Felix Salmon

I’m spending Friday at the Kauffman Foundation’s Economics Bloggers Forum in Kansas City. A dozen bloggers are giving short presentations, and I’m flattered to be one of them, along with the likes of Tyler Cowen, Bryan Caplan, Ryan Avent, Dean Baker, Steve Waldman, and Virginia Postrel. We’ve all been encouraged to write a post about our talk.

Following on from a question I asked Mohamed El-Erian at the Thomson Reuters Newsmaker event today, I’m planning to talk a bit about a favorite subject of mine, private stock markets like SecondMarket and SharesPost. They’re hot these days, and one of the questions I’m hoping to put to the bloggers at the Forum is why that might be.

Certainly it’s easy to see why these private markets serve a useful function. Take Pimco: it gives out shadow equity to a lot of employees, which vests over a period of years. But once they have that equity, what are they meant to do with it? Pimco can unilaterally announce a price for it, and say that it will buy back its own stock at that price. But that seems a bit unfair: one of the reasons that many banking partnerships went public was that they were buying back their stock at book value, even as the public markets were valuing banks at significant multiples of that. And in general, if there’s only one buyer for an asset, that buyer always has an incentive to lowball the price.

That’s why Pimco turned to SecondMarket, to take advantage of their web-based Dutch auction system. Pimco employees entered bids and offers into the system — the amount they were willing to sell their shares for, and the amount of money they were willing to pay for new shares. The bids and offers then cleared at a certain price (I didn’t get the opportunity to ask what the price was, and I’m sure that El-Erian wouldn’t have told me if I had), and that price by its nature is a fairer value for Pimco stock than anything determined according to a formula.

El-Erian said, and I believe him, that the auction didn’t see a lot of volume: there simply weren’t all that many people interested in selling their equity. It’s easy to see why: Pimco is doing very well these days, and it pays well too. Some employees might have difficulty paying their tax bill as their equity grants vest, but most are rich enough that they can do so quite easily. Most of them, too, probably reckon that employees-only equity in Pimco is likely to be a better investment over the medium term than anything they might be able to do in the current market with the proceeds of any sale. That’s the reason that shares of SecondMarket itself have yet to trade on SecondMarket: there aren’t any sellers, only buyers.

In the specific case of Pimco, there are always rumors that it might get sold or spun off from its parent, Allianz. A strategic buyer might well be prepared to pay a substantial control premium to get its hands on more than $1.2 trillion of assets, and Pimco’s employees would surely like to collect that premium themselves rather than sell the right to receive it to someone else.

So as is quite common in these situations, buyers — including El-Erian himself — outnumbered sellers. Which raises a common objection to private markets: that they don’t allow for short selling, which is an important contributor to the way in which public markets perform their role of price discovery.

There’s also my public-policy objection: that even if these markets make sense for the companies in question, they’re bad for the general public, which gets shut out of the opportunity to own equity in strong, attractive companies. Pimco’s not a great example on this front, since it’s possible to buy shares in Allianz. But if you look at the poster child for private markets, Facebook, the only people able to buy equity are a small group of elite and well-connected global rich people. And that doesn’t seem fair.

Historically, workers have been able to get access to the class of investments available to the rich: they have had defined-benefit pensions, run by pension plans which qualify as rich and sophisticated investors and which therefore have a large universe of asset classes to invest in. But as we move from defined-benefit to defined-contribution plans, that universe shrinks.

It’s quite easy to see why companies like Facebook might not want to go public — although the NYT is now reporting that an IPO might happen early next year. Being public is expensive and annoying: CEOs almost always prefer to be public. Public shareholders are litigious; public stocks tend to move in lockstep with each other rather than due to company-specific fundamentals; and the minute that your stock price is public, everybody pays an enormous amount of attention to it and judges you by it. Given the amount of money in private markets, what upside is there in going public? Especially when SecondMarket and its ilk allow shareholders to liquidate their holdings quietly and at a good price.

What’s less easy to see is why this trend is happening now. Is there something special about the USA circa 2011 that makes private exchanges particularly timely? Yes, there’s a lot of liquidity sloshing around — but that was true in the mid-oughts, too. Yes, Sarbox has made life for public companies that much harder — but Sarbox has been around for a while as well. Maybe it’s simply the fact that SecondMarket and SharesPost have come along and executed well in a space which no one bothered to put much effort into before. I’m reminded of the current rise in couponing: there’s absolutely no reason why Groupon, LivingSocial, and the like should all be exploding now, rather than during say the first dot-com boom of the 1990s.

Markets aren’t that efficient: sometimes it takes a while for an entrepreneur to spot a big gap in the market. But if there is a good reason why private markets are booming in the USA today, I’m sure the bloggers assembled at Kauffman will be able to think of it.

Ethics and escalators — SciAm

Dave Sokol resigns from Berkshire Hathaway, under stock-trading cloud, citing desire to get rich — TBI

Bank of America’s 2010 compensation: Brian Moynihan $1.9M, Neil Cotty $4.1M, Sallie Krawcheck $6.2M, Bruce Thompson $11.4M — SEC

Beware economists wielding short samples — Freakonomics

‘Where did Wilson get the inspiration for such lyrics as “Yesterday was Thursday/Today is Friday?” “I wrote the lyrics on a Thursday night going into a Friday,” he said.’ — Gawker

Ben Zimmer on tech-company trademarks — NYT

Thank you, internet: Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan’s ludicrous op-ed in the FT. And they’re not alone: as Alex Eichler notes, “everyone is laughing at Alan Greenspan today”. Greenspan could hardly have made himself look like more of an idiot if he’d tried, not only because the “notably rare exceptions” construction is so inherently snarkworthy, but also because it’s so boneheadedly stupid. Anything which normally makes money is a good idea if you ignore the times that it doesn’t work.

That said, it’s worth looking in a bit more detail at Greenspan’s nutty ramblings, because scarily they’re actually representative of what much of the financial sector believes these days. (And Clive Crook, too.) The context is the GOP-controlled Congress, which has the ability to hobble or even abolish key parts of Dodd-Frank. And Greenspan is urging them on, saying that the early consequences of Dodd-Frank “do not bode well”. In order to do this, he first sets up a straw man, saying that Dodd-Frank was designed to “readily address” the causes of the financial crisis. It wasn’t, of course, but Greenspan pretends it does, and proceeds to give five examples of how it fails to do so, helpfully delineated with bullet points.

The first is that the credit rating agencies didn’t like the idea that they should take responsibility for their ratings. Well of course they didn’t like that idea — but the SEC was so captured that it happily waived the relevant bit of Dodd-Frank. Is it true, pace Greenspan, that the SEC’s supine reaction could not have been “readily anticipated”? Maybe. But the point here is that the unintended consequence of Dodd-Frank was a significant weakening of Dodd-Frank. Greenspan should be happy about this one! It’s the intended consequence of Dodd-Frank that he didn’t like.

Greenspan’s second point is that banks “contend” that they won’t afford to be able to issue debt cards if the Durbin amendment to Dodd-Frank goes through. This contention is silly, of course: no one’s going to stop issuing debit cards at all. But Greenspan believes them, maybe because his entire career was based on trusting whatever he was told by the banks, since banks are always going to do what’s best for their shareholders, and what’s good for bank shareholders is good for America. Or something along those lines, anyway.

Back in 2008, Greenspan admitted that there was “a flaw” in that reasoning, and that he was “very distressed by that fact”. But he’s clearly got over his distress at this point, and is back to his old tricks of simply parroting the spin of the very entities he was purportedly regulating. “Concerns are growing,” he writes, “that without immediate exemption from Dodd-Frank, a significant proportion of the foreign exchange derivatives market would leave the US.”

Who has these concerns? Greenspan doesn’t say, but I’ll let you into a secret: it’s bankers. They like trading derivatives because trading derivatives makes them lots of money. Does it help the broader economy, or create a significant number of jobs? That doesn’t really matter, and neither does any specificity as to what the word “significant” might mean in this context. This isn’t argument, it’s inchoate scaremongering.

Greenspan then moves on to the Volcker Rule, complaining that it puts US banks at a competitive disadvantage. Well, yes. If you have a central bank which takes its regulatory function seriously, then less fettered banks are likely to be at a competitive advantage to your own. Ask Canada. Which is feeling pretty smug, these days, about putting its banks at a competitive disadvantage.

And of course on the subject of international regulatory arbitrage, Greenspan makes no mention of the rumors that Barclays might relocate to the US, welcomed with open arms by Mike Bloomberg among others. Either Greenspan isn’t being intellectually honest here, or else he really believes it’s the function of government to relax regulations in every conceivable area to the point at which all governments compete to see who is the most laissez-faire in as many parts of the financial system as possible. He’s an acolyte of Ayn Rand, so that’s possible. But it’s not an idea which deserves serious consideration.

Finally, Greenspan defends high pay for bankers on the grounds that “small differences in the skill level of senior bankers tend to translate into large differences in the bank’s bottom line” — an assertion which cannot possibly have any empirical basis.

At this point, Greenspan clearly decides that nothing he writes need have any factual or even rational basis:

These “tips of the iceberg” suggest a broader concern about the act: that it fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008. The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.

Well, he’s right that banks are just as interconnected now as they were pre-crisis. But how Dodd-Frank was meant to “capture” that, and what that has to do with “regulatory-induced market distortion”, is left as an exercise for the reader. I think that what he’s saying is that any deviation from a complete laissez-faire approach where banks can do anything they want is, ipso facto, a market distortion. And that since Dodd-Frank is the first time in living memory that bank regulation has got tougher rather than laxer, that gives him license to wax apocalyptic about unintended consequences and the like. Despite the fact that the main unintended consequence to boot seems to have been a massive increase in bank profits.

Greenspan concludes with a paean to financialization and leverage, which Yves Smith has already done a great job of demolishing.

The main problem with all of this is that it’s coming from someone who still, depressingly, is respected in certain policy circles — and who is using that credibility not to advance debate, but rather to lobby for his finance-sector clients. Last year, I thought that Greenspan had realized that he had been wrong in terms of regulatory policy, but not in terms of monetary policy. At this point, however, it seems that Greenspan is having second thoughts about his regulatory-policy apologies, and has reverted to his position of All Regulation Is Bad. I’m sure that’ll get him lots of cheers (and dollars from Wall Street. But it should be the final nail in his coffin when it comes to credibility. There have been many bad Fed chairmen. But Greenspan is out on his own as by far the worst former Fed chairman of all time.

Kathleen Madigan had an important post on Friday, showing financial profits roaring back to more than 30% of all domestic US profits. As she says, “that’s an amazing share given that the sector accounts for less than 10% of the value added in the economy” — and makes it “hard for banks to cry poverty” when it comes to things like debit-card interchange legislation.

Madigan gave us the percentage chart, which shows the finance industry taking an even greater share of total corporate profits than it did during most of the boom year of 2006.

But I wondered: how much of this is a function of generally lower profitability overall — a question more of a low denominator than a high numerator? So I went along to the BEA website and put together this chart:

The blue line is total domestic profits. The green bars are the massive profits made by the Federal Reserve — an incredible $233 billion in 2010 alone. But as you can see, those Fed profits are dwarfed by the red bars, which are private-sector financial profits. Those dipped into negative territory just once, in the fourth quarter of 2008, and in the fourth quarter of 2010 reached an annualized $379 billion — bringing the total for the year to more than $1.3 trillion.

What this chart says to me is that nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries. We’re back near boom-era levels of profitability now, and no one seems to worry that the flipside of higher returns is higher risk. Any dreams of seeing a smaller financial sector have now officially been dashed. And the big rebound in corporate profits since the crisis turns out to be largely a function of the one sector which we didn’t want to recover to its former size.

Update: Thanks to John Coogan for pointing out that the BEA already annualized the quarterly figures, as well as seasonally adjusting them. So I was wrong to add up all the quarterly figures for 2010 to get what I thought were annual figures. Sorry.

A tribute to journalist and colleague Sabah al-Bazee — Reuters

Footage from “Jeff Koons Must Die” video game — Switched

More Bogus Lobbying Numbers from the Banks: Debit Interchange Rates — Credit Slips

I love the idea of Cloud Drive, but it’s way too expensive to use as storage/backup — Amazon

I’m way late to the massive and wonderful report on Media Piracy in Emerging Economies by Joe Karaganis and a big team of international researchers. I blame the fact that Karaganis sent me the report a week before it was formally released, on the sensible grounds that it might take a bit of time for me to digest its 440 pages of detailed new information on one of the defining issues of the information age. Of course, like any good procrastinator, I did no such thing. But I’ve read a good chunk of the report at this point, and I highly advise you do likewise — or else sit back with Karaganis’s presentation of its main points.

For starters, Mike Masnick is absolutely right that the report debunks the entire foundation of US foreign IP policy. That policy has essentially been written by the owners of US intellectual property, who jealously protect it and think that the best thing they can possibly do is be as aggressive as possible towards any sign of international IP piracy. As the report shows, this makes a tiny amount of profit-maximizing sense for the companies concerned. But it actually encourages, rather than reduces, piracy in the aggregate.

Think about the NYT paywall, for instance. It’s easy to imagine how the higher the price for which the NYT charges a subscription fee, the more money it gets — even as the total number of people finding ways around the paywall, rather than paying the full amount, would go up. (Here’s a hint: if you run into the paywall, just delete everything past the question mark in the URL, and hit Enter. It’ll think you’re coming straight to the story from outside the wall, and will show you what you’re looking for.)

Similarly, if companies charge only a very high price for their wares in the developing world, most people will become pirates and get that material for much less money. Meanwhile, the piracy notwithstanding, corporate revenues are still being maximized. As the report says,

we have seen little evidence—and indeed few claims—that enforcement efforts to date have had any impact whatsoever on the overall supply of pirated goods. Our work suggests, rather, that piracy has grown dramatically by most measures in the past decade, driven by the exogenous factors described above—high media prices, low local incomes, technological diffusion, and fast-changing consumer and cultural practices.

The big forces driving media piracy in developing countries are real and powerful and will not be changed, no matter how many western politicians get on their moral high horses and insist that countries like India and China build a “culture of intellectual property.” But the irony is that if governments and corporations really wanted to build such a culture, then they would encourage companies to set their prices low enough that the populations of those countries could actually afford to buy music, movies, and software at the full legal retail price. It turns out that domestic companies are quite good at distributing media at low prices, and can build profitable businesses by doing that. But foreign companies have different incentives in the short term, and don’t do that.

One part of the report which is very dear to my own heart is the section on the quality of industry research:

We see a serious and increasingly sophisticated industry research enterprise embedded in a lobbying effort with a historically very loose relationship to evidence. Criticizing RIAA, MPAA (Motion Picture Association of America), and BSA (Business Software Alliance) claims about piracy has become a cottage industry in the past few years, driven by the relative ease with which headline piracy numbers have been shown to be wrong or impossible to source. The BSA’s annual estimate of losses to software piracy— US$51 billion in 2009—dwarfs other industry estimates and has been an example of the commitment to big numbers in the face of obvious methodological problems regarding how losses are estimated. Widely circulating estimates of 750,000 US jobs lost and $200 billion in annual economic losses to piracy have proved similarly ungrounded…

The rationale offered for criminal-syndicate and terrorist involvement is that piracy is a highly profitable business. The RAND report, for example, states (without explanation) that “DVD piracy . . . has a higher profit margin than narcotics”—an implausible claim that has circulated in industry literature since at least 2004.

This study, in wonderful contrast, has enormous amounts of transparent quantitative data, collected over a period of about five years in an attempt to understand just how IP is consumed in emerging economies. (And no, there’s no evidence that organized crime is particularly involved.) To take one of dozens of insights more or less at random:

Our work highlights a more specific transformation in the organization of consumption: the decline of the collector and of the intentional, managed acquisition that traditionally defined his or her relationship to media… it is clearly a shrinking cultural role, defined by income effects and legacy cultural practices.

The collector, our work suggests, is giving ground at both the high end and low end of the income spectrum. Among privileged, technically literate consumers, the issue is one of manageable scale: the growing size of personal media libraries is disconnecting recorded media from traditional notions of the collection—and even from strong assumptions of intentionality in its acquisition. A 2009 survey of 1,800 young people in the United Kingdom found that the average digital library contained 8,000 songs, with 1,800 on the average iPod (Bahanovich and Collopy 2009). Most of these songs—up to two-thirds in another recent study—have never been listened to (Lamer 2006).

Such numbers describe music and, increasingly, video communities that share content by the tens or hundreds of gigabytes—sizes that diminish consumers’ abilities to organize or even grasp the full extent of their collections… On such scales, many of the classic functions of collecting become impersonal, no longer individually managed or manageable. A related effect is that personal ownership becomes harder to specify and measure: consumer surveys are poorly adapted to mapping terrain where respondent knowledge is unreliable… Increasingly, we live in an ocean of media that has no clear provenance or boundaries.

Or check out this wonderful one-paragraph overview of the history of the Bolivian music industry:

The limit case, in our studies, is Bolivia, where the impasse of high prices, low incomes, and ubiquitous piracy shuttered all but one local label in the early 2000s and drove the majors out altogether. The tiny Bolivian legal market, worth only $20 million at its peak, was destroyed. But Bolivian music culture was not. Below the depleted high-end commercial landscape, our work documents the emergence of a generation of new producers, artists, and commercial practices—much of it rooted in indigenous communities and distributed through informal markets. The resulting mix of pirated goods, promotional CDs, and low-priced recordings has created, for the first time in that country, a popular market for recorded music. For the vast majority of Bolivians, recorded music has never been so prolific or affordable.

I’m particularly partial to analysis which shows a strong correlation between the profitability of a movie and the degree to which it’s pirated. I’ve long had this theory with regard to counterfeit handbags: the existence of the fakes only serves to increase demand for the real thing. The connection is less intuitive with movies: if you’ve seen a high-quality pirated copy, you’re not going to want to pay full price for the licit version. But Hollywood revenues are very healthy indeed, and there’s no evidence at all that they’re being harmed by increased piracy.

The most depressing aspect of this report is the fact that it doesn’t seem to have caused anything like the splash that it deserves. It’s an astonishing work of cooperative international scholarship, and really ought to fundamentally change the debate about intellectual-property enforcement in arenas with names like WIPO and USTR. But I fear that it’s too sensible and empirical for that. If the Obama Administration isn’t welcoming this report with open arms, then I fear no one will.

How many homeowners are current on their second mortgage while being delinquent on their first? When I wrote about this issue last week, I cited David Lowman, the CEO of JP Morgan Chase Home Lending saying that some 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. That came from his formal Congressional testimony, via Mike Konczal.

But Brad Miller has now sent me a bunch of other datapoints which paint a very different picture.

First up is this paper from the Philly Fed. The numbers here are roughly half Lowman’s 64%: depending on the type of second lien you have (straight second mortgage, home equity line of credit, home equity loan) it seems that somewhere between 24% and 38% of second liens are current when the first liens are in default.

Next comes a research note from Amherst Mortgage Insight. It shows that where the first lien is delinquent, just 12% of second liens are have always been current and outstanding. Fully 73% of seconds have been delinquent at some point, and 15% fall into an “other” category which usually means they’ve been paid off.

Amherst also breaks down the percentages according to lien type: if the first lien is delinquent, then 59% of Helocs have been delinquent, compared to 78% of closed-end second mortgages. This isn’t a pure like-for-like comparison, since there’s a difference between a loan which is performing now and a loan which has never been delinquent. But still, it looks very much as though most second mortgages suffer delinquency if the first is delinquent.

Finally there’s this letter, sent to Miller by the head of the OCC. According to the OCC’s analysis, just 6% of second mortgages were “current and performing but behind delinquent or modified first liens.” (Update: As my commenters point out, this number has a different denominator. In this case it’s 6% of all second mortgages, while in the other cases we’re talking about just the second mortgages which are behind delinquent first liens.)

I’m not going to hazard a guess as to what all these conflicting pieces of information mean, but when the statistics for performing second mortgages behind delinquent first mortgages range from 6% of one thing to 64% of something else, you know that this particular phenomenon is hard to pin down and subject to all manner of statistical manipulation.

It does happen, and it’s pretty clear why it happens: as the Amherst note says, “a failure to pay the 2nd mortgage has a far larger impact on credit availability than a failure to pay the 1st mortgage.” On top of that, first-mortgage payments tend to be large: if you default on them, that clears up a lot of cashflow to pay off your other obligations.

But how often does it happen? That’s much less clear.

Update: Stephen Tenison, the Senior Compliance Officer at Amherst Securities, objected to me posting their research note, so I’ve taken the link down.

About the same time that “junk bonds” became “high yield” and shortly after “third world” became “emerging markets,” the finance industry quietly engineered another rebranding: “leveraged buyouts” became “private equity.”

So as Andrew Ross Sorkin notes today, the idea of a private-equity shop without debt is fundamentally at odds with the genesis of the industry. This is private equity done the old-fashioned way, where “old-fashioned” means “unprecedented.” But in Brazil, it makes perfect sense: rates there are simply too high to be able to make LBOs profitable, and meanwhile there are lots of efficiencies to be found turning smallish family-owned companies into much larger professionally-run operations.

Brazil is particularly suited to this model, as it has a lot of family-owned companies, and it also has a large elite professional class which is more than capable of taking them on and running them efficiently.

Sorkin is a bit credulous when he wonders at how Brazilian private-equity shops can “make such huge profits,” citing returns of “more than 20 percent annually.” The fact is that many of these family-owned companies, if they’d simply waited two or three years and gone the IPO route instead, would have seen bigger returns than that on the amount of money that they actually sold for. The IPO market in Brazil has been white-hot for a while now, barely taking a breather for the global financial crisis to come and go. Brazilian private-equity shops fund themselves with 100% equity not just because debt is expensive, but also because equity is extremely cheap.

That said, it does make a certain amount of sense for a deep-pocketed investor to buy a good but small franchise and spend the money needed to get it big and efficient enough to IPO effectively: private-equity firms are probably a good way of shepherding companies to the promised land of an IPO, or some other big exit. Effectively, private equity in Brazil is behaving more like US venture capital than it is like US private equity. Except it’s more interested in old family-owned companies than in young technology start-ups.

All of this is a welcome development, in a world with enormous systemic risks associated with debt finance. Private equity might not be as good as public equity, from a public-policy point of view. But it’s still better than debt.

What having a US passport says about you — Atlantic

“The zillionaires are on the brink of an almost complete victory” — MoJo

“Kiernan has been on-set at NY1 at 4am every weekday for the past thirteen years” — NYMag

Department of good questions: How did the New York Times manage to spend $40 million on its pay wall? — Greenspun

Typical corporate fail: bike storage which closes down at 6pm — NYO

Times Digital Subscriptions introduced at 99¢ for the first 4 weeks — NYT

The WSJ has a great article today about that most fickle and capricious of creatures, the Goldman Sachs investment banker. He’ll sidle smoothly up to you, buy you a drink at the bar, even get in to bed with you — but it’s not you he wants, he’s really only in it for the money. And if your rich uncle raises his eyebrow in a suggestive enough manner, your paramour is suited up and out the door faster than you can say “secrets of the boudoir.”

A few months ago, the spurned lover was J Crew. Goldman was dating J Crew if not quite going steady: “from time to time over the past several years,” the proxy statement says slightly wistfully, Goldman had “prepared various illustrative financial analyses for the Company.” Ah, those were the days. But sadly they came to an end: a commitment to J Crew would never last long, seeing as how the company was about to be sold. An engagement with the mighty Texas Pacific Group, by contrast, was likely to be a much more lucrative union over the long term. Especially when TPG didn’t just want Goldman’s confidential advice, but also wanted to delve deep into its debt-finance facilities.

But that was just a warm-up for Goldman’s latest show of caddishness. Last summer wireless networking company Clearwire tied the knot with Goldman in a formal ceremony which involved paying a substantial dowry. Yet mere months later, having gotten to know the most private and confidential secrets of Clearwire’s special board committee, Goldman formally transferred its affections to Clearwire’s more buxom step-sister, Sprint Nextel. Oh, the betrayal!

Clearwire’s directors, report Anupreeta Das and Gina Chon, are “upset” — and you can see why! Clearwire was what’s known as a “sell-side client” — one where investment-banking fees are pretty much guaranteed. No matter who ends up buying the company, its financial advisers end up getting paid. Buy-side mandates, by contrast, are much less certain affairs: if you lose the bidding, your client won’t pay you much. Or even anything at all, in many cases.

And like good-for-nothing scoundrels, Goldman’s has decided to go very quiet when called on its behavior. It declined to comment to the WSJ, but did let it be known that “Goldman lawyers reviewed the relationships” before signing off on the treachery.

As if that’s likely to make the Clearwire directors feel any better. And of course they can’t even get their own back. Goldman’s cunning that way: he’ll get you to confide all your deepest and most private secrets. But he’ll never reveal any of his own.

Dana Vachon on Rebecca Black — Awl

Instead of giving public money directly to NPR and PBS, let’s just launder it through Goldman Sachs first — Twitpic

Take your iPad 2 or iPhone 4, go to this page, reload it, push it up to full screen, hold the screen up, turn around — Stefan Geens

Kathryn Schulz on Big Idea books: astute — NYMag

Oxford charges $3000 to put papers online for free, even though its authors can do that at SSRN for nothing — Oxford Journals

A speed camera which pays you when you observe the speed limit — NPR

The editorial search engine. An essay on Google, algorithms, and original reporting — Jonathan Stray

In case you were wondering who the judge was in the case Joe Nocera wrote about on Saturday, it’s Jerome B Friedman — Charlie Engle (who’s also on Twitter)

Ferris Bueller’s Day Off, directed by Sofia Coppola — YouTube

Michael Bierut reviews Helvetica and the New York City Subway System — WSJ (see also)

I can’t imagine that the city of Florence has much in the way of non-Italian assets — Alphaville

“It is unclear whether Cates actually understands that the money is real”: a fantastic portrait of a young poker pro — NYT

Excellent GiveWell update on Japan — GiveWell

Staci Kramer is absolutely right that the NYT has a tough battle ahead with the public perception of its paywall, which is going live today.

The public simply is not going to understand how the paywall works; I’m sure about this because over the past week I’ve come across a number of different NYT staffers — all of whom are involved in the NYT’s blogs, and therefore would you think be pretty attuned to such things — who don’t understand the paywall and believe untrue things about it. If the NYT can’t explain the paywall to its own staff, there’s no way it’s going to be able to explain it to its readers.

Part of the problem is that this paywall is not exactly the same as the paywall which was announced in January 2010. Back then, for instance, we were told this, in a Q&A with CEO Janet Robinson and digital chief Martin Nisenholtz:

If you are coming to NYTimes.com from another Web site and it brings you to our site to view an article, you will have access to that article and it will not count toward your allotment of free ones.

That’s no longer true, as the official FAQ explains:

We encourage links from Facebook, Twitter, search engines, blogs and social media. When you visit NYTimes.com through a link from one of these channels, that article (or video, slide show, etc.) will count toward your monthly limit of 20 free articles, but you will still be able to view it even if you’ve already read your 20 free articles.

If you spend over a year developing a paywall, then some of your original ideas are likely to evolve and change. But the new system, which I liken to the foul-ball rule in baseball, is certainly harder to understand than the original vision. “Twitter links don’t count” is easy; “Twitter links do count, but you’ll be able to follow them anyway” is much harder. (Twitter links, and links from blogs and Facebook and even the NYT email, all work like foul balls in baseball: if you’re below the strike-out limit, then they count towards your strikes. But you can’t strike out on one and end up hitting the wall.)

There’s confusion about the blogs, too: they are basically behind the paywall, although they do show a bit of leg outside it: the “blog fronts”, like this one, are free and do not count towards your monthly quota. But the minute you click on a “read more” link or otherwise find yourself at a blog entry, like this one, your quota gets increased by one.

This is all pretty confusing, especially to people who have better things to do than spend a lot of time worrying about the mechanics of the NYT paywall. Can you read that blog post? If you’re following my link, then yes, you can always read it. If you’re trying to get there by clicking on the “read more” link at nytimes.com, on the other hand, then at that point you may or may not be able to read it, depending on whether you’re a subscriber, and how many other paywalled items you’ve read that month.

There’s no doubt that this will change blogging at the NYT. Freakonomics has already left the building and is enjoying its new-found freedom by publishing short posts like this one. There’s all manner of reasons why that post wouldn’t ever make it onto nytimes.com, but one of the more invidious is that there’s now a good reason for blog posts to be long. Here’s the end of that post by Nate Silver:

I will work to ensure that any clicks you make to a FiveThirtyEight article will be “worth it.” I’ve always had a pretty high word count, but in recent months, I’ve been gravitating toward even longer and more substantive posts, as opposed to shorter but more frequent ones.

It goes against Blogging 101 principles, but I’ve had a lot of success in life in betting against the conventional wisdom.

This is not a welcome move, from the point of view of the vibrancy of the NYT’s blogs as a whole. My posts tend to the verbose too (although the NYT probably has the world champion in that department), but the fact is that mixing things up and having short posts along with the longer ones is always good form in blogging. The unit of quality for a blog is the blog itself, a living thing, rather than any individual blog entry or even series of entries. But when the NYT’s blogs get put behind a paywall, that changes: suddenly there’s pressure to make each individual post “worth it”. As a result, the blog becomes less bloggy and more like an irregularly-updated online column. This is unlikely to be an improvement.

It’s entirely possible that individuals like Nate — or even myself — can be successful with a combination of long-form blogging and short-form tweeting. But even long-form blogs are likely to be updated more than 20 times a month, which means that any regular reader of Nate’s posts, if they’re not a NYT subscriber, is essentially denying themselves the ability to navigate any of the NYT site at all. (Remember that even if you get to Nate’s posts via his Twitter feed, you’re still eating up your monthly quota of NYT articles every time you read one.) And more generally, it’s not a good idea for the NYT to put in place incentives to blog long rather than short. In fact, it rather undermines the purpose of having blogs in the first place.

Meanwhile, the NYT’s publisher, Arthur Sulzberger, is going out of his way to insult the people who want to read his website so much that they’re willing to put in place elaborate workarounds to do so.

“Can people go around the system?” Sulzberger, the Times’s publisher, asked at a roundtable discussion hosted by the Paley Center for Media this morning. “The answer is yes, just as if you run down Sixth Avenue right now and you pass a newsstand and you grab a newspaper and keep running, you can read the Times for free.”

“Is it going to be done by the kind of people who value the quality of the New York Times reporting and opinion and analysis? No,” he continued. “I don’t think so. It’ll be mostly high-school kids and people who are out of work.”

Sulzberger should be flattered by these people; instead, he’s likening them to common criminals who steal newspapers on Sixth Avenue. In doing so, he’s taking a leaf out of the music industry’s attitude to people who look for free content online: criminalize them, and set yourself up in an adversarial relationship to them. It didn’t work for the music industry, and it’s an equally bad idea for the NYT.

As the first US readers start hitting the NYT paywall this week, it will be met by varying degrees of confusion and anger. The NYT should be trying its hardest to minimize the ill will it’s likely to generate as people get blocked from reading stories they’re used to getting for free. The @NYTdigitalsubs Twitter account is a start, but it’s clearly not enough.

Meanwhile, here’s a question I’m not sure I want to see answered: if you get a Sunday-only subscription and then suspend delivery of the physical newspaper while you “go on vacation” for a month or two at a time, how long can you drag out your free access to the website before the NYT gets wise to what you’re doing?

Alex Ulam has a must-read article in American Banker which shows the biggest pitfall likely to face the mortgage servicers’ settlement with state attorneys general: enforcement.

AGs in general are much better at prosecutions and at negotiating settlements than they are at keeping close tabs on banks to make sure they’re doing what they agreed to do. On top of that, banks find it much easier and cheaper to simply deny allegations that they’re violating the terms of a settlement, and to fight those allegations in court, than they do to actually fix what’s broken.

The problem seems to be that banks are not entering into these settlements in good faith — as is evidenced by the banks’ behavior following a smaller settlement in 2008.

According to the settlement, a loan mod offer made by B of A in its role as servicer could be turned down if the investor or group of investors that actually owned the mortgage failed to approve the modification. But B of A was in charge of securing investor approval for the loan modifications.

Investor disapproval turned out to be one of the major reasons B of A gave when denying modifications to homeowners eligible for the National Homeownership Retention Program, according to the Arizona and Nevada suits. (Investor disapproval also has been a common reason that servicers have given for denying loan mods under Hamp.) But, according to the Nevada and Arizona AGs, while B of A refused to approve loan mod requests on the grounds that investors would not approve them, the bank, in fact, had in some instances received the delegated authority to make such decisions…

One investor in mortgage securities covered by the Countrywide settlement said that B of A never went through the procedures for obtaining approval or disapproval on loan modifications on the mortgages in the securities he owned.

“I know of absolutely no attempt by Bank of America to reach out to investors either through formal or informal channels,” said William Frey, the CEO of Greenwich Financial Services, a money management company.

This goes back to my conversation with Michael Barr back in November. He was fully cognizant of the issue, saying that “institutions are resistant to change and have difficulty implementing”; I was skeptical that the government had the ability to force these huge organizations to change. (In fact, I’m increasingly of the view that huge organizations simply can’t change that radically and that quickly, no matter how many incentives there might be to get them to do so.)

In any case, if and when any settlement is announced, the first order of business will be to look very closely at the enforcement mechanisms built in to it. If there’s anything less than a dedicated watchdog devoted to holding banks’ feet to the fire in such matters — and which is able to take complaints directly from the public — then I fear that nothing much will happen in reality, and Barr’s dreams of having real change by the end of this year will end up being dashed.

Bill Keller has now written two three columns for Hugo Lindgren’s NYT Magazine, and both of them the last two have taken aim at the Huffington Post.

The first one didn’t go so well: not only did it have an opening paragraph of astonishing braggadocio, but it also elicited a blistering response from Arianna which made him look decidedly petty. He then replied to Arianna on the magazine’s blog — except he violated the first rule of blogging, and failed to link to the argument he was engaging. So when he talked about “the reaction” to his column, or “clueless commentary”, the lack of any link was a CYA move, giving him the opportunity to say “oh no, I didn’t mean you“.

Keller did however say a couple of nice things about Arianna:

I think she’s a shrewd entrepreneur and a charming woman. Also, we seem to share a belief in hiring professional journalists; she’s hired some good ones from The Times.

This, too, was presented without a hyperlink. But it was clearly a reference to the way in which Arianna poached first Peter Goodman and then Tim O’Brien to help beef up HuffPo’s news coverage. Both were NYT stars, and Keller was quite right to call them good journalists.

Which brings me to Keller’s second column, where we he tries to talk about “the essentials that set us apart from agenda-driven journalists of the right and the left”, and explains that NYT journalists “are expected to set aside their own politics in the performance of their duties”:

This does not mean — as one writer recently scoffed — that we “poll people at both extremes of any issue, then paint a line down the middle and point to it as reality.” It does not mean according equal weight to every point of view, no matter how far-fetched. (Sorry, birthers, but President Obama is an American citizen.) Impartiality is, for us, not just a matter of pretending to be neutral; it is a healthful, intellectual discipline. Once you proclaim an opinion, you may feel an urge to defend it, and that creates a temptation to overlook inconvenient facts when you should be searching them out.

Wow, who is this dreadful scoffer — this person who just pretends to be neutral — who dares to imply that the NYT gives credence to birthers? Again, Keller provides no link. But he does provide a direct quote, which makes it very easy to identify his unnamed critic as none other than… Peter Goodman, who was talking in general, and not about the NYT in particular, in a 2,000-word HuffPo essay titled “Beyond Left And Right: It’s About Reality”.

Keller’s failure to link to or otherwise identify Goodman is simple intellectual dishonesty — it’s a way of giving the truth but not the whole truth, a way of hiding his agenda and making the meaning of his column opaque to most readers while still transparent to the insidery few. (Chris Anderson has a less polite way of putting it.)

And that’s not the only piece of intellectual dishonesty in the passage. If he were being honest, Keller would admit that some of the NYT’s most highly-paid journalists run directly into the issue he’s talking about — that “once you proclaim an opinion, you may feel an urge to defend it, and that creates a temptation to overlook inconvenient facts when you should be searching them out”. This happens with sports columnists (yawn); it also, however, happens on the business pages, where Andrew Ross Sorkin and Gretchen Morgenson are both charged with pulling off the double act of being reporters and columnists at the same time.

On top of that, dozens more NYT reporters proclaim their opinions in other venues — in radio interviews, in books, in their Twitter feeds. It’s hard to see why those proclaimed opinions should have any less of a deleterious effect on the reporting of facts.

In his urge to place himself in opposition to everything that HuffPo stands for, it seems, Bill Keller has dug himself into a nasty hole. The NYT is urging its reporters onto Twitter, has set up its own imprint to publish their books, and is even publishing magazine editors’ email addresses along with those of the writers. (Although for some reason that rule doesn’t apply to Keller’s column.) The NYT needs to make its mind up: is it going to stand up for openness and transparency and human reporters who dare to have opinions, or is its beef with HuffPo going to force a retreat to some unobtainable halcyon past where reporters handed down the news from Mount Olympus to a grateful public which had no means to effectively respond? Keller might talk the talk when it comes to social openness and transparency. But his heart clearly isn’t in it.

Thanks largely to the NYT, the wealth-inequality survey by Michael Norton and Dan Ariely is back in the news. You might remember it from back in September. Here’s how it was reported in HufPo:

The respondents were presented with unlabeled pie charts representing the wealth distributions of the U.S., where the richest 20 percent controlled about 84 percent of wealth, and Sweden, where the top 20 percent only controlled 36 percent of wealth. Without knowing which country they were picking, 92 percent of respondents said they’d rather live in a country with Sweden’s wealth distribution.

Similarly, Tim Noah, in Slate, said the survey showed respondents favoring “a wealth distribution resembling that in Sweden”. And Chrystia Freeland has the same idea: “Americans actually live in Russia, although they think they live in Sweden”, she writes.

The Norton and Ariely paper is easy to misread in this way. Americans Prefer Sweden is one heading; the text does little to dispel that idea.

As can be seen in Figure 1, the (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States. In addition, this overwhelming preference for the Sweden distribution over the United States distribution was robust across gender, preferred candidate in the 2004 election and income.

If you look at the referenced Figure 1, it labels three different charts as “Sweden (upper left), an equal distribution (upper right), and the United States (bottom)”. It also comes with a note:

Pie charts depict the percentage of wealth possessed by each quintile; for instance, in the United States, the top wealth quintile owns 84% of the total wealth, the second highest 11%, and so on.

The clear implication is that in Sweden, the top wealth quintile owns 36% of the total wealth, as demonstrated in the “Sweden” pie chart. But that’s not true. Go back to footnote 2 (yes, a footnote), and you find this:

We used Sweden’s income rather than wealth distribution because it provided a clearer contrast to the equal and United States wealth distributions; while more equal than the United States’ wealth distribution, Sweden’s wealth distribution is still extremely top heavy.

This is an important point, which nearly all the discussion of the paper has missed. Mark Gimein has put together the charts showing what the truth of the matter is. The first two charts are reality, while the third is the fictional “Sweden” of the Norton-Ariely paper:

The point here is that wealth inequality is ever and always enormous. The US and Sweden are very far apart, when it comes to inequality, but if you look at wealth inequality rather than income inequality — which is the subject of the Norton and Ariely paper — then countries tend to look more alike than different. A huge part of the population of just about every country is going to have zero wealth — if you live paycheck to paycheck, for instance, or if you’re young and haven’t been earning money for long, or if you just spend a lot. That doesn’t mean you’re poor.

In countries like Sweden, indeed, the social safety net is strong enough that you don’t need to build wealth in the same way you do if you’re Chinese, say. Wealth is a form of insurance, and when insurance is nationalized, you need less wealth. As a result, people can enjoy the fruits of their money, instead of saving it up for emergencies or for retirement — and only a small percentage of the population really spends a lot of effort in a successful attempt at accumulating more.

Indeed, Sweden and the US are even closer together, in terms of wealth inequality, than the charts above suggest: as Gimein notes, the Swedish data exclude money held offshore, the value of family owned firms, and the considerable wealth of super-rich Swedes like Ikea founder Ingvar Kamprad, who left the country to avoid taxes.

Ariely told Gimein that “we created a more equal society than the most equal society in the world,” while calling it “Sweden”. Which might be interesting as an academic exercise, but the message was lost on most of the people who read the paper, and who thought that there really was a society where the lowest quintile owns 11% of the wealth.

Wealth inequality is a problem — but it’s one of those things, like homeownership rates, where public policy only makes a very small difference to some very large numbers. Norton told Gimein that he and his colleagues are now exploring “whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality.” Well, it might. But it’s important not to mislead people about what’s possible.