Felix Salmon

One of the hardest questions to answer, when people ask about the European crisis in general and the Greek crisis in particular, is “why should we in the US care?” The simple answer is that well, this is an important part of the world, and it’s big news. But if you only care about news insofar as it directly effects the US, then the answer is harder.

One possible answer — I’ve heard this given in a number of places — is that another major crisis in Europe would spill over into the US, cause serious economic damage here, and could quite possibly make the difference between an Obama and a Romney victory. But just how likely is that? I’m no expert when it comes to assigning probabilities to events, but we can at least come up with a general framework which lets us answer the question.

Let’s start with the fiscal pact. Will all of Europe credibly commit to fiscal austerity going forwards? If so, that increases the chances of crisis and Grexit, since southern European countries in general, and Greece in particular, simply can’t operate under an austerity regime in the way that, say, the Baltics have managed, painfully, to do. On the other hand, everybody seems quite likely to break the fiscal pact in one way or another — which means that there has to be a good chance the pact will end up being honored mostly in the breach. Let’s call the probability of a Europe-wide austerity regime A; my best guess for A is roughly 15%, or 0.15.

So the next question is — what is the probability of Grexit, any time soon? That’s really two questions. First, what is the probability of Grexit if there’s Europe-wide austerity. Let’s call that B, and I’ll peg it at 85%, or 0.85. Second, what’s the probability of Grexit if Europe-wide austerity slips a bit? We’ll call that C, and I’ll say it’s 65%, or 0.65. Overall, we can define the chance of Grexit, D, as A * B + (1-A) * C. If you’re playing along at home, that’s 0.68, or 68%.

But just because Grexit happens, doesn’t mean it will necessarily affect the US election. For one thing, by definition, Grexit can’t affect the US election if it hasn’t happened by the time the election takes place. So the next question is: if there’s Grexit, what are the chances that it will happen by November? The Europeans have proven themselves very good at kicking the can down the road, so even if Grexit is inevitable, it’s still not inevitable by November. In any case, let’s define E as being the conditional probability of Grexit by November, given Grexit. I’ll say that’s 50%. Which means that the overall probability of Grexit by November, F, is D * E, or 34%.

Grexit, if and when it happens, will cause a lot of disruption in European markets, and certain deposit flight out of Spanish and Portuguese banks. Again, there are two ways this can play out. Either it will cause a series of further dominoes to fall, or else it will concentrate the Europeans’ mind and force them to build a large and genuinely effective firewall, drawing a line in the sand and saying “this far, but no further”. Will Europe let the Grexit crisis go to waste? Let’s say the probability of a credible, coordinated and constructive pan-European response to Grexit is G. Then the probability of Grexit causing a big European crisis is 1-G. What’s G? That’s a tough one, but I’ll put it at 35%.

For the purposes of this calculation, we’ll assume that Greece alone is too small to cause a big global crisis: you need contagion, for that. So we’re looking for H, the chance of a big European crisis before the US election. We can calculate that as F * (1-G), or 22% — that’s the chance of Grexit before November, multiplied by the chance of a bigger crisis if Grexit happens. (Note that a big European crisis can happen at any time; the chance of that is D * (1-G), which works out at 44%.)

If we have a big European crisis before the election, then that will certainly send US stocks falling. But will a sharp drop in the US stock market have any effect on the outcome of the election? Probably only if the election is reasonably close — and certainly not if Romney is in the lead. A European crisis, and consequent plunge in US stocks, would only be good for Romney and bad for Obama, just as the crisis in the fall of 2008 was good for Obama and bad for the incumbent Republicans. So what we’re looking for, here, is I, the probability that Obama will have a narrow lead over Romney — one small enough to be erased by a big stock-market plunge. I’ll peg I at 65%.

And thus, finally, we get to the big answer: what is X, the probability of Grexit toppling Obama? That is H * I, which using my off-the-top-of-my-head probabilities, works out at about 14%. But you should work this out for yourself. Come up with your own values for all these:

A: What is the probability of a Europe-wide austerity regime?
B: If we get Europe-wide austerity, what are the chances of Grexit, any time soon?
C: If we don’t get Europe-wide austerity, what are the chances of Grexit, any time soon?
D: What, then, is the probability of Grexit? This is calculated as A * B + (1-A) * C.
E: If we have Grexit, what are the chances it’ll happen before the election?
F: This is the overall probability of Grexit before the election, and is D * E.
G: If we have Grexit, what are the chances of it eliciting a credible, coordinated and constructive pan-European response?
H: This is the probability of a big European crisis before the election, it’s F * (1-G).
I: What is the probability of Obama having a narrow enough lead over Romney that it would be erased by a plunging stock market?

Put these all together, and you can finally come up with a number for:

X: The probability of Grexit toppling Obama. It’s H * I.

I’d be interested to know what results you get, but my guess is that most of them will come up with a number which is low and yet still significant. It’s something to bear in mind, but of course it’s also something which is pretty much entirely out of Obama’s control. That’s the way that crises work: individual politicians are rarely personally responsible for them, but whomever’s in power when they happen nearly always ends up getting the blame.

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Sheila Bair, never too shy to make modest proposals, thinks that JPMorgan Chase should voluntarily split itself up:

[The] bank is worth more in smaller, easier-to-manage pieces. Let’s face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over.

Or, as David Merkel puts it in a different context: “complexity has a price; avoid it unless well compensated for it”. And, Felix notes, setting the Volcker Rule aside, if a business requires complexity and opacity to generate profit, it should be spun out of too-big-to-fail institutions. That would be a complex task, but things only grow murkier once a firm has failed.

The FDIC continues to clarify its resolution authority and currently thinks the best method to handle the failure of a large, complex financial institution is to place the “parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge holding company”. Stephen Lubben doubts that the hundreds of billions of dollars in private debtor-in-possession financing required for a tidy resolution to work would be available during a financial crisis.

Daniel Tarullo, the Fed’s resident guru on such matters, argues that it’s not simple to preserve short-term funding and market confidence without an injection of government capital. – Ben Walsh

On to today’s links:

Housing
Armed with special privileges, the Department of Agriculture is an unusually hard-nosed debt collector – WSJ

EU Mess
Bankia, Spain’s fourth-largest lender, expected to ask for an additional $19 billion bailout – Reuters
German bonds are turning Japanese – FT Alphaville

Facebook
People said Wall Street research was worthless – now we’re worried that it’s too valuable – The American Conservative
Reminder: Spending a month’s salary on an IPO is always a bad idea – Bloomberg
Henry Blodget reports that Morgan Stanley bashed Henry Blodget on a firmwide conference call – Business Insider

JPMorgan
None of the directors on JPMorgan’s risk committee have worked at a bank or as financial risk managers – Bloomberg

Comparisons
Pakistan provides 12 weeks more paid maternity leave than the US – Think Progress

Unfortunate Because It’s True
Study confirms that Germans are incapable of enjoying life – Der Spiegel

Bubbly
AOL campus squatter receives seed funding – CNET

Stuff We’re Not Linking To
Comparing Facebook to Bernie Madoff – Barry Ritholtz

When I spoke to Kauffman’s Diane Mulcahy, the main subject of conversation was her fabulous report on how investing in venture capital is broken. And I wondered whether investors’ consistent desire to throw money at the asset class, even after 15 years of consistent underperformance, was attributable to some kind of weird nostalgia for the 1990s, when the dot-com bubble briefly made a handful of VC investors very wealthy.

But there’s something else going on here, too, I think, surrounding the whole concept of illiquidity. It’s clearly a bad and undesirable thing, in any investment, and it only takes a glance at the market for say Treasury bonds to understand that highly-liquid assets trade at a premium. In theory, then, the converse should be true as well: highly-illiquid assets should trade at a significant discount. And so long-term investors like the Kauffman foundation, who can afford to sit out market fluctuations and don’t need much in the way of immediate liquidity, should be able to buy attractive assets at a low price, and capture that extra yield for themselves.

I’m a long-term investor, too. I have retirement savings I won’t need for a good 30 years; as such, I’m in the market, should such a thing exist, for a long-term, illiquid investment which I can put money into, forget about, and then — if things go according to plan — find waiting for me in 2042 or so worth some vast amount of money which will then fund a lavish retirement. Well, a chap can dream.

The fact is, however, that such investments simply don’t exist: as Mulcahy has found out the hard way, it’s almost impossible to find an illiquid investment which even so much as manages to keep up with the highly-liquid Russell 2000 index. Alternatively, look at the incredibly low yields on syndicated loans, compared to the yields that the same companies pay in the bond market: there’s not really any indication of an illiquidity premium there, despite the fact that loans are much harder to liquidate than bonds are.

And when you do find illiquid investments, such as hedge funds with lock-up periods, or venture capital, or private equity, you invariably find a 2-and-20 fee structure which more than obliterates any premium for illiquidity which ought by rights to be going to the investor rather than the money manager.

Which leaves the one large and illiquid investment which is still made by most American households — housing. If I take out a 30-year mortgage on a house today, then — again, if things go according to plan — I’ll find waiting for me in 2042 a fully paid-off asset which will be able to provide shelter for the rest of my life. It might not have gone up in value, but at least I’ll have dealt with the natural housing short that all living humans need to cover somehow.

If I’m interested in a purely financial investment, however, it’s dangerous and probably a bad idea for individuals or even institutions to look too hard for illiquidity. Because although it pays off over the long term in theory, it’s incredibly hard to find people able of making it do so in practice.

Update: A fantastic comment from Stevensaysyes is worth promoting here:

The illiquidity premium is countered by the fact that certain market participants prefer illiquidity. Financial advisors who bought venture capital over the Russell 2000 were probably happier over the last market cycle, even though the returns were lousy:

-Illiquid investments report quarterly, so clients don’t see the daily lows, and they are less likely to call you with every swing of the Dow

-When clients do see their assets fall, they can’t liquidate everything until the end of the lockup period

-Since illiquid investments don’t have an active market to price them, you can report to clients “optimistic” estimates of their value, and also charge on it

If I were a cynical advisor, I’d put my clients in a portfolio of private equity, venture capital, hedge funds, and private real estate funds regardless of whether I expected them to outperform stocks.

There are two stories often told of hedge fund managers, and they’re pretty much diametrically opposed. In the popular imagination, such managers are risk junkies, putting on massive bets in the hope that they’ll have huge payoffs, making a fortune for their investors and even more so for themselves. But that’s not the story told to — and bought by — big institutional pension funds and insurance companies and endowments, who lap up stories of state-of-the-art risk management, carefully-calibrated hedges, aggressively maximized Sharpe ratios, and returns which not only beat the stock market but do so with significantly lower volatility along the way.

So which is true? Read Lawrence Delevingne’s account of how Michael Geismar gambled away his time at the SALT conference in Las Vegas, and it’s pretty clear that the hedge fund manager of popular imagination is a very real creature indeed. He throws $1,000 tips around like confetti, he books a $20,000 private jet home on a whim, he wins and then he loses $70,000 and then he just keeps on playing, and ends the conference up $710,000 or so.

“He was jumping into the pit screaming ‘we’re going to need more chips over here!’” O’Leary recalls, laughing. “It was insane.”

The young dealer was visibly sweating with tens of thousands of dollars now being bet on every round of cards. A small crowd had formed around the table. At one point a casino pit boss came over, worrying that the players Geismar was backing up weren’t actually betting their own money. The table quickly convinced the man they were, and play resumed. The pit boss conferred with a superior, who O’Leary recalls saying “We’re never going to win our money back, but screw it, let’s let it roll.”

Well, yes. This is why SALT will always be in Vegas, and why Vegas will always welcome SALT with open arms. I’m sure the casinos made very good money on SALT even after accounting for Geismar’s winnings, and they’ll probably make money from Geismar too, on net, over time. If nobody ever won big money, no one would gamble at all. But in the end, the house always wins — and all of these hedge-fund managers are smart enough to know that. And still, left to their own devices, what they do is gamble, and they even layer on silly “risk management” techniques which don’t reduce risk at all — in this case, after a losing hand, Geismar would bet a little less, reckoning that somehow “laws of averages” would help him as a result.

Delevingne’s story makes for great reading, but it’s also pretty much impossible to imagine why anybody would invest in hedge funds in general, or Geismar’s hedge fund in particular, after reading it. SALT is the brainchild of our old friend Anthony Scaramucci, of course — and while I’ve definitely met people who like Scaramucci, or are charmed by him, I haven’t met anybody who thinks that Scaramucci’s fund-of-funds is near the top of any list of the best places to invest money. Whatever you think of gladhanding and gambling, they’re not really the kind of behaviors you’re primarily looking for in a fiduciary.

All of which brings me, inevitably, to JP Morgan’s Chief Investment Office, which, the WSJ reports, has been making all manner of highly-risky bets, including bets on LightSquared. There’s lots of hair-splitting in the story about whether or not the bets are funded with excess deposits, but ultimately money is fungible, and in any case the reason that JP Morgan can fund this Special Investments Group so cheaply is just that it’s a big commercial bank which is too big to fail. And if it’s entirely right and proper to look askew at hedge funds exhibiting symptoms of gambling addiction, we certainly shouldn’t stand for JP Morgan Chase to be engaging in anything like that behavior.

This is a Volcker Rule question, of course, but it’s not only a Volcker Rule question. There’s a much deeper issue here as well — which is whether big commercial banks should have hotshot trading desks staffed by the likes of Achilles Macris and Bruno Iksil at all. Both Peter Eavis and Jonathan Weil have new columns decrying the opacity of JP Morgan’s public disclosures: the bank seems to make it as difficult as possible for its owners to find out just how much risk it’s taking and where. And not just its owners, either: the owners’ representatives on the board, JP Morgan’s risk committee, is deliberately staffed by muppets.

There’s a good reason for that, of course: hedge funds need to operate in secrecy, because if the market can work out what their positions are, it will move sharply against them. JP Morgan’s CIO is a hedge fund in all respects except the fees it charges, and clearly the CIO (and the CEO) want its activities to be effectively unsupervised. That’s almost certainly the reason that the CIO is effectively based in London: it’s largely outside the scope of US regulators, there, while UK regulators tend not to care too much about the actions of foreign banks, when those actions don’t present a big risk to the UK economy.

So here’s another principle, which might be helpful alongside the Volcker Rule, in any principles-based regulatory regime: if you’re a too-big-to-fail commercial bank, you shouldn’t have any desk which needs to operate in secrecy in order to do its job effectively. In practice, as Sheila Bair says, that means that JP Morgan should be broken up. If hedge funds want to gamble, fine, let them do that. But not when they have an implicit US government guarantee.

A couple of weeks ago, Artnet officially launched Artnet Indices — what it calls “the world’s first comprehensive set of art indices“. According to the press release:

It is now possible to measure price performance and other important market metrics for individual artists and artworks with the same rigorous standards used in financial indices.

Artnet’s Thomas Galbraith is quoted in the release as saying that “the artnet Indices provide quantitative market reports on the performance of artists like Andy Warhol or Damien Hirst, just as you might track a Fortune 500 company”.

I had a long lunch with Galbraith on the day that the indices were launched, and I’ve been going back and forth with him since then, trying to get a feel for how they really work. And as you might imagine, I have quite a few problems with these things.

To put this in perspective, here’s the chart that Artnet loves to send out to reporters, featuring its first index, the C50 index of contemporary art.

The message of this chart is very clear. Contemporary art is an asset class, it’s a strongly performing asset class, and if you go back to 1988, it has significantly outperformed the S&P 500. If you start them both at 100 in 1988, for instance, then by 2009 the S&P would only have reached 354, while the C50 would have reached 578 — even after a big plunge from almost 1,000 in 2008.

In fact, however, an investment in the S&P 500 would have done much better than that: it would be 638 in 2009, thanks to the fact that stocks (unlike art) pay dividends. If you chart the C50 against the S&P 500 with dividends reinvested, the outperformance shrinks markedly:

What’s more, this chart takes the C50 at face value, as a vaguely investable index — when it simply isn’t. Here, for instance, are the top 15 artists in the C50 right now: there are lot of names there (Zao Wou-Ki, Zeng Fanzhi, Chu Teh-Chun, Zhang Xiaogang, Wang Yidong) who simply weren’t investable in 1988, and certainly weren’t in the C50 index back then.

I can’t show you a chart of how the 50 artists in the C50 index would have fared if you just bought those 50 artists and held them, because Artnet’s tools won’t let me combine more than 10 artists in one list. But here’s the next best thing: the middle 10 artists from the C50 list in 1988, charted, again, against the S&P 500. These are pretty big-name artists: Alexander Calder, Jim Dine, Helen Frankenthaler, Franz Kline, Robert Motherwell, Louise Nevelson, Kenneth Noland, Theodoros Stamos, Cy Twombly, and Richard Lindner. If contemporary art in general has done well, you’d expect these names to have done well. And, they have! But they haven’t outperformed the S&P 500.

Now the components of the S&P change over time, too — but the changing components have much less effect on the S&P’s performance than they do on the C50′s. And in fact, if you just buy and hold all the components of the S&P 500, you’re likely to outperform the index as a whole. Hot stocks enter indices, and undervalued ones drop out: I don’t have a chart here for the performance of the 500 components of the S&P 500 in 1988, but it would probably do better, not worse, than the index.

Not that that matters: the S&P 500 is investable. You can buy index funds or ETFs which very closely track the performance of the index, with stocks going in and out: they’ll sell the stocks which drop out, and buy the ones which come in. Since September 1989, there have been a total of 587 additions to the S&P 500: that’s about 25 per year, or 5% of the total.

By contrast, since 1988, there have been 111 additions to the C50: that’s about 5 per year, or 10% of the total. Which means that the C50 churns twice as fast as the S&P 500. And in the S&P 500, that churn can be positive: it can happen when when one constituent gets acquired. By contrast, churn in the C50 only occurs when one artist drops out and is replaced by another.

The result is massive survivorship bias. To demonstrate just how massive the bias is, here are the middle 10 artists of the C50 in 1988, charted against the middle 10 artists of the C50 in 2012: Alexander Calder, Damien Hirst, Roy Lichtenstein, Joan Mitchell, Pierre Soulages, Wang Guangyi, Christopher Wool, Rudolf Stingel, Liu Xiaodong, and Liu Wei. You can see that the current members of the index, had you bought them back in 1988, would have performed spectacularly well. The performance of the C50, then, is largely a function of the fact that hot artists keep on getting added — after they’ve become hot. It’s a classic case of investing with hindsight: if you only bought things which performed extremely well, then you would have made lots of money. Well, thanks for that.

The difference here — the 1988 artists end up at 477 in 2012, while the 2012 artists end up at 2,183 — makes a mockery of the idea that contemporary art is some kind of homogenous and investable asset class, or that someone who simply bought contemporary art in 1988 would have seen their assets perform in line with the C50 index.

What’s more, you’re actually seeing treble survivorship bias here. Artnet’s art indices are created by combining its individual-artist indices, and those individual-artist indices have their own survivorship bias built in. That’s because they break down an artist’s work into groups of “Comparable Sets”, and then combine the Comparable Sets in a price-weighted manner to get the artist index. As a result, if Gerhard Richter abstracts, say, suddenly go on a tear, then those abstracts will start making up an ever-greater part of the overall Gerhard Richter index. Both on an artist level and on the index level, whatever does well becomes highly weighted, and things which don’t do well essentially get ignored. (For instance, you can’t even draw up a chart on Artnet of the bottom 10 artists of 1988, because for some of them, Artnet hasn’t even bothered to put together an index yet.)

Finally, it’s no coincidence that Artnet’s first public index is its contemporary art index — the one part of the art world which has been on fire of late. It’s the third level of survivorship bias: if and when Artnet starts publishing its Old Masters index, say, you can be sure the numbers won’t look nearly as impressive.

But even within the contemporary art world, I would be shocked if one collector in a hundred actually saw the kind of returns that Artnet is implying are typical. The thing about the S&P 500 is that it’s meant to be reflective of the market as a whole: while some stocks will do better and other stocks will do worse, broadly speaking stocks perform pretty much in line with the S&P 500. And that’s simply not true of the C50. The overwhelming majority of contemporary art does not perform nearly as well as the C50. Even if you confine yourself to works bought at auction, if you hypothetically bought every work of contemporary art that was sold at auction in 1988, you wouldn’t come close to matching the performance of the C50 since that date.

In other words, stock indices like the S&P 500 are useful precisely because they act as a benchmark: something an investor can reasonably hope to achieve. No sensible contemporary-art collector, by contrast, could ever reasonably hope to see their collection appreciate in value in line with the C50.

The real point here is that contemporary art is always full of here-today-gone-tomorrow art stars, who create art which goes from being white-hot to being pretty much unsellable. In 1988, for instance, the C50 included where-are-they-now names like Theodoro Stamos, Pierre Alechinsky, James Havard, Jean Fautrier, and even Saul Steinberg, the New Yorker illustrator, who appeared just above Robert Rauschenberg on the list. Last year, the most expensive Steinberg sold at auction reached just $28,750.

And that was a much more staid time, when very few really contemporary artists ever appeared at auction. (There was no Basquiat on the list, for instance; no Schnabel, no Fischl.) Today, the list is not only very China-dominated, but also includes names like Rudolf Stingel, Christopher Wool, Mark Tansey, and Glenn Brown — true heirs to the kind of hype that surrounded the likes of Schnabel in the 80s. You can buy their art at auction, if you really want. But you’d have to be insane if you really thought you were making an investment.

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After Cory Booker’s Meet the Press mishap, Noah Smith asks a great question: What does an economy without private equity look like? Smith says we should “sic the pirates on the zombies” of corporate Japan, where there isn’t an active PE industry, productivity is low and labor costs are high.

In the US, the private equity industry’s advocacy arm continues to focus on PE’s role as a job creator, releasing another in a series of videos showcasing job growth after a PE acquisition. But Steven Rattner notes that job creation isn’t the industry’s primary goal. Private equity, he says, seeks profit first and “any job creation [is] a welcome but secondary byproduct”.

The most recent research, Peter Coy writes, indicates that “having your company acquired by a private equity firm is like living through a national recession”. Ezra Klein looks at that research and argues that Mitt Romney should have learned from his time at Bain that a strong social safety net is as important as economic growth.

Mike Konczal lays out the the major strains of criticism against private equity and concludes that it “[games] tax law while cashing out short-term value, leaving others in the firm worse off and the firm itself more prone to collapse and less able to produce long-term value”. The Epicurean Dealmaker counters, saying that a successful PE deal generally ends with selling to a new buyer, and if the PE firm leaves the company as a shell of its former self, it probably won’t have made much money on the deal. – Ben Walsh

On to today’s links:

Long Reads
The philanthropic complex: Capitalism’s risk manager – Jacobin

TBTF
A simple proposal that could end too big to fail – Barry Ritholtz

EU Mess
Yes, the European crisis could drag down America’s economic growth – WSJ
The lawyer who engineered Greece’s default represents sovereigns because “it’s just more fun” – Reuters
European PMIs could be terrible again, and even German confidence is sinking – Bloomberg
Greece’s oligarchs: Paying few taxes, giving relatively little to charity – NYT
Buiter: Greece will leave the euro zone on Jan. 1, 2013 – Business Insider

New Normal
Detroit is shutting off nearly half of its streetlights to combat budget problems – Bloomberg

Facebook
“Facebook is an unprecedented synthesis of corporate and public spaces” – New Yorker

Defenestrations
HP will lay off 27,000 workers by 2014 – Reuters

Grim
Ruin your day by seeing how many more hours you work than the OECD average – BBC

Wonks
Should stocks trade in increments of $.0001? – Marginal Revolution

Every time there’s a high-profile IPO, a few clever journalists will wheel out their contrarian take. LinkedIn had a huge pop? Then it’s a failed IPO, and Morgan Stanley “screwed the company and its shareholders to the tune of an astounding $175 million”. Facebook fell off a cliff? Then it’s a great success for the company, because it means it got the best price it possibly could. Matt Yglesias has a typical such post up, saying that “Mark Zuckerberg Made out Nicely in the Facebook IPO”. He explains that “for people making the initial sales an anti-pop is ideal. It means no money was left on the table. Or, rather, it means that negative money was left on the table”.

Except, at least in the case of Mark Zuckerberg, that simply isn’t true. When Facebook went public, Zuckerberg exercised all of his options, and converted them into extremely valuable stock. That stock was valued at $38 per share, and he has to pay income tax on the gain; his tax bill is likely to be north of $1 billion. The only stock that Zuckerberg sold was the stock he needed to sell, to pay his tax bill. The rest of his wealth is tied up in Facebook stock. So the degree to which he “made out nicely” is pretty much directly proportional to the secondary-market share price, and not the IPO price.

Of course, Zuckerberg owns a substantial chunk of Facebook, and Facebook is now sitting on a substantial chunk of cash. Facebook itself raised $15.8 $6.76 billion in its IPO, and Zuckerberg owns 26.6% of Facebook. So in that sense Zuckerberg has a direct claim on $4.2 $1.8 billion which is currently sitting in Facebook’s bank account; if Facebook had raised less money, then that number would be lower. But it’s not like Facebook’s going to declare a dividend any time soon: there’s basically no realistic way for Zuckerberg to get his hands on that cash.

Here’s the main reason why Zuckerberg wanted an opening-day IPO pop of at least modest proportions: the last thing he wants or needs is an adversarial relationship with his shareholders. Zuckerberg got to where he is today with the help of extremely supportive shareholders, who were happy to give him as much money as he wanted to build his company and take it to where it is today, without second-guessing any of his decisions. Facebook’s users might not always have been happy with Zuckerberg’s decisions, but he never had any tension with his non-executive shareholders.

Now, however, as the CEO of a public company, Zuckerberg has a fiduciary responsibility to his shareholders, and you can be quite sure that his shareholders are going to get very noisy and upset if he doesn’t give them what they want. Yes, Zuckerberg has an astonishing degree of control over Facebook, and so in theory he can simply ignore what they’re saying. In practice, however, that’s very hard — especially if they’re voting with their feet and sending his stock price plunging.

There are certainly CEOs out there who maintain personal control over public companies in the face of disquiet and unhappiness from external shareholders: Jimmy Dolan, of Cablevision, is a prime example. But Mark Zuckerberg does not want to be Jimmy Dolan. And what he certainly doesn’t want is to send a message to the public markets that he thinks his shareholders are muppets.

Early investors in Facebook, including Goldman Sachs, cashed out to the tune of billions of dollars on Friday; those investors, who will continue to sell their shareholdings once the various lock-up periods expire, are the ones that Zuckerberg gets on well with, partly because he has made them enormous sums of money. As his VC backers rack up their necessary exits, Zuckerberg is going to find himself surrounded by an increasing number of public shareholders, and being asked increasingly pointed questions by stock-market analysts. He can try to take the imperial approach, and ignore all such distractions while he runs his company as a personal fief; indeed, the message sent by Facebook’s dual-class share structure is that he very much wants to be able to do just that.

Zuckerberg is human, however, and he’s had a charmed life so far: he was named, for instance, Time’s Person of the Year in 2010. From here on in, by contrast, Zuckerberg is going to be judged by Facebook’s share price: a minute-to-minute plebiscite on how he’s doing. What’s more, the really important thing about the share price is not the price itself, but rather its direction: if it’s going up then Zuckerberg is a hero, and if it’s going down then Zuckerberg is a goat. This is one of the main reasons why being the CEO of a public company sucks — and the higher your profile, and the more you’re personally associated with your company, the more it sucks.

In a hyper-rational world, it would be better to be Mark Zuckerberg after Facebook has fallen from $42 to $32 than it would to be Mark Zuckerberg after Facebook had risen from $21 to $29. But this is not a hyper-rational world. And it’s increasingly looking that if Facebook was always going to have to go public anyway, it would have been better for the company and for Zuckerberg personally if it had gone public much earlier, at a much lower share price, issuing many fewer shares. That way, the general public, rather than just select insiders, could have had some small part in the big run-up — and there would have been no opportunity for Facebook, its bankers, and the Nasdaq stock exchange to mess this IPO up so badly.

So in a way it makes sense that Zuckerberg decided to get married at the same time Facebook went public. The latter means that his life as a public-company CEO is going to be reasonably unpleasant for the foreseeable future. Maybe he hopes to counterbalance that with a bit more stability at home.

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The Congressional Budget Office released its analysis of the economic effects of the so-called fiscal cliff, and it’s not pretty:

Growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent … with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half … such a contraction in output in the first half of 2013 would probably be judged to be a recession.

These dangers aren’t new, but ever since John Boehner threatened to add another debt-ceiling fight to the mix, they’ve been amplified.

Looking at Boehner’s comments, Ezra Klein thinks the US Government is being set up for its very own Lehman moment: “We’re either likely to solve our fiscal problems early in the year in [a] way that defuses Boehner’s debt-ceiling threat or we’re likely to spend 2013 in a state of permanent crisis in which Congress lights the economy on fire”. Monetary policymakers are already attuned to the dangers. The most recent Fed minutes called the impacts of fiscal policy uncertainty a “sizable risk” to the economy. If Congress and the president do get it right, that risk could give way to 4.4% growth.

Or for a truly terrifying scenario, Joe Weisenthal imagines the stratospheric levels of Republican intransigence that a Romney triumph in the popular vote paired with an Obama victory in the electoral college would bring. – Ben Walsh

On to today’s links:

Housing
New home sales have bottomed, but 2012 is still likely to be the housing market’s third-worst year ever – Calculated Risk

EU Mess
Euro zone members agree to draw up individual contingency plans for Grexit – Reuters
US money market funds’ search for yield through exposure to European banks – Sober Look
Despite Hollande’s support, Merkel continues to oppose euro bonds ahead of EU summit – NYT
European banks remain unprepared for the fallout of a Greek exit from the euro – Bloomberg
A roundup of economists’ estimations of the fallout from Greece leaving the euro – WSJ

Facebook
Source: Banks cut estimates just before the Facebook IPO because company executives told them to – Business Insider
The Facebook forecast scandal could lead to an insider-trading case – John Carney
Facebook: The list of incompetents – Felix

JPMorgan
A glowing profile puts Ina Drew’s replacement in the running to succeed Jamie Dimon – FT
JPMorgan brings an exec back as senior vice-chairman after more than a decade in retirement – DealBook

Vintage Bess
What if Mark Zuckerberg wore a three-piece suit with a monocle to the Facebook roadshow? – Dealbreaker

Video
Everest’s congested summit – Outside

Good Questions
Where do all the dead pigeons go? – The Atlantic Cities

Investigations
All of the sudden executives want to go to trial against the SEC – Bloomberg

Large Numbers
The RIAA claims Limewire owes it $72 trillion – AV Club

Many thanks to Scotty Barber for putting this chart together for me. It shows the extraordinarily high correlations that we saw within the S&P 100 at the height of the Lehman crisis; at the height of the Greece crisis; and then, again, for pretty much the entire second half of 2011. At that point, high correlations really did look as though they were the new normal.

Obviously, correlations within and across different asset classes don’t always move in tandem with each other. But in general, the RORO trade, as it’s known, (risk-on, risk-off) tends to send correlations soaring across the board. And I can’t help but wonder whether that huge plunge in correlations that we see at the beginning of 2012 was related to the way in which JP Morgan’s CIO blew up.

Remember that the CIO’s main job was to make hedges: buy buying or selling one thing, the idea was that the bank would protect itself against losses on some other thing. So in order for hedges to work, those two things need to continue to be highly correlated.

But if you look at this chart, the period when Bruno Iksikl was putting on his huge CDS index trade was also the period when correlations were falling at an almost unprecedented pace.

Jamie Dimon, from the day he revealed the losses, has had nothing but the harshest possible words for the hedges in question, saying that they were flawed and should never have been put on. But that’s easy to say in hindsight. Maybe they were really great hedges, in a high-correlation world — and then correlations fell apart, and the trades started moving against JP Morgan, and they had to get bigger and bigger in order to retain any hint of actual hedging capability. Obviously we don’t know for sure that’s what happened. But it’s certainly consistent with movements in correlations this year.

Glenn Somerville has one of the first of what will surely be many articles handicapping possible Treasury secretaries come January. We know we’re going to get a new one, whatever happens — Geithner won’t stay on for a second term.

Top of the list if Obama gets re-elected is Larry Fink, of Blackrock — he wants the job, and he has a pretty solid reputation in finance circles. I think the problem with Fink, though, is that the country has had enough of financiers at Treasury. I suspect that Obama will want Geithner’s successor to be a communicator — someone who can get through not only to the country at large (something Geithner’s never been good at) but also to Congress. And Fink is no man of the people.

It almost goes without saying that Jamie Dimon neither wants the job nor would ever be offered it, at this point.

The other main name on the Democratic side of things is Erskine Bowles — also a financier, albeit one with rather more Washington experience than Fink has. Bowles would represent a continuation of Obama’s first-term habit of appointing former Clinton aides to top economic-policy jobs; that would disappoint many progressives, who are looking for more of a break from the deregulatory past.

Dan Tarullo, another name mooted, is being presented as Bowles lite: the same combination of finance and Clinton-era politicking, without quite the same degree of stature. Tarullo would certainly be tough on banks, but frankly if that’s his aim he’s better off staying where he is, at the Fed, which is also the top bank regulator. Roger Altman, yet another Clinton aide who’s made a fortune in investment banking, would be a more interesting choice, but I for one would really love the idea of a Treasury secretary who doesn’t come from Wall Street.

There are four names put forward on the Republican side: John Taylor, Glenn Hubbard, Robert Zoellick, and Kevin Warsh. The first two, I think, would be dreadful: you really don’t want your Treasury to be a political hack. Zoellick and Warsh would be much more credible.

But most likely, if Romney gets elected, he’ll pick someone unexpected — someone he knows well from his Bain Capital days, and feels he can trust.

In any case, since we’re throwing names out there, let me put forward two ideas of my own. First, for Romney: Randy Quarles. He’s almost a mini-Romney: a Mormon private-equity executive who has a fair amount of experience in government. The two would almost certainly work very well together.

And second, for Obama: Eric Schmidt, who needs something to do, now that he doesn’t have a day job any more, and who has been very active in Democratic fundraising circles. And who would certainly be a welcome change from the technocrats and financiers we’ve become accustomed to. If you’re going to appoint a billionaire to the job, better it’s someone who made his money from Google than someone who made his fortune by making bets with other people’s money.

Update: Annie Lowrey, quite rightly, adds Jack Lew to the list. Who has a very good chance of getting the job, if only because he’s already passed a confirmation hearing and therefore wouldn’t present the administration with an early nomination battle. Also, I forgot to mention my favorite dark horse, if Obama’s re-elected: Barney Frank!

From a PR perspective, the way that JP Morgan managed to lose more than $2 billion on a bad trade is easily the worst thing to happen to the bank since before the financial crisis. This chart comes from YouGov BrandIndex, which measures consumer’s brand perceptions, and shows that JP Morgan is now held in lower esteem than Goldman Sachs — quite possibly, for the first time ever.

The plunge in JP Morgan’s “buzz score”, of a good 20 points, is huge: the only comparable fall was the release of the Abacus complaint against Goldman in April 2010.

And just as in that case, JP Morgan’s reputation will recover, and it will surely return to the “meh” range that it’s been stuck in since the crisis — in the shallow end of negative territory.

Still, it’s interesting to note that JP Morgan’s latest score, of -32, is exactly the same level that Goldman fell to in the wake of the Greg Smith op-ed. That op-ed coincided with a major shake-up in Goldman’s PR department. My guess is that JP Morgan’s PR department, by contrast, is much more secure. They haven’t been able to make the bank popular, of course. But they’ve definitely consistently outperformed Goldman. At least until now.

It’s going to be a long time before the various lawsuits shake themselves out, but one thing’s already clear with respect to the Facebook IPO: absolutely no one has come out of it looking good. It’s worth going down the List of Incompetence here, because regardless of whether any of this was illegal, there are a lot of extremely well-compensated people who, to use a technical term, screwed the pooch on this one.

Top of that list, frankly, is Facebook CFO David Ebersman. The WSJ’s account of his central role in the offering is reasonably definitive: a lot of decisions normally outsourced to banks in the markets were made, in this case, by a tech-company executive in Menlo Park.

Ebersman didn’t make one big mistake, he made three. Firstly, as CFO, it was his job to accurately forecast Facebook’s second-quarter figures, and give the company’s banks a good feel for where they would come in. He failed so badly that he was forced to re-file the IPO prospectus just days before the deal came to market, and to whisper in his bankers’ ears that they should probably cut their forecasts for the company’s revenues.

There’s no excuse for getting that wrong, but if there was an excuse, it would be that Ebersman was too focused on the year-long process of managing an awesome IPO. Ha! He screwed that up, too, of course — not least by upsizing the deal at the last minute, raising the number of shares being sold by 25%. In hindsight, that was a very bad idea. But then, after that, he made his third major mistake: he priced the deal for perfection, at $38 per share, even as big institutional investors — the only ones who knew about the new revenue forecasts — were saying that they had no real desire to own the stock at more than $32 per share. When you’re selling $16 billion of stock, the marginal price-setters are always going to be institutions, rather than price-insensitive retail investors willing to buy Facebook on name recognition alone. And those institutions were never really willing to provide a strong bid above $38.

While most of the blame at Facebook’s end should properly be shouldered by Ebersman, that doesn’t mean Mark Zuckerberg can be let off the hook entirely. It’s his company: the buck stops with him. And he did the IPO no favors at all. First, he insisted on an unprecedented level of individual control over a $100 billion public company; institutional investors never like that. And secondly, he clearly viewed Wall Street and its investors with thinly-disguised contempt, slouching into IPO meetings — when he bothered to turn up at all — in his hoodie, and signally failing to provide the outward-facing leadership that investors crave. Zuckerberg’s refusal to play the Wall Street game is admirable, in some respects — but at the same time is completely inconsistent with a desire to sell $16 billion of shares at a $104 billion valuation.

The third member of Facebook’s leadership team who deserves some blame here is Sheryl Sandberg, the COO, and the person whose job it is to help Zuckerberg navigate the external world. Sandberg also conveniently recused herself from many IPO decisions, which doesn’t seem like a very good idea in retrospect. Either she had too much faith in Ebersman and Zuckerberg to do the right things, and should have been much more involved — or else she was deeply involved, behind the scenes, and therefore responsible for some significant part of the resulting fiasco.

Facebook’s board members and investors look very bad here, too, coming off much more short-term greedy than long-term greedy. Many of them cashed out in the IPO, in a clear sign that they had little faith in the share price going forwards. The board’s job has historically been to rubber-stamp Zuckerberg’s decisions, and to provide him with advice as and when he asks for it. Now, however, the board has a fiduciary responsibility towards all of Facebook’s investors, including the ones who bought in at $45 per share. But there’s no sign that anybody on the board saw the new investors in Facebook as anything more than muppets.

On the Wall Street side of things, the shame list is topped, indubitably, by Morgan Stanley’s technology banker Michael Grimes. He worked hand-in-glove with Ebersman, and all of Ebersman’s decisions can be considered Grimes’s decisions as well. More generally, it was Morgan Stanley’s job to understand exactly what the real demand was for Facebook shares — to sound out investors and price the company just a little bit below what the market was willing to pay. And there’s no doubt that Morgan Stanley failed miserably in that job.

And then there’s the whole scandal of the buried revenue forecasts: the way that Morgan Stanley whispered the new numbers in select clients’ ears, without ever letting the broader investing public know about the downgrade. If you want to develop a reputation as an untrustworthy bank which plays favorites and leaves the little guy out to dry, you could hardly do so in a more effective manner.

The other banks in the deal — JP Morgan, Goldman Sachs, and the rest — don’t deserve quite as much blame as Morgan Stanley, but their actions were more or less identical — they all downgraded their forecasts in secret, and they all went along with the size and pricing of the deal, in return for multi-million-dollar fees. If you bought your Facebook IPO stock from Goldman, you’re going — rightly — to blame Goldman first and foremost if they didn’t tell you about their downgraded forecast. And more generally this deal goes to prove that Wall Street acts very much like a cartel: all the banks behaved in an identical manner, and not one was willing to make a fuss or walk away from a bad deal. They all got stars and dollar signs in their eyes, and behaved like fools as a result.

Then, of course, there’s the Nasdaq. Read Nick Carlson’s interview with an anonymous hedge-fund manager for some of the gorier details here, but in general anything that Nasdaq could mess up, it did mess up. In short: the stock never opened at 11am, as planned, because Nasdaq’s computers weren’t up to snuff. There was a five-minute delay, and then there was a second, 25-minute delay, during which time Nasdaq switched over to a second computer system.

The whole thing turned into a complete disaster. The second computer system didn’t work as planned, and there was an enormous amount of confusion — which still hasn’t been cleared up, in some cases — about where and whether various investors actually managed to sell their stock. As a rule, if you placed an order between 11:05 and 11:30 on Friday, you’re probably in a world of pain today, and you might be relying on the Nasdaq to make you whole for your losses: while you thought you were selling at $42, you might not actually have been able to sell until the shares were at $38 or even less. It seems that the opening price of $42.05 was based only on orders received before 11:05, and ignored all orders after that time, most of which were at much lower levels. Which helps to explain the initial and chaotic plunge in the stock price.

Naturally, when a stock is behaving like that, it takes a very brave investor indeed to dive in and go long at a frothy valuation. And so it’s entirely reasonable to blame the Nasdaq for the failure of the Facebook IPO. It’s their job to get this kind of thing right; instead, they got it spectacularly wrong. End of story.

Finally, there are all the investors, including that anonymous hedge-fund manager, who bought into the IPO even though they knew that the valuation was incredibly high, and are now casting around for someone else to blame for their losses. It’s impossible to feel any sympathy for these people — especially institutions who had no appetite for stock at more than $32 per share, but put in large orders at $38 anyway just because they were counting on Morgan Stanley to give them a nice opening-day pop. If you pay 100X earnings for a hyped internet stock on its first day of trading and then you lose money, you frankly had it coming.

All of which means that the winners in this whole game were you and I: the quiet skeptical masses who simply sat back and watched the farce unfold. In the game of Facebook IPO, it turns out, the only winning move was not to play.

A key part of the fascinating story of Bo Xilai's fall from power is the opaque economic dealings of China's ruling class. Or more specifically, of its so-called princelings, the oddly lyrical and wonderfully infantilizing term used for the now powerful descendants of former party leaders.

The New York Times has a great look at how princelings use their dynastic political and social power for economic gain. The son of former President Jiang Zemin, for instance, has brokered deals giving Dreamworks, Microsoft,  and Nokia access to the China and also manages numerous state-funded investments. His behavior is quite typical. Princelings, we are told, "often [play] central roles in businesses closely entwined with the state", "[serving] as middlemen to a host of global companies and wealthy tycoons eager to do business in China" and have a Zelig-like ability to be "everywhere, as long as the industry is profitable".

Thinking about this behavior in a slightly different context, aren't princelings just really good bankers?

M&A advisory, principal investing, securities trading, access to public and private capital, regulatory capture and arbitrage, strong relationships and deep conflicts of interest -- the whole spectrum of modern investment banking, good and bad, is there. If sheer complexity and scope of financial dealings are how you score a banker's talent, Bo's family seems to be pretty good.

And, if the business of an investment bank is, at least euphemistically, to bring together "people, capital and ideas", this shouldn't be surprising. Just as clients not only put up with their banker's conflicts, but actually value those conflicts, Western banks and companies looking to do business in China seek out princelings for the same reasons.

All of which raises an obvious question, of the billions undoubtedly pocketed by the princelings of the second-largest economy in the world: are they a symptom of exorbitant graft? Or are they a bargain-basement price to pay, compared to the profits that America annually remits to its own investment-banking behemoths?

In March 2010, the unemployment rate for high-school graduates 25 years or older peaked at 11.9%. Since then, it has dropped 4.2 percentage points — a pretty impressive showing, in just two years — and now stands at 7.7%.

In the same period, the unemployment rate for college dropouts 25 years or older also fell, from 9.5% to 8.0%. But that drop, of 1.5 percentage points, is much smaller. And now college dropouts have a higher unemployment rate than their friends who never went to college at all.

And these two series are very comparable: both sets include about 34 million people.

Now these numbers aren’t seasonally adjusted, and you can see that the unemployment rate for high-school graduates is pretty bumpy. As a result, it might well rise again soon. But the big picture is clear: unemployment among college dropouts is proving much more stubborn than it is among most of the rest of the population.

Jed Graham lists a number of reasons why that might be the case. For one thing, with the majority of Americans now attending college, even if they don’t all graduate, college is less of a destination for the elite than it used to be. The elite will always get jobs, but as students become less elite, they’re  less assured of having great careers once they graduate.

And for another thing, college dropouts are still significantly more likely than high-school graduates to have a job: their employment rate is higher, even if their unemployment rate is lower, since they have a significantly higher labor force participation rate. On the other hand, the reason for the higher labor force participation rate is just that fewer people used to go to college, which means that among people 68 years or older, high-school graduates vastly outnumber people who went to college. And once you’re over 68, you can be excused for no longer being in the labor force.

So what’s going on? Graham’s convinced there’s something real here:

Labor Department data show that while the jobless-rate advantage of college dropouts over high school finishers has disappeared and turned negative, the advantage of two-year-degree holders over college dropouts is way above the historical norm.

Meanwhile, the jobless rate differential between high school finishers and two-year-degree holders is right in line with its historical average. This suggests that the principal mover is a decline in employment outcomes among dropouts.

I suspect that the conjoined forces of for-profit colleges and student loans are a significant contributory factor here. College dropouts certainly have more debt than they used to, and although indebtedness doesn’t directly lead to higher unemployment rates, it does at the margin act as a constraint on the massive life option that everybody has when they leave college. If high debts force you into some crappy job when you drop out of college, your chances of getting a good long-term career diminish.

And more generally, college is slowly moving from the “things which are bought” column into the “things which are sold” column — for-profit colleges, in particular, recruit aggressively in ways that would have been unthinkable to an earlier generation of tertiary educators. As a result, people drop out of college not just because it’s statistically certain that in any college class there will be some students who drop out, but increasingly because a lot of students, especially in courses offered by for-profit colleges, really can’t and shouldn’t be in those classes in the first place.

Besides, it makes conceptual sense that if you’re going to drop out of college, you’d be better off not going to college at all. Say you drop out after two years: you could have been working hard at the beginnings of a career during those two years, earning money to get yourself started on some well-defined course. Instead, people who drop out of college (Bill Gates, Mark Zuckerberg, and a handful of other exceptions notwithstanding) generally have little idea of what they want to do next, and are well behind their high-school peers in terms of building an economically-productive life.

All of which is to say that while it’s still indubitably a good idea to go to college, the “go to college” advice has to be added to, these days, with further admonitions not to take on too much debt, and certainly not to drop out. Because as far as employability is concerned, it seems that college dropouts have never had it so bad.

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Andrew Ross Sorkin doesn’t think that Glass-Steagall would have prevented JPMorgan’s botched hedges, losses that the Independent says could hit more than $7 billion. But it’s now clear that JPMorgan needed to be saved from itself.

There are two big-picture views of what went wrong in JPMorgan’s infamous CIO office. The first is organizational: The NYT points to a rift between Ina Drew, the CIO head, and her London-based deputy Achilles Macris, whose traders, including Bruno “the London Whale” Iksil, were much more comfortable embracing risk. “No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted,” a former trader said. In this view, Drew, who took an unfortunately timed medical leave because of Lyme disease, simply lost a power struggle with London traders.

The second view is that JPMorgan’s CIO office – which was meant to manage the bank’s risk – was chasing returns in a way that its rivals simply weren’t. Bloomberg breaks down JPMorgan’s outsize love for corporate bonds:

About half of the $381.7 billion in JPMorgan’s chief investment office portfolio is in company bonds, asset-backed securities and mortgage debt not backed by the U.S. government, according to a March 31 filing. That compares with 7.7 percent at the end of 2007. The amount, $188.1 billion, is more than the holdings of such securities by its three biggest competitors combined. It exceeds the total assets of Atlanta-based SunTrust Banks Inc., the 10th-biggest U.S. lender…

JPMorgan has about 30 percent of its holdings in U.S. Treasuries and bonds issued or guaranteed by U.S. government-backed agencies, according to its filings. That compares with 87 percent at Bank of America, 50 percent at Citigroup and 47 percent at Wells Fargo.

This is “an indication that they’re searching for yield like other money managers,” an analyst told Bloomberg. But JPMorgan is not your average money manager; there is, for one, the sticky issue of what a too-big-to-fail (TBTF) bank does with your deposits (other than lend). And whether JPMorgan was hedging or doing something a bit more like prop trading, as Deus Ex Macchiato puts it, JPMorgan is just “too big”, and as a result “simply finding a reasonably safe home for that $400B is quite difficult.” – Ryan McCarthy

On to today’s links:

EU Mess
iPads with a custom-made debt-restructuring app saved Greece billions – Fortune

Facebook
Facebook’s lead underwriter cut its forecast during the company’s IPO roadshow – Reuters
SEC, FINRA are calling for a review of Facebook’s IPO – Reuters
A hedge fund manager with $100m invested in Facebook is awfully angry at NASDAQ – BI
The Facebook earnings-forecast scandal – Felix

Wonks
China’s economy: Macro successes and micro failures – Robert Skidelsky
After Neoliberalism, now what? – Dani Rodrick
Jonathan Swift, the father of microfinance – Marginal Revolution

Alpha
Ray Dalio explains “beautiful” deleveraging – Barron’s

A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.

Welcome to Adulthood
“Members of the class of 2012 … You’re f*cked” – Robert Reich
1 in 2 recent college graduates are jobless or unemployed – AP

TBTF
Your latest too-big-to-fail firms: Swaps clearinghouses – Bloomberg

Reversals
By not losing, Goldman Sachs became a winner again – Forbes

Reuters Opinion
JPMorgan loss kick-starts the CEO race – Rob Cox
Equal rights and the U.S. economy – Chrystia Freeland
How Gawker wants to monetize comments – Felix
What is the long-term euro vision? – Hugo Dixon

New Normal
Only 4 states have returned to pre-recession employment – Economix
Stark images of abandoned malls and big-box retailers – The Morning News

Bubbly
AmEx to offer debit card rewards in FarmVille cash – All Things D

Stuff We Are Not Linking To
Fortune launches “Fantasy Sports, Executive League”