Felix Salmon

Bloomberg has placed an interesting headline on Michael Tsang’s story about the performance of Goldman’s IPOs: “Goldman Can Show SEC Clients Get Best Returns on Its IPOs”.

Let’s ignore the silly SEC angle: it’s utterly irrelevant. The interesting thing is the idea that Goldman’s clients, when it comes to IPOs, are not the paying customers who are forking over 7% of the proceeds in order to get the best execution, but rather the friends-of-Goldman getting in at the IPO price. Do we, or does the SEC, really care about people like Josef Schuster?

“For the underwriter, first-day success is a very important measure in terms of certifying the power and the credibility of the franchise,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion. “A good first-day pop certifies the quality job the underwriter has done with investors and the company in order to further deals.”

Schuster, who purchased Tesla shares for his Direxion Long/Short Global IPO Fund, sold 30 percent of his stake on the second day of trading.

The answer, of course, is no. And the story that Tsang didn’t write — but could have written just as easily, given exactly the same data — is the story of Goldman systematically lowballing IPO price ranges, and cheating its corporate clients out of millions of dollars in IPO proceeds, giving them instead to flippers like Schuster.

Instead, Tsang’s lead is positively misleading on that front:

Goldman Sachs Group Inc., accused by the U.S. government of defrauding investors, is generating better returns for companies and buyers of initial public offerings than any other Wall Street firm.

Tsang never specifies what he means by “returns for companies”, but it seems to me that companies going through an IPO ultimately care about three things: the quality of their investors, the amount of money that they raise, and the ultimate market capitalization of their company. None of these things can be measured by looking at the amount by which the stock rises or falls in the first day or 20 days, as Bloomberg does here. But if one underwriter in particular gets known for generating a lot of first-day pops, then speculative hedge funds are liable to pile in to those IPOs. And no company particularly wants its shareholders to be speculative hedge funds looking to sell their stock in a matter of hours or days.

So if the SEC cares about Goldman’s clients, it should care mostly about the clients who paid Goldman Sachs $580 million in fees in the first half of 2010 alone — and not the clients who made money by flipping their IPO allocations at a profit. It’s entirely possible that the companies were well served by Goldman. But Bloomberg’s numbers don’t come close to demonstrating that.

People, we have a problem: financial advisers aren’t being paid enough. But there’s a chap named Scott Welch who has a solution: pay them more!

During the turmoil of 2008, many advisers moved clients out of some high-flying assets or employed hedging strategies that limited losses. Yet many accounts are still below their peaks, and adviser income remains depressed…

“When assets dropped precipitously in ’08 and ’09, that may have been when you (the adviser) were most valuable,” Welch said. “Maybe you prevented them from panicking, did some tax-loss harvesting or bought some defensive stocks. Yet your fee for services probably dropped by 20 to 40 percent.”

Advisers typically get a fixed percentage of assets. Which means that if adviser income dropped by 20% to 40%, so did the assets they were managing. Which doesn’t seem to me like the kind of performance which should carry enormous rewards.

Structuring an incentive-based fee for financial advisers is, I think, a very bad idea, because it’s very hard to quantify objectives. You don’t want to set a benchmark to outperform, since that’s just a way of asking your adviser to take on more risk. If you want your adviser to do something like preserve real wealth for multiple generations, it’s hard to measure that on an annual basis and pay a condign bonus.

In fact, the current system is quite a good way of doing things, I think. If you manage to smooth out volatility in wealth during a time of volatility in markets, then you get rewarded with a less volatile income. And if you build wealth steadily over time, then your income goes up steadily over time as well. And, of course, if you impress your clients with your work, they will stick with you and recommend you to their friends.

The alternative — where advisers get huge paychecks in boom years and then feel aggrieved when those paychecks fall sharply after a bust — does no one any favors. So while the “hedge fund model may be good for wealth firms”, in the words of the story’s headline, I don’t think it’s good for their clients. And that’s where the conversation should end.

Bloomberg has a good update on Basel III negotiations today. To save you slogging through the whole thing, which is very long, the news is that in the war of banks vs regulators, the banks seem to be winning the battle of how to define capital.

Specifically, European banks are worried that they won’t be able to count their minority stakes in other banks as capital. That makes sense to me: in the middle of a crisis, you can hardly be expected to liquidate a strategic stake in some foreign bank. But European banks would need to raise a lot more capital if this rule passed, and so a compromise is in the works.

One of the smart things that the Basel III framework does is force banks to take responsibility for the liabilities of the banks in which they have minority stakes. Right now they can count those stakes as assets, but at the same time pretend that if the foreign bank runs into trouble, they won’t end up needing to bail it out. In reality, of course, big banks looking to protect strategic minority stakes are always going to be the first sources of liquidity that any troubled foreign bank looks to for help in a crisis.

The proposed compromise seems to be that banks can count their foreign stakes as capital — but only against the risks at the foreign bank. The stakes wouldn’t count as capital for the purposes of their own domestic liabilities and capital adequacy.

That compromise — a bit like the extended timeframe for getting up to new capital-adequacy levels — seems OK to me. In an ideal world it wouldn’t be necessary, but if it brings the Europeans on board, then fine.

But I’m less happy about possible delays in putting Basel III together: apparently the publication of new liquidity requirements might be “pushed back to the middle of next year.” And in this game, any delay is a real win for the banks: the longer they can drag out negotiations, the weaker the final rules are likely to be.

There’s also news on the Basel Committee’s forthcoming response to the bank lobby, which claimed that the new rules could reduce G7 GDP by 3.1% by 2015:

“Preliminary results do not point to a growth problem coming from the regulation,” Jaime Caruana, general manager of the BIS, said in Basel on June 28. “On the contrary, it would support resilience relatively rapidly.”

The Basel committee may publish the study later this month or in August, according to a person with knowledge of the matter. The report is expected to show an impact on economic growth of about one-third what the IIF calculated, another person familiar with the research said.

This is heartening. The whole point of the Basel rules is to help prevent exuberant credit bubbles during booms and recoveries, in order to also prevent disastrous crashes during busts. The banks will scream and shout about how expensive the new rules will be, but they’re best ignored on such matters, since they will always prefer less regulation to more, and lobby hard to get what they want. The international community is now faced with a once-in-a-generation opportunity to increase bank regulation while the banks are on the back foot. It must act fast, or face decades of failure.

I’m very confused by WaPo’s new “Washington Post with Bloomberg” business section. Bloomberg gets a lot of branding at the top of the page, but at least at launch it had no stories at all above the fold.

If you zoom out or scroll down you can finally see some Bloomberg stories appear, I’ve marked them with arrows here. And if you look really carefully, you’ll see that they say “(Bloomberg)” after the headline, in hard-to-read light grey type.

There doesn’t seem to be any top-level editing of these stories: the third Bloomberg story, “Sales at U.S. Retailers Decreased for a Second Month in June”, is basically exactly the same as the top WaPo story, “Retail sales drop 0.5 percent in June.” Bloomberg, here, is adding nothing to the WaPo file.

But the real weirdness happens when you actually click on those links. The WaPo story looks and feels and is part of the WaPo website. It’s hosted at washingtonpost.com, and has the familiar three-column view with lots of easy navigation.

The Bloomberg story, by contrast, takes the new biz-section header, pastes it on top of the Bloomberg wire copy, drops a WaPo footer at the bottom, and hosts the whole thing at bloomberg.com. It’s neither one thing nor the other: after spending a lot of time and money on a very good new redesign of its main site, Bloomberg seems to have slapped together a new co-branded site for the Washington Post in about five minutes. If you try to navigate to the top-level URL, http://washpost.bloomberg.com/, you just get a useless error message.

In the accompanying press release, Bloomberg’s Matt Winkler proves himself a master of PR gibberish:

“As Bloomberg has become the first, fastest and most factual provider of the story of money in all its forms, readers of the redesigned online business section conceived with the Washington Post can look forward to a unique blend of actionable news,” said Matthew Winkler, founder and Editor-in-Chief of Bloomberg News.”

Insofar as this means anything, I think Winkler is saying that the WaPo’s readers can and should trade based on what they read there. That’s the only reason to care so much about the news being “first” and “actionable.” But that would be a really bad idea, for a large number of reasons which should be obvious to anybody thinking about it for more than five seconds.

At heart, this looks to me as though it’s the online-news equivalent of one of those Europudding movies, co-produced by nine different state-backed film production agencies. I’m sure it seemed like a good idea at some BizDev meeting, but from a purely editorial perspective it makes little if any sense. Why go to the trouble of building a whole new site co-branded with Bloomberg, when the WaPo was always welcome to simply link to Bloomberg stories from its business-section homepage any time it liked? This deal just makes it that much harder for WaPo to link to anybody else.

I suspect that what’s really happening here is that Bloomberg is desperately trying to turn itself into a consumer-facing brand in as many ways as it possibly can — through television, BusinessWeek, co-branding at the Washington Post, and anything else it can come up with. It has the budget to put together something like this, and so it has done so. But it’s being weirdly slapdash and inconsistent about it, from the perspective of the actual consumer. And the decision to force readers of the Washington Post to navigate to a whole new bit of bloomberg.com when they want to read Bloomberg’s stories — that just makes no sense at all. Either you integrate your material into the WaPo website, or you don’t. This attempt to find some kind of middle ground simply fails.

Pimco launches GDP-weighted sovereign debt indexes: seems like a very good idea to me — Reuters

“For reasons that aren’t clear, almost all adult picky eaters like French fries” — WSJ

SLAPP fail: ML-Implode’s parent company will likely file for bankruptcy in wake of baseless nuisance libel suit — ML-Implode

The $0.99 comments paywall — Guardian

The Lost City List of classic, utterly New York places worthy of your patronage — Lost City

“The average amount of time the ball is in play on the field during an NFL game is about 11 minutes” — WSJ

Did speculators cause commodity price spikes? The OECD says no. But David Frenk says their paper is very flawed — Traders Narrative

If you’re going to put a paywall on your website, this is a very sensible way to do it:

Press+ is aware that there are ways users can avoid paying for the content its affiliates are about to charge for, including by using this Firefox extension (as well as by using multiple browsers), if they are willing to spend the time and effort and endure the related inconvenience.

As we develop the system in the coming months we will implement our plans to address this problem to the degree it is material for any publisher. But we’ll do so from the prospective that we are talking about content that has been free for years; thus the fact that a small percentage of people may try to circumvent a modest charge for it and succeed in doing so for a short period of time must be seen in light of the fact that most won’t, which means that a new revenue stream from loyal readers will have been created.

David Brauer seems to be of the opinion that any new paywall should be “robust” and shouldn’t be able to be defeated by means of a plugin (or by using multiple browsers, or by deleting cookies, or various other methods, I suppose). But that’s exactly wrong. The purpose of a paywall isn’t to keep people out, it’s to generate revenue from loyal readers. And the expense of making the paywall harder to circumvent is almost certainly greater than the marginal extra revenue that such an action would generate: after all, the kind of people trying to get around the paywall will most likely simply go elsewhere, rather than pay.

Back in the old days of print newspapers, you could read them for free by going to your local library or your nearest hotel lobby. You want a free copy of the FT? Just pop in to the FT building at 1330 Sixth Avenue — there’s always a pile there. A paywall is like the cover price on a newspaper: it’s the amount that you’re asking and expecting your readers to pay, but it’s not a sum without which reading the paper is impossible.

LancasterOnline is asking its readers to pay it $1.99 a month if they read a lot of obituaries. That’s a reasonable request and if I was a regular reader of that site’s obituaries, I would pay the fee. To sneak around the paywall is to place oneself in an antagonistic relationship with the paper you’re reading: it might be legal, but it’s certainly impolite. It’s a bit like stealing fruit from a roadside farmstand operating on the honor system. And I can’t imagine that’s the kind of thing that LancasterOnline’s loyal obituary readers would do.

Meanwhile, high paywalls impose other costs. When I’m reading Twitter on my phone and follow a link to the WSJ or FT, I hate running into their paywall. And the FT, in particular, has a paywall which breaks in unexpected and annoying ways, barring you from reading stories even when you’re a logged in subscriber. Recently a very generous multimillionaire, a huge admirer of the FT and a loyal subscriber of many years, told me that he hates the FT paywall — partly because he runs into it sometimes and partly because it makes it harder for him to share FT stories he likes. It’s pretty obviously not good business for the FT to alienate its customers like that and I suspect that part of the reason that the NYT is taking so long building its paywall is to try to avoid those problems as much as possible.

Circumventability, then, is a sign of a sensible paywall, not a sign of a badly-designed one. People will get around any paywall if they really want — just pasting the headline into Google News will often work fine. Newspapers shouldn’t worry about the people who do that; instead, they should be flattered. And spend their efforts instead on improving their relationships with their paying customers.

FT Alphaville is spinning off! The fabulous Paul Murphy and Stacy-Marie Ishmael, who have been with Alphaville from the beginning, are now setting up something at even more of an arm’s length from the FT itself: “a new digital media service”, whatever that might be, called FT Tilt. It’s all quite mysterious for the time being; I can’t wait to see how it turns out.

Meanwhile, the Alphaville email newsletter is disappearing behind the FT’s ever-expanding paywall: in order to receive it, you either need to be a subscriber to FT.com (just the newspaper isn’t good enough), or else you need to subscribe to the email alone for £65 or $93 per year.

The Alphaville blog itself, however, will remain free. So I have a piece of advice for anybody pondering whether they want to pay to get multiple emails per day from Alphaville: go to Feed My Inbox, type your email address into the email address field, and type http://ftalphaville.ft.com/blog/feed?abstractlen=-1 into the “Feed URL” field. Presto, you’ll get dozens of great emails a day from Alphaville, in a more timely manner, full of links and analysis and wit, all for free. Then, if you still want to spend $93 a year for the 6am Cuts, go right ahead.

I’m not entirely clear on why this charge is being implemented, and the way that Alphaville talks about “an executive decision reached somewhere above the tree line at the FT” makes me think that they don’t understand it either. My guess is that it’s a matter of principle: the FT doesn’t want its readers to feel that they can read it for free. And maybe they want their FT.com subscribers to feel more special because they’re getting an email no one else can get. But if the FT is willing to share the information, I’ll be very interested to find out whether anybody signs up for the email-only option. My guess is that the subscriber base is going to be tiny, certainly so long as rivals like the NYT’s Dealbook email remain free.

For every person with a green card, there’s a story of exasperating grappling with an incomprehensible U.S. government bureaucracy. My own story is far too long and boring to go into, but one part of it involved what turns out to be a very common occurrence: my green card was simply lost in the mail, and I was forced to reapply (and pay hundreds of dollars) for a new one on the grounds that it wasn’t returned as undeliverable.

I’ve been reading the ombudsman’s annual report on U.S. Citizenship and Immigration Services, and it turns out that there are plans afoot within USCIS “to improve its mailing technologies”. Which means using the delivery-confirmation service of the US Postal Service. But don’t hold your breath. “This program is developed, but due to financial constraints, is tentatively delayed,” says the report, adding that there is “no scheduled deployment date.” But that’s still better than the plan to link delivery-confirmation numbers to the internal case-status system: that program hasn’t even been developed yet.

Meanwhile, some of the stories about people applying for green cards go beyond exasperating and enter the realm of the truly tragic. I got my green card because I was the spouse of a U.S. citizen; the ombudsman tells the story of another applicant, who was the unmarried child of a U.S. citizen. Have a guess how long that application took:

A U.S. citizen filing a petition in August 1992 for an unmarried son or daughter (F1) in Mexico could not be processed for an immigrant visa until February 2010, nearly 18 years later. Generally it takes another year or more to complete consular processing, including security checks, medical examination, and interviews. In total, the immigration process spanned 19 years in this scenario.

Green card holders, too, can sponsor their unmarried children for green cards — but their situation is complicated even further:

Unlike the situation for a U.S. citizen’s beneficiary, who converts from the F1 to F3 preference category upon marrying while waiting for an available visa, there is no category available for the married son or daughter of a green card holder. The marriage of the son or daughter of a lawful permanent resident (F2B) voids the pending petition, and the priority date is lost. Consequently, many such beneficiaries find they must choose between marriage and immigrating to the United States.

There are nuggets like this throughout the report, and the section on the insane way that the USCIS toll-free support line is run will only confirm all your prejudices about government bureaucracy. As for the deep-seated structural problems at USCIS — what the ombudsman calls “the many systemic problems that arise from its antiquated environment” — IBM has been awarded a half-billion-dollar contract to modernize the agency’s systems. But the ombudsman notes drily that “until the immigration experience tangibly improves for customers, the success of Transformation remains an objective not yet achieved”, adding that “Since USCIS’ inception, every Director has attempted, and failed, to successfully implement a system overhaul.”

Immigration and visa nightmares are a large and growing problem for high-skill employers in the U.S.. Wall Street and Silicon Valley tend to complain the loudest about such things, but they happen everywhere — right now celebrated Colombian journalist Hollman Morris looks as though he won’t be able to take up his Nieman fellowship at Harvard, since the State Department has denied him a visa for reasons that no one can understand. Between dealing with capricious decisions and navigating the insanity that is the USCIS bureaucracy, it’s little surprise that many employers choose to simply set up shop abroad. The national economy will definitely continue to be harmed if we don’t fix this problem, but unfortunately to date there has been no sign of any ability or desire to really do that.

What is the financial legacy of George Steinbrenner? Certainly he’s built a hugely valuable franchise: he bought the Yankees for $10 million in 1973, and they’re now worth just over $1 billion, $1.6 billion, according to Forbes, with Steinbrenner personally worth slightly more than that, some $1.15 billion. That’s a lot more money than he could have made if he just stuck with shipbuilding, and it’s proof of how profitable it can be to overpay for talent.

Steinbrenner also professionalized the business of sports teams, not only in terms of paying lots of money for free agents, but also in terms of financial sophistication when it came to things like setting up the YES Network in league with Goldman Sachs and Providence Equity Partners. He also proved adept at extracting large amounts of money from the the public sector: this breakdown, for instance, puts the total cost of Yankee Stadium at $2.3 billion, of which only $670 million was paid by the Yankees, while taxpayers ultimately ended up on the hook for $1.19 billion.

The new Yankee Stadium was also ahead of the curve in terms of reducing the number of seats while massively jacking up the price of entry, taking the cost of going to a Yankees game out of the reach of many of the most fervent fans who live in the shadow of the stadium (although they’re welcome, of course, to watch all the games on YES). When Steinbrenner first bought the Yankees, the owners of sports teams tended to be very wealthy. He was instrumental in making the players very wealthy as well. And now the crowd is getting much wealthier too. I guess rich people tend to cluster together.

Pine River Capital Management has just launched a new hedge fund. You’ll like the fee structure: there’s no incentive fee at all, which makes for a welcome change from the standard structure where the fund manager takes 20% of the profits. But you might not like the performance: it’s designed to lose between 12% and 18% per year playing in the options market.

Why would anybody invest in such a product? As insurance: the idea behind the fund is that it will soar in the event of extreme market chaos. It’s a productized form of tail risk hedging, and it gives a pretty good indication of how difficult and how expensive true tail-risk hedging really is. Especially since there’s no guarantee that the fund will actually work as hoped.

Deutsche Bank’s Ken Akoundi has a great 21-page primer on tail risk hedging, which lays out the various options. For those of us who rely on old-fashioned diversification across asset classes, there’s this handy cut-out-and-keep chart:

What you’re looking for here is numbers less than zero. At zero, there’s no correlation at all: for instance there’s no correlation between U.S. bonds and managed commodity futures. Less than zero, and you’re likely to at least partially make up in one asset class’s gains what you lose in another asset class: for instance, if you’re long U.S. equities and also long volatility, then when stocks crash and volatility spikes, you’ll do better than if you just held stocks on their own. The correlation between stocks and volatility is very low, at -0.65.

The other asset class which has a negative correlation with stocks is, again, those managed commodity futures — which are not to be confused with commodities themselves. Those have a positive correlation. It’s worth noting that diversifying internationally doesn’t seem to help at all: U.S. stocks have a +0.93 correlation with foreign stocks.

The problem with trying to invest in asset classes like volatility or managed commodity futures, of course, is that it’s expensive and difficult to do so. You can’t just go out and buy an ETF. Deutsche Bank has its own proprietary products, with names like ELVIS and EMERALD, which try to give pension funds the ability to invest in these asset classes, but again it’s hard to know whether they’ll work ex ante. As everybody knows, in a crisis, correlations all tend to zoom towards 1.

So what other options are there for hedging tail risk? Akoundi presents a pretty long list. There are complex things like variance swaps, inflation floor agreements, and tail risk protection indices, but there are also simpler ideas like buying out-of-the-money index puts, or buying credit protection in the CDS market. And then there are the kind of strategies which ask “if there’s a crisis, what’s likely to happen to certain assets”: Akoundi cites as examples the “sovereign risk commodity hedge” of buying calls on gold and puts on oil and aluminum, or the “sovereign risk rates hedge” of buying something known as a  low‐strike receiver swaption in USD.

I’m not a huge fan of these strategies, because they only work if (a) there’s a crisis like the crisis you think might come, and (b) it plays out in the way that you think it will. Crises, of course, have a way of being unexpected, both in terms of where they come from and how they play out. That’s why someone like Peter Schiff could position his investors for the coming crisis, see the crisis materialize, and still lose his investors lots of money.

There’s another way to deal with tail risk, and that’s the Nassim Taleb approach: put 90% of your money in Treasury bills, and then invest the other 10% in options and other instruments which normally go down but which are likely to pay off massively if there’s a crisis or a major spike in inflation. If they don’t, well, at least you still have 90% of your money in Treasury bills. But that kind of strategy is much harder to pull off if the bulk of your money is in stocks rather than risk-free investments.

Ultimately, tail risk is something that’s very expensive to hedge, and attempting to do so might well fail. It’s worth thinking about, but some things, while great in theory, just don’t work so well in practice. And I don’t think there are any tried-and-tested tail-risk hedging strategies.

Po Bronson and Ashley Merryman take to Newsweek to break the shocking news that creativity is on the decline:

With intelligence, there is a phenomenon called the Flynn effect—each generation, scores go up about 10 points. Enriched environments are making kids smarter. With creativity, a reverse trend has just been identified and is being reported for the first time here: American creativity scores are falling.

Kyung Hee Kim at the College of William & Mary discovered this in May, after analyzing almost 300,000 Torrance scores of children and adults. Kim found creativity scores had been steadily rising, just like IQ scores, until 1990. Since then, creativity scores have consistently inched downward. “It’s very clear, and the decrease is very significant,” Kim says. It is the scores of younger children in America—from kindergarten through sixth grade—for whom the decline is “most serious.”…

It’s too early to determine conclusively why U.S. creativity scores are declining. One likely culprit is the number of hours kids now spend in front of the TV and playing videogames rather than engaging in creative activities. Another is the lack of creativity development in our schools. In effect, it’s left to the luck of the draw who becomes creative: there’s no concerted effort to nurture the creativity of all children.

There’s no link to Kim’s paper, which I suspect has not (yet) been peer-reviewed. But I’m inclined to take this finding with a very large pinch of salt.

For one thing, as Kim himself has demonstrated at some length, it’s hard to make apples-to-apples comparisons of Torrance scores as they change from decade to decade. Which makes sense, since conceptions of things like originality and elaboration are culturally determined and evolve over time; indeed, every so often the tests are “renormed” making long-time-series comparisons even harder.

The nature of creativity might be changing: children who grow up with videogames might be creative in different ways to children who spend more time with more traditional toys. And that change in creativity might well show up as a decline in a creativity test invented in 1966, renormings notwithstanding. I’d certainly be interested in what Steven Johnson thinks of Kim’s paper, if and when it’s released.

I’d also love to see statistical evidence that the decline in Torrance scores is significantly correlated with a decline in (rather than simple lack of) creativity development in schools. Bronson and Merryman spend a lot of time talking about how schools can and should teach creativity, but they never quite come out and say that schools were better at such things in the past than they are today.

I have no problem with creativity-based education being baked in to school curricula, and there’s a case to be made that such a change is desirable whether or not Torrance scores are declining. That said, the evidence in favor of innovative kinds of teaching is often based on looking at a handful of schools which have adopted such ideas enthusiastically, and those kind of findings tend not to scale when you try to adopt them across an entire school system. And if big changes to a national curriculum are being proposed as a solution to a given problem, the first thing to do is surely to check and double-check that the problem actually exists. So let’s hold off a minute, here, and look for reactions to Kim’s finding within pedagogical circles. A single paper from a single researcher shouldn’t be enough to spark widespread worries about our children’s creativity.

Alex Edmans makes a very good point today: it makes a great deal of sense, especially in leveraged companies, to pay CEOs in debt rather than equity. What’s more, such compensation is already quite widespread: if a company has promised an executive a defined-benefit pension upon retirement, that’s essentially unsecured debt of the company, and can be substantial.

Edmans is right that there’s the germ of something possibly quite powerful here. If companies started institutionalizing payment-with-debt, rather than having it simply be a necessary byproduct of making promises to pay out money in the future, that could go a good way towards reducing incentives for executives to take on excessive amounts of risk:

The risky project can sometimes create value (e.g. investing in R&D) but sometimes destroy value (e.g. subprime lending). A CEO who holds exclusively equity will take the risky project even when it destroys value (a behaviour known as “risk shifting” or “asset substitution”) because, if he gets lucky and it pays off, his equity will shoot up in value, but if the project is unsuccessful, it is bondholders who suffer the bulk of the losses – as has been clear in the recent global crisis. Equity holders’ losses are capped by limited liability – thus, if the firm is already close to bankruptcy and equity is close to zero, things can’t get any worse and so the manager may “gamble for resurrection,” taking riskier and riskier projects to try to salvage the firm.

The problem, of course, is getting companies to sign up to such a scheme. Compensation committees are created by the board of directors, which is elected by shareholders, not bondholders. So it’s only natural that those compensation committees will structure things in the benefit of shareholders, with bondholders bearing the brunt.

But in extraordinary circumstances, it can be done. AIG executives’ compensation is in 80% debt and 20% equity, for two unusual reasons. Firstly, the equity is worthless, and the executives know that the equity is worthless. And secondly, the debt is paying an attractive coupon.

Expanding this model from AIG to other leveraged companies will be hard. But increasingly institutional investors place their money across the whole capital structure of a company, rather than just in equity or in debt. If a firm’s big shareholders are also big bondholders, they might be able to persuade the board to do the right thing.

Merkel’s Rules for Bankruptcy: Berlin Club as ‘International Guarantor’ — Spiegel

Adventures in bank PR doublespeak, BofA edition — ProPublica

Wherein the Daily Telegraph calculates that £20 placed on a 3,000-to-1 bet will pay out at £6,000 — Telegraph

Box-office futures, RIP: Cantor fires most of its HSX staff — The Wrap

Consumer Reports Says It Doesn’t Recommend Apple’s iPhone 4 — Bloomberg

William Poundstone’s new book sounds like a great addition for your behavioral-economy shelf — Aleph Blog

Remember when left-wing inside-the-Beltway pressure-group person Tom Matzzie started demonizing Steve Eisman for being a short seller, without actually engaging with any of his arguments about how for-profit colleges are causing a huge amount of damage and very little benefit? Well, it wasn’t long before another inside-the-Beltway pressure group joined in: this time it was Melanie Sloan, of something called Citizens for Responsibility and Ethics in Washington.

Sloan’s letter to Tom Harkin, of the Senate Committee on Health, Labor, Education, and Pensions, received a great reply, pointing out that Sloan had no problem with people invested in the for-profit college’s success testifying in front of Harkin’s committee:

Mr. Eisman is not the only person to testify before a Senate Committee this year who has a stake in federal policy. Indeed, the same panel had another witness with a financial stake in the regulatory treatment of for-profit colleges: Ms. Sharon Thomas Parrott of DeVry University. In the case of both Mr. Eisman and Ms. Parrott, their financial interests did not preclude them from having valuable information that benefited our discussion of the for-profit educational industry…

We welcome your observations and invite you to further explore the actual matter of our hearing. I have attached a report released at the hearing that outlines in greater detail how the for-profit colleges receive $23 billion in taxpayer dollars, but offer little transparency regarding the outcomes of that investment. Your assistance in seeking greater transparency in the for-profit higher education industry, for example, on behalf of its students, as well as taxpayers, would be a great service.

Good for Senator Harkin. But of course there’s clearly a fishy organized campaign going on here: why exactly are people like Matzzie and Sloan suddenly getting terribly exercised about Evil Hedge Fund Short Sellers in general, and Steve Eisman in particular? Eisman’s testimony is very compelling, and so the only possible grounds to attack him are ad hominem ones, essentially saying that he can’t be allowed to testify just because of who he is and how he makes his money.

Now Matzzie and Sloan have a most unlikely new bedfellow in their campaign against the short sellers: Sharona Coutts of ProPublica. Last year, ProPublica launched what it calls an “ongoing investigation” into for-profit schools, especially their graduation and loan-default rates. She’s naturally on the side of the angels here, which is to say, the short-sellers. But nothing was published in 2010, until now, when Coutts filed a story headlined “Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges.”

You might remember Coutts from a dreadful story she filed in 2008, attacking Goldman Sachs for putting out credit research. This story isn’t half as bad as that one, but at heart it’s similar, assuming that anything done by anybody on Wall Street must be suspect:

Some short sellers appear to be moving beyond assessing particular companies and taking a financial position accordingly. Now, says the Career College Association, some are trying to stage-manage the reporting of negative stories to fuel the impression of a groundswell of anger against the schools.

“Certainly there are legitimate critics. I may not agree with them, but they’re not in it to fatten their wallets,” said Harris Miller, president of the CCA, which represents for-profit schools. “But I think that a lot of the activity going on, and with other media reports, is being driven by the short sellers, who are hiring people who are semi-disguising who they are and not being candid with people about their role in trying to drive down the stock price of certain companies.”

The only remotely scandalous thing in Coutts’s story is the tale of a single researcher, Johnette McConnell Early, who helped to organize a letter signed by the representatives of 19 different homeless shelters, complaining about how “for-profit trade schools and career colleges are systematically preying upon our clients.” Early’s mistake was that she didn’t tell the signatories that she was employed by an investment firm. She could and should have done so, because now some of the signatories feel that they were duped:

“Had I known, I probably wouldn’t have signed on,” Panico said. “I probably would have contacted one of the other people and said, ‘Hey, now that we have all this information, let’s do this ourselves.’ I think it’s sleazy to basically use me and use other executive directors that have a real issue to make a profit for some companies.”

The irony here, of course, is that the letter would have had even more force if Panico and the other signatories had simply taken the information from Early and put together the letter themselves: that way no one could discount the real moral force behind the letter on the grounds that there was any kind of hidden agenda.

But instead, Coutts is now writing a silly exposé of a non-issue, quoting the paid representative of the for-profit schools uncritically, and training her sights instead on exactly the people who are willing to invest a lot of time, effort, and money into uncovering the gruesome truth.

Coutts doesn’t know who paid Early: it may or may not have been Eisman. I hope it wasn’t: it would be an ethical blunder on Eisman’s part to be anything but fully transparent about his efforts to get the government to crack down on this sordid industry. On the other hand, she’s not being entirely transparent herself about where she got the information that Early was working for a hedge fund; in fact, she never says in the article who fed her that particular nugget. If I had to guess, I’d say that it was Harris Miller, and I’d also be very interested in finding out what his connections might be with Matzzie and Sloan.

As for the headline on Coutts’s piece, it’s clearly Coutts herself, rather than “investment funds,” who’s stirring controversy here. (Incidentally, it’s pretty hard to justify the plural in the headline: even if Coutts Early was hired by an investment fund, it’s pretty safe to assume that there was only one fund involved.) Unless and until Coutts started phoning up the signatories to the letter and asking them how they felt about being duped by Evil Hedge Fund Short Sellers, there was no controversy here at all: in fact, it looks to me that the entire controversy, insofar as it exists, has been manufactured by Coutts and the anti-Eisman brigade. Certainly there’s no indication, anywhere in Coutts’s story, that the likes of Miller and Sloan look pretty desperate if the biggest gun they have to train on Eisman’s arguments is that a single researcher, who might not have anything to do with Eisman at all, made a stupid mistake regarding her personal disclosure. Especially since full disclosure would have made no real difference to anything.

The lesson here, I think, is that short sellers have to be very, very careful to be whiter than white in anything they do or say: the companies they’re campaigning against will happily just start shouting “short sellers!” in an attempt to drown out rational argument — and those shouts, sadly, can be very effective. Happily, Tom Harkin, at least, seems to be quite good at ignoring them.

Update: ProPublica’s Dick Tofel leaves a comment, saying that “ProPublica found out who wrote the letter by asking some of the people who signed it”. Which makes the whole thing seem even less scandalous.

BusinessWeek has a big feature on the value of a college degree, and naturally has presented it in the format of a ranking. College rankings are profoundly silly things, and this one is no exception; it purports to calculate the extra amount of money that graduates of certain universities earn, compared to the amount that they would earn if they hadn’t gone to college, thereby coming up with some kind of dollar figure for value-for-money. It then ranks “30-year net return on investment”, which ranges from $1.69 million at MIT to just $998 at Black Hills State University in Spearfish, South Dakota.

There’s a lot to dislike here, and the BW story twists itself into knots listing one disclaimer after another. For one thing, the survey doesn’t look at how much people actually spend on college tuition: it just looks at the headline rack rates, failing to take into account any kind of grants or student aid. It also uses a 30-year-long dataset, which includes a lot of years when women were chronically underpaid. That penalizes women’s colleges.

What’s more, the survey does a very bad job of quantifying the benefits of a liberal-arts degree. Let’s say you go to college and then earn $45,000 a year working in the theater, or you end up with a steady job in public administration or social services. You’re clearly better off in many different ways than a high-school graduate earning the same amount — you’re probably happier in your job, you’re doing what you want, and you have more job security. But the BW methodology would give you a negative return on your university tuition, on the grounds that you missed out on earning money while you were at college.

There are other problems with the survey, too, which aren’t even hinted at in the BW story. Pay for college graduates has been rising over the past 30 years, while pay for individuals with no more than a high-school education has been falling sharply. But the survey pays no attention to those trends, and assumes that the income prospects for someone with no college education are the same now as they have been, on average, over the past 30 years. Needless to say, that’s ridiculous.

The survey also assumes that students who drop out of any given university will make no more money than if they hadn’t enrolled at all. That’s trivially false in the case of top-ranked universities like MIT and Stanford, where you could probably make the case that dropouts end up making more money than graduates.

And the survey also concentrates solely on income, rather than wealth. Getting large paychecks is one — but only one — way to get wealthy. And I’m pretty sure that college graduates in general are wealthier than non-graduates earning the same amount of money. If nothing else, they have a tendency to marry each other, so even if they don’t end up earning a lot of money themselves, they can still benefit from their spouse’s higher income.

Even with all those caveats, one thing jumps out from the survey, which again BW doesn’t mention: even the very worst-performing colleges — the ones coming 851st and 852nd out of 852, for instance, where fewer than one in three students even graduate — have significantly positive “annualized net ROI”s. John Carney looks at these numbers and concludes that “the ROI on going to college is worse than the S&P” — not when the ROI on the S&P is negative, it isn’t. Clearly anybody who’s got a good chance of graduating from university would be much better going to university than investing their tuition money in an S&P 500 index fund.

The one thing which most annoys me about the survey, however, has nothing to do with the methodology, and rather the way that the results are presented: you have to do a lot of clicking and scrolling to try to read them, and they’re not searchable. So while the results carefully make the distinction between public and private colleges, they don’t make the distinction between for-profit and non-profit private colleges. Are there any for-profit colleges in the list? How do they stack up? That’s one datapoint I’d be fascinated to see, but I can’t find it anywhere.