Felix Salmon

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America got more great news on housing today. In April, existing home sales — which exclude newly built homes — hit their highest level in more than three years.

We’ve heard the larger story of America’s housing recovery before, on splashy magazine covers, from the Fed minutes, and consistently from the folks at Case-Shiller. Beyond the headline figures, there are other bits of good news for housing:

• Homes are selling faster: Homes are now sitting on the market for a median of 46 days. That’s down from a median of 83 days last year, the National Association of Realtors said.
• Fewer struggling homeowners: From March to April, mortgage delinquency rates hit their lowest level since July 2008, according to Lender Processing Services. On top of that, the total share of loans in foreclosure fell to 3.2% in April from 4.2% a year previously. “Just 15 months ago, distressed sales accounted for 35% of all existing home sales,” says Capital Economics’ Paul Dingle. In April, that number, which comprises foreclosures and short sales, had fallen to 18%.
• People are buying home construction goods: Matt Phillips noticed some good news in Home Depot’s earnings earlier this week. The company’s sales to professional contractors eclipsed sales to consumers in the first quarter for the first time since the crisis. These sales, Phillips says, are even more sensitive to the housing recovery than a typical consumer splurging on, say, a power drill.
• Homebuilders are sitting pretty: Toll Brothers reported that orders for new homes hit their highest quarterly level in seven years; profit was up 46%. All homebuilders are seeing their margins increase, a UBS analyst told Reuters.
• People are planning to build things: Last week, we had some worrying signs with housing starts (the industry term for new construction). But the key to housing’s future, Nick Timiraos writes, is new building permits, which hit their highest level in five years in April.
• Investors aren’t leaving the market anytime soon: This week, Waypoint announced that it would become the fifth landlord of single-family rental homes to file for an IPO in the last year. Investors purchased 20% of existing homes sold in April, roughly flat over the same period last year. All-cash deals are still making up about a third of these sales.

That certainly sounds like a full recovery. Cardiff Garcia explains why all this hasn’t lead to a “tipping-point burst” of economic activity:

There has been a permanent shift lower in the homeownership rate: those who have switched to renting (voluntarily or not) won’t revert back, and new households formed by young people will also be in multi-family (apartment) buildings rather than in single-family homes. Relatedly, much of the housing rebound has been driven by investors who buy the homes to rent out. But the construction and maintenance of rentals and multi-family buildings has a smaller effect on the rest of the local economy.

Nick Timiraos, too, looking at a new report from Pimco, runs down four reasons why the recovery isn’t doing more to boost the economy. One of those factors, Pimco writes, is that lenders simply don’t want to loosen lending standards. “The transmission mechanism between home prices and spending depends on lending growth, which is likely to stay low for some time,” the analysts write. – Ryan McCarthy

On today’s links:

Alpha
Sony may actually be considering Daniel Loeb’s spin-off plan – Reuters
Broker pitchbooks are exactly as sleazy as you expect them to be – BuzzFeed

Tax Arcana
Apple isn’t the only one using effective tax avoidance strategies – Bloomberg
“It’s as if Apple checked a box to elect out of worldwide taxation…” – Floyd Norris

The Fed
Bernanke: easing will continue “in the medium term and beyond” – Federal Reserve
The full Fed Minutes – Federal Reserve

JPMorgan
How Jamie Dimon beat back a shareholder challenge to his power – DealBook
“JPMorgan shareholders fond of this Dimon guy, would like to see more of him” Matt Levine

Oxpeckers
A 500 word re-write of a competitor’s article “is un-necessary and a total waste of time” – Anthony De Rosa
Everyone secretly hates “Snow Fall” – Choire Sicha

New Normal
While life may feel more fluid, “America appears to be getting stuck in place” – Bloomberg

It’s Academic
Slick presentations make you overestimate how much you’ve learned – Priceonomics

Bitcoin
There is a “disturbing cultishness to the Bitcoin community… everyone is as bullish as can be” – The Verge

EU Mess
Italy considers job sharing between older and younger workers – WSJ

Energy
Why the structure of electric utilities is broken – Grist

And, of course, there are many more links at Counterparties.

Tyler Cowen has no truck with the Bubble Crew. He aligns himself with Paul Krugman and against Jesse Eisinger; we can add Gillian Tett to Eisinger’s side of the debate, and Jim Surowiecki to Cowen’s.

The bubblista side of the argument, at heart, says that the flood of money being poured into the global economy by the world’s central banks is driving up asset prices to well beyond fundamental valuations, and that if and when valuations revert to sanity, the unwind (the “burst”) could be disastrous in all manner of unpredictable ways.

This is a prediction which is very easy to make, not least because it has no time stamp associated with it. Tett, indeed, says that “these distorted conditions will remain in place far longer than most people expect”, which is little a bit weird: the whole reason why assets are expensive is precisely because, as Krugman says, “long-term rates are low because people, rightly, expect short-term rates to stay low for a long time.” And when long-term rates are low, that doesn’t just affect the price of long-dated bonds; it also drives up the price of stocks, which have infinite maturity.

Still, this is a good place to start, because there does seem to be consensus here: low interest rates, across the curve, are causing asset prices to rise, around the world. Is that prima facie evidence of a bubble? I’d say clearly not. The first job of financial markets is to be a place where you can convert future cashflows into a present-day lump sum, and that lump sum is naturally going to be higher when interest rates are low. Similarly, if and when interest rates start to rise, asset prices may well start to fall. But that’s just what financial markets do: they go up, and they go down. Not every rise is a bubble, and not ever fall is a bubble bursting.

The word “bubble”, at least for me, is a loaded term, with a specific meaning. For one thing, it implies speculation: people buying an asset which is going up in price, just because they think they’re going to be able to sell it to a greater fool at a substantial profit. The dot-com bubble was a prime example of that, with investors jumping onto high-flying technology stocks not because they thought the stocks were cheap but just because they thought the stocks were rising, and that they could make money day-trading these things. Much of the housing bubble looked like that too: you could buy a tract home in Phoenix with no money down, hold on to it for a few months, and then flip it for a substantial payday — even if you never expected to live in it. And certainly the bitcoin bubble fits the bill: pretty much the only reason to buy bitcoins and hold them for more than about 10 minutes is that you think they’re going to go up in value and that you’ll be able to make money as a result.

Is it possible to have a non-speculative bubble? In certain rare cases, perhaps. For instance, there was the market in Impressionist paintings in the 1980s: they went up in value enormously, and then the bubble burst and values came back down again. But people weren’t buying these things to flip them, and — importantly — no real harm was done to anybody when prices stopped going up and started going down. Similarly, in 2007, I said that if Manhattan property prices were in a bubble, then it wasn’t a speculative bubble. And again, whether you call it a bubble or not doesn’t really matter: when Manhattan property prices declined during the housing bust, no real harm was done to anybody.

In any case, the truly defining characteristic of a bubble is surely its bursting. The reason to be worried about bubbles has nothing to do with fear of what happens when everybody is happily making money. Rather, the problem with bubbles is that they burst; bursting bubbles are dangerous, unpredictable things which we should rightly be afraid of. Or, to put it another way: if asset prices simply decline without causing substantial collateral damage, then you weren’t in a bubble to begin with; you were simply in a bull market which then became a bear market.

Looking at the markets today, they show every indication of being bull markets rather than bubbles. For one thing, there’s not much speculation going on: no one’s day-trading junk bonds. Eisinger says that the One Percent are getting wealthier “through speculation”, and cites private-equity firms in the “house flipping” business, but that’s really not what’s going on at all: the One Percent are getting wealthier just because they own stocks and those stocks are going up, while the private-equity firms buying houses aren’t flipping them, but are rather renting them out, as part of their global search for yield. That’s real investment, it’s not speculation. What’s more, when Eisinger points to this chart as evidence that stocks are overvalued, he’s pointing to a chart which shows that — except for a deep “V” at the very height of the financial crisis — shows stocks trading at pretty much their lowest valuation of the past 20 years. Nasdaq 5,000 this is not.

More importantly, investors aren’t leveraged in the way they were during the housing boom: no one’s buying houses with no money down, and no one’s borrowing billions of dollars to invest in super-senior CDO tranches. The dot-com bust wiped out hundreds of billions of dollars of paper wealth, but only caused a relatively mild recession: the reason was partly the fact that Alan Greenspan was able to slash interest rates, but it was also in large part a function of the fact that very little of the dot-com bubble was fueled by leverage.

Today’s markets might well be frothy — but, in the short term at least, that’s a good thing for the real economy. So far this year, we’e seen 1,413 companies issuing stock onto either the primary or secondary markets, raising $288 billion in the process — that’s up 33% from the same period last year. (And remember, the same period last year included the Facebook IPO.) Amazingly and wonderfully, that total includes $74 billion of issuance in Europe, up a whopping 44% from the same period in 2012. Companies don’t generally raise equity capital just to sit on the cash: they raise it so that they can invest the proceeds into their business, thereby creating jobs and economic growth.

Companies are raising equity capital right now because doing so is cheap for them: the higher that stock prices go, the more that we can expect this trend to continue. And that’s good for the economy. And, of course, investors are getting wealthier, which causes some nonzero wealth effect in terms of the amount of money they spend. So, what’s not to like, in terms of markets going up? If it means that the population gets richer and companies have more money to invest in their business, what’s the downside?

Over the long term, expensive stocks are bad for people who are trying to save for retirement: the more you pay for your investments, the lower your ultimate return is going to be. But that’s a relatively minor concern right now. The bubble-worriers have something else on their minds — something more moralistic. They see the rich getting a free lunch: central banks dropping money from helicopters, most of which is going directly into the pockets of the top 1%. That isn’t fair, and they are sure that there’s some kind of cosmic karma which means that wherever there’s a party, there’s bound to be a hangover.

The view that “we have to pay a price for past sins” is nearly always wrong, and in any event the only real sin being committed here is that the rich aren’t sharing their good fortune with everybody else. The stock market is a rising tide which is lifting only the luxury yachts; everybody else is underwater. That is genuinely deplorable. But it doesn’t mean that we’re in a bubble, and it doesn’t mean that if and when the tide goes out, the rest of us are going suffer massive injuries. There are always tail risks, of course: there are always unknown unknowns. But for the time being, the most likely scenario is that when asset prices start to fall, the main people to be hurt will be the ones owning the assets in question. In other words, the people who can best afford it. That’s not a bursting bubble: it’s just a common-or-garden bear market, of the type that all investors should be able to withstand.

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SAC Capital Advisors’ $616 million insider trading settlement back in March hasn’t settled much of anything.

On Friday, the hedge fund announced to investors it would quit cooperating with federal authorities, and it later came out that Cohen was subpoenaed by the Manhattan US attorney’s office last week to testify in front of a grand jury. Peter Henning runs down a list of reasons why it’s in SAC’s interest to stop cooperating with the authorities, and notes that while SAC can’t win a fight over subpoenas, it can make enough time-consuming challenges to them to force prosecutors to ask for fewer records. The clock is ticking, after all: the statute of limitations on this particular insider trading case will be up in July.

Matthew Goldstein pulls out two interesting takes on the Cohen subpoena. First, a former prosecutor tells him the move seems more theoretical than practical: “I think it’s purely an effort to cause him to assert his Fifth Amendment privilege and knowing that will get communicated to the media”. Second, the move likely means that Cohen himself is not the target, as it’s rare to subpoena the person who is directly under investigation.

This may even mean prosecutors are effectively admitting defeat: Columbia law professor John Coffee told Bloomberg they likely wouldn’t “regard a criminal prosecution against the company as a victory without a conviction against Cohen”.

Bloomberg reports that the recent legal developments might push Cohen to purge his hedge fund of outside investors and propose a deferred prosecution agreement, which would require SAC to admit wrongdoing, pay a fine, and agree to face prosecution if it broke the law in the future — but would save Cohen from indictment and allow him to continue managing his own billions.

Matt Levine says this sort of agreement would mean Cohen’s “two layers of deniability” management system worked as it was supposed to. In the end, this may be a best-case scenario for Cohen. It’s unclear how many outside investors SAC would be left after a grand jury investigation, anyway. – Shane Ferro

On to today’s links:

Energy
Transport by rail is reshaping the US energy industry – CME

Apple
Ireland does not want to be blamed for Apple’s tax avoidance – Reuters

New Normal
“We have to recognize that the face of American poverty is an increasingly suburban one” – NYT
Don’t forget the suburbs! - Architect Magazine
“Welcome to the new Wall Street, where back-office work trumps backslapping” – WSJ
Bloomberg chat is getting a new rival – WSJ

JPMorgan
Jamie Dimon will keep his double chairman-CEO role – DealBook
Everything you need to know about JPMorgan today – Reuters

EU Mess
Spanish unemployment could hit 30% by 2014 – FT Alphaville
The failure to combat European youth unemployment “is a scandal beyond compare,” says former German Chancellor Helmut Schmidt – Der Spiegel
Mobile data is a luxury good in southern Europe – Quartz

Politicking
“Washington has all but abandoned efforts to help the economy recover faster” – Washington Post
“Blame-shifting to amorphous systems and faceless ‘lobbyists’ weakens our understanding of what is really going on in financial reform” – American Prospect

Wonks
Why pre-tax income inequality matters – Chris Dillow

Good Questions
How many users does Tumblr really have? – Peter Kafka

Billionaire Whimsy
The US is leading the recovery in the private jet industry – Bloomberg

Great Captions
“Well-being of two hypothetical poodles over time” – Worthwhile Canadian Initiative

And, of course, there are many more links at Counterparties.

When Apple CEO Tim Cook appeared in front of Carl Levin today, I was hoping for an epic showdown, as presaged by Levin’s highly-aggressive press release yesterday. I was sorely disappointed — although I did end up with a newfound admiration for Tim Cook’s ability to acquit himself with dignity and intelligence and integrity in the toughest of situations.

The Apple executives at the hearing spent most of their time politely listening to various senators pontificate about taxes. But every so often, in response to a rare direct question, they would try to explain why they didn’t think they were evading billions of dollars in taxes.

The Levin report is very long and dry, so let me oversimplify a little. Apple revenues basically end up in one of two places: California, for sales in the Americas; and Ireland, for sales everywhere else. Apple pays US taxes on the money which ends up in California, but only pays US taxes on the interest on the money which ends up in Ireland. Which isn’t very large.

A lot of the hearing was taken up, unhelpfully, with senators asking whether Apple pays taxes on the income from sales made in the US, and Apple saying yes. (Although, as Tim Fernholz points out, “between 2009 and 2011, the company told investors it was setting aside $13.7 billion to pay federal taxes—but it has actually paid only $5.3 billion”. The amount the government receives is significantly lower than we had all been given to believe from Apple’s SEC filings.)

The more interesting questions concern Ireland, the money flowing in there, and the degree to which those enormous sums of money constitute tax avoidance on a massive scale.

There are two parts to this question. The first is the sheer amount of money flowing into Apple Operations International (AOI), a company without tax jurisdiction and which hasn’t filed a tax return in five years. The Apple executives were unflustered about that fact: all of Apple’s various subsidiaries in Europe and Asia pay local tax on their profits. They could then just hold on to those profits themselves, if they wanted. But because it’s nice for Apple to be able to look after all of its money in a single place, the various subsidiaries send it all to Ireland to be invested. It has already been taxed at that point, and shouldn’t be taxed again.

This is more than a little disingenuous, because it seems that Apple is extremely good at ensuring that the “local subsidiary” in question, accounting for the overwhelming majority of the profits being fed into AOI, is ASI — another Irish company without tax jurisdiction. When Apple ships product from its factories in China to its stores in Singapore, the stores in Singapore don’t make much if any profit. That’s because somewhere in the South China Sea, ASI takes ownership of that product at a very low cost, before selling it on to Apple Singapore at much higher cost. The hardware never goes anywhere near Ireland, but title to the hardware changes hands, and substantially all of the profit associated with that hardware thereby ends up being taxed at friendly Irish rates, somewhere south of 2%, rather than at whatever the government of Singapore might charge. Here’s the Levin report:

Transferring title in this manner allowed Apple to retain most of its profits in Ireland, where it has negotiated a favorable tax rate and maintains entities claiming to have no tax residence in any country, and limit the income it reported in the non-tax haven countries where the company did most of its business. For example, in 2011, Apple reported $34 billion in income before taxes; however, just $150 million of those profits, a fraction of one percent, were recorded for Apple’s Japanese subsidiaries, even though Japan is one of Apple’s strongest foreign markets. ASI, meanwhile, reported $22 billion in 2011 net income. Those figures indicate that Apple’s Japanese profits were being shifted away from the United States to Ireland, where Apple had negotiated a minimal tax rate and maintained two non-tax resident corporations.

So we shouldn’t take Apple’s executives at face value when they say that all of the money in AOI has been taxed once already. That might technically be true, but only at extremely low rates.

What’s more, Apple actually does, under the spirit of the law, owe substantial US taxes on that income. The law in question is something called the foreign base company sales income rule — a regulation specifically designed to prevent companies from jurisdiction-shopping when it comes to taxes. Under US law, Apple has to pay US tax on the income that ASI receives on things like the profits from all those Singaporean gadgets. But Apple uses something called the “check-the-box loophole” to make ASI “disregarded” by the IRS. Instead, the IRS looks only at the parent company, AOI, which, being merely a holding company, does not have any foreign base company sales. According to the Levin report, this clever two-step — first putting the income in to ASI, and then disregarding that income using the check-the-box loophole — “allowed Apple to avoid paying taxes on nearly $44 billion in income from 2009-2012″.

The second part of the question is even more important, and surrounds something called a Cost Sharing Agreement which Apple has signed along with its Irish subsidiary, ASI. Under that agreement, ASI pays 60% of Apple’s R&D costs, and in return gets to keep 60% of the income from Apple’s intellectual property. This agreement, Apple executives repeatedly said, was signed “at arm’s length”, with the 60/40 ratio representing the respective proportions of Apple’s sales split: Europe and Asia account for 60% of Apple’s sales, with the Americas accounting for 40%.

But the fact is, as Levin hammered home at the end of the hearing, that Apple’s intellectual property is its crown jewel; that the amount it spends on R&D is in no way reliant on the fact that it’s getting some of that money from Ireland; and that in no conceivable universe would Apple ever sell off 60% of the rights to its intellectual property in return for a promise to pay 60% of present and future R&D costs. Not in a genuine transaction with a non-Apple counterparty, anyway. As Levin said, “95% of the creativity that goes into that product is in California. But two thirds of the profits are in Ireland.”

Apple receives enormous benefits from being based in California — Cook was entirely genuine when he said that it simply never occurred to him that the company might ever be headquartered anywhere else. And yet Apple has decided, in its wisdom, that 60% of the fruits of its Silicon Valley creativity should end up in a corporate shell in Ireland, never to be taxed by the US Treasury. This system has been in place for many years — since long before the Macintosh was invented — but that doesn’t make it any less of an obvious tax dodge. Apple Inc gets to claim the entirety of its global income for its shareholders, but less than half of it is ever taxed in the US. If an American company makes billions of dollars from its creativity and its enviable geographical location, it’s reasonable that the US authorities should be able to tax those profits, rather than helplessly watching them accumulate offshore.

Here’s the Levin report, again:

Despite the fact that ASI conducts only de minimis research and development activity, the cost sharing agreement gives ASI the rights to the “entrepreneurial investment” profits that result from owning the intellectual property. According to Apple, over the four year period, 2009 to 2012, ASI made cost-sharing payments to Apple Inc. of approximately $5 billion. ASI’s resulting income over those same 3 years was $74 billion, a ratio of more than 15 to one, when comparing its income to its costs… the cost-sharing arrangement for Apple Inc. makes little economic sense without the tax effects of directing $74 billion in worldwide sales revenue away from the United States to Ireland, where it undergoes minimal – or perhaps – no taxation due to ASI’s alleged non-tax resident status.

That’s no arm’s-length agreement, that’s a tax dodge — and a pretty blatant one at that. That’s why I’m astonished that Cook emerged from this hearing so unscathed: the facts were against him, but somehow none of the senators — not even Carl Levin — really managed to put him on the spot. It’s almost as though he had some kind of reality distortion field around him.

Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple’s tax strategies is Pulitzer-worthy stuff. When Apple CEO Tim Cook testifies in front of Levin today, it’s going to be one of the most uncomfortable grillings of his life. Steve Jobs could be intense — but Carl Levin, in full flow, is truly formidable.

The first discrepancy I’d love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were “nearly $6 billion” in FY2012, for “a US federal cash effective tax rate of approximately 30.5%”. (Those numbers imply taxable income of about $19.6 billion.)

The Senate report, by contrast, looks at the 2011 calendar year, and reproduces Apple figures showing $3.884 billion in current federal taxes, plus holding on to $2.998 billion in deferred federal taxes, for a total of $6.882 billion; that means an effective tax rate of 20.1%. (Again, working backwards, the implied total taxable income increases here to $34.2 billion.)

The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the 1099 1040 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.

The report doesn’t convert those figures into an effective tax rate, just saying that the number would be “well below the statutory tax rate”. But in in the year ended September 23, 2011, Apple overall reported net income of $25.9 billion, while in the following year its net income was $41.7 billion. Much of that income was overseas, of course. Still, it does seem that Apple’s total actual federal tax payments in both FY2010 and FY2011 were less than 10% of its reported net income.

This is particularly shocking to the US public, which has to pay taxes on its global income. Every other country’s billionaires are extremely good at escaping into a state of tax-free statelessness; America’s aren’t, and we expect that if you’re rich American, you’re going to pay a substantial amount of US taxes.

American multinational corporations, in this sense, lie somewhere in the middle: they don’t need to pay income tax on their global income, and so they can avoid billions of dollars in taxes by moving income to tax-friendly jurisdictions like Ireland, or to subsidiaries such as Apple Operations International and Apple Sales International, which pay taxes in no jurisdiction at all. (Their headquarters are in Ireland, so they are sheltered from US taxes, but since their operations are mostly in the US, they don’t pay Irish taxes, either.)

The only real punishment for avoiding taxes, if you’re a US corporation, is that your offshore profits are stuck offshore, where it can be hard to invest them or return them to shareholders. So when Apple claims in its testimony that it “supports comprehensive reform of the US corporate tax system”, note its two key provisos: that such reform be “revenue neutral”, and that it allow “free movement of capital back to the US”. The first would mean that US corporations wouldn’t actually pay the taxes they’re avoiding right now: total corporate taxes would remain at an all-time low. And the second would mean that the biggest corporate tax loophole of all — the ability to pay no taxes on foreign earnings — would be made substantially bigger.

The Senate report quotes Mark Keightley, making a very important point:

Corporate tax revenues have declined over the last six decades. In the post-World War II era, corporate tax revenue as a percentage of gross domestic product (GDP) peaked in 1952 at 6.1%. Today, the corporate tax generates revenue equal to approximately 1.3% of GDP. The corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue.

What we’re seeing here is a corporate class which is vastly more effective at evading taxes than individuals are; I don’t see that trend going away any time soon.

Instead, I have a modest proposal of my own: why not at least require all public US companies to file their federal tax returns with the SEC. They already report the amount of taxes that they pay, but as we’ve seen, the reported numbers, calculated under GAAP, can differ substantially from the actual cash numbers. I’m not saying we’d shame companies overnight into suddenly paying more taxes. But at least we’d be able to see which ones are evading taxes most effectively.

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

American companies have gotten the message from the market: borrow as much as you can, as fast as you can.

So far this year, $315 billion of investment grade bonds and $124 billion of junk bonds were issued, according to Thomson Reuters data, respective increases of 36% and 17% over the same period last year. The massive syndicated loan market is up 13% to $654 billion over the same period. Those numbers don’t include the blazingly hot convertible-bond market, or foreign issues like Petrobras’s monster $11 billion bond last week.

Even as debt issuance booms, however, Reuters’ Mike Dolan reports that finding an actual bond in the wild isn’t necessarily easy. “JPMorgan estimates that the world’s central banks and commercial banks… hold some $24 trillion worth of bonds — or 55% of the entire $44 trillion universe of government, asset-backed and corporate bonds”.

Sober Look says that low rates have pushed companies to borrow, even if they don’t have a use for the capital — debt and cash are piling up on American balance sheets. John Kay attributes growing cash piles to a decline in truly capital-intensive US businesses, like heavy manufacturing. Soaring debt issuance, he thinks, is “more likely related to financial engineering, or the acquisition of existing assets, than to new investment”.

On cue, there are worries about excessive risk-taking by banks and the “reach for yield”. The bond rally is vulnerable, according to the WSJ’s Richard Barley, “since it isn’t driven by fundamental factors.” The Contrarian Corner comes to a more nuanced conclusion. Some portions of the bond market are overpriced (CCC), others aren’t (BB), because investors “can’t resist a high-coupon and overestimate their ability to pick the bond that won’t default”. — Ben Walsh

On to today’s links:

Yikes
Bloomberg is already comparing the EU oil trading scandal to Enron – Bloomberg

Investigations
Steve Cohen is considering a deal with authorities that would shut his fund to outside investors – Bloomberg
Cohen has been subpoenaed to in the SAC insider trading investigation - DealBook

Deals
Yahoo plans to be “hands off” after buying Tumblr for $1.1 billion – Kara Swisher

Hope
Ben Bernanke instructs graduates to be optimistic about the future, invoking Keynes (and robots) - The Fed

JPMorgan
How Jamie Dimon became a risk factor – Justin Fox
Tuesday’s JPMorgan vote could be an “inflection point in shareholders’ push for greater say in the boardroom” – DealBook

Ouch
You’re more likely to get a high-skilled worker visa as a model than as a computer programmer – Bloomberg

Charts
The end of the car and the labor force participation rate – Joe Weisenthal

Great Headlines
Big rig carrying fruit crashes on 210 Freeway, creates jam – LAT

Legalese
A law professor is taking on telecom monopolies - NYT

Primary Sources
New paper suggests the Fed find some central bankers who understand how the economy works – Romer and Romer
The Senate report on Apple’s offshore tax strategies – US Senate

Wonks
Gold and the “wedge between financial markets and economic fundamentals” – Mohahmed El-Erian
A rant on why money isn’t “easy” – Scott Sumner
Time to start worrying about the recoveryless recovery – WSJ

EU Mess
No, Greece isn’t turning the corner – Megan Greene

And, of course, there are many more links at Counterparties.

Amidst all the positivity coming out of Yahoo and Tumblr, any self-respecting pundit is going to want to pour cold water on the whole deal. Especially since billion-dollar mergers almost never work out very well. But here’s the weird thing: the more I look at this tie-up, the more it makes sense to me.

Yahoo has more than enough money to pay for Tumblr in cash, which is exactly what it’s doing. Here’s one easy way of seeing why this is a good deal for Yahoo: profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly. For Yahoo, having $4.4 billion in cash plus Tumblr is clearly going to be better in terms of the future than having $5.5 billion in cash, waiting interminably for some kind of Godot to come along and be bought. $1.1 billion is a lot of money, but it’s not so much money that it’s going to change the way that investors look at Yahoo’s balance sheet.

More fundamentally, Yahoo is acquiring 300 million young, mobile users at a stroke — along with invaluable information about what they like to consume online, and how they like to consume it. It’s a four-fer, in fact.

First, there’s the immediate traffic boost.

Second, there’s the ability to use Tumblr’s data to help optimize the rest of Yahoo’s pages. If I’m logged in to Tumblr, as I normally am, then when I go to Yahoo, I should see the kind of material that Tumblr knows I’m interested in, rather than some one-size-fits-all generic home page.

Third, Tumblr is Marissa Mayer’s opportunity for a Flickr do-over. The big portals have been extremely bad at building out genuinely interactive properties in the age of self-expression, and Tumblr knows how to attract a new generation of users who want to create rather than just consume.

And finally, Tumblr is the perfect platform for Yahoo’s brand advertisers to use if they want to start building up relationships with consumers, rather than just bombarding them with banner ads. (My friends at Percolate, an official Tumblr partner which was designed to solve this stock vs flow problem, are incredibly well placed to be huge winners from this deal.)

From Tumblr’s point of view, founder David Karp has extracted many promises from Mayer that she will leave the company alone, in New York City, to do its thing. “We’re not turning purple,” he says. More importantly, Karp can now outsource to Sunnyvale a lot of the gnarly monetization problems which the NY team was only slowly beginning to solve. The plan right now — which might change — is to give Tumbloggers the option to start running ads on their sites, presumably with some kind of revenue-sharing deal. But from day one, Yahoo’s sales team could simply start insisting that any brand wanting to buy ad space on the Tumblr dashboard will also have to buy a bunch of space on the Yahoo network. That’s a great way of leveraging the amount of money that Tumblr brings in.

And then of course there are the itchy VCs: Tumblr raised its first money back in 2007 at a $3 million valuation, resulting in a glorious 365X return for early investors including Fred Wilson and Jacob Lodwick.

Lodwick is on the record saying that acquisitions like this one are always a failure for the company being bought: “Big companies aren’t just big versions of small companies,” he writes. “They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders.” But part of the deal you make, when you accept VC funding, is that there will almost certainly be an exit within 5-10 years, and it will almost certainly not be an IPO where the founder retains control. This kind of exit, where the company is big enough to retain a modicum of independence, is the least bad outcome that Karp could realistically achieve.

It won’t be easy: as Peter Lauria points out, Yahoo’s decision to ban Kara Swisher and Peter Kafka of All Things D from the press announcement is exactly the kind of heavy-handed corporate meddling that Lodwick is talking about. And Tumblr’s users are predictably unhappy about the whole thing. But Yahoo certainly has the tools to help boost Tumblr’s flattening traffic numbers, while Karp should be able to retain enough control of Tumblr that his users don’t revolt entirely. After all, it’s far from clear where else they could go.

Most mergers fail, and this one could fail as well. But on the spectrum from “obviously doomed” (NewsCorp/MySpace) to “obviously sensible” (Google/YouTube), I’d put Yahoo/Tumblr well within the “sensible” half. Which is rare enough to be noteworthy.

It’s tragic that Cooper Union has decided to start charging tuition. The fateful announcement was made by Mark Epstein, the self-aggrandizing chairman of the board of trustees, and was greeted with dismay by thousands of Cooper students, faculty, alumni, and friends.

It’s the trustees who are in charge of the school, and the trustees who most need to be held accountable for what happened. To date, Jamshed Bharucha, the president of Cooper Union, has shouldered most of the blame — and he does deserve a good chunk of it. The decision would not have been taken without his pushing for it, and while he has the full support of the board, which is paying him $650,000 per year, he has signally failed to garner the support of the broader Cooper community. (It will take the tuition payments from 67 average students just to cover Bharucha’s salary; to put that in context, a full freshman class comprises about 20-35 architecture students, 65 in art, and 115 in engineering.)

That said, Bharucha’s situation is a bit like that of Greece’s George Papandreou: he’s a leader who inherited a crisis which was much deeper and more serious than he had any reason to believe. Cooper’s parlous state was bequeathed to him by the previous president, George Campbell, but also by the a board of trustees which signed off on a series of dreadful decisions, most catastrophically the decision to borrow $175 million to build a shiny new building, while having no ability whatsoever to pay that money back.

In order to recover from such atrocious decision-making, the first thing you have to do is to draw a clear line under the past, being very explicit about what went wrong and where. If you can’t admit your own past mistakes, then you’ll be doomed to continue to make those mistakes in the future.

Which is where Mark Epstein comes in. Epstein, unlike Bharucha, was intimately involved in most of Cooper Union’s worst decisions. He should therefore be disqualified from making even more bad decisions, at least unless and until he can demonstrate that he understands what the board did wrong and how they managed to bring Cooper Union to its fiscal knees. This is one reason the tuition announcement was received so badly: the Cooper community quite understandably has no reason to trust that Epstein’s board will do the right thing. Quite the opposite.

There has been no hint of any apology or remorse from Epstein when it comes to the board’s past mistakes; indeed, he hasn’t even come out and admitted that the board made any mistakes at all. When I appeared on Democracy Now with him Thursday morning, he aggressively defended everything the board did in the past, including the decision to build the ridiculously expensive New Academic Building.

Epstein set the tone for the conversation from the very start:

Let me first categorically state that had we had enough money and were able to generate enough revenue to cover our expenses and keep the school with 100 percent scholarship policy, that was our intention. But we can’t. We don’t have the ability to raise enough revenue.

A big part of that problem—and I’ve made this public before—is that we don’t have enough alumni support. Traditionally, only 20 percent of our alumni, who have gotten 100 percent scholarships, give back to the school on a regular basis. You know, contrast that with Princeton. Princeton charges now $40,000-some-odd a year for scholarships, and they’re one of the best schools at alumni participation. They get a participation rate of approximately 65 percent.

I’ve pretty much responded to the first part of this already, so suffice to say: if you’re running a free school, you don’t start with your expenses and then try to work out how you’re going to “raise enough revenue”. Instead, you start with your revenues, and then work out how many students you can educate with that sum of money.

As for the idea that the alumni are to blame, and that Cooper should be more like Princeton — well, that is so misguided, on so many levels, that no one capable of making that statement should ever be the person who makes the decision to start charging tuition. Princeton is very good at being Princeton, but Peter Cooper was never trying to create a center of research excellence, where Nobel laureates regularly rub shoulders and where undergraduates can study any subject under the sun.

Cooper prides itself on being one of the most selective colleges in America, and picking students solely on merit. Princeton is also highly selective, but can’t claim that its admissions process is entirely merit-based: some 40% of legacies applying to Princeton end up being admitted, compared to just 9% of non-legacies. Alumni donate to Princeton in large part because they rationally believe that doing so will help their kids get in there; Cooper’s alumni, in contrast, would be horrified were Cooper to start admitting applicants on the basis of who their parents are. Besides, most kids don’t even want to attend Cooper, given that the only choices it offers are art, architecture, and engineering.

Epstein basically wants Cooper’s students to pay for their education after they’ve graduated — but if you wanted to create the kind of school where students effectively paid their tuition ex post rather than ex ante, you wouldn’t create Cooper Union. Art students don’t tend to go on to particularly lucrative careers, and neither do architects, who generally have an astonishingly low incomes given the amount of skill and education required to do their jobs. Even the engineering school only rarely generates highly-paid graduates, and then often only when they leave engineering to pursue a career on Wall Street.

Within days of Epstein’s announcement that Cooper would be forced to charge tuition for the lack of alumni donations, Ronald Perelman announced that he was giving $100 million — to Columbia Business School, a place which really doesn’t need the money. Perelman will get his name on a building, of course: The Ronald O. Perelman Center for Business Innovation will sit across from the Henry R. Kravis Building, which was itself the result of another $100 million donation. But that kind of thing has never been what Cooper Union is about, and it’s profoundly depressing that Epstein seemingly aspires to it.

On Democracy Now, Epstein talked about how Cooper had “raised $60 million in specific naming opportunities for the new building as part of the capital campaign”; as far as I know he has never admitted that the campaign was anything other than a glowing success story: “a triumph of grit, determination and the gradual evolvement of dedicated volunteer leaders: the board, alumni and friends”.

In 2007, Cooper Union’s five-year strategic plan talked about alumni giving as a key area of success, and added:

Current financial projections indicate that in fiscal year 2008, the college is likely to achieve positive cash flow for the first time in about a quarter century, and longer term projections indicate that the overall annual cash deficit problem will then be left behind for the foreseeable future.

As late as June 2009 — with the worst of the financial crisis behind it — Cooper’s board was still getting the message out that the college had “sidestepped the crisis” and was “basking” in good fortune. No hint there of desperate financial straits, or any need for massive and urgent alumni donations, without which the board might be forced to break the century-old tradition of free tuition.

So you’ll excuse me if I raise an eyebrow when Epstein points the finger at tight-fisted alumni, rather than accepting any blame at the board level. Cooper has never had much in the way of alumni donations, and in fact alumni donations have been much higher in the past 15 years or so than they ever were before. So where did this sudden desperate need for extra alumni donations come from — and who on the board decided that it made sense to embark on a plan which required unprecedented levels of alumni giving? Cooper’s alumni have a lot of love for the institution. But there aren’t very many of them — it’s a small school — and they don’t tend to become massively wealthy.

According to Epstein’s version of events, Cooper is a victim of circumstances largely outside its control: “the costs of education have gone up,” and Cooper Union’s revenues haven’t managed to keep pace. And it’s certainly true that Cooper’s costs have gone up. Never mind the enormous presidential salaries, just look at the interest payments on the loan which Cooper took out to construct its New Academic Building.

Stay with me here: according to Epstein, the poorest 25% to 30% of students will still get a full scholarship, and the richest 25% to 30% of students will be expected to pay the maximum amount of $19,250; the rest will be assessed on a sliding scale between the two endpoints. To a first approximation, then, we can anticipate that total tuition payments will average out to roughly $9,625 per student. The interest payments on the $175 million loan from MetLife come to $10.3 million per year, which means that Cooper will need the income from roughly 1,070 students just to pay the interest on the loan. (Never mind the extra $5.5 million per year in principal repayments which start in 2019.) Coincidentally, 1,070 is pretty much the size of Cooper’s entire student body.

The conclusion is hard to resist: Cooper Union’s tuition payments are required to pay off the interest on its $175 million loan, and if it hadn’t taken out the loan, then charging tuition might not have been necessary.

So, is that $10.3 million per year — all of which goes directly into the maw of a giant insurance company — a legitimate “cost of education” at Cooper Union? Yes, in that Cooper can’t educate its students unless it makes those payments. But we’re not talking, here, about some generalized and inchoate force which is driving tuition payments up across the board; we’re talking about a very specific decision, made by Cooper’s trustees, which had dreadful consequences.

Of course, Epstein doesn’t see it that way. Here’s what he said on Thursday:

The building helped us financially; it did not hurt us. We had two buildings that were in need of tens of millions of dollars in upgrading to make them building and fire code compliant, to make them ADA compliant. The accrediting boards that determine whether or not we can offer degrees questioned the validity and the viability of our facilities, because they were falling behind par.

The new building was paid for by selling the ground lease under our old engineering building, which we got $97 million for, right before the crash. And we raised $60 million in specific naming opportunities for the new building as part of the capital campaign. The new building going up on our old engineering building site, being built by Minskoff, will generate $2 million a year at least, ongoing, to the school. The building was paid for by those funds, not the loan.

The loan proceeds were eaten up by the deficit.

Let’s be very clear about what Epstein is saying, here. Cooper borrowed $175 million, in the form of a 30-year fixed-rate mortgage. It then built a new building at a cost of slightly less than $175 million. But don’t for a minute conclude that the loan was used to pay for the building! Not at all! The loan was simply “eaten up by the deficit”.

Here’s my challenge to Epstein, and to Cooper Union: find me one person — just one — who (a) believes this version of events, and (b) isn’t a member of Cooper’s Board of Trustees, either now or when the decisions were made. In fact, I would be astonished if even a majority of the current board would agree that the new building was helpful rather than harmful, financially. You just need to look at it to see how much of a white elephant it is; you don’t need to know that the engineering faculty — which mainly uses the new building — voted against it twice, and that the myth about the new building being required in order for Cooper to keep its accreditation is, well, let’s just say that none of the faculty believes it.

The reality is that you don’t need to know anything about the building at all in order to understand that you can’t take Epstein at face value here. All you need to know you can be found in one sentence from the official Cooper Union FAQ:

The MetLife pre-payment penalty for the 30-year loan is approximately $81 million (as of August 2012).

You read that right: even if some gazillionaire (or capital campaign) dropped $175 million into Cooper’s lap tomorrow, they still couldn’t pay off their $175 million loan: it also has a whopping $81 million prepayment penalty.

The trustees’ story is basically that they expected to be able to pay for the new building through their capital campaign: one of them told James Stewart that the college expected to raise $125 million more than it actually did. And Epstein told me, when I asked what the $175 million was for, that “part of it was used as a bridge loan, while the building was being built, because the moneys from the capital campaign takes years to come in”.

But here’s the question: if the MetLife loan was meant to just be a bridge to future alumni donations, then why was it structured as a 30-year fixed-rate loan with a prepayment penalty of as much as $81 million? The capital campaign ended in 2012, not in 2036.

All of which is a very long-winded way of saying that Cooper’s trustees, who couldn’t be trusted a year ago, still can’t be trusted today — and that so long as Mark Epstein is chairman of the board, the broader Cooper community simply will not rally behind him and give his decision to charge tuition any kind of broad-based legitimacy.

On Friday, Kevin Slavin — one of the most outspoken opponents of charging tuition at Cooper — was elected to the position of alumni trustee for the period from December 2013 to September 2017. Slavin didn’t even run: he was a write-in, a protest at the way in which Cooper’s trustees seem to be unaccountable to anybody. The vote wasn’t for Slavin, so much as it was against Bharucha, and Epstein, and everybody else on the board who has consistently downplayed their own culpability in the Cooper fiasco.

Charging tuition doesn’t solve Cooper’s financial problems — far from it. In order for Cooper to get onto a sustainable footing, it’s going to need to regain the admiration of multiple constituencies, including current students, alumni, current faculty, and prospective students. It’s pretty clear that the board isn’t going to get that support by blustering and stonewalling and pretending that they didn’t do anything wrong. So maybe, if and when Bharucha manages to find a new communications chief, that person could start by persuading the board to give a full explanation of — and take full responsibility for — everything which went wrong.

Jeff Jarvis reprints the clip above, in an article dismissing the privacy concerns surrounding Google Glass. The Victorian attitudes of Newport’s cottagers, he clearly implies, were misguided and misplaced. “Rest assured,” he writes. “ I will ask you whether it’s OK to take a picture of you in private.”

The key words, here — words which weren’t even part of the cottagers’ vocabulary — are “in private”. We now live in a world where we have public lives and private lives — and for over a century now, since roughly the point at which the above article appeared, the portion of our lives considered “public” has been expanding, while the portion of our lives we can consider “private” has been contracting. What’s more, Jarvis himself is a prominent proponent of the idea that we should maximize the speed at which we move our lives into the public realm; he also equates a desire for privacy with being “scared of the public” .

Never before have we faced so many opportunities to turn the formerly-private into the newly-public. As those opportunities arise, many people adopt them, and turn “public” into the new norm for such activities. Eventually, the norms become societally entrenched, to the point at which it is now utterly unobjectionable for those who once would have been labeled “kodak fiends” to take photographs outside a Newport tennis tournament.

My point here is that technology has a tendency to create its own norms. The classic example is the automobile — a technology which kills more than 30,000 Americans every year. From the 1930s through the 1990s, societal norms about who roads belonged to, and what people should do on them, were turned on their head thanks to the new technology. The dangerous new activity allowed by the new technology became the privileged norm, to the point at which just about all other road-based activity — and roads have been around for thousands of years, remember, since long before the automobile — essentially ceased to exist. Eventually, we reached the point at which elected representatives were happy saying that if a bicyclist gets killed by a car, it’s the bicyclist’s fault for being on the road in the first place.

If Google Glass — and wearable computing more generally — takes off and fulfills its potential, it will change society’s norms about what is public and what is private. It is therefore entirely rational, whatever you think of the set of norms we have right now, to assume that they will end up moving towards something more well disposed towards the new technology.

Jeff Jarvis will welcome that move, and can come up with dozens of reasons why it would be a good thing rather than a bad thing. “There’s no need to panic,” he writes. “We’ll figure it out, just as we have with many technologies—from camera to cameraphone—that came before.” But let’s be clear here about how much weight is carried by that “we’ll figure it out”. Realistically, “figuring it out” means, in large part, changing norms: irrevocably moving the line between what is private and what is public. That might be a good thing, it might be a bad thing. But if you like the norms we have right now — or if you think they’ve already gone too far in terms of robbing individuals of their privacy — then you have every reason to worry about what the onset of wearable computing might portend.

Update: Noah Brier points me to a quote from Daniel Mendelsohn, who goes back further still than the Victorians:

I am amused by the fact our word idiot comes from the Greek word idiotes, which means a private person. It’s from the word idios, which means private as opposed to public. So the Athenians, or the Greeks in general who had such a highly developed sense of the radical distinction between what went on in public and what went on in private, thought that a person that brought his private life into public spaces, who confused public and private, was an idiote, was an idiot. Of course, now everybody does this. We are in a culture of idiots in the Greek sense.

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Why might Yahoo want to buy Tumblr, as AllThingsD reported last night and Adweek confirmed this morning? Henry Blodget has a couple of ideas. For one thing, he says that “Yahoo wants to become hip and cool again, and Tumblr is hip and cool.” Tumblr also has a large following in the 18-29 demographic that Yahoo would like to capture (CFO Ken Goldman told a group of investors earlier this week that “One of our challenges is we have had an aging demographic.”) In that way, the move is similar to last year’s Facebook/Instagram deal, which Ryan McCarthy described as “a $1 billion way to make your parents’ status updates more interesting.”

Blodget also says that Yahoo is looking to become a content distributor, rather than a content producer: hosting a vast number of user-generated selfies, GIFs, and pornography is easier to scale than paying journalists, as Tumblr itself realized last month when it canned its in-house Storyboard journalism team. To Joshua Brustein, the purchase of the 108 million or so Tumblr blogs could be Yahoo’s “path back to cultural relevance”; it also may build on Mayer’s plan to move Yahoo toward stream-based advertising.

Because kids today don’t think Tumblr sucks (Techcrunch reports that “21% of its audience is under 18, 30% is 18 to 24, and 22% is 25 to 34”), other Silicon Valley companies with aging user demographics, like Facebook and Microsoft, are reported to be interested in bidding. However, Jeff Bercovici reports that the Yahoo talks are “likely to result in an offer as soon as Yahoo CEO Marissa Mayer can get her board’s approval”, and that it’s unlikely anyone else will be given an opportunity to bid.

What will Yahoo do for Tumblr? The site has a young and idealistic founder in 26-year-old David Karp, who has previously expressed resistance to being “absorbed into a behemoth of another company and raided for talent and traffic.” Unfortunately for Karp, Yahoo’s track record in that respect is abysmal. Sam Biddle has a good roundup of the Yahoo acquisition graveyard, including GeoCities ($3.6 billion in 1999), Flickr, and Delicious.

Back in 2011, Tumblr raised a $85 million at an $800 million valuation. Yahoo’s $1 billion offer isn’t a big premium over that, but Nicholas Carlson writes that Tumblr’s late-stage investors may have some deal sweeteners, ensuring they get a decent return. Karp may also see an upside to selling to Yahoo: Carlson writes that Mayer is likely to let Tumblr continue being relatively ad-free for the near future. — Shane Ferro and Ryan McCarthy

On to today’s links:

Scandals
Is there a price-fixing scandal brewing in the oil market? - Economist

JPMorgan
“The current Chairman of JP Morgan should be run out of town on a rail” – Epicurean Dealmaker

New Normal
Greek shipping magnates are not really feeling the whole economic depression thing – Time

Alpha
Morgan Stanley analyst reminds the world he only has a job because investors are dumb – Sam Ro
No, 2013 is not 1999 – Josh Brown
Bill Ackman is investing in a $90 million New York penthouse – WSJ

The Fed
Suggestion: “Let’s have more people setting monetary policy who understand how the financial system works” - Matthew Klein
Why the US and Europe need a tad more inflation – Ben Walsh

Legalese
Legally, Goldman can’t deny it misled an investor — even though a court just threw out claims that it did (Got that?) – Jonathan Weil
“Company that helped Goldman build terrible CDO loses lawsuit over the result” – Matt Levine

Oxpeckers
“Sponsored Content Pretty Fucking Awesome” – The Onion

New Normal
Why the housing market continues to disappoint: supply-side issues – Cardiff Garcia

Helpful Reminders
Americans say a family of four needs nearly $60,000 per year to get by - Gallup

Black Market
Argentina is considering amnesty for those who launder money through its banks – Quartz

Valuations
No one is sure if this mansion listed at $190 million is actually worth that much – WSJ

And, of course, there are many more links at Counterparties.

Jamie Dimon is wagging his finger from newstands across America this week, above the kind of headline his PR team can only dream of: “DIMON IS FOREVER: Why Jamie Dimon is Wall Street’s Indispensable Man”.

The story itself, by Nick Summers and Max Abelson, consists mainly of rich corporate insider types talking about how wonderful Jamie Dimon is, and how ridiculous it is that anybody might consider stripping him of the chairmanship of JP Morgan. Here’s a doozy:

Admiring rivals have been known to call Dimon “the sun god.” That cosmic aura has real use, says Kathryn Wylde, who served on the Federal Reserve Bank of New York’s board with Dimon until his term ended last year. “There’s no doubt that it helped the bank, because so much of that business is built on confidence.” The intrusion of shareholders, in the form of a vote on Dimon’s dual roles, she adds, is “indefensible if the company is performing well.”

Wylde is one of those great-and-good people who turn up on boards all over the place: not only the New York Fed, but also everything from the NYC Economic Development Corporation and the Manhattan Institute to the Lutheran Medical Center and the US Trust Advisory Committee. Her day job is serving as the president and CEO of the Partnership for New York City, a partnership made up exclusively of large companies and the rich people who lead them. JPMorgan is unshockingly among them. Her view of the role of shareholders in corporate governance is fascinating: it’s “indefensible” for them to care about such things so long as they’re getting paid.

But clearly shareholders do care about governance: both Institutional Investors Services and Glass Lewis, advisory firms paid to work out what is in the best interests of shareholders, have come to the entirely reasonable conclusion that Jamie Dimon should not keep his job as chairman of the board.

The battle line between princpals and agents has never been more clearly delineated than it is here. The shareholders of JP Morgan — the owners of the company — want a board which represents their interests, and which can control what the CEO does. The managers and captured professional board members, on the other hand — the CEO class — have rallied around Dimon in an impressive display of high-wattage solidarity. Bloomberg Businessweek quotes Bill Daley, John Mack, Jimmy Cayne, Phil Gramm, Dick Kovacevich, and “two dozen of Dimon’s peers and colleagues” in his defense; Andrew Ross Sorkin, for good measure, adds Barry Diller and Hank Paulson.

Will shareholders see this awesome display of PR firepower and decide that Jamie’s right, he should stay on as chairman after all? If they’re narrowly focused on the short-term future of the JP Morgan share price, then probably they will. After all, Dimon has petulantly threatened to quit if the motion goes through, which would be bad for the share price — and as all of these articles are at pains to point out, there’s not much evidence that splitting the chairman and CEO roles is likely to do any particular good for JP Morgan’s share price over the medium term. (It can help underperforming companies, but that effect disappears with respect to relatively strong ones.)

The cult of the CEO is still going strong: just look at the way Bloomberg has appointed the ex CEO of IBM to try to help the company recover from its recent data scandal. So maybe if you get enough CEOs supporting Dimon, their collective weight will help tip the balance. (Although it’s hard to believe that any shareholders particularly value the opinion of Jimmy Cayne on this issue.)

But the fact is that Dimon should not be chairman of JP Morgan, and shareholders can see exactly why just by looking right there at the cover of Bloomberg Businessweek. No one man should ever be indispensable, and it’s the job of the chairman to ensure that the company is in good solid health no matter what happens to the CEO.

A fuller, and quite wonderful, explanation has also been offered up by the Epicurean Dealmaker, who makes a few more salient points. He explains:

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically.

Even if Dimon is a great CEO, there’s really no evidence at all that he’s a great chairman, and JP Morgan’s shareholders have the right to install the best possible officeholder in each of those roles.

How do we know that Dimon is a bad chairman? Well, there’s the fact that there’s no good succession planning, for starters. And then there’s the board itself, which is basically a bunch of supine muppets, who do as they’re told rather than actually representing shareholders and holding the CEO to account.

Most intractably, there’s the question of shifting goalposts. As the Epicurean Dealmaker points out, Jamie Dimon is the very last person on the planet who should be in charge of judging whether Jamie Dimon is doing a good job as CEO. For instance: it’s impossible for a bank with $2.4 trillion in assets and 256,000 employees to stay out of regulatory trouble entirely. But how many fines is too many? As Businessweek points out, “the litigation section of the bank’s quarterly filings now runs to almost 9,000 words, or 18 single-spaced pages.” At what point does the litany of legal and ethical lapses become so long that the CEO has to take responsibility, and/or break up the company into small-enough-to-manage chunks? This is an important question, and Jamie Dimon cannot answer it. You need an independent board to do that — to set the goalposts — and JP Morgan’s board is not independent.

In theory, shareholders elect directors, who hire the CEO to run the company. In practice, the CEO picks the directors he wants, pays them a handsome stipend for doing nothing, and they in turn make no attempt to listen to what the company’s shareholders might desire. In fact, they’re quite offended when it’s suggested that they might want to do that at all.

The debate about this vote often seems as though it’s two groups of people talking at cross purposes to each other: the Dimon defenders are making it all about him personally, and what a good job he’s done running the company, while the good-governance types generally say nothing personally about Dimon at all, and instead insist that all they’re doing is standing on principle.

But in fact this is about Dimon personally: it’s about how much power one man can or should be allowed to have. Dimon has too much. It’s time to give him a boss.

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Today something strange happened: a dreary, easily overlooked vote at the Commodity Futures Trading Commission ended up on Gawker.

Gawker, Bloomberg, the NYT and HuffPost agreed that the vote, which approved a watered-down reform to the the $633 trillion derivatives market, was a win for big banks.

The 2010 Dodd-Frank act included a provision to bring the opaque world of derivatives — including the kind of trades which nearly brought down AIG — into something like an open market. Over the last three years banks have held 80 meetings with the CFTC officials on how swaps should be brought into public exchanges. Along the way, a proposed rule got pared back: Buyers would have to solicit two prices quotes from banks before purchasing a swap, instead of the proposed five quotes. That requirement will eventually increase to three.

The resulting rule is a small reform, but also preserves much of the status quo. Ben Protess writes that the move “could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.” (Five big Wall Street banks dominate more than 90% of the derivatives market.)

Wallace Turbeville, formerly of Goldman Sachs, says the two-quote requirement is too easy to game and invites LIBOR-like collusion on swap pricing. CFTC commissioner Bart Chilton voted for the measure, but quoted Churchill to suggest it fell short of full transparency: “The English never draw a line without blurring it.” Republican CFTC commissioner Jill Sommers was the only of the CFTC’s five commissioners to vote against the proposal.

The story of swaps regulation is emblematic of the larger story of financial reform. As Haley Sweetland Edwards’s terrific April piece on Dodd-Frank implementation describes, reforming America’s financial system now hinges on minute details like whether bills contain the word “appropriate”. The financial industry has adopted a death-by-thousand-cuts strategy; as Better Markets’ Dennis Kelleher says, it is “consistently and methodically getting strong rules weakened bit-by-bit, often behind closed doors.”

Jesse Eisinger, reviewing a new book on Dodd-Frank, says that even though it was written by smart, informed people, it left far too much for regulators to hash out:

Smart legislative and regulatory solutions may embrace flexibility and exemptions that banks can later exploit. Regulations that create clear, bright lines may seem simplistic and dumb. But such rules tie regulators’ hands, freeing them from banking influence.

– Ryan McCarthy

On to today’s links:

EU Mess
It’s banks that are killing Europe, not simply austerity – Pawel Morski
Europe’s Central Bank now even wronger on inflation – Simone Foxman

Growth Industries
The US government expects to make $51 billion from student loans this year – Shahien Nasiripour

Bubbly
There may or may not be a housing bubble in places like Brooklyn and Menlo Park, CA – Bloomberg

JPMorgan
JPMorgan’s shareholders have suddenly been denied access to the results of their own votes – DealBook
Jamie Dimon will decide who’s on Jamie Dimon’s board, thank you very much – Reuters

Liebor
The wife of a UBS trader accused of manipulating Libor is venting about justice on Twitter – WSJ

TBTF
The idea that you can wind down a failing megabank in some orderly fashion is probably a myth – Simon Johnson

The Oracle
S&P has downgraded Warren Buffett’s Berkshire Hathaway – BI

Fiscally Speaking
The CBO is still likely overestimating future deficits – Karl Smith

Oxpeckers
The New Yorker welcomes your anonymous leaks – New Yorker

And, of course, there are many more links at Counterparties.

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Europe is in the midst of its longest recession since it began keeping records in 1995 — even surpassing the calamity that hit the region in the financial crisis of 2008-2009. While the German economy grew 0.1% from the fourth quarter of 2012 to the first quarter of this year, just about everyone else in the eurozone is shrinking.

France’s economy shrank 0.2% quarter on quarter, and is now officially back in recession after just one quarter of positive growth. It’s not alone: Cyprus, Finland, Italy, Greece, the Netherlands, Portugal, and Spain are all in recession right now. And while the UK managed to just barely avoid a triple-dip recession by growing 0.3% in the first quarter, its economy is still 2.6% smaller than it was 5 years ago.

Yesterday, Pew’s latest eurozone survey confirmed that the continent’s sentiment matches its dour economic data. The survey’s disconcerting conclusion:

The European Union is the new sick man of Europe. The effort over the past half century to create a more united Europe is now the principal casualty of the euro crisis… The prolonged economic crisis has created centrifugal forces that are pulling European public opinion apart, separating the French from the Germans and the Germans from everyone else.

Median support for the EU stands at 45%, down 15 percentage points in just the last year. Across the eight surveyed countries, only 26% think the economic integration has strengthened their national economy, a 6 point decline from last year.

The data shows that as Europe’s division and disillusion grows, a familiar, and politically worrying, trend is emerging. Joshua Tucker says that the Germans aren’t just living, as Pew puts it, on another continent, they “appear to be living on a different planet.” 75% of surveyed Germans think their domestic economy is good, compared to a median of just 9% in the other countries surveyed who said the same about their domestic economy. 77% of Germans said their personal economic situation is good. Barely more than half said the same elsewhere.

An economically ascendant and politically isolated Germany was precisely what the euro was meant to prevent. Instead, George Soros says the “euro is in the process of destroying the European Union.” — Ben Walsh

On to today’s links:

Must Read
Inside the massive drug company that fabricated test results for AIDS medication and generics – Fortune

New Markets
Buyouts are so 2009: Blackstone is building dams in Uganda now – WSJ

Politicking
Hedge funds bet on their ability to change the government’s mind on Fannie and Freddie – WSJ

MOOCs
Harvard professors are not huge fans of free online courses – Bloomberg

Kids Today
“The Pentagon estimates that only one in four of today’s youth are fit for military service” – CNN

Leaders
Lloyd Blankfein, willing listener to Jamie Dimon’s problems – DealBook

Second Acts
Sallie Krawkcheck buys 85 Broads – DealBook

Hilarious
The 21 Fiercest Things Richard Nixon ever did – Alex Pareene

New Normal
The world is in a bond drought – Reuters

Layoffs
HSBC will cut another 14,000 jobs – Reuters

Bitcoin
Homeland Security shuts down major Bitcoin payment system – BetaBeat

And, of course, there are many more links at Counterparties.

Ezra Klein has a good summary of the latest CBO budget projections, which show that the national debt really isn’t going to be a problem at any point in the foreseeable future. The deficit isn’t going away, of course: the smallest it’s likely to get, according to the CBO, is $378 billion, or 2.1% of GDP, in 2015. But that’s entirely manageable, and puts the national debt-to-GDP ratio on a pretty flat trajectory over the medium term.

Of course, in the real world, none of this is actually going to happen as forecast. It’s hard enough to forecast what’s going to happen in 2013, let alone what’s going to happen in 2023: the CBO projection for this year’s deficit has fallen from $845 billion to $642 billion just in the past three months, so it’s worth taking all future forecasts with a large pinch of salt — especially since the one thing that’s certain is that there will be substantial changes to US fiscal policy between now and 2023.

This chart contrasts quite dramatically with the bipartisan consensus that America’s national debt — and especially the way that it is built up by the entitlement programs of Medicare, Medicaid, and Social Security — are serious problems. As Paul Krugman explains wonderfully in his latest essay for the NYRB, America’s social safety net was actually a key channel through which countercyclical government stimulus entered the economy in the wake of the financial crisis. And given how difficult it is to legislate expansionary fiscal policy on the fly, there’s a strong purely economic case for keeping such programs.

With any luck, then, this chart will help us to stop bellyaching about the debt, and create a bit of space where we can try to work out how to really get the debt-to-GDP ratio down over the long term, by concentrating on increasing the denominator rather than decreasing the numerator. But don’t hold your breath. Even the CBO takes pains to warn of debt problems in the future, saying that a debt-to-GDP ratio around 75% “would have serious negative consequences” in terms of interest expenses, lower wages, and worse:

A large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

In the USA, this risk is de minimis, barely even worth mentioning: not only do we print our own currency, but in general US government bonds are universally considered the safest assets on the planet. So what’s the CBO playing at, here?

Krugman has a fascinating explanation for what might be going on:

Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed.

I’d argue that Keynes was overwhelmingly right in his approach, but there’s no question that it’s an approach many people find deeply unsatisfying as an emotional matter. And so we shouldn’t find it surprising that many popular interpretations of our current troubles return, whether the authors know it or not, to the instinctive, pre-Keynesian style of dwelling on the excesses of the boom rather than on the failures of the slump.

My opinion is that it’s even simpler than that. Krugman naturally sees macroeconomic problems in terms of cycles: there are booms and busts, and there are emotional reasons why economists prefer to concentrate on the problems with booms, and apply the solutions to those problems (spend less money) even during busts where they are contraindicated.

But I think the general view of the public, and of our mainstream elected representatives, is even simpler. These people aren’t economists, and don’t think in terms of cycles; they certainly can’t clearly articulate the difference between a financial crisis and a fiscal crisis. Everything just reduces to “we spent too much, we should spend less”, which makes intuitive sense: the biggest problem with Keynes is that, just like Ricardo, a lot of what he discovered is deeply counterintuitive.

In which case, Krugman’s cyclical arguments are not going to carry the day politically: it’s hard to explain that the right thing to do changes according to various measures of resource utilization. Instead, it might be best, on a tactical political level, just to point at the CBO’s debt-to-GDP chart and say look, we’ve solved this problem now. Even if the CBO wouldn’t really agree with that interpretation.

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No CEO relishes being on the receiving end of a Dan Loeb letter. Today’s unfortunate addressee is Sony’s Kazuo Hirai, who woke up to find Loeb urging a partial breakup of the Japanese conglomerate.

Loeb was more cordial, today, than he has been in the past; he even delivered his message by hand in Tokyo. And he certainly didn’t tell Hirai to “bend over the hedge funds have something special for you” as he wrote of Fairfax’s Prem Watsa in 2006. Nevertheless, he packs a punch: Loeb’s hedge fund, Third Point, has a $1.1 billion stake in Sony, and he’s fresh off the success of installing Marissa Mayer as the CEO of Yahoo.

Loeb’s Sony plan is twofold. First, he wants the company to spin out a 15-20% stake in Sony Entertainment, the company’s movie, TV, music and cable division. That move would raise up to $2 billion which in turn would finance the second part of Loeb’s plan: a revamp of the company’s once-vaunted but now-diminished electronics division. Loeb reckons that his scheme could boost Sony shares by 60%.

For all his boldness, Loeb is strategically vague at the same time, with language such as “our plan shifts that paradigm” and a notable lack of specificity about what in particular he’d like to see Sony Electronics do with $2 billion from Sony Entertainment. He likes Sony’s Playstation, smartphones and cameras, but Sony has a lot of catching up to do in these areas: Samsung’s smartphones outsold Sony’s 7-to-1 last year.

Loeb thinks Sony’s woes stem from a lack of focus, but what’s really troubling the company at present is that it “long ago stopped dreaming up game-changing products,” William Pesek writes. After all, in 2010 the company had a focus – 3-D TVs — but it couldn’t attract the customers. It’s unclear how an additional $2 billion will produce a breakthrough gadget given that a lack of resources doesn’t explain Sony’s innovation failures. The company spent $5.5 billion on research and development in fiscal year 2011 while Apple spent only $2.4 billion.

Then again, maybe this whole scheme is a huge bet that Japanese macro policy will continue to drive the Japanese yen down and benefit Sony’s bottom line. — Peter Rudegeair

On to today’s links:

Energy
The price of oil may finally start declining – Quartz

EU Mess
The ECB pushes for a full banking union as Germany stalls - Reuters
The euro is leading to the demise of the EU – George Soros

Life Is Not Fair
An undead Lehman tries to grab millions from non-profits for its bankruptcy creditors – Bloomberg

Welcome To Adulthood
It’s probably time to start talking about global youth underemployment - Shane Ferro

New Normal
The US could return to pre-crisis employment in the middle of next year – Calculated Risk
A new type of growth is coming from the new collaborative sharing economy – FT

Crisis Retro
Nearly six years after the crisis, ratings shopping is very much alive and well – Bloomberg

Good News
The CBO says the deficit problem is solved for the next 10 years – Ezra Klein

Felix
Why dedecimalization is a bad idea – Reuters

Remuneration
University presidents get paid a lot – Pacific Standard

Strange Bloomberg Headlines
“Brokers Go Gray as Youth Unsustainable Without Cold Calls” – Bloomberg

Ugh
Rich moms are hiring the handicapped to pose as family members to cut lines at Disney World – NY Post

Oligarchy
Family offices are the new private equity firms – Reuters

Protectionism
France may tax smartphones to protect its culture from foreign competition – BBC

Possibly Useless Data
Europeans hate the EU (and the Germans), but can’t quite let go of the euro – FT Alphaville

And, of course, there are many more links at Counterparties.