Felix Salmon

Mohamed El-Erian weighs in on Ireland today, and is blunt:

What is most desirable is not feasible given the path Europe is embarked on; and, to make things even more complicated, what appears feasible to Europe is not necessarily desirable. As a result, Ireland finds itself stuck in an unstable muddled-middle.

What seems probable in Ireland is a Greece-style bailout. It’s a debt-go-round, basically: the sovereign takes on the bad debts of its banks, becoming less creditworthy itself in the process; and then the EU takes on the debts of the sovereign. Writes El-Erian:

While seemingly exceptional to many, this approach constitutes the path of least resistance. In fact, it is the most feasible. But we should not confuse feasibility with desirability.

At its roots, the approach addresses liquidity but not solvency. It adds to the debt overhang rather than reducing it. And it uses the socially-painful method of income and growth compression as the principal way to promote international competitiveness over time.

This approach hasn’t worked in Greece, which still has sky-high borrowing costs and which is no more internationally competitive now than it was during the bailout. And it’s unlikely to work in Ireland, either.

So what might work? Default and devaluation, basically:

In a wider policy debate, debt restructuring would be considered as a possible pre-emptive option rather than a disorderly inevitability; thought would be given to the possibility of the weakest Euro-zone members taking a type of sabbatical from the club and rejoining on a stronger and more sustainable basis.

These options are still unthinkable politically. But as El-Erian says, the longer they’re put off, the worse the consequences for European growth in general, and the higher the likelihood that the crisis will engulf the entire eurozone. Right now, says, El-Erian, “given the undeniable strength of core Euro-zone countries, anchored by a fiscally sound and economically robust Germany,” it’s possible to structure a default and devaluation in such a way that the country concerned emerges in a strong fiscal position and with a healthy growth outlook. But the longer we wait, the harder that becomes.

I do think that it would be grossly unfair should the lenders to Ireland’s insolvent banks find themselves getting bailed out by Irish and EU taxpayers at 100 cents on the dollar. Is a sovereign debt restructuring the only way to avoid that? I’m not sure. And it’s also politically all but impossible to build a mechanism into the eurozone allowing countries to exit and re-enter again at a more competitive level, now that the currency union has been deliberately designed without that possibility in place.

Essentially, what El-Erian is calling for requires a level of political unity within the eurozone which has rarely existed historically and which certainly doesn’t exit now. Which is why, as he says, “the region as a whole will lose out in terms of both what is desirable and what is feasible.”

Time’s Stephen Gandel says that Loan Value Group’s Responsible Homeowner Reward program is one of “the 50 best inventions of 2010″:

Under LVG’s patented Responsible Homeowner Reward (RHR) program, banks promise to pay borrowers who continue to pay on time a lump sum — typically 10% of their original loan amount — when they sell or refinance their home. Miss more than one payment and the reward disappears. It’s still early (fewer than 5,000 people have been enrolled), but LVG says fewer than 10% of the borrowers in RHR have ended up defaulting, compared with a redefault rate of more than 20% for other loan-modification programs.

I like the program too, and am hopeful it will have lots of success. But what’s with that “patented”?

It turns out that RHR is technically an invention of 2009, not 2010, if you look at its patent application. Loan Value Group hasn’t actually been awarded the patent yet—Gandel was a little bit ahead of himself there—but LVG’s Frank Pallotta told me that applying for a patent on the idea “was the first thing we did” after setting up the company, and that the patent application preceded substantially all of the time and effort that LVG put in to building RHR.

Pallotta is an expert in mortgages, not in intellectual property, but he did say that he hadn’t personally ever come across a finance company applying for a patent on its idea before.

What’s more, it’s generally accepted that financial innovations can’t be patented: it’s an argument that Sebastian Mallaby regularly rolls out, for example, to defend and explain the secrecy of hedge funds. If you can’t apply for a patent, then the only way to stop people copying you is to operate in utmost secrecy.

But I’m not a fan of this development. For one thing, it’s unnecessary. The barriers to entry in this business are high: Pallotta says LVG has spent millions of dollars over the past few years building and marketing the program, as well as running it by a lot banks, servicers, investors, and regulators. And what’s more, LVG would probably benefit, at the margin, if and when its idea was ratified by the entrance into the market of other people doing pretty much the same thing.

More generally, I don’t want to see a world where people wanting to do positive things in the housing market are stymied by worries over patent suits. There is a worry that sleazy operators will put themselves forward as doing homeowners a favor when in fact they’re doing no such thing, but patent law is not the best way to stop such people. LVG had a good idea in 2009. But that doesn’t mean it should be able to patent the idea, and implicitly threaten anybody else thinking about entering the space with an expensive lawsuit.

Update: Mike Masnick points out 1998′s State Street decision, which was the point at which financial innovations started being patented.

When Meredith Whitney released her magnum opus on America’s municipalities in September, there was lots of grumbling about why an expert in financial stocks should be listened to on the subject of municipal bonds. But she’s serious about this: building on the work that she did for that 600-page report, she’s now formally setting herself up as a credit rating agency in direct competition with Moody’s and S&P.

I see two forces at work here. One is the way that the reputation of Moody’s and S&P was shredded in the crisis, creating an opening for competitors; Jules Kroll sees that too. The second is the continued failure of the independent-research business model to actually make money. Many have tried and few have had any success: while financial institutions on both the buy-side and the sell-side do value high-quality research, they tend not to want to pay for it.

So Whitney is building a second revenue stream here: alongside selling research to investors, she’ll also sell ratings to issuers. I wish her luck: breaking the ratings duopoly is very hard, as anyone at Fitch will tell you.

But she’s chosen the right corner of the market to get involved in: municipal ratings are a racket. Municipalities are forced to pay big fees three times every time they issue debt: first to the bankers and lawyers for the debt issuance, then to the ratings agencies for a rating, and finally to the monolines for a wrap. The ratings agencies make sure that the ratings they give municipalities are lower than the ratings they give the monolines, so that the municipalities are forced to pay up to bridge the difference.

John Carney has published his theory that investors are wise to the idea that monolines are rated more leniently than municipalities, so none of this matters:

We’d only want to require the same criteria for corporate bonds and muni bonds if we discovered that measuring them by different criteria created some serious market failure. But markets aren’t as stupid as that. Markets are very much aware that muni bonds rarely default, regardless of the rating. This is why muni bond investors accept lower yields—they know they are getting less risk…

Rating munis according to the same criteria as corporate bonds would reduce the amount of information available to the market by obscuring differences in the risks of different municipalities. If two-thirds of munis were rated triple-A, investors would lack guidance about real differences between the issuers.

The truth is that different types of debt are rated on different scales, and the market is very well aware of this.

Muni spreads have gapped out since Carney wrote that, and so he’s changed his tune a little:

Without an exchange traded equity market, and free from many financial disclosure rules governing public companies, muni investors are dependent on analysts and ratings agencies to discover information about the financial health of issuers.

How bad can things get for munis? Very, very bad. During the 1873 Depression more than 24 percent of the outstanding municipal debt defaulted.

I’ve been saying something similar for a while, although I’ve been concentrating more on moral hazard than on financial considerations. (When a municipality’s bonds are insured, the cost of default falls quite a lot.)

What’s clear is that there’s real credit risk in the muni market, and that bond investors are very bad at doing the enormous amounts of legwork needed to measure it. Whitney sees profit there. And the more trouble munis get into, the more money she’s likely to be able to make in this market.

“I’d – I’d really prefer to live in a doggy-dog world” — Dinosaur Comics

Fabulously bonkers argument that Dodd-Frank is unconstitutional — Federalist Society (PDF)

A European sovereign bailout is really a bank bailout. Here’s the list of banks — Alphaville

Dan Primack owns the Rattner story. His response to Rattner’s statement — Fortune

Have you forgotten about the mortgage-bond scandal yet? I’m sure a lot of bankers are hoping that you have. But Adam Levitin hasn’t, and his written testimony today to the House Financial Services Committee is well worth reading in full. He concludes:

The foreclosure process is beset with problems ranging from procedural defects that can be readily cured to outright fraud to the potential failure of the entire private label mortgage securitization system…

In the worst case scenario, there is systemic risk, as there could be a complete failure of loan transfers in private-label securitization deals in recent years, resulting in trillions of dollars of rescission claims against major financial institutions. This would trigger a wholesale financial crisis…

A critical point in any global settlement must be removing mortgage servicers from the loan modification process. Servicers were historically never in the loan modification business on any scale, and four years of hoping that something would change have demonstrated that servicers never will manage to successfully modify many loans on their own. They lack the capacity, they lack the incentives, and the lack the will…

For many, the preferred course of action is not to deal with a problem until it materializes and certainly to avoid any loss allocation that might threaten US financial institutions. But if we pursue that route, we may well be confronted with an unmanageable crisis. We cannot rebuild the US housing finance system until we deal with the legacy problems from our old system, and these are problems that are best addressed sooner, before an acute crisis, then when it is too late.

David Dayen reports on the consequent follow-up, in oral testimony, between Levitin and Brad Miller, who’s arguably the most sophisticated member of the House when it comes to mortgage finance.

Levitin said that we don’t have the full data sets from the servicers, or any comprehensive data to see whether there is a full-on crisis of unclear title and improper mortgage assignment. In other words, we don’t quite know the full extent of the problem. Levitin said, essentially, “The federal regulators don’t want to get info from servicers, because then they’d have to do something about it.” They don’t want to recognize the scope of the problem because it would require them to act.

And Levitin in particular singled out the Treasury Department. “The prime directive coming out of Treasury is ‘protect the banks’ and don’t force them to recognize their losses.”

Essentially, there’s a three monkeys act going on here: the servicers will hear no evil, the trustees will see no evil, and Treasury will speak no evil. And so long as they all remain deaf, dumb, and mute, they can ignore the problem as it slowly approaches systemic levels.

One very suggestive datapoint here comes from Tomasz Piskorski, Amit Seru, and Vikrant Vig, who have written a very dense but important paper on what happens to houses and mortgages when borrowers are delinquent on their loans. One finding is that banks are much less likely to foreclose on delinquent loans if they own the mortgage themselves than if they’re simply servicing the mortgage on behalf of RMBS investors. Foreclosure destroys value for the owner of the loan—but, crucially, it does not destroy value for the servicer, who therefore has very skewed incentives.

And then there’s this chart, at the end of the paper:

What you’re looking at here is the percentage of delinquent mortgages which are put back to the lender after they turn delinquent. All of these mortgages had early pay default clauses, which allowed investors to put back any loan which went delinquent within three months.

The investors, of course, can’t put back the bonds themselves: they have to rely on their trustee to do so for them. But the trustees are so otiose that they don’t do that.

Look at the y-axis: the highest number there, about 14%, is the fraction of loans which went delinquent in the very first month, and which were returned within three months. For loans which went delinquent in the third month, less than 5% were ever put back.

By rights, 100% of those loans should have been put back: that’s the whole point of having an early pay default clause in the contract. But the otiose trustees instead simply do nothing.

Levitin makes an extremely strong case that it’s much better to bite the bullet now, even if that involves socking the banks with losses, than to wait for the situation to continue to deteriorate to the point at which a devastating crisis is unavoidable. But Treasury, it’s clear, is not going to act, any more than the servicers or trustees are. Maybe because the technocrats at Treasury don’t really mind seeing pain being borne by homeowners and investors. Just so long as the banks are OK.

When a big new book comes out, the publisher has two choices. It can allow Amazon to sell the Kindle edition at a much lower price than the hardback, increasing the number of copies sold but possibly cannibalizing hardback sales. Alternatively, it can force Amazon to charge a high price for the Kindle edition, garnering a passive-aggressive note on the website saying “This price was set by the publisher.”

The result looks something like this. All the Devils are Here, published by Penguin Portfolio, is $16.99 on the Kindle; Decision Points, published by Crown, is $9.99. And in return for allowing Amazon to subsidize the Kindle price, it seems that Crown has agreed not to sell the book in Apple’s iBook store:

And here’s the tag cloud for the Kindle edition of All the Devils are Here:

It’s easy to overstate how representative the vocal protestors are, but it’s certainly clear that e-book buyers are price-sensitive. Has an e-book priced at more than $10 ever made it to the top of the Kindle bestseller list?

The SEC is all over the news today. It’s investigating Citigroup! It’s examining Charles Schwab, over the YieldPlus fiasco which we thought was settled but wasn’t! And, of course, in conjunction with Andrew Cuomo, it’s coming down on Steve Rattner like a ton of bricks:

The two lawsuits seek at least $26 million from Rattner and his immediate lifetime ban from the securities industry in New York…

“Steve Rattner was willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions,” said Attorney General Cuomo. “Through these lawsuits, we will recover his ill gotten gains and hold Rattner accountable.”

Technically it’s Cuomo who’s bringing the suits, while the SEC is announcing a $6.2 million civil settlement with Rattner, timed beautifully to coincide with the first day of trading in GM shares. But what seems clear is that the SEC, egged on by the likes of Cuomo and emboldened by its success in extracting half a billion dollars from Goldman Sachs over the Abacus affair, has started to grow some teeth for the first time in living memory.

This means significantly heightened regulatory risk for just about everybody in the financial-services industry. And it could, conceivably, be the beginning of a national process of holding firms and individuals accountable for their excesses in the run-up to the financial crisis. The SEC is certainly taking its time, here: these suits and settlements are dribbling out very slowly. But you can be quite sure that they’ve only just begun.

A big infographic on how banks sold themselves CDOs — MortgageRates

“I dislike arguments that disparage moral intuition while inviting the clever to delight in the counterintuitive” — Interfluidity

Pre-roll ad views more than doubled in six months — AdAge

Max out your credit cards: even evil card companies only want a tiny fraction of the return that VCs do — Dash

The Washington Independent, RIP — Washington Independent

New York City proposes extending subway to New Jersey — Reuters

There’s no point in appointing a Wall Street type to the NEC if Wall Street doesn’t trust him — TNR

BofA’s seizure of $500 mln Lehman deposits unauthorized — Reuters

Cookbook writers are terrible at estimating how long it will take to cook a recipe — Slate

Peter Eavis has an elegant solution to the Ireland crisis, and he even manages to squeeze it into less than 140 characters — Twitter

Are we ever going to get a good article on the hugely important microcredit crisis in the Indian state of Andhra Pradesh? The WSJ took a stab on October 29, but the article was thin, added nothing to the FT’s earlier report, and spent more time rehearsing well-known facts about the microfinance industry than it did trying to explain exactly what was going on so suddenly and why. The WSJ didn’t even mention the precipitating cause of the crisis, an ordinance passed by the state governor on October 15 which essentially shut down a whole class of microfinance lenders.

Now the NYT has published its own attempt to cover the story, under the striking headline “India Microcredit Faces Collapse From Defaults”. The story does a good job of bringing us rapidly up to speed on the extent of the crisis:

Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.

Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.

I’m not sure that the language about legislators is true: the ordinance clearly states that “the Legislature of the State is not now in session” and that it is being promulgated by the governor.

More importantly, the NYT fails to mention the main reason why the ordinance was passed, which is that the government runs a rival microlending program, known as self-help groups, or SHGs. As Justin Oliver explains,

It’s only the MFIs that are affected by the current crisis. Clients in Andhra Pradesh have essentially stopped repaying MFI loans, but SHG loans continue to be repaid for the time being. It’s worth noting that some of the loudest complaints about MFIs have come from the Andhra Pradesh state agency that oversees and promotes the SHG program.

All of this starts getting very messy very quickly; the Center for Global Development’s David Roodman, who has been the foremost blogger covering the crisis in detail, feels the need to qualify one recent post by saying that “as an outsider, I only half-understand the extraordinarily complex situation.”

But the way to make sense of a complex situation is not to do what the NYT does, and simply concatenate a series of quotes from various important participants. In one long and frustrating passage, the NYT quotes Vasant Kumar, the state’s minister for rural development; Reddy Subrahmanyam, a government official; Vikram Akula, the chairman of SKS Microfinance; Vijay Mahajan, the chairman of Basix; Ela Bhatt, head of the Self-Employed Women’s Association; and then Mahajan again, this time identifying him as chairman of the Microfinance Institutions Network. They all talk their various books, and the NYT writers — Lydia Polgreen and Vikas Bajaj — seemingly just throw their hands up in the air and leave it to the reader to decide whom to believe.

That’s pretty much impossible, not least because the NYT fails to spell out all the biases: the story neglects to mention, for instance, that Basix has moved beyond microfinance to offer many other financial services, which explains why its chairman is willing to be quite critical of the industry.

The NYT also ignores a strong counternarrative which blames the whole crisis not on predatory microlenders but rather on the government of Andhra Pradesh. Impassioned blog entries along these lines from Eric Bellman at the WSJ and Vineet Rai at the Harvard Business Review are contentious (which is fine, they’re blogs), but they are also much more deeply informed than most of the reporting we’re seeing. Much the same can be said of Milford Bateman, who takes the other side of the debate with virulence and verve, accusing the microlenders of greedily looting the poor. If you read, say, Rai and then Bateman, you’ll learn a lot more about what’s really going on than you will if you try to follow the tenuous thread of the NYT article.

The blogosphere is also the best place to look for a genuinely fair and balanced one-stop take on the whole affair. Beth Rhyne, of the Center for Financial Inclusion, wrote a great blog entry on the Andhra Pradesh crisis for HuffPo a couple of weeks ago, spreading the blame for the crisis liberally among microlenders, federal regulators, and state-level politicians. If you want to read a short piece explaining the crisis and its implications for microfinance globally, this is undoubtedly the place to go. And in an interesting twist, Rhyne only wrote it after the WSJ story came out, because she felt that story was in such dire need of a corrective.

In fact, I’m beginning to think that this is one of those stories which is better reported from your neighborhood coffee shop with wifi than it is from Andhra Pradesh itself. There’s nobility in sending reporters halfway around the world to get the story at first hand, and the NYT does provide the compulsory human-interest color by ending the story with a 38-year-old farmer who owes $2,000 and has no ability to repay it. But the paper breaks no news with this story, and seems so keen to re-report everything by talking to the principals involved that it’s forgotten the first purpose of stories such as these, which is to explain the world clearly to the readers back home.

The irony here is that by flying across the planet for the story, the NYT has missed the big global picture, which is that Andhra Pradesh is simply the latest and largest proof that microfinance as an industry is at the mercy of regulators and politicians, who are more likely to get things wrong than they are to get things right. Remember Nicaragua? It doesn’t take much in the way of political demagoguery to persuade a population to stop paying its loans en masse, driving the local lenders into immediate bankruptcy. Similar things have happened in Bolivia, Bosnia, Pakistan, and Morocco, but the microfinance true believers are often oblivious to this kind of political risk. Silicon Valley billionaire Pierre Omidyar has put some $200 million of his own money into microfinance, for instance, but when I met him in New York recently and asked him about this risk to the model, he had no idea what I was talking about.

It’s pretty clear to me that there’s a direct causal relationship between the IPO of SKS Microfinance, which garnered $117 million for another Silicon Valley billionaire, Vinod Khosla, and the collapse of the microfinance industry in SKS’s base state of Andhra Pradesh. When outside dollar investors make millions off the backs of the poor, the poor are liable to rise up and display a decided lack of gratitude.

But that’s not a story you’re going to read in the New York Times — not when Vikas Bajaj, one of the reporters on this story, filed a gushing profile of Khosla last month, calling SKS a “roaring success”:

Some nonprofit experts say commercial social enterprises have significant limitations and pose conflicts of interest. But proponents like Mr. Khosla draw inspiration from the astounding global growth of microfinance — the business of giving small loans to poor entrepreneurs, of which SKS Microfinance is a notable practitioner…

Mr. Khosla said his experience with microfinance had helped shape his views on the best way to tackle poverty. He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers.

But did SKS actually make those needy borrowers any richer, even as it was multiplying Khosla’s own investment 37-fold? I suspect that the single best financial decision that many of them ever made was to simply stop paying their SKS loans entirely.

SKS won’t ever be able to collect on the loans where its borrowers have gone on strike, and there’s no point in even trying; neither can it sell those loans to anybody else. Roodman says that “microcredit portfolios are like sand castles” — if you try to pick them up and move them to another institution, they disintegrate, since they’re based on a personal relationship between lender and borrower.

SKS’s loan portfolio in Andhra Pradesh has effectively evaporated, and no for-profit microlender is immune from the same thing happening to them. This is a global issue, which should be addressed by scaling back, going local, giving borrowers ownership of their lenders, and generally being much less ambitious when it comes to growth rates. Much better that full-service banks grow organically out of local communities than monoline microlenders parachute in, flush with venture-capital funds, make a huge splash, and then implode.

Update: Roodman, who should know, says that the best reporting on the AP crisis is coming from M Rajshekhar of The Economic Times in India.

I work for a global information company which makes billions of dollars a year selling valuable data to banks, hedge funds, and other people in the financial markets, often at very high prices: $2,000 a month or even more.

And then there’s Twitter, which jealously guards access to its full stream of tweets (roughly 1,000 per second, these days). As of now, however, it’s signed a deal with Gnip whereby you can get a randomly-selected 50% of those tweets for $360,000 a year, which works out at $30,000 a month. You’re not allowed to republish them, but that’s OK—the people willing to spend that kind of money are likely to be high-frequency trading shops who want to keep the data as private as possible in any case.

I don’t have a problem with Twitter monetizing my public tweets in this manner; as I understand it, DMs aren’t included, and neither are any tweets from protected accounts. But it’s quite astonishing how much those tweets are worth, when they’re aggregated into a fat pipe. And it’s also interesting to me how much more 50% of the full stream is worth than 5%, which you can get for just $5,000 a month. Given the rapidly-diminishing marginal returns of each additional Twitter stream, I wonder where the added value comes from. I’d imagine that if a topic starts trending on the 50% feed, it will almost certainly be trending on the 5% feed as well.

I do, on the other hand, have a problem with other sites—Facebook in particular—monetizing my private information. I worried that Mint might be doing that kind of thing back in March, and in general if any website wants to sell any information of mine which isn’t public, I want them to ask my permission first. As Twitter shows, aggregated user data can be very valuable indeed. And with that kind of money on the table, there’s a lot of incentive to be ethically flexible.

Alexandra Berzon has an enjoyable piece in today’s WSJ about the Cosmpolitan, the new $4 billion casino, fully paid for by Deutsche Bank, which is opening up in Las Vegas next month.

Berzon gets the obligatory isn’t-Wall-Street-a-casino-anyway shot in at the beginning of the piece, and then walks through the chain of events which resulted in a $60 million loan to a Las Vegas developer somehow morphing into ownership of a $4 billion project. But I would have loved to see a bit more detail on the finances:

Deutsche was originally just funding the project, pumping in a loan of $1 billion to build the soaring two-tower development. But its original developer, Ian Bruce Eichner, defaulted on Deutsche loans in 2008…

By the time the Cosmopolitan holds its grand opening next month with a New Year’s Eve party featuring Jay Z and Coldplay, Deutsche will have spent an additional $3 billion from its own coffers. That makes it one of the most expensive resorts in Las Vegas history.

Already, Deutsche has written off nearly $1 billion of its Cosmopolitan investment, according to securities filings…

After Mr. Eichner left the development, the bank was still uncomfortable about getting directly into the casino business. It tried to cut deals with more established players, including Hilton Worldwide and MGM Resorts International, but the deals didn’t come through.

Several other potential investors declined because they weren’t confident the Cosmopolitan could cover its loans, according to people involved in the talks.

What’s missing here is any explanation of its decision from Deutsche itself, beyond a bland statement that Thomas Fiato, the bank’s head of corporate investments, made to Nevada regulators. Berzon has talked to “people involved in the talks”, and there’s nothing about Deutsche refusing to comment, so I assume she talked to Deutsche executives off the record. But after reading her article I’m left with a lot of questions.

For one thing, how did Deutsche come to the decision that the best thing to do with a construction site in the middle of Las Vegas was spend $3 billion of its own money turning it into a new casino? I can see how it might have been a bit overoptimistic when it lent $1 billion to Eichner in the first place. But when Eichner defaulted on that loan and Deutsche defaulted, clearly there were problems in the Las Vegas real estate market. And when big casino operators took a look at the construction site and walked away, that was obviously a sign that Deutsche’s sunk costs were never going to be recovered.

And yet, somehow, Deutsche decided that the smart thing to do was to throw $3 billion of good money after its $1 billion of bad money. Why? What made them think that they could see a healthy return on that $3 billion even as no one else showed any interest in the deal? And given that casino investments are always risky, what justification did they have for adding such a big one to Deutsche’s balance sheet?

Furthermore, when did Deutsche take its “nearly $1 billion” write-off? If Deutsche knew that it was going to write off substantially all of its initial loan in any case, then wouldn’t it have been just as expensive and much less risky to just give the entire construction site away? And if Deutsche has now put $4 billion into the development, does that mean that the Cosmopolitan, which has yet to host a single paying guest, is valued at something north of $3 billion on Deutsche’s books? What would a reasonable valuation be, in this market?

Finally, what does Berzon mean when she says that other potential investors walked away “because they weren’t confident the Cosmopolitan could cover its loans”? What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?

The tale that Berzon tells is entirely consistent with Fiato and his team getting so caught up in the Cosmopolitan concept when they agreed to finance it that they simply couldn’t let go, wanting to retain at least a substantial debt-finance involvement and ultimately deciding to finish themselves what Eichner was unable to do, placing valuations on the Cosmopolitan that no one else was willing to ratify. But we don’t quite get there: we get hints of that story, but not enough detail to see it clearly. Let’s hope there’s a follow-up.

(Cross-posted at CJR)

We’ve seen the problem, and we’ve seen why quantitative easing doesn’t seem to be much of a solution. So what is the solution? Fiscal policy, of course. But don’t hold your breath.

The proposal from Bob Corker and Mike Pence to abolish the dual mandate is pure gesture politics. It probably won’t even become a bill; if it does become a bill it won’t become law; and even if it does become law it won’t actually change what the Fed does.

What’s more, Corker and Pence simply don’t make any sense to the reality-based community. For instance, Corker wants the Fed to be “focusing singularly on maintaining the value of the dollar,” which sounds for all the world like a third mandate to replace or go alongside the inflation and employment mandates. What happens, for instance, if inflation is low and the dollar is falling? Or if inflation is high and the dollar is rising?

Meanwhile, Pence is declaring that QE2 “will monetize our debt and trigger inflation,” which is kinda the whole point of the exercise, since the Fed is worried that inflation is too low. Giving the Fed a simple inflation target would only make it easier to justify this kind of action when inflation is low and falling.

Neil Irwin gamely tries to come up with an example of where the abolition of the dual mandate might make a difference in practice:

In the first half of 2008, inflation was very high as energy and other prices skyrocketed. Yet the labor market was getting worse, with layoffs mounting. Bernanke and his colleagues cut interest rates to try to address the deteriorating economy, while the European Central Bank, focused as it is solely on inflation, raised interest rates to contain prices.

It’s true that the ECB was late to the rate-cutting party, although it got there eventually with 225bp of rate cuts between November 12 and January 21; in hindsight I’m sure it wishes it had started earlier. But it was hardly aggressively raising interest rates, either: there was a quarter-point hike in June 2007, to 3%, and another quarter-point hike in July 2008, to 3.25%. Meanwhile, the Fed funds rate was at 5.25% as late as September 2007, and came down to the ECB’s 3% level at the beginning of 2008.

But at that point the Fed was already in full-on crisis-fighting mode, trying to get ahead of the rapidly-deteriorating financial situation. Of course it worried about layoffs, but the main reason for the rate cuts was the financial system rather than the unemployment rate.

It’s silly to think that the U.S. central bank won’t step in to help in the face of a financial crisis. But the fact is that Corker and Pence are embarking on their Fed-bashing crusade not because they think they’re being constructive or helpful in terms of setting the parameters of US monetary policy, but rather because they’re playing to the Tea Party wing of the GOP. This is internal Republican maneuvering, and interesting mainly on a political level. As policy, it’s eminently ignorable.

It’s all about the bailouts today, as Warren Buffett contributes a thank-you-for-the-bailout op-ed to the NYT to run alongside the paper’s reasonably comprehensive accounting of which bailout monies have been paid back, which might be, and which won’t be. (Think banks, AIG, and Frannie respectively.)

The next big tranche of bailout repayment funds, of course, is going to arrive tomorrow, with the upsized GM IPO. The size of the stake that Treasury’s selling has been growing impressively, and at this point it looks as though taxpayers are going to end up owning just 33% of GM, down from 61% right now.

The more shares that the government sells in the low $30s, of course, the harder it’s going to be for Treasury to realize an average price of $44 per share for its stake by the time its last share of stock has been sold. That’s the point at which the government breaks even on the deal. But I’m glad that Treasury isn’t letting such considerations stop it—holding on to stock just because it’s trading below some arbitrary 0% return figure is simply speculating in the stock market, and it’s not Treasury’s job to be a stock-market speculator.

Meanwhile, the Ireland bailout is already well under way, the protestations of Ireland’s PM that Ireland isn’t asking for one notwithstanding: we’re still in the middle of the bailout era, and we’re not even close to a point where bailouts are a thing of the past. Portugal is next, Greece is inevitable at some point, and various U.S. states might well end up getting bailed out too, sooner or later.

We haven’t even put an end to bailouts of the private sector, since any bailout, even of a sovereign, is ultimately a bailout of its private-sector creditors.

All of which means that sovereign debt is going to continue to go up rather than down: at heart, bailouts are a way of moving indebtedness from the bailed-out entity to the government doing the bailing out. With yet another debt reduction task force reporting today, it might be time to start asking how and whether crisis-related bailouts can ever be accounted for in long-term sovereign debt planning.

What Joe Nocera has in common with Matt Taibbi: “Individually, I honestly think the biggest villain is Alan Greenspan” — NYMag

She still doesn’t get it — Cook’s Source

From 2006: George Osborne urges Brits to copy the Irish economic miracle “They’ve much to teach us.” — Times

Only 2 days left to bid $4,000 on a 2-week internship at Rolling Stone mag — Charity Buzz

The Murdoch plan for the WSJ: go aggressively highbrow — WSJ

Whole Foods begins rating meat based on how producers treat animals–antibiotic use, cage-free, etc. — Chicago Tribune

Unemployed English Girl to Wed Soldier from Welfare Family — Awl

Soros Fund Management now owns >4m shares of InterOil, worth $304,215,776 — GuruFocus

The state of the Celtic Tiger — Independent