Felix Salmon

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It was a comment that launched a thousand strained attempts to capture its essential absurdity. Sandy Weill, the man who broke the wall between commercial and investment banking, the architect and former chief executive of Citigroup, has decided the whole thing is now a bad idea:

What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.

That’s a massive reversal for a man who two years ago hung a “hunk of wood – at least 4 feet wide – etched with his portrait and the words ‘The Shatterer of Glass-Steagall’” in his office. Even then things had changed: Citi was in a shambles, and Weill had gone from the pioneer of an economic boom to an early harbinger of the dangerous financialization of the American economy.

Weill, it turns out, is not the only now-retired finance chief to have second thoughts. The American Banker has a list of other prominent proponents of breaking up the big banks. Phil Purcell, former CEO of Morgan Stanley; John Reed, former chairman of Citi; David Komansky, former CEO of Merrill Lynch — each one is on the list. Dick Parsons, another former Citi chairman, isn’t on American Banker’s list, but he should be.

The public mood toward finance has shifted dramatically, but so has the employment status of each of these men. Parsons’s post-retirement alacrity was particularly bold: It took him just three days away from Citi’s board to have second thoughts. It seems that once you receive the banking chieftain’s version of an AARP card, repressed doubts about the value of your life’s work emerge. Or perhaps your incentives (and ego inflation) now come from public plaudits and not compensation.

Lining up against Weill et al to defend big banks is former senator Phil Gramm, the co-author of the bill that retroactively legalized the merger that created Citigroup. He’s joined by Rodge Cohen, the Sullivan & Cromwell rainmaker famous for advising numerous bank CEOs through the financial crisis. Wells Fargo Chairman and CEO Richard Kovacevich disagrees based on Rumsfeldian existentialism: “Investment bankers are risky, not investment banking”. Other big-bank CEOs have been silent, but they might say they’ve already addressed the matter – they’re not too big to fail, because they have filed a piece of paper with the Fed saying they can fail.

It will take more than armchair advice from former titans, it seems, to persuade current big-bank executives that Weill is on to something. It will take demonstration of real economic gain: Even if Jamie Dimon “can’t imagine” that any unit of JPMorgan would be more profitable alone, the idea of more than doubling shareholder value could, one suspects, catch James Gorman’s eye. – Ben Walsh

On to today’s links:

EU Mess
Germany’s finance minister declares that markets are wrong, then goes on vacation – Bloomberg
Draghi’s bazooka: The ECB will “do whatever it takes to preserve the euro … believe me, it will be enough” – Bloomberg

Charts
The “Garbage Indicator” has something very grim to say about US GDP – Business Insider

Alpha
“Brokers are being paid 12% to put your money into these private vehicles that are opaque, illiquid and frankly, unnecessary” – Josh Brown

Politicking
Ron Paul’s “audit the Fed” bill passes the House, paving the way for certain death in the Senate – Yahoo News

‘Liebor’
BlackRock, Fidelity and Vanguard considering legal action against banks – Bloomberg

Surprisingly Difficult
Pop quiz: British Olympian or London Tube stop? – Slate

Takedown of a Takedown
Jason Linkins rips the dismissive review of Bailout by the NYT‘s Jackie Calmes – Huffington Post

That Better Get Better Fast
In 29 states, companies can still legally fire a worker for being gay – WSJ

Bloomberg News has been run, since inception, along the lines laid out very clearly by its editor-in-chief, Matt Winkler, in The Bloomberg Way. But you don’t need to buy a copy of the book to know what the Bloomberg Way means: if you spend any time at all reading Bloomberg articles, you’ll know exactly how it feels to read them.

Of late, however, Bloomberg has started injecting some serious attitude into various parts of the empire which are close to — if not strictly part of — the central news organization. Look at Richard Turley’s covers for Bloomberg Businessweek, for instance: “Most of my work involves trying to turn the capitalist system against itself,” he told AdAge, “but try not to tell anyone that”. Or look at @bobivry’s balls-out Twitter feed (sample tweet, from yesterday: “Sandy Weill just made me throw up.”)

Now a Bloomberg View columnist, Bill Cohan, has delivered an entire column devoted to fisking Loren Feldman’s long NYT piece about the court case currently pending against Goldman Sachs brought by James and Janet Baker, a couple who sold their company for $580 million in worthless stock.

I remember thinking, when I read Feldman’s story, that it felt like it wasn’t telling the whole story. For one thing, how was it that this lawsuit has managed to drag on for over a decade? (Although Feldman never actually says when the suit was filed, so that bit was always a bit fuzzy.) And secondly, what kind of M&A banker blithely goes on vacation when his client is having a hugely important meeting with the acquiring company, saying that he would be unable to call in “and that it was pointless to send anybody else from Goldman because there wasn’t time to catch up on the deal”?

Cohan doesn’t answer either of those questions, but he does reveal other germane information which Feldman either missed or chose to ignore. For instance: Goldman advised the Bakers consider hedging the stock they received in the transaction; the Bakers rejected that advice. And: the Bakers’ suit against Goldman is just one of many different lawsuits they have brought against more than 30 separate defendants, including KPMG and SG Cowen; so far those suits have resulted in the Bakers being awarded more than $70 million. And: in those suits, at least according to Goldman, the Bakers swore under oath that their company had done due diligence on its acquirer; that the due diligence was not Goldman’s job; and that in any case “no amount of due diligence could have detected the fraud”.

Cohan concludes by describing Feldman’s story as a “one-sided potshot” — and I have to say I love it when I see that kind of say-what-you-mean language coming from any part of the Bloomberg empire. Winkler is notoriously allergic to ad hominem attacks, and media organizations in general tend to be very shy when it comes to criticizing each other, especially outside clearly-labeled media-criticism ghettoes. No one wants to throw the first stone.

The fact is, however, that Cohan’s column does a good job of placing Feldman’s story in a bigger perspective. I don’t sign on to Cohan’s opinions, either in this piece or elsewhere: I think his sympathy with Goldman’s argument that it was only advising the company and not its shareholders, for instance, is misplaced. And while I’m OK with opening sentences which liken Goldman Sachs to a deep-sea cephalopod, Cohan’s decision to compare the company to Jerry Sandusky seems unnecessarily vile.

But when it comes to the substance of Cohan’s column, I think he makes his case quite well: it can be dangerous to take NYT stories about Goldman Sachs at face value. I only wish that Feldman felt free to reply, and that we could have some real iterative journalism here about what really went on in this deal.

Most of all, though, I wish that one of Feldman and Cohan had seen fit to upload some or all of the legal source materials they reviewed. The NYT’s document viewer is great for such things, and Bloomberg is entirely capable of publishing primary documents too. Here’s the one place where Feldman and Cohan are saying exactly the same thing: Feldman talks about how his account “is based on a trove of legal filings”, and Cohan talks about how his piece is based on vague “court documents I reviewed”. Neither links to any of those documents, and neither gives much of a hint of what exactly those documents are, or where they might be found. It’s classic “trust me, I’m a journalist” reporting, and it’s offputting in both instances.

By all means tell us what certain documents are saying. But when you do so, show us those documents at the same time, so that if we’re so inclined, we can judge for ourselves. At the very least, if you don’t upload or point to the documents, explain why you’re failing to do so. Right now, we know that Feldman looked at a bunch of documents and came away thinking very little of Goldman; we also know that Cohan looked at a bunch of documents and came away much more sympathetic to the bank. But we don’t even know whether they were even looking at the same documents or not. And neither is letting us draw our own conclusions.

So while Bloomberg’s move into content-with-attitude is entirely welcome, I’d love to see it do more when it comes to linking to primary documents. The NYT, too, for that matter. Both of them are good at such things sometimes: Jonathan Weil, in particular, is great. But it doesn’t seem to have sunk in to the corporate DNA yet.

Update: Apparently Cohan did attach two documents to his column, but they initially showed up only on the Bloomberg terminal. They’re up online now; let’s hope for more!

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The Consumer Financial Protection Bureau and the Department of Education released a great new report last week detailing how the market for private student loans ballooned from less than $5 billion in 2001 to more than $20 billion in 2008. In its arc, its reliance on securitization for rapid growth, and its push to lend superfluous amounts of money to individuals with relatively low credit scores, the boom and bust in this market very much resembled the subprime mortgage market. All told, the report points out that there’s more than $150 billion in outstanding private student loan debt, and that the poor outlook for jobs for recent grads is making defaults all the more likely:

In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.

And that’s just private loans. The New York Fed pegs total student loan debt outstanding in the United States at $902 billion as of the first quarter of this year. Dylan Matthews notes that the median amount of student debt last year was $12,800, or about 17% of median household wealth.

Rohit Chopra, the student loan chief at the CFPB, reckons that the links between the mortgage market and the student debt market aren’t just superficial – they’re causal, too: “Student debt may be more intertwined with the housing market than we realise and it may prove more important every day to understand that connection,” he told the FT’s Shahien Nasiripour and Robin Harding. That connection may already be having an impact: In June, first-time purchasers made up 32% of homebuyers, down 2% from May. In 2011, first-time buyers accounted for 37% of all purchasers, but that’s still the second-lowest level in the past decade, according to the National Association of Realtors. Regulators and realtors aren’t the only ones who are noticing or who are concerned by this macroeconomic relationship. Credit Suisse’s chief economist, Neil Soss, agrees with Chopra’s diagnosis:

“We are trying to migrate towards a much safer underwriting standard, with let’s say 20 percent down payments required,” Soss said today. “It takes a certain amount of time for people to save that up, and the more they’re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that.”

If Chopra, NAR and Soss are on to something, then the proposed policy solutions that the CFPB and the Department of Education outline in their report – namely, allowing only private student debt to be discharged in bankruptcy, while federally issued student debt remains inviolable – are too anemic to have much of an effect on the broader economy. – Peter Rudegeair

On to today’s links:

Liebor
Not my bag – Geithner says it was “on [the British] to take responsibility to fix” Libor – WSJ

You Say That Now
Sandy Weill decides big banks aren’t that great after all – CNBC

Munis
No, unions did not bankrupt California’s cities (housing did) – LAT

The Fed
The Fed is closer to action than the last time it was close to action – WSJ
The Fed’s “monetary policy has little effect on a number of financial markets, let alone the wider economy” – NYT
Inflation: from threat or menace to friend and benefit? – LAT

New Normal
After arbitrage, arbitrary rage: Getting punched in the face is just like risk-taking on Wall Street – Bloomberg

Apple
Apple’s strangely mediocre quarter in charts – SplatF

EU Mess
More people in Spain are betting, but they’re wagering less – Phys Org

Oxpeckers
Unlike Gretchen Morgenson, the NYT’s fiscal policy reporter is no fan of Neil Barofsky’s book – NYT

Analytic Rigor
Dick Bove thinks Wells Fargo is smart enough to hate serving customers, himself included – Dealbreaker

Cephalopods
There really is something in the water at Goldman Sachs – DealBook

I’m a huge fan of Senator Jeff Merkley’s new plan to help out the 8 million American homeowners who are current on their mortgages but underwater and therefore unable to refinance. If you like to see such things in video form, the YouTube announcement is here; for the nerds among us, the full 31-page proposal is here.

I’ve been bellyaching for a while about one of the biggest and most obvious market failures out there: the fact that huge numbers of mortgages are trading well above par — at roughly 106 cents on the dollar, on average — just because the homeowners are locked in to high interest rates because they’re underwater. When investors made these loans, they made them in the knowledge and expectation that if rates fell sharply, the loans would be refinanced and prepaid. But that never happened, and now they’re reaping an undeserved windfall.

Merkley’s plan addresses that problem straight on, and because it only concerns homeowners who are current on their mortgages — and not the 3 million homeowners who are underwater — it doesn’t come with any moral hazard problems attached: indeed, at the margin, it encourages homeowners to stay current on their loans, rather than defaulting on them.

The basic idea’s very simple: the government will buy, at par, any new underwater mortgage written on certain terms. So if you currently have a $240,000 mortgage on which you’re paying 8% interest, but your house is only worth $200,000 and you can’t refinance, then suddenly now you can refinance. In fact, you have three options. You can get a $240,000 15-year mortgage at 4%, which keeps your payments roughly the same, but which gets you paying down principal quickly, so that you should be above water in about three years. You can get a $240,000 30-year mortgage at 5%, which cuts your monthly payments substantially. And there’s a third option I don’t fully understand, which includes a $190,000 first mortgage at 5% and a $50,000 second mortgage with a five-year grace period; on that one, monthly payments, at least for the first five years, drop even further.

In many ways, if you don’t sell your house, this is functionally equivalent to a principal reduction. That $240,000 15-year mortgage at 4%, for instance, has exactly the same cashflow characteristics as a $198,000 15-year mortgage at 7%. And the $240,000 30-year mortgage at 5%, similarly, asks homeowners to pay exactly the same as they would if they had a $193,00 30-year mortgage at 7%.

Problems arise, of course, if and when you want to move, or sell your house. In that event, Merkley told me, “we have to be very aggressive in not accepting short sales that dump losses onto the taxpayer. They’re on the hook for the amount”. He suggested that instead of selling, homeowners simply rent out their home until they’re no longer underwater. That works for some people; it doesn’t work for others. But in any case, his proposal is clear: “the program would not entertain short sales during the first four years of a loan,” it says.

And bigger problems might well arise with banks and investors, who are not going to be happy to see the loans they’re carrying on their books at 106 cents on the dollar suddenly reduced to par. On top of that, the banks are going to be asked to pay a “risk transfer fee”: 15% of the first 20% that the loan is underwater, and 30% of the second 20% that the loan is underwater. Beyond a loan-to-value ratio of more than 140%, banks are going to be asked to write off everything.

For Merkley’s typical family in a $200,000 home with a $240,000 mortgage, the result is that the bank would have to pay the government $6,000 in risk transfer fees, on top of any losses it might take if it had been holding the loan on its balance sheet at more than par. In total, the bank losses could reach $20,000 — a substantial sum, and one which might well result in the banks dragging their feet quite a lot.

On the other hand, there’s upside for the banks, too. For one thing, all their default risk — which is non-negligible, on underwater mortgages — goes away. And for another thing, they get paid off on second mortgages as well as firsts: the Merkley plan will refinance everything, up to 140% of the value of the home. And the opportunity to exit an underwater second mortgage at or near par is one that few investors would pass up.

The Merkley scheme has been very carefully assembled, so that it should make money for the taxpayer even at higher-than-expected default rates. Nothing’s guaranteed, of course. But after all the bailouts of banks, if there’s a plan which will credibly make money while saving homeowners enormous amounts of money at the same time, the government really should adopt it — especially since the funding will come from the private sector.

If you’re not persuaded, maybe these numbers will help. If you have a 30-year $240,000 mortgage at a blended interest rate of 8% (between your first and your second), your monthly payment is $1,761, and over the course of those 30 years you’ll make a total of $633,967 in mortgage payments. On the other hand, if you have a 15-year $240,000 mortgage at 4%, your monthly payment is $1,775 — basically exactly the same — while your total mortgage payments, over the life of the loan, plunge to just $319,544. (For all these calculations I am as ever indebted to this wonderful mortgage calculator.) Your monthly payments stay the same; your aggregate payments fall by 50%. And your total interest payments fall by a whopping 80%.

If we can save homeowners 80% on their mortgage-interest bill, while still making a profit and while helping to stabilize the housing market at the same time, well, that’s a no-brainer. I don’t know whether this plan is going to get any traction. But it should.

There were lines out the door of 500 Pearl Street on Monday afternoon, as a surprisingly large crowd of jurists and hedgies and bankers and wonks — and even a few journalists — filed into the Ceremonial Coutroom of the Second Circuit Court of Appeals for an hour-long hearing about two sentences in old Argentine bond documentation. The case is huge in the world of sovereign debt, arguably the biggest that world has ever seen. And it was no surprise to see Treasury’s lawyer get up in front of the judges to make his case that they should overturn Thomas Griesa’s lower-court decision, which seeks to force Argentina to pay off its holdout bond creditors.

If you want some extremely smart analysis of what happened at the hearing, I’d point you to two pieces: Anna Gelpern’s, at Credit Slips, and Vladimir Werning’s, for JP Morgan. The two of them take different routes to arrive at much the same conclusion: although Argentina’s lawyer, Jonathan Blackman, got beaten up much more than Ted Olson, who was representing Elliott Associates, ultimately the chances are that Argentina will prevail.

If nothing else, the hearings made it clear that a decision to uphold Griesa, and to find in favor of Elliott, would have such enormous consequences, not only for Argentina but for the entire world of sovereign debt, that I can’t imagine it wouldn’t be appealed all the way to the Supreme Court. (Where, interestingly, Antonin Scalia wrote one of the more important precedents for this case, in Argentine litigation dating back to 1992.)

One key precedent that the Second Circuit would set, were it to find in favor of Elliott, would be a significant weakening of the Foreign Sovereign Immunities Act (FSIA). Sovereigns have sovereign immunity, and can basically do what they like, and all sovereign bondholders know this — but in order to uphold Griesa’s order, the New York court would essentially be constraining what Argentina can do with its own foreign exchange. Everybody in the court agreed that Argentina’s foreign reserves are immune from attachment, but if the order were upheld, then Argentina would find itself in one of two states. If it continued to pay existing bondholders who tendered into its bond exchange, it would have to pay holdout bondholders as well. Alternatively, if it continued to refuse to pay holdout bondholders, it would be barred from paying holders of the new bonds at the same time.

Under the FSIA — and the US government made this argument reasonably forcefully on Monday — it’s really hard to make the case that the US can or should force Argentina’s hand in either case: it can’t compel Argentina to pay holdout bondholders, and it can’t restrain Argentina from paying other bondholders. Which means that no matter what the pari passu clause means, the FSIA presents a formidable roadblock to Elliott Associates, and one which the Second Circuit is likely to be reluctant to dismantle. The way that one judge, Reena Raggi, put it, if Argentina was determined not to pay its holdouts, it could do anything it wanted with its money — even spend it on hookers and blow, if it wanted — except pay its other bondholders. And as Gelpern notes, the FSIA “does not provide for sliding scale immunities”.

What’s more, upholding Griesa’s decision would have significant waterfall effects: it would hit not only Argentina, but a lot of private-sector institutions in New York as well, not least Bank of New York, which is the trustee for Argentina’s new bondholders. Olson made it very clear that if the order was upheld, and Argentina kept on trying to pay its new bondholders while stiff-arming its holdouts, then Elliott would go after Bank of New York for “aiding and abetting” Argentina in flouting the order.

That would put Bank of New York in a very invidious position. On the one hand, it acts as a trustee for the new bondholders, and if it is given a coupon payment by Argentina, then that coupon payment belongs to the bondholders. BoNY has to pass the coupon payment on to them. On the other hand, if it does so, it might well be found in contempt of court. The Second Circuit is going to have to think long and hard about what exactly it would expect BoNY to do in such a situation — not least because that subsidiary case is very likely to come up in front of them if they find in favor of Elliott here.

Finding in favor of Argentina, then, is the easy way out, and as a result the appeals court is likely to hold its nose and find in favor of a defendant whom they really don’t like. That might explain why the justices were so hard on Argentina during oral argument: if they’re going to find in the country’s favor in their decision, they really ought to at least make the country’s lawyer squirm a bit in person. It’s — almost literally — the least they can do.

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ArcelorMittal, US Steel and Caterpillar each want to push labor costs lower — and that might well mean pay cuts, even for unionized workers. It’s all part of a trend that even the most well-organized unions haven’t been able to alter: “Wage and salary income… has fallen steadily from close to 55% of GDP in the early 1970s to less than 45% today”, writes Edward Alden.

According to documents reviewed by the WSJ, ArcelorMittal is offering union workers a 36% pay cut and the elimination of retiree healthcare benefits for new workers. US Steel is likely pushing for cuts as well, although a similar specifics aren’t available. And Caterpillar is living up to its reputation for hard bargaining with labor, asking 780 workers to take a six-year pay and pension freeze.

In response, workers at Caterpillar went on strike. That, however, is a measure that has lost its former force:

Labor experts say that leverage has shifted to owners, who are increasingly willing to close unprofitable operations or bring in replacement workers… ”The strike is a weapon of the past,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass.

If that’s the case, Robert Bruno, a labor relations professor at the University of Illinois, wonders “how can you counter a powerful multinational in this economy?” Eduardo Porter thinks the answer to that question is to move beyond “organizing work site by work site… Instead of negotiating for their members only, unions might do better pulling for better wages and conditions for all workers”. Acting globally, as Felix has advocated before, would be a good start to implementing Porter’s idea. Unite Here appears to agree: The union is calling for a global boycott of Hyatt Hotels. – Ben Walsh

On to today’s links:

EU Mess
Mario Draghi’s secret weapon: the ECB’s “risk control framework” – Forbes
Geithner: Euro crisis has caused “huge, really remarkable levels of deprivation” – Charlie Rose
Moody’s downgrades German outlook to negative – WSJ

Politicking
The pointless debt ceiling standoff cost the US $1.3 billion – GAO

‘Liebor’
The Libor investigation now involves more than a dozen traders at nine banks – WSJ
Don’t look back: Barclays to formally review its “current” culture and practices – Reuters

Hackgate
Rebekah Brooks and Andy Coulson to be charged with phone hacking – Guardian

Terrible
Patients routinely abused at for-profit brain injury treatment center – Bloomberg

New Normal
The winners and losers of the last three years’ “global political obsession with austerity policies” – Huffington Post

Data Points
Women are “more than 1/2 of the work force in the financial industry but are chief executives at fewer than 3% of US financial companies” – NYT

JPMorgan
The strange price surges that inflated JPMorgan’s controversial trades – Bloomberg

Wonks
Tett: Welcome to the new age of “disaster economics” – FT

Oxpeckers
Effusive coverage of Kazakhstan, brought to you by Kazakhstan – The Atlantic

Odd Couples
Driving enthusiasts: surprising supporters of high-speed rail – Motor Trend

Adding Value
Most share buybacks haven’t “added much value for remaining shareholders” – Credit Suisse

Back in 2009, when Andrew Ross Sorkin wrote Too Big To Fail, Moe Tkacik picked up on one particular anecdote: that Joe Gregory, who “loved being the in-house philosopher-king” at Lehman Brothers, was prone to handing out copies of Malcom Gladwell’s Blink to employees, and “had even hired the author to lecture employees on trusting their instincts when making difficult decisions”. Then Joe Weisenthal, reading Tkacik’s post, immediately reblogged it under the very TBI headline “GUILTY: Malcolm Gladwell Caused Lehman To Fail”.

Now, in a classic case of history repeating itself, we find a new book — this time Frank Partnoy’s Wait — reprising the same Gladwell-Lehman story.* Indeed, it’s in some ways the whole reason that Wait was written. Here’s Partnoy talking to Smithsonian’s Megan Gambino:

What made you want to take a closer look at the timing of decisions?

I interviewed a number of former senior executives at Lehman Brothers and discovered a remarkable story. Lehman Brothers had arranged for a decision-making class in the fall of 2005 for its senior executives. It brought four dozen executives to the Palace Hotel on Madison Avenue and brought in leading decision researchers, including Max Bazerman from Harvard and Mahzarin Banaji, a well-known psychologist. For the capstone lecture, they brought in Malcolm Gladwell, who had just published Blink, a book that speaks to the benefits of making instantaneous decisions and that Gladwell sums up as “a book about those first two seconds.” Lehman’s president Joe Gregory embraced this notion of going with your gut and deciding quickly, and he passed copies of Blink out on the trading floor.

The executives took this class and then hurriedly marched back to their headquarters and proceeded to make the worst snap decisions in the history of financial markets. I wanted to explore what was wrong with that lesson and to create something that would be the course that Wall Street should have taken and hopefully will take.

This time, it was Andrew Sullivan filling the role formerly played by Joe Weisenthal. His headline in The Daily Beast: “Did Malcolm Gladwell Cause The Recession?”

After seeing this all play out twice, I thought it was maybe time to ask Malcom Gladwell whether he caused Lehman to fail. Alternatively, did he merely cause the greatest recession in living memory? He replied:

First, Blink was not a book about the benefits of making instantaneous decisions. It was a book examining the power of instantaneous decisions–and a good half of the book (the last half) is devoted to all the ways that snap judgements can go awry. (The last two chapters, for example, are about how gut reactions caused the Diallo shooting and how gut reactions resulted in women being discriminated against in orchestras). The talk I gave to Lehman was along those lines: it was a talk, arising out of the book, about the “fragility” of gut decisions–and about how if they are to be useful they have to be defended against bias and corruption. Of the many journalists who have reported on that talk, you are the first to actually ask me what I spoke about. The others, I suppose, just made an instantaneous decision about what I must have said.

Put aside the lesson about media memes, and what you have here is a classic case of arrogance trumping knowledge. Check out the wonderful Wikipedia list of cognitive biases, and you’ll find dozens of reasons why it’s quite possibly a very bad idea to trust your gut. But people like Joe Gregory, no matter how much they know about such things, and no matter how astutely they can recognize them in others, still insist that they are very good at overcoming such biases themselves.

In reality, of course, they’re not. If you make decisions quickly, you will make bad decisions a lot of the time, no matter how many times you read Gladwell’s book. Grown-ups think about important decisions, and take time over them. That’s certainly the lesson of Portnoy’s book. But, it turns out, that’s exactly what Gladwell told Lehman, too.

Update: Portnoy emails to clarify that the Gladwell-Lehman story is not actually in Wait, although he was indeed inspired by it. He also writes:

Your last paragraph is dead on.  I’ve always described WAIT as a “friendly amendment” to BLINK, though I guess it’s inevitable that some people will misread (or not read) my book in the same way some misread Gladwell’s.

Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar. His initial conceit is reminiscent of Dennis Berman’s attempts to set himself up as a pre-IPO Facebook investor, only without the deceit:

Earlier this month, I decided to see how hard it would be to set up my own offshore bank account. I figured it would be pretty difficult, because I’m not rich and don’t have a team of tax lawyers to oversee my money and because the E.U. and U.S. governments have been cracking down on tax havens by imposing stricter tax-sharing requirements.

You know how this is going to end: Davidson ends up concluding, in the first of his “deep thoughts this week”, that “it takes 10 minutes to open an offshore account”. But, by his own account, that isn’t really true. He did end up talking on the phone — surely for more than 10 minutes — to someone who said that in return for $1,500 or so, he could set up a Belizean company with a bank account in Singapore. It’s not at all clear whether Davidson actually ended up creating the Belizean company or its Singaporean bank account, although it is clear that in addition to the phone call, Davidson had to get notarized copies of his passport, driver’s license, “and some other identity documents”, and then email them to A&P Intertrust, a company in Canada.

More to the point, Davidson didn’t incur any of the really big expenses involved in setting up an offshore account, most of which come in the form of legal and accounting advice. As Davidson writes:

Setting up an account may be easy, but managing one is expensive. Following the law requires a team of lawyers and accountants to carefully monitor tax laws in dozens of countries and maintain accounts that stay on the safe side of confusing rules. It’s not really worth the cost for anyone other than wealthy investors looking to put aside money, tax-free, for future generations. Or for large multinationals who prefer to centralize their global cash-flow stream in a place that doesn’t tax corporations or require a lot of financial reporting. Why would a huge company like G.E. want to pay U.S. taxes every time its Spanish subsidiary sells parts to a company in Belarus when it could avoid them by incorporating offshore?

This is entirely true. If you’re a US citizen and you intend to spend your money in the US at some point, there’s very little reason to set up an offshore account. And even if you’re saving for your heirs, if they end up spending the money in the US, then they’ll probably have to pay full income tax on any money they bring in from overseas. What’s more, given demographic and fiscal realities, the income tax they pay might be significantly higher than it is today.

So why would Adam Davidson or anybody else ever want an offshore bank account? He cites laws saying that information about the owners of such accounts is not public and is would not be available even to the Belizean or Singaporean governments. And he talks about how difficult it would be for the IRS to investigate such arrangements. All of which is a polite way of saying that if you intend to break the law, there’s a good chance that you won’t get caught. (Although, tell that to the thousands of Americans who held money in Swiss accounts at UBS, and then saw their details handed over to the IRS.)

The IRS also doesn’t really need to be able to investigate all those bank accounts directly, most of the time: all they need to do is ask the account holder directly. If Adam Davidson were ever audited by the IRS, they would ask him for a list of all of his offshore accounts — and if he had any sense at all, he would give it to them.

While it’s true that people are more likely to break the law if they think they won’t get caught, there’s no way that changing US law is going to alter that. The attraction of offshore accounts isn’t a function of US law, really, so much as it’s a function of the fact that such accounts are opaque to US tax authorities. And it’s really hard for the US Congress to unilaterally pass a law which suddenly allows the IRS just as much access to an account in Singapore as they have to an account in Des Moines.

Still, they’re trying, with something called the Foreign Account Tax Compliance Act, which puts a lot of transparency responsibilities onto any foreign financial firm with American account holders. And weirdly, Davidson isn’t a fan of the act:

The move is very unpopular among foreign banks, governments and Americans living abroad, but the more complex rules could actually mean more business for offshore centers. By the time Fatca is in full force, in 2017, truly wealthy individuals and corporations will almost certainly have used their resources to find more intricate loopholes.

Instead, he says:

My colleagues at NPR’s “Planet Money” recently polled several economists of all political stripes and found that while they disagreed on the right level of taxation, they generally agreed that the overly complex taxation of rich people and corporations was disastrous. It all but guarantees that those people and companies will spend an inordinate amount of money figuring out how to game the system rather than come up with new ideas that improve the economy. Economists generally agree that the best tax system would be simple and strict, offering little incentive to lobby for loopholes. The big problem, of course, is that many of the people and corporations with the most influence over Congress don’t want it that way.

And this is where I get very confused, since it’s not at all clear what Davidson is calling for here. The third of Davidson’s “deep thoughts” is that “it would be better if the rules were simpler” — but how would it be better? By those lights, today’s rules are better than the rules which are going to be in force in 2017, just because they’re simpler. And it seems to me, at least when it comes to US individuals, that we already have a simple system. You have to pay taxes on your global income, including investment income, wherever those investments are in the world.

As a result, by all accounts, Americans have much less money in offshore bank accounts than citizens of most other countries. Reliable data on such things is impossible to come by, of course, but all of the numbers in Davidson’s piece are trying to measure a total amount in offshore centers, rather than the amount that can credibly be considered to be American in some way.

And while it’s true that American companies have a lot of money offshore, substantially all of those companies are multinational, and they would have to have many international bank accounts no matter what the rules said.

As far as US individuals are concerned, no one has yet demonstrated to me that there’s some kind of pandemic of rich people opening offshore accounts. In England, where I come from, it’s reasonably commonplace for individuals to have bank accounts in Jersey. And in Germany, likewise, lots of middle-class families keep money in Luxembourg or Liechtenstein. But in the US, by contrast, I see no day-to-day indication that offshore accounts are a remotely common tax-avoidance strategy.

Insofar as there is a problem, it seems to me, the problem is with tax collection and enforcement, rather than with the complexity of US tax legislation. Yes, the US tax code is ridiculously complex, and riddled with loopholes which ought to be abolished. But I think it’s actually pretty good when it comes to individuals’ offshore assets. And it’s only going to get better as Fatca comes in to force.

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A ban on short selling didn’t reverse a drop in stocks when the SEC imposed one covering 19 financial companies in July 2008, including, ahem, Lehman Brothers. Spain and Italy believe they can achieve more success — the countries have reinstated a ban on short selling the shares of their financial institutions.

Spain’s claim that the sell-off in bank stocks is overdone is made difficult by its continued negotiation of a $1.2 billion bailout of its financial banking system. That bailout looks increasingly necessary: The Bank of Spain reported that the economy contracted by 0.4% in the second quarter. And the fiscal health of the provinces continue to weaken. On Friday, the overly indebted region of Valenica sought financial aid from the central government in Madrid, and the tiny region of Murcia looks like it will do so as well. Those payments are getting increasingly expensive for the central government to fund. Yields on Spain’s 10-year bonds hit 7.52% today, a euro-era high.

Italy is in a relatively better position (emphasis on “relatively”). Sicily’s situation is causing alarm in Rome, as policymakers announced they would send the island $484 million in aid to stave off a liquidity crunch. Sicily, which some call “the Greece of Italy,” faces the same problems of bloated public payrolls and overly generous public pension contracts, as the country as a whole:

Today, Sicily’s regional government has 1,800 employees – more than the British Cabinet Office – and the island employs 26,000 auxiliary forest rangers; in the vast forestlands of British Columbia, there are fewer than 1,500.

Out of a population of five million people in Sicily, the state directly or indirectly employs more than 100,000 of them and pays pensions to many more. It changed its pension system eight years after the rest of Italy. (One retired politician recently won a case to keep an annual pension of 480,000 euros, about $584,000.)

And then there’s Greece itself. The WSJ reports that European officials have doubts about the new government’s commitment to austerity – and have compiled a laundry list of more than 200 delays to cuts to prove their point. The Germans are growing increasingly inured to Greece’s cries for help: While Prime Minister Antonis Samaras was telling Bill Clinton that Greece was in “our version of the Great Depression,” German Vice-Chancellor Philipp Roesler told an interviewer that a Greek exit from the euro zone “has long ago lost its terror”. – Peter Rudegeair

On to today’s links:

Epistles
Wall St: Experts (including our own!) say eminent domain mortgage seizures are unconstitutional – SIFMA

New Normal
Economists predict US poverty to reach its highest levels since the 1960s – AP

Tax Arcana
Corporate tax breaks, why bother? They’re more trouble than they’re worth – WSJ

China
China’s glamour vs. service infrastructure problem – FT Alphaville

Bold Moves
Banks intrigued by idea of profitable, non-abusive ways to serve the poor – American Banker

‘Liebor’
Libor scandal is moving closer to becoming officially criminal – Reuters
Bob Diamond asked to resign from decreasingly prestigious jobs – Waterville Morning Sentinel

Less is More
Bank of America has 1,536 fewer ATMs than it had six months ago – American Banker

Terrifying
11,000 new business books are published each year – Businessweek

Distinctions
The main job of venture capital’s trade group: contradicting reports that Mitt Romney was a venture capitalist – Reuters

Good Questions
What is Yahoo? – NYT

The media has not exactly covered itself in glory when reporting on money-related research of late. For instance, consider Martha White’s blog post at Time.com on Friday. Here’s the headline:

Would You Pay $520 in Interest to Borrow $375? 12 Million Americans Did Last Year

White cites “a payday lending report” from Pew for her datapoint — but, unforgivably, doesn’t link to it. If she had linked to it, she might have read the report a bit more carefully: it’s clear that the average interest paid on a $375 loan is $65, not $520. The $520 figure comes from multiplying the $65 number by eight, on the grounds that the average payday borrower takes out a loan eight times per year. Which in turn means that the $520 in interest is paid on $3,000 in loans, not $375 in loans.

(Update: The vast majority of payday borrowers never take out more than one loan at a time, so most of the time, the maximum principal balance is $375. The Pew report was careful to say it was talking about eight $375 loans, which is a more accurate way of putting it than saying $3,000 in loans. But it’s doing 12 million Americans a disservice to imply that they are willingly entering into deals knowing that they will pay back $520 in interest on a single $375 loan, even if that’s how it often ends up.)

Then, over the weekend, a series of stories — starting with the Observer, and moving on to Reuters and elsewhere — started writing about the trillions of dollars sitting in offshore bank accounts. All of them use the word “hidden” or its cognates, and all of them were based on a report from the Tax Justice Network (me neither), which is very long on hyperbole. This, for instance, from the main section of the report, gives a flavor of how it reads:

The subterranean system that we are trying to measure is the economic equivalent of an astrophysical black hole… The way is hard, the work is tedious, the data mining is as mind-numbing as any day below surface at the coal face…

The assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments… In terms of tackling poverty, it is hard to imagine a more pressing global issue to address.

The report does concede, grudgingly, that in fact the governments in question don’t have net debts at all: these countries, on a sovereign level and taking into account no private assets at all, are net creditors rather than net debtors. But still we’re told that “ordinary people” are shouldering massive debts which should somehow by rights be either serviced or paid off using the wealth of these countries’ plutocrats.

The reality is that the wealth of the global super-elite does not, actually, cause poverty; nor is there any obvious way of using it to alleviate poverty. Bill Gates, for instance, the richest of the lot, is putting an absolutely enormous amount of effort into trying to use his wealth to alleviate certain pockets of poverty; the jury’s still out on whether or when he might see real success on that front.

The conceit of the report is that if all offshore wealth was instead held onshore, and if that onshore wealth produced a certain amount of income, and that if all that extra income were taxed at top marginal rates, then there would be lots of lovely money for governments to spend on making poor people rich. Or something.

But the fact is that there’s a good reason why countries tax income and not wealth: for all that I personally think that a wealth tax is a very good idea, I can’t think of any country in the world, other than the USA, which could effectively levy such a thing.* The world’s wealthy don’t pay taxes on their wealth; they never have, and they never will. And because of the way they live, in a stateless cocoon, it’s a bit silly to expect them to reinvest most or all of their wealth back into their country of origin.

If you’re extremely wealthy and you come from one of the countries on the list here — Russia, Brazil, Mexico, Venezuela, Argentina, Indonesia, Nigeria, Malaysia, Ukraine, you get the picture — then obviously you’re going to keep a huge amount of money offshore, whether you made your money in a legal or in an illicit manner. And while some of the reason might well be tax avoidance, much of it is going to be simply the fear of expropriation and/or confiscation — again, be that legal or illicit. And since your investments are going to be global, it does make sense to park your money in jurisdictions which have proven themselves good at safeguarding individual wealth, as opposed to plundering it.

The total amount of wealth in the world is not an easy number to estimate, but it’s probably somewhere in the $250 trillion range. A lot of that wealth is financial, and a lot of financial wealth is held “offshore”, whatever that means these days. This new report says that roughly $25 trillion is held offshore by the wealthy, which just means that roughly $25 trillion is held offshore: after all, poor people by definition don’t have bank accounts in the Cayman Islands. That’s an interesting datapoint, but it’s not much more than that.

What’s unhelpful and sensationalist is to lead off your press release (and therefore lots of news articles) by saying that that amount “is equivalent to the size of the United States and Japanese economies combined”. That’s just a cheap way of comparing a stock with a flow, since GDP figures don’t measure wealth at all, but rather income.

“Rich people are rich” is not much of a story, although I can see why certain people want to make it one, by reframing it in terms of inequality or tax evasion. Similarly, “poor people find it difficult to stay on top of their finances” is not news either, and there’s therefore a temptation to sex it up a bit by making it seem that people are paying more in interest than they’re borrowing in principal. But as a rule, if you see a headline about these kind of issues and the story cites a report without linking to that report, be very suspicious. There might be a lot less there than the story you’re reading would have you believe.

*Update: There are in fact six countries with a wealth tax: France, Switzerland (in certain cantons), Liechtenstein, Holland, Norway, and Italy. In none of them is it an obvious success.

Jim Surowiecki and John Kay both have columns today looking at the way in which regulatory structure failed to stop abuses in the financial-services industry, and wondering how we might be able to do better in future.

Surowiecki says that we trusted the banks when we shouldn’t have: their incentive to preserve their reputation was not nearly big enough to override their incentive to make money. He’s right about that. But his proposed solution is vague: first, he says, prosecutors should “admit that fraud is a crime and throw some people in jail”, and secondly regulators should “be aggressive not just in punishing malfeasance but in preventing it from happening”. Well, yes. This is the rhetorical equivalent of throwing your hands up in the air: if you end up proposing something which absolutely everybody will agree with, then there’s almost certainly no substance there.

Kay, by contrast, has been looking at UK equity markets in detail, and has determined that the problem lies more with market structure than with anything within the realistic control of prosecutors or regulators. Surowiecki’s proposal basically boils down to “all you prosecutors and regulators are weak, weak people, you should man up and go to war”. I don’t know how many prosecutors and regulators he’s talked to, but this does them a disservice: there are serious institutional and legal constraints here. And what’s more, we can’t try to reform financial-services regulation by assuming that we can easily find a whole new breed of regulators: we can’t.

One reason why we can’t is laid out clearly by Kay:

Regulators come to see the industry through the eyes of market participants rather than the end users they exist to serve, because market participants are the only source of the detailed information and expertise this type of regulation requires. This complexity has created a financial regulation industry – an army of compliance officers, regulators, consultants and advisers – with a vested interest in the regulation industry’s expansion.

But this is in turn only a symptom of a broader problem, which is the way in which the consolidation and ever-increasing complexity of the financial-services industry has reduced the ability of firms to police each other and to earn each others’ trust, while at the same time increasing incentives to fraudulently game the system. Barclays’ Libor lies, for instance, started life as a way for its derivatives traders to make money: something which could never have happened when the banks reporting into the Libor system didn’t have derivatives desks.

A large part of the problem is the way in which financial tools which had a utilitarian purpose when initially designed have become primarily vehicles for financial speculation. Libor, for instance, was a way for banks to peg loan rates to their own funding costs, and thereby minimize their own risks while at the same time minimizing the amount that borrowers had to pay. Today, banks don’t fund on the interbank market any more, and Libor has become something else entirely: a number to be speculated on in the derivatives market, and, in times of crisis, an indication of how creditworthy banks are perceived to be.

Similarly, equities used to serve a capital-allocation purpose, and there was, as Kay says, a chain of trust running from investor to board to management. “Most asset managers want to do a good job – earning returns for their clients through strong, constructive relationships with the companies in which they invest,” he writes. “Most corporate executives also want to do a good job, leaving the companies they manage in a stronger competitive position.”

But that’s not the equity market we see today: “It is hard to see how trust can be sustained in an environment characterised by increasingly hyperactive trading, and it has not been.”

Kay’s conclusion is sobering spot-on: the entire financial-services industry, he says, needs to be restructured so as to create the kind of institutions which thrive on increased trust, rather than on maximized arbitrage of anything from news to interest rates to regulations.

In order for that to happen, we’re going to need to see today’s financial behemoths broken up into many small pieces — because at that point each small piece is going to have to earn the trust of the other small pieces which rely on it.

Of course, that’s not going to happen. And as a result, financial-industry scandals will continue to arrive on a semi-regular basis. When they do, they will always be accompanied by calls for stronger regulation: rules-based, or principles-based, or some combination of the two. But the real problem here isn’t regulatory, and as a result there isn’t a regulatory solution. The real problem is deeply baked into the architecture of too-big-to-fail banks. And frankly I don’t see any realistic way of unbaking that particular loaf.

Back in February, Janet Novack had a short piece in Forbes magazine, and a better, more detailed blog post, about one of the more bonkers tax fights out there: the one between the IRS, on the one hand, and the heirs of Ileana Sonnabend, on the other. Basically, Sonnabend owned a Robert Rauschenberg masterpiece, called Canyon, which cannot be sold — not even to a museum — because it includes a bald eagle. But the IRS wants her heirs to pay inheritance tax on it at a $65 million valuation, over and above the $471 million they’ve already paid in inheritance tax on other Sonnabend artworks they were bequeathed.

Novack couldn’t get a good explanation of where the $65 million number came from, although she did talk to the heirs’ lawyer, who said that the head of the IRS art panel, Joseph Bothwell, had said that even though it’s illegal for anybody to buy the work, “a recluse billionaire in China might want to buy it and hide it”. Which hypothetical Chinese billionaire was apparently enough for the IRS to ask for $29 million in taxes, plus a $12 million penalty for misstating the value of the work so grossly? Apparently what the estate should have done is mark the work not to where it can be sold legally (it can’t be sold legally), but rather to where it might conceivably be sold illegally, should there be Chinese billionaires interested in such things.

Today, the NYT’s Patricia Cohen picks up the story. She only really adds one thing, but it’s a very fascinating thing: she spoke to Stephanie Barron, who sits on the IRS’s Art Advisory Panel, and who was one of the group of people who jointly came up with the $65 million figure.

She said that the group evaluated “Canyon” solely on its artistic value, without reference to any accompanying restrictions or laws.

“The ruling about the eagle is not something the Art Advisory Panel considered,” Ms. Barron said, adding that the work’s value is defined by its artistic worth. “It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn’t make any sense.”

The assumptions baked in to this are both jaw-dropping and entirely unsurprising at the same time. Barron is the senior curator of 20th-century art at Lacma, which puts her at the pinnacle of the non-profit art world, the place where art is supposedly valued just for its own sake and not because it’s worth lots of money. And yet, faced with a literally priceless work of art, Barron and her fellow panelists “just cringed” at ratifying precisely that concept. If a work has great artistic value, in Barron’s view, it must have great financial value as well. And, conversely, if a work has no financial value, then it cannot have artistic value.

I’m sure that Barron would push back at the idea, expressed at one time by Tobias Meyer of Sotheby’s, that the most expensive art is the best art, and that there’s some kind of direct correlation between price and quality. But in a weak sense, she is clearly invested in the concept. While it’s common to find unlimited editions in museum design collections, they’re rarely found in museum art collections, precisely because they lack the artificial scarcity that confers financial value.

Over the course of the past 100 years or so, various artists, with varying degrees of success, have attempted to distance themselves from the art market and make work with no financial value. Rauschenberg himself, actually, was one of them: he was an early and important player in the world of performance art. But high financial valuations get attention, and museum curators are easily forced into a stance of worshiping those valuations, even if such a stance doesn’t at first come easily to them.

The way the art world works is that collectors collect art, and museums collect collectors: that’s how great museum collections are built up. Collectors are always rich, and while once upon a time that meant there was a lot of old money in the art-collecting world, those days are over now and the world’s biggest art collectors are nearly always new-money self-made men.

Now: suppose you’re a museum curator, and your job is to flatter some billionaire collector so that he will end up donating his collection to your institution. While you will surely talk about his great eye, and subtly disparage some hedge-fund whiz-kid without nearly the same degree of connoisseurship, there’s one thing you’ll never do, which is suggest that maybe there are much better collections out there which aren’t worth nearly as much money. For new-money art collectors, the art market is a constantly evolving judgment on what they have bought: if your art has gone up in value then that means you have a great eye and you’re very perspicacious; if your art has gone down in value, then that means you fell for some trendy fad, you fool. At its highest levels, art collecting is a highly competitive game — and mark-to-market valuations are the way that collectors keep track of who’s winning.

Ileana Sonnabend, who died with a billion-dollar art collection, surely ranks among the very best at playing that game. But at the same time she was the kind of person who would love Canyon, her Rauschenberg combine, all the more because it had zero financial value. And I’m quite sure that if she was on the Art Advisory Panel, and Canyon was owned by someone else, she would have taken great pleasure in assigning that work a value of $0.

For Stephanie Barron, a work’s financial value is defined by its artistic value. But for people like Robert Rauschenberg and Ileana Sonnabend, that was never the case. They both died wealthy, thanks to the art world. But I think they would have been genuinely horrified at Barron’s idea — the concept that if Canyon is worth nothing financially, then it must be worth nothing aesthetically. It’s a dangerous and invidious notion, and while it might fly with big-name LA collectors, it really has no place in any museum devoted to art rather than money.

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Read the headlines and you’d think Marissa Mayer has received the fastest series of pay raises in corporate history.

Yesterday, Yahoo’s new CEO was earning “over $40 million“. A few hours later, her compensation was worth “more than $59 million“. Or maybe just “as high as $59 million“. Then, overnight, she had secured “more than $70 million”. This morning, her value continued to climb, and she was set to “receive up to $100 million“. A few hours later, the number was a positively rococo “$129 million“.

Adding to the confusion, while some headlines were running the $40 million or $60 million figures yesterday, others had already broken the $100 million mark (the LAT and Business Insider). Even more confusing, as the successive waves of Mayer’s pay arrived, the filing and offer letter they were based on remained unchanged.

Using those documents, here’s how Mayer’s five-year pay package was reported within the massive range of $40 million to $129 million:

• $1 million annual base salary (running total: $5 million)
• Target annual bonus of $2 million for five years (running total: $15 million)
• Potential annual bonus of an extra $2 million (running total: $25 million)
• $14 million in restricted stock to compensate Mayer for lost Google stock (running total: $39 million)
• $30 million in restricted stock as a “retention award” (running total: $69 million)
• $6 million or more in restricted stock annually (running total: $99 million or more)
• $6 million or more in stock options annually (running total: $129 million or more)

That’s $5 million to $25 million in cash, $74 million or more in restricted stock, and an additional $30 million or more in options. The information was publicly available from get go. So why did reporters play by business journalism’s version of “Price is Right” rules and incrementally ratchet up to the correct figure? – Ben Walsh

On to today’s links:

Corporate Welfare
Medicare bought billions in lethal drugs at elevated prices – WaPo

Disturbing
The human tissue industry: inadequate safeguards, limited patient disclosure and strong profit margins – International Consortium for Investigative Journalists

Liebor
Banks would prefer to just settle this whole Libor thing amongst themselves – Reuters
Elizabeth Warren: “We cannot trust Wall Street to regulate itself – not in New York, London or anywhere else” – WaPo
Citi may have to pay more than Barclays’ $450 million to settle Libor claims – Fortune
Bank of England: “At no point did the [Fed] draw the attention of the Bank to evidence of wrongdoing” in Libor setting – Bank of England
Deutsche Bank and WestLB roped into Libor investigations – WSJ

Best Footnote Ever
430 words and almost 20 different entities – the footnote explaining how Bain owned Domino’s Pizza – Footnoted

It’s Academic
Old but awesome: “Japan’s Phillips curve looks like Japan” – QED

Analysts
Morgan Stanley needs to look for a “rich uncle” – WSJ

Old Normal
A top executive “surrenders around 40 percent of his salary to the Bureau of Internal Revenue” – Fortune

Politicking
President Obama’s Wall St BFF out at UBS – DealBook

Contrarian
Actually, we’re all rich kids on Instagram – Atlantic Wire

The Post Office’s problems are the same today as they were back in September: the long-term secular decline of postal mail, on the one hand, combined with all manner of Congressionally-mandated restrictions which make a bad situation much, much worse. And now the inevitable has happened: we’re going to have a $5.5 billion default.

A default of that magnitude sounds scarier than it actually is. Congress requires the Post Office to make inordinately huge pension-plan payments, for reasons which nobody can really understand. But in the final analysis, USPS pensions are a government obligation, and it doesn’t make a huge amount of difference whether they come out of a well-funded pension plan, a badly-funded pension plan, or just out of US government revenues.

What does make a lot of difference is the degree to which the Post Office is hamstrung by Congress. There’s still room for the Postal Service to reorient itself and become a successful 21st-century utility — but there’s no way that’s going to happen if it’s constantly on the back foot and if Congress prevents it from entering new businesses, possibly including banking.

To put it another way: the Post Office is broken, in large part thanks to unhelpful meddling by Congress. And it won’t get fixed unless and until Congress gets out of the way and stops forcing it into the corporate equivalent of ketosis, essentially consuming its own flesh in order to survive.

The talking point from the mailing industry here is that multi-billion-dollar defaults “could make consumers lose confidence in the Postal Service”, and thereby make matters even worse. It’s a bit like the argument we saw in Detroit in 2009, when lots of people said that if the big auto makers went bankrupt, no one would buy their cars any more. That argument wasn’t convincing at the time, and it turned out not to be true. Similarly, I’m not worried about that bickering in Washington will directly affect the confidence that Americans have in their postal service.

On the other hand, it’s pretty much certain that bickering in Washington will unnecessarily make the situation at the Post Office much worse than it needs to be. And as such, it’s a prime example of US political dysfunction. As Zero Hedge says, if the muppets in Washington can’t get this right, what are the chances that they’re going to be able to do the right thing when the fiscal cliff arrives at year-end?

The best hope for America is that politicians are more likely to create fights and dysfunction for things which don’t rise to the level of outright crisis, but that they somehow manage to come together to find solutions when the alternative is catastrophic. That’s often a good bet — but not always. And so while I’m reasonably confident that we’ll get through the fiscal cliff somehow, I’m not at all certain of it. Meanwhile, I am reasonably certain that Congress will starve the USPS of the funding and freedom it needs to succeed over the long term. Which of course will cost taxpayers enormously for as long as postal workers are collecting pension checks.

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Today Nokia announced that it lost $1.7 billion in the second quarter, its fifth quarterly net loss in a row. Just a few hours before the announcement, the WSJ published a great piece revealing how, as early as 2000, the Finnish phone maker had designed a proto-iPhone – complete with a color touch screen and geo-location, gaming, and e-commerce capabilities. The phone, though, never moved into the mass production phase because of ”a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to market.”

While it’s not surprising that a lumbering, oversized multinational corporation failed on the innovation front, it’s clear that Nokia does not suffer from a dearth of ideas: It spent $40 billion on research and development over the past decade, almost four times what Apple spent over the same period. Nokia also developed and ultimately discarded not one but two operating systems, Symbian and MeeGo. Nokia’s deficiency lies in what Vijay Govindarajan and Chris Trimble call “the other side of innovation,” or the problem with executing new ideas, not just thinking them up.

If you believe Peter Thiel, this is also an affliction Google suffers from. At a debate at Fortune Brainstorm Tech this week, Thiel told Eric Schmidt that the $30 billion in cash Google has sitting idly on its balance sheet demonstrates that the company is “out of ideas” that are worthy of scaling up: