Felix Salmon

How come Netflix has a market capitalization of $4 billion, on 2009 net income of just $116 million? That’s about $325 per subscriber, even as each subscriber generates on average about $145 in revenue and $10 in net income per year.

Ethan Epstein makes a pretty compelling case that Netflix’s business model is threatened by problems at the US Postal Service: a rise in postal rates would be bad, and the abandonment of Saturday delivery would be much worse.

But the fact is that the economics of Netflix have always been unique and hard to put into old-fashioned business models, and I think they’ve done quite a good job of reinventing the whole way that we pay for consuming movies. By turning it from a cost-per-movie into a cost-per-month, they can somehow charge more money but cause less pain while doing so.

I’m aware that I’m extrapolating wildly from my personal experience here, but in the olden days I hated paying late fees on rented movies, and as a result was an eager and early adopter of Netflix. But pretty much since day one, I’ve paid more money to Netflix in any given month than I ever would have paid in movie-rental fees, including late fees. I just don’t watch that many movies, and the occasional $10 late fee is still much less than the regular $20 or so I pay Netflix. And while Netflix has done a good job of reducing its rates noticeably: my plan has dropped from $23.84 in 2004 to $18.50 now, including tax, that’s still more than I’d ever be likely to pay a video-rental store.

Indeed, I still occasionally get DVDs from my local rental store, because of the way that serious-and-earnest Netflix DVDs tend to pile up unwatched when the whole reason for wanting to relax with a movie in the first place is because you’re frazzled and just want to kick back with something funny or brainless. The Netflix tail is long, but when you have no more than three movies out at a time, your choice is actually much more constrained than at the video store. And similarly with the streaming stuff: it’s great in theory, but in practice it’s going to take me a long while to work out how to hook it up to my video projector.

Yet despite all of that, I’ve been a loyal Netflix customer for nine years now, and I’m likely to continue to pay them their $18.50 a month pretty much indefinitely, bearing them none of the ill will that I used to have towards surly clerks charging me late fees for scratched DVDs. There’s just so much less pain involved, when you pay for access to movies rather than for the movies themselves.

Still, $4 billion seems pretty crazy to me. Netflix is just a middleman, a delivery company. Shouldn’t that be a commodity, rather than something trading on a p/e in the mid-30s?

Gary Weiss reads the SEC inspector general’s report into its behavior with respect to Allied Capital and David Einhorn, and finds this startling nugget:

The official who supervised the Allied probe got a special “thank you” from Allied. This person (his name is blanked out in the report) left the SEC a year later to work for the company, apparently as a registered lobbyist. The exact position he got is unclear in the report, but we do know that the SEC ethics office had no problem with that. Apparently the SEC’s conflict-of-interest rules can be summed up as a cheery “okie dokie!”

Meanwhile, Ira Stoll finds a bunch of gamekeepers-turned-poachers on the attendee list at an FDIC meeting. Among them are Allen Puwalski, who went from the FDIC to working for John Paulson; John Douglas, who went from the FDIC to a partner position at Davis Polk, where he’s “counseling Citigroup with respect to FDIC matters”; John C. Murphy, who went from the FDIC to a partner position at Cleary Gottlieb; and Kevin Stein, who went from the FDIC to FBR Capital Markets.

It’s all well and good these people moving to the private sector, but do they really need to rub it in by hanging out at high-level meetings held at their former employer?

Stoll also notes the presence at the meeting of Randy Quarles, who moved from being the point-man on many regulatory issues at Treasury to an MD position at Carlyle Group.

And while we’re on the subject, it’s worth noting Matthew Leising’s story about Peter Roberson, who’s moving from his job liaising with banks and exchanges for Barney Frank. He’s now, depressingly, going to be a registered lobbyist for Intercontinental Exchange.

If even Barney Frank’s staffers can’t resist the appeal of the revolving door, there’s really no hope that Frank or anybody else will be able to put an end to the practice. Especially when it regularly benefits cabinet ministers.

Remember OCC head John Dugan’s email to to Cheyenne Hopkins? He told her — and since the article was only published yesterday, I’m assuming it was in the last few days — that a consumer agency could conflict with safety and soundness concerns. “A consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership,” he wrote, “while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid”.

Compare that to the email he sent Shahien Nasiripour on Tuesday:

“It’s hard to say in the abstract what sort of conflicts could arise, though I don’t think there will actually be many instances in which there is a genuine conflict,” he wrote.

Better late than never, I suppose, especially when he goes on to underline that CFPA measures which “simply reduce a bank’s profitability” are not measures that he would consider to interfere with safety and soundness concerns.

Still, as Shahien notes, Dugan doesn’t exactly have the zeal of the newly converted: he’s still trying to insist on federal preemption, preventing state and local governments from stepping in when and where the OCC proves toothless or asleep at the wheel.

The consensus among those who have long been pushing for a consumer protection agency is that the latest “evolution” in the OCC position is tactical, and a way to preserve as much power for the OCC as realistically possible. I buy that. But if the OCC is now conceding that a consumer protection agency is likely to happen in some form, that’s surely an encouraging sign.

The term has been around for a little while now, but only recently has the concept of a syndicated bond been commonplace in news stories, and it seems to have arrived without anybody explaining what it is.

Most of the references to syndicated bonds are coming from Greece these days, so I phoned up George Georgiopoulos, Reuters’s man in Athens, and got him to explain them to me.

The confusing thing here is that only sovereigns issue syndicated bonds, because only sovereigns don’t issue syndicated bonds.

OK, let me try again. As a base case, essentially all bonds are syndicated. If a company wants to issue bonds, it will find a group of banks to underwrite its bond issue and sell those bonds to investors. And if a sovereign wants to issue bonds in a foreign currency, it will do the same thing. None of these bonds are ever referred to as “syndicated bonds”, though — they’re just old-fashioned bonds, or global bonds, or whatever. The existence of a bookrunner and an underwriting syndicate is simply taken for granted.

The exception to that rule is when governments issue debt in their own currency. Normally, that kind of thing is handled through auctions, where a group of primary dealers, who promise to make a market in government debt, bid on new issuance. It’s always possible, however, that such an auction might fail, and that the government won’t be able to issue all the debt that it wants, for lack of bids from the primary dealers.

So Greece has started issuing occasional syndicated bonds, where it does just what companies do when they want to issue debt: it gets a small syndicate of banks together, and the banks underwrite the bond, promising to buy it if there aren’t enough bids in the market. Then they go out and build a book and sell the bond to investors just like they would with a corporate issue. This way of doing things guarantees that the government will be able to sell all the bonds it wants to sell.

Think of it this way: most bonds are syndicated, while government bonds are auctioned. If you see a reference to a “syndicated bond”, that means that a government is not auctioning its bonds, and has decided to syndicate them instead.

Which raises the question: what on earth is a syndicated auction?

It’s now been three and a half years since Bloomberg’s Shannon Harrington and John Glover showed that there was a very strong pattern of CDS spreads gapping out in advance of debt issuance by large corporates, which came as a surprise to everybody else. And it’s been three years since I noted that the SEC was going to have a hard time prosecuting insider trading in the CDS market, since CDSs aren’t securities.

Since then, of course, we’ve had a major financial crisis and the introduction of financial regulatory reform which would give oversight of single-name CDS to the SEC. But if you need an example of how slowly these things move, just look at the front page of today’s WSJ, which is reporting on an insider-trading case based on trades and phone calls which took place in July 2006:

The defendants in the New York case argue, among other things, that swaps aren’t securities, but private contracts between financial players outside the SEC’s jurisdiction. Unlike most stocks, bonds and options, swaps aren’t traded on an exchange.

It’ll be interesting to see how this case plays out, especially given the much harsher attitudes towards Wall Street in general and credit default swaps in particular that you’re likely to find in the average New York jury pool today as opposed to 2006.

But the first obvious thing that needs to be done here is to give the SEC formal jurisdiction over single-name CDS. Note that this is not one of the cases which Harrington and Glover talked about: those involved information which was obtained legitimately by hedge funds, since hedge funds were involved in the loan syndicates concerned. In those cases, the question was whether the funds were allowed to trade on that privileged information in the CDS market.

This case is slightly easier to prosecute, since it seems to involve a salesman at a regulated sell-side investment bank, Deutsche’s Jon-Paul Rorech, illicitly giving inside information to one of his buy-side clients. That’s illegal whether there’s any trade involved or not, I think.

The second thing which ought to be considered is moving CDS trading onto an exchange, where it can be regulated. And it’s almost certain, at this point, that that’s not going to happen. In fact, I asked Craig Donohue, the CEO of CME Group, about this at yesterday’s Reuters Global Exchanges and Trading Summit. He’s very keen on clearing over-the-counter CDS trades, but he said that he’s come to the decision over the past couple of years that he’s not interested in listing CDS on any of his exchanges directly. The big CDS players are his clients, they make lots of money from their OTC trading, and he seems to have no appetite to start competing with them on that front, rather than simply facilitating the clearing of their trades.

I am hopeful that if and when financial regulatory reform goes through, it’ll give the SEC a bit more in the way of teeth to prosecute rampant insider trading in the CDS market than it has at the moment. Whether we’ll actually see more prosecutions, however, is a very open question, and so long as CDS trading takes place entirely in the shadowy OTC universe, my guess is that the answer will be no.

A great introduction to the sleazy AFA Press by Nick Lyne — Qorreo

Stunning photos of dew-covered insects — Daily Mail

Why Are Thousands of Jews Selling Their Homes for Passover? — The Atlantic

My Global Conference panel with Carney, Ishmael, and Moore — Milken Institute

I like Gawker’s “branded traffic” metric, and wish more sites would make it public — Gawker

There are very few investors for whom a 0% return is just another arbitrary point on the real-number spectrum. In theory, the difference between a +10% return and a +15% return is the same as the difference between a -3% return and a +2% return. But in practice, the latter is much more important, because it spans the crucial zero bound: it’s the difference between making money and losing money.

Much has been written on the behavioral economics of loss aversion, where the pain of losing a certain amount of money is nearly always greater than the pleasure of gaining an identical amount. And what’s true of a country’s citizens is often true of its government, which is why the question of whether or not governments are making a profit on their bank bailouts is an interesting and important one.

Which is not to say that the super-smart dsquared was wrong when he left this comment about whether it would constitute speculation for Treasury to hold on to its Citigroup shares. Quite the contrary, he’s absolutely right:

I had heard the saying “an investment is just a speculation that went wrong”, but it’s a joke, not a sensible principle of money management and not something that can be reversed to give an exit target. If the Treasury is speculating now, it was speculating when it was in the red.

But the point is that if Treasury continues to speculate now, it’s mere speculation. When it was underwater on its investment, it at least could say that it was holding on to its stake until the share price rose enough that it could get its money back. Yes, that’s a form of speculation too. But it’s somehow a more acceptable form of speculation to hold onto an investment in the hope that you won’t lose money than it is to hold onto a profitable investment in the hope that you’ll make even more money.

Indeed, the whole argument about whether or not banks should mark their assets to market is at heart an argument about this very question. If banks hold loans on their books at par, even if they could never get 100 cents on the dollar for those loans in the secondary market, they’re essentially speculating that the value of the loans will return, over time, to more than they lent out in the first place. But they don’t call it speculation, they call it “commitment to our valued clients through thick and thin”, or something like that.

Sovereign investments in banks, it seems, work much the same way:

Switzerland made a profit after selling a 9 percent stake in UBS in August, saying it was confident the bank was on a solid enough footing for it to retreat.

Britain is expected to start selling shares in Royal Bank of Scotland and Lloyds, although that would not happen until after the general election, expected in May.

Share prices for RBS and Lloyds have risen close to the average price at which Britain bought its stakes and the government is becoming increasingly confident of making a profit on the billions of pounds it has pumped in.

A full exit could take many years in many countries, however. Sweden, which pioneered NAMA-style schemes, is still a big shareholder in Nordea after it stepped in to rescue lenders in the early 1990s.

The pattern here, from the U.S. to Switzerland to Britain to Sweden, is clear: you hold on to your stake until you’re in the black, and then you sell it. Yes, that’s a form of speculation. But it’s clearly an acceptable one.

Swiss researchers Philippe Masset and Jean-Philippe Weisskopf have a new paper out claiming to demonstrate that if you add wine to a portfolio of financial assets, that decreases your risk, increases your returns, and helps you out (if you care about such things) on the skewness and kurtosis fronts as well. Leslie Gevirtz writes up the results here, and Reuters graphics supremo Silvio DaSilva has even put together some pretty charts from the paper here.

I’m very skeptical about this result, however, for four main reasons.

1. The number of people genuinely investing in wine — that is, buying with an eye to selling it, rather than drinking it — is still tiny, but Masset and Weisskopf are probably right that it’s growing. “The resulting improvement in transparency and liquidity has rendered this market even more attractive for investors,” they write, but I’m not so sure: I suspect that wine’s relatively low asset-price correlation during the financial crisis was entirely a function of the fact that it wasn’t really an asset class in the first place. If and when it becomes an asset class, then correlations are bound to rise, especially in times of crisis.
2. Incredibly, Masset and Weisskopf treat wine as a cost-free investment: in the world of their paper, it costs nothing to sell wine, it costs nothing to store and insure wine, and it costs nothing to buy wine, over and above the hammer price at auction. On planet earth, of course, none of these things is remotely true. So far, I have yet to see a story on wine as an investment which takes into account reasonable estimates for these costs. If and when such a study comes along, I’m pretty sure that wine will suddenly look much less attractive as an asset class.
3. There’s enormous survivorship bias in the dataset. Masset and Weisskopf looked back at the wine market between 1996 and 2009, and then cherry-picked the regions which, in hindsight, turned out to have the greatest volume at auction. Then they took the wines from those regions and cherry-picked again, choosing only wines which traded at least once a year. So the 1982 Barbaresco Riserva Santo Stefano, for instance, made the cut, as it rose sharply in price between 2002 and 2009. But a neighboring Barbaresco which sold for just as much in 2002 would be ignored if it didn’t appear at auction in 2003 or thereafter. An investor in Barbaresco in 2002 would have no way of knowing which one was going to go up and which would end up impossible to sell, but by the lights of Masset and Weisskopf, the one which went up a lot was entirely representative.
4. This isn’t a buy-and-hold market: you have to know exactly when to sell your wine before it becomes passé. Masset and Weisskopf try to spin this as a good thing, saying that they “discard wines that are viewed as antiques and not as wine as such” and that doing so “eliminates wines that are mostly illiquid and are traded infrequently”. Without dwelling on the metaphor of a “mostly illiquid” wine, the problem here is that Masset and Weisskopf seem to think that it’s possible for investors, en masse, to buy wine when it’s young and sell it at a profit when it’s middle-aged, but before it gets old. Of course, they can’t: who’s meant to be buying all that middle-aged wine? This strategy is all well and good so long as there aren’t enough wine investors to move the market. But if wine-as-an-investment ever takes off, that’s certain to significantly increase the supply, and therefore decrease the price, of good middle-aged wines being sold before they get too old. And when that happens, the returns from a wine-investment strategy could easily turn negative.

To get an idea of how Masset and Weisskopf think, check out this chart:

The thing to note here is the way that all the different wine regions have been rebased to 100 in 1998, as though people first decide how much money they’re going to spend on wine and then work out how much wine that will buy. Masset and Weisskopf don’t provide the actual datapoints in their paper, so I don’t know how much the average Rhone wine was going for in 1998 compared to the average Bordeaux. (And, of course, remember that we’re not actually talking about the average Rhone wine here: we’re talking only about the Rhone wines which, in hindsight, turned out to be the ones that wine lovers wanted to buy at auction. If you bought an obscure Rhone wine in 1998, which Robert Parker then started extolling in 1999, you would have made lots of money; if he didn’t, it probably wouldn’t make the index.)

But let’s say that Rhone wines were a quarter of the price of their Bordeaux counterparts in 1998, and a third of the price in 2009. No self-styled wine investor would ever allocate on an equal-investment strategy, investing say $10,000 in each: investors are always going to be overweight the most expensive Bordeaux. If you ran this same chart on the basis of average price per bottle, rather than rebasing everything to 100, it would look very different indeed — and would be much more representative of how wine investors actually view the wine market.

At its heart, this paper is an exercise in highly-theoretical number crunching, and bears little if any relation to the real world. If you want to go out and buy fine wines, that’s great. But don’t kid yourself that you’re making an “investment”. I should know: I still own a case of 1963 Croft which my grandfather bought for me when I was born. I’m not a huge port fan, and haven’t been drinking it. But I wouldn’t be at all surprised to hear that storage costs alone, since purchase, exceed its market value. Of course, if my grandfather had bought me first-growth Bordeaux instead of port, then that might not be the case. But he didn’t have the benefit of Masset and Weisskopf’s hindsight. They shouldn’t assume that he did.

Update: Masset and Weisskopf respond in the comments.

In the wake of Andrew Martin’s searing profile of him last week, the last thing John Dugan needed was to be quoted in the American Banker looking like even more of a banking-industry shill. Yet here’s the quote he gave Cheyenne Hopkins for her (sadly firewalled) article on whether safety and soundness conflicts with consumer protection:

“One area that stands out is loan underwriting,” Dugan said in an e-mail. “For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership, while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid.

Given the significant role that loose underwriting played in the financial crisis, I think it makes sense to provide an exemption from the consumer agency’s jurisdiction for credit standards.”

Why on earth would a consumer protection agency ever limit down payments on house purchases? Does Dugan think that the government is going to step in and forcibly prevent people from paying cash for a property? Is he so confused about what consumer protection entails that he thinks it would involve setting minimum — as opposed to maximum — amounts of leverage? Has he already forgotten so much of the crisis that he thinks that homeownership is likely to be considered something unequivocally good for consumers, as opposed to the largest financial risk that most consumers will ever take?

The fact is of course that loose underwriting is as bad if not worse for consumers as it is for banks, and no consumer financial protection agency is going to condone it. After all, if banks lose money on bad underwriting, that’s because their consumers can’t pay back their loans — and if they can’t pay back their loans, that means they’re in bad financial shape. You don’t protect consumers by encouraging them to get into bad financial shape. This is not rocket science.

Yet Dugan wants to prevent the consumer protection agency from looking at credit standards! The reason of course has nothing to do with worries that the agency will force the banks to loosen up on underwriting, and everything to do with worries that it will prevent predatory lending and loan pricing based not on the likelihood of repayment but rather on how much money can be squeezed out of the borrower.

Honorable banks who want to profit from their customers’ financial well-being have nothing to worry from a consumer protection agency. Dishonorable financial institutions who want to squeeze their customers dry before moving on to the next sucker do have something to worry about. And its those institutions that Dugan is trying to protect. For shame.

Update: Many thanks to American Banker, which has now taken down its firewall for this story. So go read it!

Alan Mutter is a genuine expert on newspaper economics, which is one reason why his bizarre blog entry today on the economics of non-profit newspapers is so puzzling. This has to be one of the most innumerate things he’s ever written:

The math, as detailed below, shows that it would take $88 billion – or nearly a third of all the $307.7 billion donated to charity in 2008 – to fund the reporting still being done at America’s seriously straitened newspapers.

The good news is that he does indeed detail his math, making it easy to see where he goes wrong.

Rick Edmonds, the estimable media economics expert at the Poynter Institute, calculated that American newspapers are spending $4.4 billion today on news-gathering…

If you wanted to sustain the current level of newspaper coverage by replacing for-profit funding with non-profit dollars, the typical approach would be to raise an endowment that would be invested conservatively to produce an annual return of 5%. The investment income would be distributed each year to provide the operating budgets for non-profit news organizations.

The endowment necessary to provide $4.4 billion in annual newsroom funding would be $88 billion.

There are two huge errors here. The first is the way that Mutter confuses stocks with flows. The $308 billion donated to charity in 2008 is an annual figure; he should therefore compare it to the annual figure of $4.4 billion, rather than applying a multiplier of 20 to that $4.4 billion first in order to convert it from a flow to a stock.

But even the $4.4 billion figure is far too large, since a non-profit needs to cover only a newspaper’s losses, not its total newsgathering expenditures. After all, it’s not like anybody’s suggesting that newspapers stop carrying ads the minute they get bought by a non-profit.

What’s more, a non-profit which owns a newspaper can, in theory, fund those losses out of future profits, in the way that for-profit newspaper owners find hard. In a capitalist system designed for the efficient allocation of capital, it only makes sense to fund short-term losses if the long-term profits will more than make up for them. If the long-term return on investment is lower in newspapers than it is anywhere else in the economy, then you should invest your money somewhere else, rather than covering near-term losses.

A non-profit, on the other hand, is interested foremost in the perpetuation of the institution, rather than the maximization of profits. Of course, the more profitable the newspaper is, the longer it will be able to survive. But if the non-profit sees a path to a sustainable model of small-and-steady profits in the future, it just needs to get the newspaper there from here: it doesn’t need a massive endowment.

Newspapers, just like websites, are in the business of monetizing readers. Historically, they’ve done that by selling advertising; in the future, they’d be well advised to develop other revenue streams as well. Their total readership is generally higher than it’s ever been, thanks to the internet, even if their print readership is down. And their readers are often well-heeled and very loyal to the newspaper brand: that’s a relationship which should be worth a lot of money, somehow.

If you found an inventive, business-savvy, and optimistic non-profit, then, I think it could in theory run a newspaper with a pretty modest sum in the way of up-front costs. Of course, it might fail — but any newspaper might fail. Non-profits should be allowed to fail just like anybody else. Which is another reason why raising a full endowment up front is not only unnecessary, but is also arguably counterproductive.

So while the non-profit route is probably not going to happen very often, it’s certainly an intriguing one which can make quite a bit of financial sense. It’s not remotely the impossible money-pit painted by Mutter.

Update: David Cay Johnston weighs in, along similar lines.

Mark Roe expands his excellent FT column on derivatives superpriority into a fully-fledged paper — SSRN

The NYT, with all its troubles, is vastly outperforming CNN, which has no good reason to be imploding like this — NYT

2 days. 70 painters. Bushwick. Oh, and did I mention the Germany vs USA angle? — Tom Sanford

Superman comic sells for $1.5 million — AP

“When given a choice, more people log in to comment with their Yahoo accounts than with Google, Facebook or Twitter” — PaidContent

Your random NYT story of the day — NYTimes Roulette

Good catch by Michael Wolff — VF

Are you worried about a huge earthquake in Seattle? You should be — NYT

Is Geithner really a “powerful ally” of John Dugan? That’s bad if true, but I haven’t seen a lot of evidence — NYT

Yves Smith criticizes Michael Lewis for not writing the book that she wrote. You’d think she’d be happy about that — Naked Capitalism

Advertisers who buy 8 pages of ads one issue of Wired magazine will be able to lace video in the iPad version — WSJ

The problem with dropping money from helicopters: if people trouser it, they risk being prosecuted for grand theft — Dispatch

The $149 Walmart singlespeed — Walmart

Watch a diamond burning on a pool of liquid oxygen — PopSci

Photoshop content-aware fill. My jaw is on the floor — YouTube

With trading in Citi accounting for 25% of the volume on the NYSE, there’s only one game in town for stock traders — even if the price of the stock ended the day within 13 cents of where it started it. Zero Hedge puts it pungently, noting that trade is being increasingly concentrated in Citi, BofA, and the QQQQ Nasdaq index fund:

The entire market will soon consists of exactly two companies (both of which are wards of the state) and one ETF, as liquidity finds the path of least resistance.

This is not good for the market, and it’s long past time, I think, for that reverse stock split at Citigroup. It’s beyond silly for any company to have 28.5 billion shares outstanding; a one-for-10 split would overnight bring Citi volume down to sensible levels, bring the price into line with other Dow components*, and prevent some of the crazy speculation going on in Citi stock, where a swing of a few cents per share can mean massive P&L for the day-traders.

The idea is hardly original: Citi first proposed the reverse split back in March 2009, when there were a mere 5.5 billion shares outstanding, but it took until the fall for the idea to get shareholder approval, and the bank is still dragging its feet as the June 30 deadline gets ever nearer. Can somebody explain to me why this is taking so long? It really is getting in the way of efficient equity capital markets elsewhere.

I can’t believe that the delay here is due to pressure from Citi’s largest shareholder, which has just tapped Morgan Stanley to sell its 7.7 billion shares in an orderly fashion over the course of 2010. It’s about time that Treasury got out of this trade: now that its stake is in the black, it’s essentially just speculating if it holds on to those shares for longer than it has to.

And yes, as I said on BNN today, the fact that Treasury’s equity stake in Citi is now worth a good $7 billion more than was paid for it is indeed vindication of the don’t-nationalize strategy. It was still a bailout of Citi’s bondholders, of course, with all the moral hazard that implies. But, thanks to the broad-based equity rally, it’s worked out well so far.

That said, Citi is still too big to fail, and therefore still has an implicit government guarantee on top of all the explicit guarantees which are still floating around. The government might make a nominal profit on the sale of its stock, but that means effectively ignoring the enormous value of those guarantees to Citi, which is still the shakiest bank in America from a systemic-risk perspective. And every little thing helps: psychologically, a share price of $40 would surely make it seem a bit more solid than a share price of $4. Hell, it worked for AIG.

Update: As commenter lahar points out below, Citi is no longer a Dow component. I’d forgotten that. Sorry.

Kevin Drum and I had a thrilling discussion about liquidity risk and capital ratios over lunch on Friday. He sums up:

Getting Congress and the Fed to impose higher and more rigid capital requirements on big financial institutions is important, but what’s even more important is getting an international agreement in place to make sure everyone else does it too. However, there’s really no one who does a good job of reporting on this. Largely this is because the discussions are all held behind closed doors, so we only hear about the status of negotiations when someone like Larry Summers or Mervyn King drops hints in a speech. It’s like reporting on the intelligence community, except worse.

And no sooner do we ask for good reporting on this front than along comes Bloomberg’s Yalman Onaran, with a 1,600-word story on the national and international rules and guidelines governing liquidity risk management. In typical Bloomberg style, however, it’s sometimes hard to see the wood for the trees, so it’s worth backing up a bit here and looking at the three different places that rules governing these things can come from.

Firstly, there’s legislation — and it’s pretty clear that Congress isn’t touching these issues in its financial-reform legislation. It would be nice if it did: simple legislative bounds on how much leverage financial institutions are allowed, and how much liquidity they need to have, can be useful in preventing regulators from loosening things up too much during boom times. But it’s not going to happen.

Part of the reason, I think, is that the executive branch in general, and Treasury in particular, doesn’t want it to happen. They just released their own Interagency Policy Statement on Funding and Liquidity Risk Management, which is about as hard-hitting as you’d expect, but still useful at the margin. If all financial institutions had followed these guidelines to the letter in the run-up to the credit boom, we’d be in a better place than we are now — but the problem of course is finding regulators with both the ability and the inclination to force such behavior. After all, the utterly ineffectual Office of the Comptroller of the Currency has its name at the top of the new guidelines, and there’s no chance of John Dugan baring any teeth to ensure they’re enforced.

On this front, at least, the financial legislation wending its way through Congress might well help, by consolidating regulators and abolishing the OCC: if there’s one regulator who cares about enforcing extant guidelines and who has authority over all systemically-important financial institutions, that’s a clear improvement on what we’ve got right now.

But the real progress on this front, if it happens at all, isn’t going to happen in Congress, and isn’t even going to happen within Treasury. Instead, it’s going to happen in Basel. Onaran explains:

Looming over discussions about liquidity are rules proposed in December by the Basel Committee on Banking Supervision, a 35- year-old panel that sets international capital guidelines. The new framework would require banks worldwide to hold enough unencumbered assets to meet all of their liabilities coming due within 30 days. That amount, called the liquidity coverage ratio, could be used to offset cash outflows during a panic.

Banks would also have to maintain a “net stable funding ratio” of 100 percent, meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months, including off-balance-sheet commitments and anticipated securitizations.

The Basel committee, which is collecting comments on the proposed rules through April 16, would establish clear definitions of liquid assets and funding needs, rather than leave those determinations to the banks. It would also set new capital requirements. The committee expects to complete its work by the end of the year and implement the regulations by the end of 2012.

These are the rules which we should really be caring about, and they’re the ones I was talking about with Kevin: they’re hammered out slowly, behind closed doors, by mid-level central bankers you’ve almost certainly never heard of. They’re people like Nigel Jenkinson and Marc Saidenberg, the co-chairs of the Working Group on Liquidity, or Hirotaka Hideshima and Richard Thorpe, the co-chairs of the Definition of Capital Subgroup.

The Basel rules are important, and they take a long time to coalesce into something acceptable to all the main players — especially the US, whose abundance of small banks makes it wary of rules which are generally designed for much bigger institutions. It’s entirely foreseeable that the Basel committee’s self-imposed 2012 deadline is going to come and go. But if and when the rules go into effect, they’re going to have much more force than anything coming out of Congress or Treasury. So keep an eye on them: if they get diluted significantly from their present form, that’s a bad sign.

Add another name to the list of naive editorial-side people without business-side experience: John Harris, the editor-in-chief of Politico.

Our fundamental model is not driven by traffic. It’s trying to be as essential to the conversation of Washington insiders, people who live and breathe this, whose careers depend upon it.

That’s a rather small audience. Our core audience is kind of at the center of the circle. That’s the one we care about.

And that’s not chasing traffic. That’s not chasing a huge number. But for the readers who matter most to us, does our content matter to them? Is it indispensable?

If we can answer that with a yes, then we’re succeeding. If not, or somebody else beats us to it, then we’re not.

It’s occasionally remarked upon that there really isn’t a Politico for finance, and there should be. At one point, it seemed that Henry Blodget might have aspirations in that direction, but those seem to have been abandoned in a quest for cheap pageviews: ZeroHedge breaks more news than Clusterstock does, and Clusterstock is definitely more an analysis aggregator than a news originator.

I have no problem with a business model of adding value through aggregation, but the barriers to entry are much lower than they are for a news site staffed by smart, experienced, opinionated and well-sourced journalists. Creating that kind of thing might be prohibitively expensive: it would probably cost at least as much as Lex or Heard on the Street or Reuters Breakingviews, all of which have editorial-side payrolls running into the millions of dollars per year. But a Politico-of-finance could carve out a franchise at least as valuable as that of Politico itself, and could I think become very established surprisingly quickly, if it had a critical mass of name-brand journalists at launch.

Update: Spiers weighs in, calling Harris “disingenuous”. But I think she misses his point. If you own Harris’s “center of the circle”, by providing essential content, then all manner of monetization opportunities are likely to emerge — including high traffic. Going for quality first, and getting traffic as a consequence, is doing things the right way round. Going for traffic first, never mind the quality, is liable to backfire.

This is how the blogosphere glosses the news: first the WSJ runs a slightly overheated article about the most recent Treasury auctions, talking in the headline about “Debt Fears” in the market for US government bonds. It’s one of those spectacularly meaningless headlines onto which all manner of rank speculation can be piled: a market went down, so you can talk about “fear” (although for some reason when a market goes up you get many fewer headlines about “greed”), and yes, it’s a debt market, so you can talk about “debt fear”.

This is not helpful, and Paul Krugman pointed out as much with a handy little chart showing that Treasury bonds have been pretty flat since the end of 2007, but for that sudden flight-to-quality at the height of the crisis. Brad DeLong had much the same post, with a bit more added snark.

Steve Waldman then responded to Krugman with a few more charts of his own, this time looking at the yield curve rather than nominal yields. The basis for doing this is simple:

The US government’s cost of long-term borrowing can be decomposed into a short-term rate plus a term premium which investors demand to cover the interest-rate and inflation risks of holding long-term bonds. The short-term rate is substantially a function of monetary policy: the Federal Reserve sets an overnight rate that very short-term Treasury rates must generally follow. Since the Federal Reserve has reduced its policy rate to historic lows, the short-term anchor of Treasury borrowing costs has mechanically fallen. But this drop is a function of monetary policy only. It tells us nothing about the market’s concern or lack thereof with the risks of holding Treasuries.

This is true, but at the same time it feels naive to me: I think it’s fair to say that the historical connection between the Fed funds rate and Treasury bond yields is largely lost when the overnight rate is at or near zero. Indeed, that was one of Alan Greenspan’s big mistakes: he dropped rates so far that he lost control of long-term interest rates. If the Fed funds rate is at 5%, you can turn the steering wheel and see an effect at the long end of the curve. If it’s at 1%, that mechanism becomes much squishier.

James Hamilton adds a useful chart of his own, showing that TIPS have been rising in yield even more dramatically than Treasury bonds. Yields on TIPS are real, not nominal, remember, so that chart alone does a lot to debunk any notion that an increase in bond yields is related to an increase in expected future inflation.

Ryan Avent, attempting to adjudicate, can come up with little more than to conclude that “the data bears watching closely, but that’s about the most one can say for now”. I wouldn’t even go that far. If you stare long enough at bond data, you can conclude just about anything you like — you can even start kidding yourself that you’re looking at the market pricing in default risk on Treasuries. My feeling is, looking at Waldman’s charts, that it might be time for the curve-steepening we’ve seen over the past 18 months to start coming to an end and reverting to the mean. But that said, concluding anything much from looking at lines on charts is always a fool’s game, unless your conclusions are independently derived from much harder empirical analysis.