I’m fascinated by the various headlines reporting the deficit commission’s 11-7 vote.
Some treat the plan as some kind of independent entity which was lobbying for votes: the WSJ runs with “Deficit Plan Fails to Win Panel Support,” while Reuters plumps for “Deficit-cut plan falls short, offers framework” and Fox News has “Deficit Commission Report Fails to Advance to Congress.” The Washington Post goes long: “Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action.”
Other headlines concentrate on the panel as the key actors, and the range of views here is very wide. Bloomberg says bluntly that “Debt Panel Rejects $3.8 Trillion Budget-Cutting Plan,” in line with the FT’s “Panel reject US budget deficit plan”. Politico is a bit softer — “Debt panel falls short on votes” — while NPR is positively upbeat: “Majority Of Deficit Commission Endorses Plan; Not Enough To Make It Automatic.” Ezra, too, looks on the bright side, plumping for “The fiscal commission succeeded — sort of.”
My feeling here is that the second group is probably better than the first: the news here should properly focus on the deficit commission and what it has failed or succeeded in doing. It was the commission which was charged with putting a bipartisan plan together, it was the commission which faced the very high hurdle of getting 14 votes (a 78% supermajority), and it was the commission which ultimately didn’t manage to get there.
Interestingly, there was one particular caucus within the commission which was responsible for its failure: the members of the House. There were six of them altogether, three Republicans and three Democrats, and five of the six voted no; those five votes alone were enough to veto the plan.
There’s a certain irony there, in that it’s the House which just passed the fiscally responsible version of extending the Bush tax cuts, and it’s the Senate which seems to want to pass the much less responsible version with lots of extra tax cuts for the rich. It seems that senators love to clothe themselves in the garb of fiscal statesmen when it doesn’t matter, but balk at such ideas when they actually come up for a vote; the House, meanwhile, works the other way around. Needless to say, none of this bodes well for getting anything substantive through Congress in the foreseeable future.
The unemployment rate has long been called Obama’s Katrina, but at this point it’s clear that it’s much worse than that: its political toll is surely worse for the president than a bungled hurricane response could ever be. Its human toll too, probably. And while it’s never a good idea to read too much into a single datapoint, the fact that it rose, unexpectedly, to 9.8% in November is undeniably bad news.
Catherine Rampell has a great piece in today’s NYT about the long-term unemployed, complete with a new parsing of data from the Labor Department:
People out of work fewer than five weeks are more than three times as likely to find a job in the coming month than people who have been out of work for over a year, with a re-employment rate of 30.7 percent versus 8.7 percent, respectively.
She also reprints a familiar and damning chart: the average duration of unemployment is now significantly longer than the 26-week maximum duration of unemployment benefits.
Rampell does a good job of explaining what the sensible policy responses might be for a government looking to bring these numbers down. The list of possibilities includes tax breaks for hiring the unemployed; direct employment of the unemployed, as in the New Deal; and programs devoted to retraining and apprenticeship. Notably absent from the list is the idea of getting the Federal Reserve to buy long-dated Treasury bonds, which seems to be the only thing the government is actually doing.
Indeed, the elected branches of government are making things worse rather than better: 2 million of the long-term unemployed lost their federal emergency unemployment aid on Tuesday, and Republicans in Congress are much more interested in a $700 billion scheme to extend tax cuts for people earning more than $250,000 a year than they are in providing some kind of social safety net for people who have been out of work for more than six months.
Rampell ends her piece with a resonant point:
“After a while, a lot of European countries just got used to having 8 or 9 percent unemployment, where they just said, ‘Hey, that’s about good enough,’ ” said Gary Burtless, a senior fellow at the Brookings Institution. “If the unemployment rates here stay high but remain relatively stable, people may not worry so much that that’ll be their fate this month or next year. And all these unemployed people will fall from the front of their mind, and that’s it for them.”
European countries, of course, don’t cut off benefits after six months, just when the unemployed need them most. But Burtless’s point is well taken. Right now, the unemployment rate is rising and therefore news, which means that people are at least paying attention to it. If it just bogs down, over the long term, somewhere north of 8%, then at that point the policy debate loses all urgency, and unemployment gets added to the long-term fiscal outlook as something which really ought to be addressed but never is.
Vinicius Vacanti has a very smart analysis of the economics of Groupon, which also helps explain why companies like OpenTable are trading at such stratospheric valuations. The real value of Groupon lies in its email list. But Groupon’s list is a list of bargain-hunters. Companies with large lists of people who have already demonstrated their ability and willingness to pay full price—companies like OpenTable—can present an even more attractive proposition to would-be advertisers.
This doesn’t mean that Google’s overpaying for Groupon at $6 billion. No one else has cracked the local-advertising-online conundrum nearly as well as Groupon has, and, as Evelyn Rusli points out, the multiples involved are significantly lower than Google has paid for other acquisitions. Besides, shareholders want Google to put its enormous cash pile to good use and try to get a decent return on it, rather than letting it just sit there gathering dust or returning it to shareholders who wouldn’t know what to do with it either.
There’s also something a little snobbish about the criticism of the deal:
Despite Groupon having some social media trappings, and being profitable, it feels oddly old-fashioned.
Groupon amasses groups of users to take part in mass one-off discounting programmes by retailers – hence the name. In the US, where coupon-clipping is still popular, despite the power of Wal-Mart’s “every day low prices”, it grown very rapidly…
Buying an electronic coupon company? Is this the way to revolutionise the world?
No, it’s not a way to revolutionize the world: Google’s good at growing those in-house. Instead, it’s just a natural way for Google to expand its ad revenues: it started with simple text ads, moved into display with the acquisition of DoubleClick, got into mobile with AdMob, and is now doing coupons.
Sure, there’s defensive strategy involved here: Google doesn’t want Groupon ending up in the hands of Facebook or Yahoo. But Jon Fortt, when he says that Google would be better off buying Gannett, does a good job of presenting Google’s dilemma. Local advertising dollars have historically flowed into local media companies, and Google has no desire whatsoever to be in the business of producing local media. It wants to be a pure advertising play, with no editorial content of its own. And it also wants to be online: its attempt at selling print ads was a disaster.
Groupon gives Google access to a whole new market segment it otherwise would have great difficulty reaching. Maybe the acquisition will turn out to be overpriced. But Google can afford to make a $6 billion mistake. So the risk is worth taking.
Scott Austin has an interesting article about a third form of capital-raising: not debt, not equity, but a deal where investors get back a fixed percentage of revenue for a certain amount of time:
Royalty investors say the default provisions of royalty loans are generally less onerous than bank debt, and the payments are variable not fixed, allowing for flexibility if a company loses a major customer or has a down year.
Perhaps more importantly to entrepreneurs like Dan French, the chief executive of independent brokerage house Leonard & Co. in Troy, Mich., entrepreneurs give up little or no equity in these royalty scenarios.
It’s an interesting idea, which could, in theory, be extended to large companies, too. But before it gets scaled up, it’s first being scaled down, by a company called Profounder, which was founded by Kiva and Prosper alums.
Profounder has two arms. One offers “private investment opportunities,” which are basically the same as the opportunities offered by companies like Arctaris Capital Partners, Cypress Growth Capital, and other firms in the space. Except in this case, Profounder doesn’t help find investors: the only people who can invest are friends, acquaintances, and family members who are specifically invited to do so by the person raising money. As such, it’s hard to see why anybody would use Profounder rather than a shop which could actually help find money.
The other arm of Profounder is more problematic, and offers “public investment opportunities.” But “investment” is an odd way of putting it, because the way these things are designed, there’s no way that any investor can ever get back more money than they invested in the first place. Profounder spins this the best way it can:
If you make your original investment back before the term of the investment contract is up, your share of the revenues for the remainder of the term will go to a great nonprofit that the business has chosen. So, if you invest $1000, and in year 2 of a 3-year investment contract that $1000 comes back to you, any payouts from your revenue share above and beyond this $1000 for the next year will go to a great nonprofit.
The only good news here is that none of the companies seeking this kind of funding look as though they’re going to reach their goals. (And if you don’t reach the full amount, you don’t get any money at all.) The closest to their goal is textile-design company Proud Mary, which has received 17% of its $12,000 goal. Investors will receive 6% of Proud Mary’s revenues over the next 4 years; those revenues are projected to total $221,000, which means that if all goes according to plan, investors will get their $12,000 back and a worthy charity—Nest—will get $1,260.
Proud Mary founder Harper Poe says that her projected revenue for 2011 “is a conservative calculation”; after that, revenues are projected to rise between 10% and 12% per year.
But let’s have a look at that conservative projection:
Entrepreneurs have to be optimistic, of course, but I don’t see how a rise in revenues from $6,500 in 2010 to $47,000 in 2011 can possibly be described as “conservative.” Poe says the $47,000 figure is “based on the sales of our newly designed line for Spring/Summer 2010″, but she gives no details as to how it was arrived at. If Poe manages to grow her 2010 revenues at a compound annual growth rate of 25%, they would total $46,846, and investors would get back $2,811 — or just 23% of what they invested. Alternatively, if Poe just cashes the $12,000 and lets Proud Mary wither away while she gets a proper job, investors get nothing at all, while Poe is $12,000 richer.
I was alerted to Profounder by an anonymous correspondent, who writes:
It appears that what ProFounder is doing is employing an innovative strategy to leverage the “halo effect” of non-profits into providing businesses a very cheap form of capital.
Like most social-ventures/bottom-double line/etc investments targeted at retail investors, it appears highly unlikely that the money invested in these ventures will ever produce a positive return. However, by affiliating the investment with a potential donation to a non-profit organization and not allowing the investors to generate any positive return, investors begin thinking of this as a “donation” more than an “investment”. Investors start to think “it’s ok that I don’t get all my money back because it’s for a good cause”, but of course if the investor doesn’t get all their money back, then the good cause gets nothing at all.
My correspondent did the math on the 10 companies featured by Profounder: three of them won’t even pay back the investment if they meet their revenue targets in full! And Chill Low Glycemic Organic Soda, which is asking for $200,000, is projecting $44 million in revenues over the next four years, despite never having made a single penny to date. In order to repay its investors, it will need to bring in $5,714,285 over the next two years; there’s no indication of how it’s going to be able to do that on an investment of just $200,000, or where any other money might be coming from.
Steve Waldman, of Interfluidity, comments, via email:
I like the idea of nonequity revenue sharing investing in small businesses, but I don’t like this at all. I want small business investing to be investing, that is, I want people to choose good businesses and gain or lose from the quality of their choices. The hokey giveaway to nonprofits takes out much of the incentive to monitor businesses on commercial terms: the funding is viewed as a donation (best-case scenario is a loss when the time value of money is taken into account). The primary motivation for funding becomes expressive — do I “like” this business.
I have no trouble with there being an expressive component to investing, and I think funding costs ought to be lower for businesses that people “like”. But I think we want investors who do intellectual work about evaluating businesses, and they won’t do that without compensation.
I want to invest in small businesses, not subsidize them and mix my subsidy up with gifts to nonprofits. I dislike this pretty strongly, because it associates smallbiz investing with charity rather than with the good work of building successful businesses.
Steve is absolutely right. The fundamental problem with Profounder is that it turns small businesses into charity cases, which they are not and should not be. Finding innovative sources of small-business investment funds is a great idea. But let’s not implement it like this. Especially when Profounder itself is a for-profit operation which skims 5% off the top of any money raised.
ProPublica is my favorite one-stop shop for presenting the Fed data dump in an at-a-glance format. The main thing that jumps out is that three banks, more than any others, were the primary recipients of the Fed’s lending facilities:
I’ve included the banks in positions 4 and 5 just to make clear how big the gap is here: Citi, Merrill, and Morgan Stanley each borrowed more than $2 trillion from the Fed in total. No one else borrowed even $1 trillion.
Of course, a lot of these were overnight loans being rolled over day after day: it’s not like the Fed ever lent this much money at any one time. But the sums involved are still astonishing, especially for Merrill Lynch and Morgan Stanley. We all know what happened to Citi and to Merrill, but this underlines just how rocky Morgan Stanley was at the height of the crisis.
The only time I’ve ever got a genuine death threat from my blogging was when I wrote this, on October 9, 2008:
It looks like we’re getting close to one of the market’s vicious syllogisms here: without the market’s trust, Morgan Stanley is nothing. The market doesn’t trust Morgan Stanley. Therefore, Morgan Stanley is, well, toast.
My guess is that at some point over the weekend, Hank Paulson will announce that he’s using his new authorities under the TARP to effectively nationalize Morgan Stanley, following Gordon Brown’s lead in the UK. And Morgan Stanley will only be the first of many banks to suffer such a fate.
I was right about the government stepping in to save Morgan Stanley from a vicious market where it couldn’t stand alone; I was just wrong about which arm of the government would be intervening. It wasn’t Treasury, it was the Fed.
How should bike-share services pay for themselves? Up until now, the main model has been sponsorship and advertising. But CityRyde has a bright idea: why not sell carbon offsets?
The idea’s pretty simple: as bike-share use rises, the amount of carbon-emitting vehicle use falls. So bike shares save carbon; CityRyde even has a methodology to determine exactly how much. (One thing I’d like to see, though: virtually all bike-share programs involve trucking bikes from the center of town back into the periphery, not to mention transporting broken bikes to be fixed. So somewhere in the methodology there should be an accounting for the amount of carbon emitted by the bike-share program itself.)
In any case, if the bike-share program sold carbon offsets to companies which want to claim to be carbon-neutral and to individuals wanting to offset their carbon emissions, that could raise some revenue: CityRyde co-founder Jason Meinzer told me his rule of thumb is that you could bring in between $25 and $100 per bike per year that way. For a scheme with 50,000 bikes in New York City, that would equate to between $1.25 million and $5 million per year: hardly chump change.
Meinzer didn’t share with me exactly how he got his numbers, though, so I ran a smell test. Let’s say each bike travels 15 miles per day, 350 days per year: that’s 5,250 miles per year. A lot of bike rides are simply for pleasure, and others—especially in a city like New York—replace walking or taking mass transport. Those are activities with negligible marginal carbon emissions.
But let’s say that 1/3 of bike journeys would otherwise have been taken in a car of some description. That means that each bike saves 1,750 passenger-miles in cars. If one car carries the same number of people as two bikes, on average, then that’s 875 car miles saved. At 1.2 pounds of CO2 per mile, that’s basically half a ton of CO2 emissions saved per bike per year. And while the market in carbon offsets is far from transparent, my feeling is that you’d be lucky to get $5 per ton, which would equate to $2.50 per bike per year. That’s a full order of magnitude lower than Meinzer’s lower estimate.
Meinzer’s methodology is a lot more sophisticated than that, and I’ll update this post if he wants to share his own math. But at $5 per ton, selling carbon offsets would gross only about $125,000 a year—which, by the time you subtract the cost of measuring the carbon saved and administering the sales, leaves you with little or nothing in net revenue. So while it’s an intriguing idea, I’m not yet convinced it’s a practical one.
Update: Meinzer says that he does account for the carbon costs of the program, in the “Project Emissions” and “Leakage” sections of his methodology; I don’t see it myself. And he explains that he gets his much higher estimate for total revenues from selling carbon offsets at a much higher price:
Our credits most certainly will be sold at a premium due to the novel co-benefits associated with their generation even outside of the carbon mitigated; e.g. health and social (and remember some credits sold for as high as $111 last year). This has been validated by the carbon brokers we’ve been working with over the years. Moreover, outside of the “price-point” per carbon a key angle we are taking to obtain an even higher premium on our credits is via creative bundling; by lumping the carbon credits w/ the sponsorship and advertising. Case in point – Blue Cross Blue Shield donated $1.5 million to have their name tied to the existing 1,000-bike Minneapolisbike share. Had they been able to purchase the offsets stemming from that program the donation would have been MUCH higher. This argument is reinforced by the fact that this donor in particular clearly has a key interest in health, and so the aforementioned co-benefits of our credits would prove even more attractive given the health-benefits of biking. Most big names companies are already offsetting their carbon emissions each year anyways for a variety of reasons, even outside of a regulatory mandate.
Hal Scott has an op-ed in Forbes, taking the Obama administration to task for supporting the Argentine government in its court fight against holdout creditors. As the prospect of sovereign default spreads from emerging markets to the euro zone, Scott wants the US to do everything it can to encourage other governments to never default. “Default,” he writes, “should only be a last, disgraceful resort.”
What I’m most interested in here is the way that Scott is identified:
Hal S. Scott, a professor of international finance at Harvard Law School, has filed an amicus brief in the Argentine litigation.
This is true, but it needs to be parsed very carefully to be properly understood. In reality, Scott is a paid partisan in the Argentine-debt wars, and has been for years. In September 2006, he released a paper entitled “Sovereign Debt Default: Cry for the United States, Not Argentina”, which can be found hosted on the website of ATFA, the vulture-fund-backed pressure group which is the lobbying arm for Argentina’s holdout creditors. (ATFA also emailed me to make sure I’d seen Scott’s piece in Forbes.)
Scott’s 2006 paper was very radical: it suggested massive changes to the Foreign Sovereign Immunities Act which would be tantamount to repealing the entire thing. He said that “the US should endeavor to give creditors the same rights against sovereign borrowers that they have against private borrowers” and that if foreign central banks have assets in the US or Switzerland, those assets should be “available to be attached in satisfaction of debts owed by the sovereign” — as should sovereign payments to the IMF. Creditors should also, he said, be able to seize state-owned companies if those companies were owned by a state in default.
This is very extreme stuff, and violates every norm in international diplomacy: it’s never going to happen. Scott’s paper was a salvo in the court battle over Argentina’s debt, and I have always assumed that it was paid for—as was his amicus brief—by Argentina’s creditors. (Scott was writing briefs siding with them as long ago as 2004.) But as Charles Ferguson showed so well in his movie Inside Job, academics are incredibly bad at disclosing even when they’ve been paid by vested interests, let alone how much they’ve been paid.
Scott, then, is hardly a disinterested law professor here, as a naive reading of his Forbes bio might suggest. Is it too much to ask that he disclose that he’s been paid by Argentina’s creditors, even if he doesn’t have to give a dollar amount?
Gawker Media’s big company-wide redesign, a year in the making, will finally come out of beta on January 3. It will the biggest event in Gawker Media history, for all three arms of the company—editorial, sales, and technology. It’s a concerted attempt for Gawker Media to stop being a blog network and start being something much more ambitious. And while that will be most immediately visible in the way that the blogs look, a massive change is taking place on the sales side, too: Chris Batty, Gawker Media’s semi-legendary head of sales, is leaving the company.
Gawker Media has had more than its fair share of staff turnover, of course. Much of it, especially at the Gawker flagship, has been detailed obsessively in the press. But above the editorial fray, the executive team has been constant all along: Nick Denton, the owner and CEO; Gaby Darbyshire, the general counsel and COO; Tom Plunkett, the CTO; and Batty, the VP of sales and marketing, working alongside the VP of sales, Gabriela Giacoman. Batty’s departure marks the first visible fracture in this team, and is a sign of just how far-reaching Denton’s changes really are.
This is a monster post, so I’ll put the rest below the fold. The stuff about Batty and Gawker Media’s revenues comes near the top, the stuff about corporate structure and valuation is near the bottom.