Felix Salmon

Georgina Adam has the gobsmacking story, for the Art Newspaper: according to the European Commission, works by Dan Flavin and Bill Viola are not art.

In its ruling a Flavin work is described as having “the characteristics of lighting fittings…and is therefore to be classified…as wall lighting fittings”. As for Viola, the video-sound installation, says the document, cannot be classified as a sculpture “as it is not the installation that constitutes a ‘work of art’ but the result of the operations (the light effect) carried out by it”.

It’s not just the EC which thinks this way: the ruling reinstates a decision by UK Customs, which charged Haunch of Venison £36,000 ($56,188) in taxes for importing a Flavin sculpture — four times as much as they should have done. Haunch appealed, and won, but now the appeal has been overturned by the EC.

The idiocies here are numerous — for one thing, it’s pretty obvious that no set of light fixtures would ever be worth £180,000 if it wasn’t art — and that the amount of money you get by taxing art at 5 percent is vastly greater than the amount of money you get by taxing the underlying light fixtures at 20 percent. The EC wants to have its cake and eat it here: on the one hand it’s only light fixtures, and so it’s taxable at 20 percent, but on the other hand it’s many orders of magnitude more valuable than any other set of fluorescent lamps.

On top of that, substantially all art is the result of the light effects being out by some carefully-constructed object. Try admiring a Rembrandt in the dark, if you don’t believe me.

This ruling sets the worst type of precedent, since I doubt there’s any practical way that it could conceivably be used by a customs office or anybody else to determine whether or not any given object is art. (But I haven’t seen it: can someone find a copy, or a link to it, somewhere?)

But most fundamentally, Flavin and Viola are art. Of course they’re art. We’re not in 1976 any more, when people could and did actually debate whether a Carl Andre sculpture was art. Today, neither Flavin nor Viola is remotely controversial; in fact, Viola is downright conservative in many ways, and both of them are firmly ensconced in the canon.

I hope this story gets picked up widely, and that the people responsible for the ruling get identified, and asked all the obvious questions over and over again. (Update: as well as the UK bright sparks who appealed the ruling to the EC in the first place, of course.) Meanwhile, a large portion of the European art industry is likely to be in panicky disbelief right now. The ruling can’t stand — but how is it going to be overturned?

(Via Cottrell)

Is Mary Meeker’s job these days really to sit on various tech boards? — Fortune

This payback story of an eBay scam & the “glim-dropper trick” will make you smile — Gizmodo

The inhumane conditions of Bradley Manning’s detention — Salon

A list of multi-million-dollar fines at BofA and Wachovia, 2006-2010 — Charlotte Observer

Amazing block-by-block census map of NYC — NYT

Keith Hennessey, one of the four Republican commissioners on the Financial Crisis Inquiry Commission, has helpfully provided a copy of the Financial Crisis Primer the commissioners sent to the President and Congress. The commissioners sent the primer “to as best we can comply with the deadline in the law”, writes Hennessey in two different colors, adding:

It’s probably hopeless, but I want to encourage reporters to focus on our substance rather than our process.

Of course, this man who so values substance over process is the same person who voted against giving the FCIC more time to compile its report, on the grounds that doing so would violate “section 5(h)(1) of Public Law 111-21″.

What’s more, it’s hard to focus on any substance here when the primer is essentially 5,400 words of nothing much at all. There was a housing bubble. The US government was involved. So were the banks. There was a run on the banks. Which hurt the economy. That’s basically it. As advertised, the terms “Wall Street”, “shadow banking”, “interconnection”, and “deregulation” are nowhere to be found.

For this anodyne material, bereft of any insight, we’re paying something over $1,000 a word?

I did ask the FCIC today whether there’s any chance of them putting all their source material online; I haven’t heard back, but at this point it seems the only way to get any value at all out of the $6 million we’ve spent on this panel. A book will be published; it will be rubbished by Republicans; it will have no lasting impact. But give us that Goldman Sachs data dump, and we’ll discover so much more. Maybe not a financial-crisis smoking gun, but an unprecedented degree of access into the real inner workings of Wall Street. Now that would be valuable.

Back in November, Michael Perino said he wasn’t hopeful on this front:

Along with its report, the panel could release all the documents and interviews it has collected. The amount of material is staggering –800 witness interviews and millions of pages of documents. Making these documents available will allow independent analysts (in essence, an army of wiki-investigators) to draw their own conclusions from the data. It’s just what Angelides said he wanted the FCIC to do — lay out the facts for the American public and allow them to draw their own conclusions.

The prospects for immediate release of this material, however, seem slim.

Today, perhaps Phil Angelides has changed his mind a little. If he can’t release a definitive and bipartisan report, maybe he can go one better and release the actual facts he’s discovered instead.

I did enjoy reading John Cassidy on Larry Summers:

There are things not to like about Summers, one of which is the fact that he appears to hold the Fourth Estate in contempt. At the same event where he failed to thank his boss, a speech to the Economic Policy Institute, a journalist asked him what he would miss most about being in the White House. “Reporters like you,” he replied with a chuckle. Doubtless, Summers thought he was being amusing. Still, reporters need to get over it. After all, we aren’t the only folks Larry considers intellectually beneath him. Such a category would include most members of President Obama’s cabinet and their top policy advisers; many of his colleagues in the White House; virtually all foreign officials; ninety per cent of the Harvard faculty; and a similar proportion, or possibly higher, of his fellow academic economists.

Cassidy goes on to criticize Summers on quite a lot of other fronts too, before saying that ultimately we have to judge him on whether he guided Barack Obama in the right policy direction. His conclusion there: Summers noticed the “glaringly obvious” fact that there was a crisis going on, and did something about it. After that, “the Obama Administration has made a series of policy errors for which Summers must share responsibility”.

Essentially, the only good thing that Cassidy can find to say about Summers is that he was “largely right” in terms of identifying and responding to the crisis. What Cassidy fails to note is that Summers had already identified the crisis and said what should be done about it before he joined the Obama team. In many ways, his crisis-related policy prescriptions, which he laid out quite pompously in the pages of the FT before getting tapped by Obama, were his very public job application — and he wound up being passed over for both of the jobs he was applying for.

Obama always knew, pretty specifically, what policies were needed to respond to the crisis — and in many cases those policies had already been enacted by the Bush administration. Summers was chosen because he believed in those policies; it’s simply not the case that the policies were enacted because Summers was chosen.

Which brings Cassidy’s list of “things for which we owe Summers some gratitude” down to absolutely nothing.

Catherine Rampell has an interesting post today on the economics of Spider-Man, the most expensive musical that Broadway has ever seen. Even assuming it’s a massive hit, she says, it’ll make its producers no more than $313,489.80 a week—which means it will be “about 4 years before the show even begins to make up its initial investment.”

But this calculation misses the elephant in the room: the absolutely enormous upside tail risk for a hit musical. Remember, after all, Taymor’s last foray onto Broadway:

If your reference point is The Lion King, all bets are off. Mounted at a cost of about $25 million in 1997, it has so far grossed $4.2 billion worldwide.

Of course, you can’t do that on Broadway alone: at $313,489.80 a week it would take over 250 years to gross $4.2 billion.* But a global franchise can make money in dozens of cities around the world simultaneously: once you’ve done all the initial work of putting the Broadway production together, it can become a license to print money—just ask Andrew Lloyd Webber. What’s more, Spider-Man already has a lot of the global reputation needed to get to that stage, as we’ve seen with the success of the movies.

It’s easy to see how a Spider-Man musical, especially if it has music by Bono and The Edge, could more or less sell itself in just about any global market — which means that the possible profit, here, is in the billions. Broadway is just a place to develop the concept: it’s not where the real money is made.

*Update: Thanks to Kyle Maclean, who points out that I’m confusing box-office gross with profit here. Rampell’s figures assume a gross of $1,646,991 per week, at which rate it would take a mere 49 years to gross $4.2 billion.

I just started reading Erika Olson’s Zero-Sum Game, her account of the CBOT-CME merger. Her introduction of the CBOT’s CEO, Bernie Dan, includes this passage about his college days:

He’d often tell classmates his future goal was “to pay more in taxes than most people make.” They thought he was joking, but he wasn’t.

That seems to me to be a good baseline for what it means to be rich; it certainly felt that way to the young Bernie. And so I wondered what income that amounts to.

The national median income is $52,029; in New York state it’s $55,980; and in Manhattan (New York county) it’s $68,295. Playing around with a paycheck calculator, I reckon that in order to pay $68,295 in annual income and payroll taxes, a NYC resident with one standard allowance would have to earn about $192,000 per year. And of course if you start taking further deductions for things like children and mortgages, that number rises significantly.

It’s harder to work things out nationally, since taxes vary from state to state. But an Illinois resident with the same single deduction would have to earn about $186,500 in order to pay $52,000 a year in taxes.

In other words, using Bernie Dan’s definition, it’s reasonable to conclude that “rich” is about $190,000 a year. Which seems reasonable to me.

Sharon Terlep’s story on GM trying to pay down its debt is a great indicator of how the leverage-is-good meme simply refuses to die, even after the financial crisis.

What GM is doing is very simple. The main reason to carry debt is the tax advantages it gets, but GM already has all the tax advantages it will be able to use for the foreseeable future thanks to all the losses it made in previous years. Meanwhile, as GM vividly remembers, carrying a large debt load can be devastating in a cyclical downturn. So GM is trying to pay down its debt and carry as little of it as possible.

But Terlep just can’t seem to believe it’s as simple as that. And so we find:

GM, like its Detroit rivals, had long carried a large debt load to help finance the business through the industry’s periodic downturns.

This makes no sense. A large debt load is a bad thing, not a good thing, in a periodic downturn. If a car company loses money in any given year, it has to borrow that money. But borrowing money is much easier and much cheaper if you have a small debt load than if you have a large debt load.

Terlep seems desperate to find some kind of a downside here:

GM’s plan carries risks. Should the car market again fall severely, GM may not be able to keep funding new vehicles and other investments through current earnings alone.

I’m not sure that’s a risk. If the car market again falls severely, then GM’s lower debt load will make it easier to borrow money to keep funding investments in new autos. GM CFO Chris Liddell isn’t ruling out borrowing money in a crisis — he’s just announcing a baseline plan for paying down debt if there isn’t a crisis. Indeed, a few grafs later, Terlep contradicts herself:

In wiping out most debt, GM hopes to cut the tie between sales levels and its ability to invest in vehicles.

Which is it to be? Does the plan mean that GM won’t be able to invest in vehicles during a downturn, or does it mean that GM will be able to invest in vehicles during a downturn? The latter is surely the case, but Terlep does seem to want to have it both ways.

And this is surely a stretch way too far:

Anticipating GM may again borrow at least some money, Barclays Capital and Goldman Sachs on Tuesday began quoting prices for credit-default swaps for GM debt, a way for investors to insure against losses in any bonds GM may issue.

Does Terlep really think that investors are going to buy protection now against bonds which “GM may issue” some time in the future? Of course not: they’re buying protection now against bonds which are outstanding now. But more to the point, quoting CDS prices on GM in no way means that Barclays and Goldman are “anticipating GM may again borrow at least some money.” Indeed, a case can be made that the opposite is the case: if GM really is going to pay its debt down to essentially nothing, then a great way of getting free money is to write protection on GM debt now, and then just cash your insurance premiums for the next 3 or 5 years. It’s certainly a lot cheaper than buying outstanding bonds.

All of which makes me mistrust something Terlep says earlier on in the story:

“The new GM is trying to be the new GM,” said Gimme Credit analyst Kimberly Noland. Yet over the long term she sees GM needing to return to borrowing.

“Needing,” here, is a strong term: if GM is going to need to return to borrowing over the long term, that basically means it’s going to lose money over the long term. Is that really what Noland meant? Or did she just suggest that GM at some point will issue debt, on its own terms? Given the tone of the rest of this piece, I wouldn’t assume that Noland said what Terlep says she said.

(Crossposted at CJR)

Shahien Nasiripour reports this morning that the Financial Crisis Inquiry Commission has, to all intents and purposes, fallen apart. The four Republicans seem set to issue their own minority report, sticking to discredited Republican talking points which blame the government and Frannie for the crisis, with especial focus on the long-standing and harmless Community Reinvestment Act. As a result, the official report will be received as some kind of equal-and-opposite Democrat view, rather than a definitive take along the lines of the 9/11 Commission report.

Given that putting this report together seems to be impossible, here’s my suggestion: it should go open-source. The FCIC’s great advantage over other narratives of the crisis is its subpoena power: it has access to enormous amounts of information no one else has seen. If it can’t collate that information into a definitive report, it should make all the information public—including everything in that notorious Goldman Sachs data dump—and let all of us have at it. Collectively, we should be able to do at least as well as the partisans in DC.

Update: You really can’t make this stuff up:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

“One senior defense official questioned the wisdom of blocking the newspaper sites” — WSJ

Brooklyn borough prez Marty Markowitz sings a tribute to bike lanes — YouTube

Citi Mortgage gave Phil Falcone a $22.5 million mortgage at 2.357% — WSJ

Lots of new Lucian Bebchuk papers — Harvard

Jim Ledbetter on how America is “losing the battle against the darker aspects of the military-industrial complex” — NYT

The UK’s Institutional Investor Council has issued a blistering report on the excessive fees that investment banks charge companies to issue new shares — fees which one issuer are “usually immoral”. It certainly seems that way, looking at this chart: fees have been steadily increasing over time, even as the discount at which the new shares are issued has got larger and larger. The bigger the discount, of course, the less risk taken on by the underwriter, since the more that the share price would have to plunge overnight in order for the underwriter to risk losing money on the deal.

Yes, this chart includes the financial crisis, and it stands to reason that fees for rights issues would rise during a crisis. But we’re not in a crisis any more, and the fees aren’t coming down to their historical levels, even though the discounts are still enormous. And it’s notable that fees hit these highs on a percentage basis just as the amount of underwriting was surging:

What we’re seeing here is a textbook example of banks squeezing every last dollar they can out of their clients just when those clients are most desperate for money. And it stands in stark contrast to legal fees, which were considered fair by issuers and which have not risen visibly at all over the past few years.

None of this is illegal, of course, but it’s fair to call it unethical, if ethics are fundamentally based on the principle of “treat others as you would like to be treated”.

Christina Rexrode had a long article on banking and ethics in Sunday’s Charlotte Observer, and she concentrated on the kind of behavior which steps close to or even over the line into outright illegality. Maybe it’s just so blindingly obvious that banks behave in a fundamentally immoral manner most of the time that her editors considered that not to be news — charging $35 for a $2 cup of coffee, slapping enormous overdraft fees onto those who can least afford them, pushing high-interest credit cards on desperate customers, locating credit-card operations in South Dakota where usury laws are at their laxest, encouraging people to use the bonkers anachronism that is signature debit, steering customers into the financial products which pay the highest commissions, etc etc. All of this is legal, and all of it is designed to funnel as much money as possible from the customers’ pocket to the bank’s bottom line, and none of it is in the customer’s best interest, which means that none of it can really be considered moral.

More generally, Wall Street is an inherently adversarial place, where players are constantly trying to benefit from the misfortune of others. I’ll happily sell this stock to you at $40, because I think it’s going down, and I think that you’ll be sorry you bought it. Ethics and morals are very narrowly defined, when it comes to finance, and generally just mean being honest. Of course there’s much more to morality than simple honesty — and in any event honesty in financial markets is never simple.

So the issuers are absolutely right that the bankers are immoral — and the bankers are going to continue to ignore such questions, because ignoring such questions is how they make the big bucks. Here’s Rexrode:

The Observer broached the topic of banking and ethics with more than 50 people, almost all of them bankers or former bankers. Only 10 of the bankers agreed to be interviewed on the record. Some said they would speak only under anonymity because they feared retaliation from their employers…

People who spoke up could be seen as disloyal. The units that churned out the most revenue held the most sway with executives and other decision makers.

“To throw a flag in the sand and say, ‘I’m not sure about this’ – you’re not having a philosophical discussion with your priest, you’re saying to the guy in the next cubicle, ‘I’m not sure you should be making as much money as you’re making,’” said William Atwood, executive director of the Illinois State Board of Investment, an investor in major banks.

Ethics are great, of course. But money? In finance, that’s always greater.

(HT Dealbook, although they neglected to link to the report.)

“The history of the Internet is, in part, a series of opportunities missed,” says Jim Surowiecki in this week’s New Yorker. Blockbuster could have bought Netflix for $50 million dollars; Excite turned down the chance to buy Google for less than $1 million.

But how valuable were those opportunities, really? If Blockbuster had spent $50 million on Netflix, then it would just have run out of money that much more quickly. There’s no chance that Blockbuster’s management would have let Netflix grow, unencumbered, in the way that it did independently. Similarly, Google would have been stifled as part of Excite: it would have been nothing more than one of many search algorithms competing on the internet.

Buying internet companies is very, very hard: even if they are set to be very successful on their own, that’s no reason to believe that they will have similar success in-house. Google bought Foursquare back in 2005, when it was called Dodgeball, but then closed it down; only when its founders left Google and recreated the company as Foursquare on their own were they able to succeed.

And so I’m suspicious that Surowiecki’s employer, Conde Nast, is going to do well with its new $500 million warchest. Conde is rich, and can buy companies, but at that point the problems start: it’s always much easier to spend money on acquisitions than it is on internal growth, with the result that those acquisitions can end up starved of money. Conde is a particular case in point: it bought Reddit and neglected it so badly that the site ended up having to run a pledge drive to raise needed funds.

Big established companies with their own revenue streams simply don’t have the skillset needed to be the next Y Combinator or Softbank, and they probably shouldn’t try. If Conde is smart, it’ll restrict itself to taking minority stakes in companies where it can be strategically helpful. Otherwise, it’s liable to end up looking like News Corp with MySpace.

I enjoyed Dana Milbank’s farewell to Larry Summers today, complete with cameo from Reuters’s very own Caren Bohan:

It was the final question from the audience following Larry Summers’s final speech as President Obama’s chief economic adviser. “What,” asked Caren Bohan of Reuters, “will you miss most about being in the White House?”

Summers could have taken the chance to wax eloquent about the virtues of government service, but instead he glared at the questioner. “Reporters like you,” he said. Awkward laughter followed. Bohan’s eyes widened, and Summers chuckled at his little joke.

For a man delivering his valedictory, with TV cameras rolling, it was oddly petulant…

The parting shot was vintage Summers: a man who rose to national prominence because of his intellect but is now leaving government known more for his dyspepsia…

In his remarks, he spoke of not a single wrong decision he made.

Summers decided to leave public service with a long speech recapitulating a lot of the economic themes of his tenure at the NEC. There are notable parts to the speech; I’m particularly astonished that Summers thinks the government needs “to make it easier to patent a new idea or innovation”, for instance, in a world where patent-trolling is rife and where Nathan Myhrvold can rack up a multi-billion-dollar portfolio of more than 30,000 patents in a very short space of time, any one of which could stifle genuinely valuable innovation for years.

More notable, to me, is the fact that Summers did not, on leaving the White House, take the opportunity to thank the president for the opportunity to serve his country during this most tumultuous economic period. I don’t think Summers thinks that way: in his mind, the thanks should all flow the other way.

Summers is a virtuoso at not answering journalists’ questions, partly because he doesn’t feel accountable to the public in the first place. Instead, he feels that the public, and its elected representatives, are little more than political obstacles standing between himself and some kind of optimal policy which he would happily implement if only it were politically possible to do so. The public is often wrong; Summers himself, not so much, even as the unemployment rate has remained stubbornly elevated far above the levels that he foresaw when he joined the Obama administration.

It won’t take long, I’m sure, before Summers, like Peter Orszag before him, decides that a hefty academic salary is insufficient for his needs, and starts accepting millions of dollars from the financial services industry which was in large part responsible for the crisis he’s been trying to navigate. And as Summers revolves through that ignoble door, the president will surely be wondering who got the better deal out of the arrangement of the past two years.

There’s been a lot of talk over the past couple of days, since Gawker was hacked, about how embarrassingly insecure its users’ passwords were. More than 3,000 users had “123456″ as their password; almost 2,000 had “password”. There’s a long tradition of servicey journalism explaining how to generate secure yet memorable passwords, and telling those of us with insecure passwords that “what you’re doing now is going to come back to bite you”.

As someone whose password was on the Gawker list, I’ll agree it’s annoying. But I think that what’s being missed here is the element of sheer protest. All of us hate being asked to come up with passwords all the time — especially for silly things like Gawker comments. Now it’s not enough simply to have a password, it also has to be secure? Come on.

My general feeling about using insecure passwords is much like my feeling about hopping on to an unencrypted wifi network at the local coffee shop: the real safety comes from the fact that no one has the slightest interest in cracking into my Gawker commenter account or getting a preview of a blog entry I’m writing about sovereign debt negotiations.

On top of that, as Gnosis has shown, if a sophisticated computer hacker is really determined to crack into my life, then they’re likely to be able to do so. Using stronger passwords will slow them down, but it won’t stop them. The most common password in the Gawker set — 123456 — was used by just 3,000 of 1.5 million people, which is 0.2% of them. If you’re trying to guess my password, using brains rather than computer-assisted brawn, it won’t be easy, even if it’s in the dictionary somewhere. And if you’re using computer brawn to try to crack into my life, I’ve likely got bigger problems than having insecure passwords.

What’s needed here, I think, is some kind of empirical data on people who have had their passwords stolen or hacked. How often does this happen? What are the chances of it happening to me? And how much safer do people become if they move from insecure to secure passwords? Without any numbers for any of those things, it’s easy to understand why people refuse to buy into the paranoia of techies.

Many thanks to Peter Lattman and Diana Henriques for answering my question from last week. Yes, as I suspected, there is a secondary market in Madoff claims — although from the tone of the article it seems more like a primary market, where hedge funds compete with each other to buy claims from people who have been defrauded, rather than a well-functioning secondary market where those funds actually trade the claims between each other. The going rate seems to be about 30 cents on the dollar, with an expected payout, somewhere down the line, of roughly double that amount.

For the Madoff victims who can afford to sit tight for the time being, then, the eventual losses are likely to prove manageable: the pretty healthy final recovery comes on top of the massive tax refund they got immediately after the fraud was uncovered, returning to them the taxes they paid on all that fictional investment income.

The NYT report comes from Dealbook, the bloggy arm of the business section, so maybe if I ask a question they’ll answer it. The story says that in October, “claims were trading at about 25 cents on the dollar” — does that mean that victims were willing to sell for 25 cents, or does it mean that there was an actual brokered market and that hedge funds or other non-victim investors were selling at that level? If so, that’s a very interesting datapoint, since it implies that the sellers either managed to buy their claims at a very deep discount indeed, or else got quite demoralized, for some reason, about the prospects for recovery.

Incidentally, while I’m on the subject of opaque secondary markets, Kerry Dolan is reporting that Facebook shares are now being valued at $23 each. That’s $115 on a pre-split basis, which works out at a valuation of over $50 billion — roughly the same as General Motors, somewhere between Morgan Stanley and Boeing. Wow.

TNW and Geekosystem interview Gnosis. “The timing for the release was quite a rush; we will not disclose why this was” — TNW, Geekosystem

This xkcd is just amazingly cool. It’s like a funny, perfect, free, nerdy, gorgeous Sol Lewitt — xkcd

You can now link to, or highlight, every separate paragraph on NYTimes — NYT

Among black men in NYC age 16 to 24 who do not have a high school diploma, just one in 10 had a job — NYT

If you are not paying for it, you’re not the customer; you’re the product being sold — SSPNet

Warhol Foundation Demands Reinstatement of Censored Art Work or Will Cease Funding all Smithsonian Institution Exhibitions — Warhol Foundation

Here are Nick Denton and Tom Plunkett being very sorry — Gawker

Attention data journalism, infographics, development geeks: Hans Rosling’s latest video — YouTube

Here come the ’99ers — CR