast, the upside is still enormous, and if the team continues to deliver amazing growth figures, then the share price will eventually rise a very great deal.

Amazon and Apple and Facebook are large and pretty mature companies at this point: hires have job security as well as stock-related upside. But they all need talented engineers, and in a weird way it’s the company trading on the lowest multiples which is the most attractive in that respect. Apple’s low current share price could even be a competitive advantage, in the all-important war for talent.

Three weeks ago, Joe Pompeo reported that “the one area still in recruitment mode”, when it comes to the brand-new Reuters website launching in March, was “the business vertical, the broad direction of which is being overseen by Ryan McCarthy and Reuters columnist Felix Salmon”.

Reuters Next, as it’s known internally, will be a ground-up reboot of Reuters.com — and Pompeo is absolutely right that we need a couple of amazing, web-native business and finance geeks to help run that section.

We’re looking for people who can write, of course: the site will need quick, clean, memorable posts on everything from central banking policy to Facebook’s latest product launch. But, even more importantly, we’re looking for people who can read. Why match when you can  link?

The vision for business section of the site is that it will be a single source for readers to find the best business news and analysis online — regardless of source. The news will come from Reuters and from the rest of the web. As for the analysis, sometimes we’ll link to it, sometimes we’ll reprint it from elsewhere, and sometimes we’ll write it ourselves. Which means that although writing is going to be a key skill for anybody on the team, we’re looking for writers of the contextualizing, value-adding sort — rather than reporters.

This property won’t look or feel like any other business section — it’ll be smarter, linkier and much more aware of the conversation. Practically, that means blending Reuters content with prominent external links, hover-and-dive blogging (which elides the distinction between a blog and a liveblog), great headlines, semi-traditional news blogging, op-eds, lots of charts, and of course a keen eye on social media in general and the ongoing Twitter conversation in particular.

If you’re interested, please send a resume and a short note to Counterparties.Reuters@gmail.com. [Also, please apply through official channels here. ] Be sure to include your Twitter handle!

This month’s payrolls report is one only a statistician could love. The official press release contains three whole pages on the subject of revisions and rebenchmarking, on top of the box on the front page: the very clear message is that we’re starting a new year, and that it’s a very bad idea to compare the January numbers to the December numbers.

That said, no one would have been particularly surprised by these numbers even if they were directly comparable: they’re basically exactly in line with what we’ve been seeing for months. Payrolls growth is constant, unemployment is flat: nothing’s getting better, nothing’s getting worse. And if you exclude some of the more volatile categories, that trend is even stronger. The good news in the report is about levels rather than changes: the total number of Americans on payrolls is now 134,825,000, while last month we were told that it was just 134,021,000. That means the number of Americans with a job is 800,000 higher than we thought last month, even if the unemployment rate, at 7.9%, is no closer than it was in September to the Fed’s 6.5% target.

Frankly, the payrolls report should be of interest mostly to statisticians and econometricians. The error bar for the number of jobs added is large, but the amount of data in there is enormous: the jobs report is an amazingly useful resource for people who want to study the state of the US economy over time. The problem is that it’s also the earliest indication that the markets get of how the economy is doing each month, and as a result it moves markets more than any other scheduled data release in the world, with the possible exception of FOMC announcements. In our short-attention-span world, where anything that moves markets must be news, it’s far too easy to get distracted by monthly noise — especially when people like me feel the need to weigh in every month.

The fact is that the jobs report is a sprawling, messy thing at the best of times, and it’s especially so this month. We only ever find out with hindsight whether the immediate market reaction was rational or silly, and the same goes in spades for the flurry of activity that greets the report on Twitter every month. Even the unemployment rate, which is now being explicitly targeted by the Fed, isn’t crucially important: Ben Bernanke has made it very clear that he’s going to take a big-picture view of the employment situation to determine when it’s time to raise interest rates, rather than just target the U3 rate narrowly, with no attention paid to things like the workforce participation rate.

To be honest, this month’s payrolls report probably isn’t even the most important data release of the day, let alone the month: the data from the manufacturing sector of the US economy is much less ambiguous, with the ISM report coming in strong and GM sales looking impressive. It’s an open question, of course, as to whether and how industrial strength is going to make its way through into full employment. But don’t look to the headlines atop this month’s payrolls report for answers. If they’re in there at all, they’re deeply buried, and not easy to find.

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Today, Europe’s biggest bank posted a $3 billion net loss, but it insists it’s embarking on “deliberate”, “uncomfortable change”. Deutsche Bank’s revenue up was up 14%, and the bank’s losses came from a €1.9 billion writedown on assets and €1 billion put aside for litigation (read: likely Libor scandal-related) costs.

But analysts, including KBW’s Andrew Stimpson, agreed that “the big thing is the capital” that the bank is amassing to comply with future regulations. DB’s Tier 1 capital ratio — the amount of money its regulators require it to hold against losses — jumped to 8%, higher than its target of 7.2%, and the stock market promptly loved it.

The WSJ, Reuters and Bloomberg each suggest much of this capital boost was due to the bank tweaking its internal risk models — changing the way it values assets rather than, say, selling them off. To David Weidner, this kind of dial-fiddling means the bank could be reaching “the limits of financial engineering”. Dominic Elliott argued earlier this month that DB has a long way to go on its capital: “investors want big universal banks with sizable exposure to capital markets to be at around 10 percent as soon as practicable.”  (For the uber-wonky, here are the Basel guidelines for tweaking this sort of formula).

DB has been very busy lately thinking about the future: it’s shrinking and “undergoing the most radical surgery of its global peers”; it’s being asked to simulate its own breakup while possibly facing a version of the Volcker Rule; and its own executives have been actively pushing the industry’s most aggressive messaging campaign. In the bank’s earnings release, co-CEO Anshu Jain said he wants to “place Deutsche Bank at the forefront of cultural change,” a process that will take “years not months”. (Hence, the bank calling this “Strategy 2015+”, which will, likely, mean fewer employees getting paid less).

DB’s main problem, Lex writes, is more mundane: it simply needs to stop paying its employees more than its competitors. On that, Deutsche says it’s making progress. The bank deferred more compensation for senior execs, and it has eliminated multi-year bonus guarantees. Sarah Butcher finds a murkier picture — pay per employee in the investment and corporate banking division is actually up, despite variable compensation (aka bonuses), as a percentage of revenue, falling by 60% since 2006. — Ryan McCarthy

On to today’s links:

Oxpeckers
Inside network TV’s biggest musical/comedy/critically acclaimed train wreck – BuzzFeed

Long Reads
How North Dakota produced one of the world’s biggest oil booms – NYT

Hackers
Chinese hackers “stole the corporate password for every NYT employee” – NYT

New Normal
Government is hurting the economy by spending too little – Ezra Klein

Welcome To Adulthood
The latest subprime boom: student loans – WSJ
FICO: Student loan bubble “simply unsustainable” – Zerohedge

Yep
Just saying that the deficit is a really big number “isn’t much of an economic argument” – Neil Irwin

Politicking
White House petitions aren’t about change – Time

Legalese
Regulatory enforcement is a “positive thing… to a point” – Matt Taibbi

Pivots
Citi decides that Pakistan, Paraguay, Uruguay and Romania aren’t part of its consumer banking plans – Reuters

National Emergencies
America now only producing 30,000 lawyers a year – NYT

Facebook
Facebook’s revenue rises 40% over last year – Facebook

Bubbly
5 years of writing the “Is There A Bond Bubble Coming?” story – Matt Phillips

It’s Academic
Fair wages increase productivity – Chris Dillow

A couple of weeks ago, the WSJ’s Brody Mullins had a big story about the fact that the SEC was investigating a political-intelligence consultancy named Marwood. Marwood doesn’t seem to have done anything wrong, but the very fact that it was being investigated was, at least as far as the WSJ was concerned, front-page news.

This week, Mullins has done it again, this time with an SEC investigation of firms which provide financial data. Once again, there’s nothing in the story to suggest that any of these firms, which include Bloomberg, Dow Jones, and Thomson Reuters, have broken any insider-trading rules. And yet here’s a juicy front-page story all the same, based entirely on the fact that there was an investigation at all, regardless of whether the investigation actually discovered anything untoward.

I’d love to know the story behind these stories. It seems pretty obvious that they’re being leaked by the SEC, in a way that seeks to embarrass the subjects of the probes as much as possible. Marwood and Bloomberg and Thomson Reuters might have done nothing wrong at all, but if the WSJ determines that there’s front-page news here, then its readers are surely expected to conclude something about smoke and fire.

There’s a clear implication in the latest story, for instance, that the data companies in question (which include the WSJ’s corporate parent) did do something wrong, and that they’re just lucky the SEC can’t prove it in a court of law:

Investigators decided against filing charges because they couldn’t link the pattern to specific actions by media companies, people familiar with the probe said.

A key issue, one of the people said, was whether the government could prove in court that a time advantage for a trader of a sliver of a second—as little as a few thousandths—was enough to conduct profitable trades on confidential information.

Even so, these people added, investigators continue to have general concerns about the handling of federal economic data.

This whole thing has a decided whiff of “doesn’t the SEC have anything better to do”. For one thing, to answer the SEC’s question, it’s not at all obvious that getting information a few thousandths of a second ahead of anybody else would allow some computer somewhere to conduct a profitable trade on the information. Firstly, big economic data comes out before the stock market opens, which means that any profitable trades would have to take place either on the much less liquid out-of-hours market, or else on the bond market. Both of them are largely free of high-frequency traders.

Yes, there’s a lot of trading and jostling and positioning in the bond market in the run-up to a big data release, but I can pretty much guarantee you that all markets are in holding-their-breath mode when it comes to, say, the final couple of seconds. The traders and the algobots are short or flat or long, they’re waiting for the number, and then they’ll burst into action as soon as the number is released. If you want to trade a couple of thousandths of a second before the number is released, you’re going to be looking for a counterparty who doesn’t know what the number is but who is willing to trade anyway. It’s hard to imagine such counterparties exist.

The news agencies can blame themselves a little bit, here, because they have for many years been highly invested in the idea that if you get a certain piece of information first, even if it’s just by a fraction of a second, then you can make a huge amount of money. All of them get incredibly excited about the times when they move the market: when a story comes out, and then some financial instrument — normally a stock, but a commodity will do in a pinch — moves sharply on the news. They charge a lot of money for their real-time news feeds, and the implication is something like this:

1. The news hits the wire.
2. A smart trader, staring intently at his newsfeed, sees the headline cross the wire, and immediately groks the implications.
3. The trader then puts in a monster buy/sell order, picking off a bunch of tortoises who aren’t smart or rich enough to subscribe to the wire service in question.
4. The price moves sharply.
5. Monster profit!

It’s a lovely story, but it’s also a fairytale: things don’t actually happen that way. In the real world, when a piece of news hits a wire, at that point it’s public. And once it’s public, the market then reflects that public information in the share price. If you’re a broker-dealer who was quoting a security at one price before the news came out, you’ll now be quoting it at a different price after the news has come out.

The key question to ask is this: how many trades happened (a) at the old price, but (b) after the news became public? Most of the time, the answer is zero, or very close to zero. News headlines often move the market, but that doesn’t mean that someone has gotten financial benefit from reading them first.

The point here is that once a headline crosses the wire, that information is, by definition, public. And if it’s public information, it can’t be insider information. There are lots of good reasons why the U.S. government and rival news agencies would be cross if one of the wires published that information a fraction of a second before the other ones did. But just because someone is cross doesn’t mean that laws have been broken, or that inside information has been traded upon. An embargo is an agreement between a news source and a journalist; it’s not something to be enforced by the SEC.

So I do wonder what the SEC thought it was doing, here, conducting what the WSJ describes as a “technically and legally complex” probe. What exactly was the SEC hoping to achieve? And why is this weird investigation, in and of itself, newsworthy as anything other than a waste of government resources?