Felix Salmon

“When two companies love each other very much, they form a structured investment vehicle.”

Citigroup says it has “no plans” to increase its newly-implemented $0 “reinstatement fee”. Yeah, right.

“For a pedestrian to complain about cyclists is to misunderstand all the main sources of imbalance in the sharing of the road.”

“Taibbi was the first to write for people who didn’t know they wanted to read thousands of words on Goldman Sachs.”

Matt Taibbi wins $500 “and a bottle of union-made wine” for his Goldman Sachs story

Was buying Merrill good for BofA after all? Dick Bove thinks so.

Bank will let customers deposit checks with their iPhones. Just snap a picture.

Comparing Murdoch’s plan to switch to paid model to the failure of Sirius to convert radio to paid

Dan Ariely wonders how the New York bus system could cope with the extra demand created by making crosstown buses free. (Actually, he does more than wonder: he simply asserts that it couldn’t.) But Charles Komanoff has already run the numbers, and as far as anybody knows, they do add up.

This is an increasingly common story: blogger writes a great blog entry which gets noticed by someone big in the MSM (these people don’t read books), and he ends up getting a well-paying job as a result. That’s how you monetize blogs, folks. Not Google ads.

(Oh, and, many congratulations, Dan!)

This is the kind of thing which makes Nassim Taleb tear his hair out. The 32-page, equation-filled IMF paper on new developments in credit risk modelling (which, yes, spends a lot of time on Gaussian copulas) seems to accept as an article of faith that the problem with credit risk models was that they weren’t sophisticated and complicated enough.

One thing I’m quite sure of: the kind of equations being flung around in this paper are not going to be intuitively understood by underpaid regulators. This could then constitute a good test of any new regulatory regime: will the regulators roll over and say “oh well you’re very clever we’re sure you know what you’re doing”, or will they slap down any attempt to use these newfangled models to persuade regulators that everything’s perfectly safe? I do hope it’s the latter.

Update: A reader finds a classic quote on page 19 of the paper:

With sufficient detailed information, it is possible to design an optimal algorithm that generates contagion in the network and, therefore, correlation and multiple defaults, following the failure of one or more firms to honor its liabilities.

Yes, people still believe in “optimal algorithms”, even now, even after all we’ve been through.

BusinessWeek has an interesting article about CDS-linked lines of credit, where the cost varies in line with the borrower’s CDS spreads:

The lenders stress that the new products give them extra protection against default. But for companies, the opposite may be true. Managers now must deal with two layers of volatility—both short-term interest rates and credit default swaps, whose prices can spike for reasons outside their control.

Making matters more difficult for corporate borrowers: high fees. Banks are raising their rates for credit lines across the board—but the new CDS-based credit lines cost far more than the old lines. FedEx could end up paying $1.9 million to $3.6 million a month if it decides to tap a new line from JPMorgan and Bank of America. On its previous line with JPMorgan, FedEx would have paid about $540,000.

Companies the size of FedEx can easily hedge their interest-rate risk, using rate swaps. But how can they hedge their own credit risk? There’s only one way of doing that: by buying credit protection on themselves — the bond-market equivalent of shorting your own stock. That might be legal, but it’s certainly not pleasant.

(Via Chittum)

Is the problem with Harvard University that it was spending too much, and therefore is now facing a nasty crunch in the wake of endowment losses? Not according to Peter Conti-Brown, whose recent paper makes a pretty compelling case that if anything, Harvard is spending too little from its endowment, and has been for years:

From 2003 through 2008, Harvard’s annual budget grew an average of 7% per year, starting at $2.43 billion in 2003 and ending at $3.46 billion. Including an estimated 30% loss to the endowment in 2008, the endowment grew an average of 10.15%, from $16.24 billion to $25.59 billion. In absolute terms, while the budget grew annually at an average of $206 million, the endowment grew an annual average of $1.56 billion. More strikingly, Harvard’s payout rates during this period remained a steady 4.4%, an average of more than 5.5% less than endowment growth. Far from spending like “drunken sailors,” universities were, if anything, not spending enough.

Conti-Brown also looks at the makeup of Harvard’s endowment in 2008, and concludes that fully 70% of it was invested in liquid instruments. “This data may not present the full story of Harvard’s liquidity problems,” he concedes, “but it does present enough information to at least shift the burden of proving illiquidity away from those with access to only the public reports and toward the insiders who make the claim that illiquidity prevents universities from dipping further into their endowments to prevent budgetary instability.”

Conti-Brown makes a strong case that it’s not illiquidity preventing America’s largest university endowments from being put to aggressive use during this crisis, so much as a fear of realizing losses, combined with the institutionalization of the endowments themselves: “the endowment has become a symbol of status and prestige,” he writes, “similar to the university’s libraries, art museums, and architecture”.

The upshot of the paper is that the move to tax university endowments made quite a lot of sense when it was first mooted in 2007-8, and that it still makes sense. There never was much reason for university endowments to exist at all, let alone to exist in the ultra-bloated form that we see at Harvard and Yale. If these institutions aren’t going to spend the money in their endowments on providing educational services, they should pay tax on it.

There’s one thing that art dealers and venture capitalists have in common: a severe allergy to “down rounds”. A dealer will never sell an artist’s new paintings for less than the cost of the paintings in the last show, and a VC-backed company will never raise funds at a lower valuation than in the last round of funding.

Until now:

We analyzed the terms of venture financings for 89 companies headquartered in the Silicon Valley that reported raising money in the second quarter of 2009.

Down rounds exceeded up rounds 46% to 32%, with 22% flat. This was slightly better than 1Q09 when down rounds outpaced up rounds 46% to 25%, with 29% flat. The past two quarters are the only quarters since 4Q03 in which down rounds have exceeded up rounds.

The Fenwick & West Venture Capital Barometer™ showed an average price decrease of 6% for companies receiving venture capital in 2Q09 compared to such companies’ prior financing round.

I don’t know how you’d even begin to do this kind of analysis for primary art-market prices, but it would be fascinating. Have art dealers finally capitulated and started cutting their list prices from boom-era levels? Or are they just offering much larger discounts these days?
(Via Stone)

There are a couple of noteworthy nuggets in Ben Stein’s whiny account of his defenestration from the NYT. The main one is that, contra all appearances, he really was edited there:

I started criticizing Mr. Obama quite sharply over his policies and practices. I had tried to do this before over the firing of Rick Wagoner from the Chairmanship of GM. My column had questioned whether there was a legal basis for the firing by the government, what law allowed or authorized the federal government to fire the head of what was then a private company, and just where the Obama administration thought their limits were, if anywhere. This column was flat out nixed by my editors at the Times because in their opinion Mr. Obama inherently had such powers.

Stein is, of course, a highly unreliable narrator here. But I do believe that there was some mechanism by which he would run proposed columns by an editor before writing them. If that’s the case, however, then how come the columns themselves showed no sign of being edited?

Stein also insists on characterizing FreeScore, the sleazy bait-and-switch merchant he’s appearing in ads for, as “an Internet aggregating company”. He writes:

This commercial was red meat for the Ben Stein haters left over from the Expelled days. They bombarded the Times with letters. They confused (or some of them seemingly confused ) FreeScore with other companies that did not have FreeScore’s unblemished record with consumer protection agencies. (FreeScore has a perfect record.) They demanded of the high pooh-bahs at the Times that they fire me because of what they called a conflict of interest.

Of course, there was no conflict of interest. I had never written one word in the Times or anywhere else about getting credit scores on line. Not a word.

But somehow, these people bamboozled some of the high pooh-bahs at the Times into thinking there was a conflict of interest. In an e-mail sent to me by a person I had never met nor even heard of, I was fired. (I read the e-mail while having pizza at the Seattle airport on my way to Sandpoint.) I called the editor and explained the situation. He said the problem was “the appearance” of conflict of interest. I asked how that could be when I never wrote about the subject at all. He said the real problem was that FreeScore was a major financial company and I wrote about finance. But, as I told him, FreeScore was a small Internet aggregator, not a bank or insurer.

Stein should read this if he genuinely believes that FreeScore “has a perfect record”. And he should also read the NYT’s ethics guidelines, which say that “it is an inherent conflict for a journalist to perform public relations work, paid or unpaid”.

Besides, of course there’s a conflict here: Stein provides financial advice in his column, and he provides financial advice in the ad. FreeScore isn’t an “internet aggregator”, it’s a way of tricking people into paying money they can’t afford for a service they don’t need.

The best bit of the Stein column, however, comes at the end:

It’s sad that the Internet has become a backyard gossip freeway for the whole world’s sick people to pour out their neuroses. I have seen a tiny fraction of all of the hate mail that’s come in the wake of the NY Times announcement (which they promised they would not make in any event). Too many sick people out there on the web for comfort.

Sick people? Does Stein mean me? Should I be flattered? But also, it’s interesting that the NYT promised Stein that they wouldn’t announce his being fired. That only serves to underscore how much of a scoop Ryan Tate had when he not only learned that Stein had been fired but also got the NYT to confirm it. Many congratulations to him. I wonder how long it took for the news to reach Gawker.

(HT: Roush, via Chittum)

Update: I’ve just noted that the Ben Stein page on the NYT website has been completely deleted. If you try to go there by clicking on the byline of one of his columns, you just get a blank page. Stein is now an unperson at the NYT!

(To clarify: Stein’s archived columns are still there. It’s just his personal webpage on nytimes.com which has disappeared.)

My commute this morning took me in a car down the West Side Highway, instead of on a bike up 8th Ave. And so I was confronted with this enormous billboard, which lives above Fairway at about 138th Street:

How long has it been there? And is there really a chance of seeing Jim Cramer mauled by a Grizzly? I’d tune in for that.

Incidentally, that stretch of the highway was quite congested; we found out why a few minutes later, when we saw a guy in a rather offensive costume standing by the side of the road and advertising his YouTube channel. The minute that we passed him, traffic sped up markedly. It was a classic case of one person imposing enormous negative externalities for the sake of minuscule personal gain: a good couple of miles of backed-up traffic in three lanes, all for the sake of a handful of pageviews on YouTube. At least traffic doesn’t slow down when it approaches the CNBC billboard.

My new object of desire

Ryan Chittum with a great deconstruction of the WSJ’s Congressional-jet expenses non-scandal

Abnormal Returns with a fantastic round-up of Falkenstein’s views on how the equity risk premium is negative

Bjørn Lomborg’s change of mind

Self-Help mortgages show need for CFPA

What happens when companies engage in fraudulent activity? Short-sellers get wind of it, and, by selling the stock of the company in question, depress the share price and save uninformed investors some of the loss they would otherwise have suffered had they bought in at an undepressed level. How much is that worth? According to Xiaoxia Lou and Jonathan Karpoff, somewhere between 0.2% and 1.5% of the firm’s market cap.

But what if the short sellers have it wrong, and the company in question is not engaged in fraud? Well, in that case the uninformed investors have just been given the opportunity to buy into that question at a discount, thanks to the shorts. They win again!

Is there any downside to short-selling? Not really: the authors say that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

So thank you, short-sellers, for saving us from buying in to fraudulent firms at inflated prices, and from giving us a nice discount on the share price of non-fraudulent firms. You rock!

(HT: Marr)

A couple of very big cheeses at Reuters — Chris Ahearn and David Schlesinger — have been weighing in on the subject of the “link economy”, and have been encouraging the rest of us to join the debate. Which I’m very happy about, and very happy to do.

Both of them have nothing but good words to say about linking; that stands in stark contrast, of course, to their luddite counterparts at the AP. Schlesinger explains that the lack of hyperlinks in Reuters news stories is a function of “the particular ecosystem of our professional products” which “will change over time” — what that means in English is that the technology driving the Reuters wire isn’t really up to hyperlinks yet, but it will be, promise! And Schlesinger’s entirely right about this:

The real danger in not being extremely open to linking, it seems to me, is that by moving yourself out of the mainstream debate you risk irrelevancy.

This means, of course, that as much as your content as possible has to be freely available online: people don’t link to content behind subscription firewalls. And in turn, that means Rupert Murdoch is making a huge mistake when he says that he intends to charge for all his news websites. (Although I don’t actually believe Murdoch is nearly as stupid as that, and I’ll believe it when I see it.)

But then Ahearn adds an interesting twist:

I don’t believe you could or should charge others for simply linking to your content. Appropriate excerpting and referencing are not only acceptable, but encouraged. If someone wants to create a business on the back of others’ original content, the parties should have a business relationship that benefits both.

The back story here appeared in the NYT last week: a start-up called Attributor has estimated that publishers of news online collectively lose $250 million a year from the unauthorized copying of their articles. The story quoted Ahearn:

Mr. Ahearn said there was “tens of millions of dollars worth of inventory that is likely being created that we are not getting our fair share of.”

The first thing worth clarifying, as Ahearn told me yesterday, is that he didn’t mean that Reuters’s share of the $250 million was tens of millions of dollars. Instead, he estimates the total market in pirated news copy at tens of millions of dollars, and would like some fair share of that. So it seems to me that Ahearn is not as far as it might seem from Mike Masnick, who is pretty persuasive in his case that there really isn’t much of a piracy problem for newspapers, or, for that matter, for newswires.

I know a lot of bloggers who get upset when their material is stolen without their permission, but I have yet to see any evidence that such activity has any visible effect on their own pageviews. As Masnick writes:

There are plenty of “parasitic aggregators” (we usually refer to them as “spam blogs”) that copy all our content. We track them, just because they tend to show up in searches, and one thing quickly becomes clear: they get little to no traffic at all, and any advertising revenue they bring in has to be close to nil. The average lifespan of such sites is usually about 3 months before they go away, and the argument that they take money away from us is silly.

Is it the parasitic aggregators that Ahearn has in mind when he talks about wanting to build a “business relationship” with people who “create a business on the back of others’ original content”? If so, I fear he’s in for disappointment. For one thing, they don’t make much money — probably less than it would cost, in terms of management time and legal fees, to collect some percentage of it. And more to the point, they don’t want a business relationship: these people are hard to track down and pretty sleazy and in any case not the kind of publishers that the likes of Reuters really wants to get into bed with in the first place.

If it’s not the parasitic aggregators that Ahearn is thinking of, then that leaves two other constituencies who use Reuters material, nearly always while linking to it: small-time bloggers, on the one hand, and bigger-time web publishers, on the other, such as Gawker, HuffPo, and even Yahoo.

The relationship between Reuters and Yahoo is one of the oldest on the web, is very much a formal business relationship, and indubitably benefits both parties. But the interesting thing with that relationship is that insofar as any money changes hands it goes from Reuters to Yahoo: we value their links — and the resulting traffic — so much that we’re willing to pay for it.** The traffic we get from Gawker, by contrast, comes free, and I suspect that if Ahearn ever does enter into a formal business relationship with Gawker (and I doubt he ever will) then he’d be looking to be paid by Gawker. Which really gives Gawker no incentive to enter into such a relationship. Gawker tried syndicating its content, once, to Yahoo; the deal fizzled out with neither side getting much out of it, and I don’t think that Nick Denton has any particular desire to repeat the experiment.

One of the great things about the link economy is that although there’s a huge amount of value embedded in all those links, that value largely sits at quite a distant remove from cash money. Schlesinger talks about how links create value “when the linker extracts real gold that was hidden in the original and gives it more prominence”, and “when the link or retweet uses the original as a jumping off point for argument, debate, or development”. He’s right; that’s blogging, in a nutshell.

But bloggers don’t extract all that gold and engage in all that debate for the sake of a few pennies from AdSense. Blogging has lots of value for bloggers, but insofar as it’s monetized, it’s monetized indirectly: the money comes from book deals or consulting gigs or speaking fees or even just job offers, rather than through selling ads. And if someone offers me a job on the strength of my blogging, there’s no way that I can or should pay some percentage of my new salary to the people I linked to as part of getting that job.

When Ahearn calls for a conversation and for building some kind of consensus on business models and fair use and blogging ethics and the like, I get the impression that he feels Reuters is somehow being shortchanged by the link economy right now, and both can and should be benefitting more from it than it does right now. And I can see why he might feel that way, because he works for a big corporation where value-added is measured in dollars and cents. While the blogosphere happily creates and extracts lots of value which exists largely in the reputation economy, Ahearn has a business unit to run, with a P&L which he wants to see going up rather than down.

My feeling, however, is that the way that Reuters will benefit most from the link economy won’t show up in Ahearn’s P&L at all. The Reuters news product is primarily monetized through terminal sales, not through ad sales on reuters.com, and that’s how we’ll make our money from the link economy too: insofar as Reuters becomes a central hub of the link economy, it will increasingly be a must-have product for the financial-market professionals who pay $1,000 a month* for their terminals. Could those professionals, in theory, find the same content online for free? Yes. But not nearly as quickly or as conveniently as they can find it on their terminal, where it’s pushed to them with ultra-low latency and long before the story in question finally gets put up on our website. As Reuters becomes increasingly authoritative and important online, largely through all the inbound links it gets, it will become that much easier for us to sell those terminals and make lots of money doing so.

If I were Ahearn, then, I’d be looking for recognition that the link economy in general, and Reuters.com in particular, has value to Reuters far beyond the cash money it brings in. If we didn’t have a strong an open presence on the internet, we would be, as Schlesinger says, doomed to irrelevance. And it would become increasingly difficult to sell our terminals. By embracing the Web’s link economy, Reuters is building a strong competitive advantage over its rivals. Which is worth much more than any amount of ad sales.

*Update: Which, to be clear, is a very round number I more or less pulled out of thin air: it should not be taken as a hard empirical datapoint of exactly how much the terminals cost.

**Update 2: While it’s true that Reuters pays Yahoo to link to us, it’s also true that Yahoo pays Reuters to syndicate and publish our content off the media wire, just like any other media outlet. Net-net, Yahoo pays us more than we pay them.

What does it mean when employment and unemployment both move in the same direction? It might be an error in one of the two pretty fuzzy datasets, or it could be, as Agnes says this morning, a real turning point. That’s certainly what the bond market seems to think.

My feeling is that it’s far too early to say that unemployment has stopped rising, and that clearly nobody believes employment has stopped falling. We’re moving to a world where a smaller workforce works a shorter workweek, and that bodes ill for any kind of strong sustainable growth unless and until we see a serious and improbable turnaround in the jobs situation.

All the same, on such a happy day it would be churlish not to take some joy from today’s figures. The most vertiginous part of the economic plunge is clearly over, and there’s some real hope for (modest and painful) economic recovery going forwards; there’s actually a very good chance that the next few GDP figures will be positive. That’s something to celebrate a little.

You’ll forgive me if I take some small measure of credit for this one: after something in the region of 35,000 words of the Ben Stein Watch, the world’s worst financial columnist has finally been fired from the New York Times. And I couldn’t be happier. The reason was his appearance in commercials for (and on the homepage of) freescore.com, a sleazy company which exists only to extract large sums of money from those who can least afford it.

NYT spokeswoman Catherine Mathis confirmed this, telling Gawker that “Ben Stein’s fine work for us as a columnist for Sunday Business had to end, we told him, after we learned that he had become a commercial spokesman for FreeScore, a financial services company.”

I’m thinking celebratory Champagne at the Oyster Bar this lunchtime. It is an August Friday, after all. Anybody care to join?

Update: Yes, I’m serious. Oyster Bar, Grand Central Terminal, 1pm. I’ll be the one looking a bit like this.

Price discovery in Scrabble

You do not have health insurance

How to improve the federal government’s data visualization

Dean Starkman’s smart (but verry long) take on Matt Taibbi

Alex Beam delivers the final word on Gates-gate

Zizek on Berlusconi: he “may look like a corrupt idiot and act like a corrupt idiot, but don’t let that deceive you – he is a corrupt idiot”

Your probability of dying during a given year doubles every 8 years