Felix Salmon

Tim Duy asks me whether “the public is being pushed into a retirement dead end,” and “how the average investor should manage their 401k plans in this environment.” I have two answers to this; one’s facile and the other’s quite important.

The facile answer is “I’m not an investor” — don’t ask me, because the one thing I know for sure is that my investment calls have generally turned out pretty badly, I don’t have the courage of my own convictions, and insofar as I’ve managed my own personal finances in a non-disastrous manner that’s more been a matter of luck than judgment. I could try to give you investment advice, but it wouldn’t be worth very much.

The more important answer is “I’m not an investor” — and neither are you. Just because you have a 401k plan does not, ipso facto, make you an investor. This is a serious problem with defined-contribution pensions in general: they place an onerous set of responsibilities onto individuals who are wholly unqualified to discharge them in a sensible manner. Already, such plans tend to have far too many choices, many of which are expensive long-only mutual funds which seem like a pretty bad idea for just about anybody. Trying to add alternative investments in private equity or hedge funds to the mix would almost certainly be disastrous — the dumb money coming in at just the wrong time, just like it always does.

So your 401k is going to be made up of stocks, bonds, and cash, just like it always has been. Those asset classes are, it’s true, only a subset of the full range of investment opportunities available to sophisticated investors. But you’re not a sophisticated investor, so there’s no point in feeling aggrieved. It’s possible that you might be able to invest some of your 401k funds in Pimco’s Total Return Fund, which is an active and sophisticated investor, and which happily uses very sophisticated derivatives on a regular basis to get extra return and to make money in down markets. But generally speaking, people with 401k plans should stop at big-picture asset-allocation decisions: beyond that, they’re way out of their depth.

It’s possible to argue ad nauseam about the equity premium and whether it exists; I’m very sympathetic to those who say it’s smaller than you might think. But if you’re talking about retirement money you’re not going to touch for at least a couple of decades, then stocks do look a lot more sensible right now than bonds or cash, neither of which are going to do anything for you. Are they expensive? Yes: everything’s expensive. And at some point stocks will surely drop alarmingly. But at least the earnings yield on stocks is vaguely reasonable, and you can expect those earnings to rise over time as the economy grows. And you’re certainly not sophisticated enough to try to time the market and buy on dips.

The good news about 401k plans is that you put a more-or-less identical amount of money into them every month, which means you’re dollar cost averaging quite impressively. And ultimately the best way to save up lots of money for retirement is the same as it’s always been: to save up lots of money for retirement. By far the most important number here is the total sum of dollars that you’ve put into your retirement funds over time; the annualized rate of return on those dollars is secondary. So the more comfortable you want to be in retirement, the more money you should save while you’re working. Don’t expect the market to come to your rescue, and you won’t be disappointed when it doesn’t.

There’s no point in blaming the world for its unfairness. Sure, it would be nice if you and I could buy hot pre-IPO tech companies — or at least it would be nice if we were able to pick the winners. But again, Sod’s Law says that if we could do that, the returns in that space would turn negative pretty fast.

And it’s possible that we’ll have a resurgence in the stock market, if and when the US economy starts making things again. Dorian Taylor sent me a thought-provoking email this morning which said that one of the reasons we’re seeing fewer companies tap the equity capital markets is that we’re in a phase where all of the buzz and excitement is in what he characterizes as “networked information services.”

“Relatively speaking,” writes Taylor, “these companies don’t really need a huge amount of capital at any given time because they aren’t buying stuff with it; they aren’t making or building or physically shipping anything.” (Yes, I know that datacenters are expensive, but this is broadly true.) Taylor continues:

I suspect emerging industries for which production (eventually) eclipses R&D (i.e. physically consumes stuff to make things) may still do well in the stock market. Metamaterials, space tourism, alternative energy or tissue engineering perhaps. Just not information services.

If the greentech (or any other capital-intensive) revolution ever arrives, in other words, maybe the stock market will step up and become relevant again. And for the time being, those of us with 401k plans should just continue to put our money into stocks, or target-date funds, or the like. Because we literally don’t know any better.

Is it true that the South Street Seaport Museum has closed down Bowne & Co after 182 years? I very much hope not.

Mohamed El-Erian’s moving and heartfelt column on Egypt — FT

Did Ticketmaster really sell only 1,000 LCD Soundsystem seats on the on-sale date when there are 13,000 seats in total? — Lefsetz

Everybody link to the Content Farm! We need to boost its PageRank!

Iran opposition protests — Reuters

Battle of the credit-card concierge services, Valentine’s Day edition. You might be surprised by the winner — NerdWallet

President Obama will present Jasper Johns with the Presidential Medal of Freedom at the White House — LA Times

Ivan Oransky reveals the name of the idiotic press officer: it’s the University of Manchester’s Aeron Haworth — Embargo Watch

Why small IPOs are important, and why they no longer exist — Urgent Speed

Mark Miller has a great column on Social Security scaremongering. It’s not in crisis, people! — Reuters

Mike Elgan: Why Nokia is toast — Computerworld

Bill O’Reilly is Internet Meme du Jour — Geekosystem

I spent a large chunk of Saturday looking at The Clock. Christian Marclay’s video masterpiece is currently on show at the Paula Cooper gallery in New York, and is also part of the British Art Show, which is touring the UK and will open in London on Wednesday.

Still, like a lot of excellent video, it’s very hard to find. Wayne Rooney’s bicycle-kick winner on Saturday is out there, although the copyright holders were being very aggressive in taking it down from YouTube for most of the weekend. And the Grammy performances from last night are still pretty much nowhere to be found.

In the case of expensive entertainment media, I kindasorta understand what’s going on — or at least I would understand, if they had any strategy for profiting from the viral nature of these videos themselves. But in the case of the artwork, I’m just depressed.

Marclay’s work is truly magnificent — but it’s 24 hours long. It’s basically the world’s most expensive clock, laboriously pieced together from thousands of film and TV clips, each of which tell the time in some way. It’s synced to the actual time where the film is showing, so that if a clock shows 3:45pm on screen, that means it’s 3:45pm where you’re watching.

It’s an amazing work, beautifully edited. Like much high-end contemporary art, it marries a striking conceptual purity with a no-expense-spared perfectionism when it comes to technique — the film quality is first-rate, the edits are carefully put together so that you get whole sequences which echo each other and create mini-narratives within the narrative-free whole. And while it certainly works extremely well in a gallery context, one can’t help but think that its ideal presentation would be as a permanent clock, on the wall in one’s house, where you’d look over to tell the time and then get completely distracted and be late for whatever it was you were trying not to be late for.

After all, the main reasons that the piece is so hypnotic has nothing to do with the gallery setting. Instead, it’s just the nature of what’s known as “tick-tocks” in financial journalism: the deep-seated human desire to know what happens next, and which explains why so many people got all the way through Too Big To Fail. The film is comprised mostly of high-end Hollywood product, made by people who know how to keep you watching. Which creates a kind of surfing sensation: you never find out what happened after any given clip, but you’re already engrossed by the next one. According to one of the gallery assistants, people tend to spend a huge amount of time between getting up to leave and actually leaving: they can’t quite bring themselves to tear themselves away.

I would dearly love to be able to have a copy of this piece at home, getting to know its nuances — look, it’s the sequence with a whole series of dropped-in bits from Sam Raimi’s Spider-Man! — and looking out for the more subtle or hidden clocks and watches in scenes where they’re not immediately apparent. It wouldn’t be too hard, I don’t think, to set up a website where the film was constantly streaming in various timezones, and which you could just play, full-screen, in any web-connected home. And the amount of pleasure and wonder that website would generate would be enormous.

But I doubt that’s going to happen. The Clock is being sold in an edition of six, to museums around the world who will sometimes have it on show but who normally won’t. And museums, for all that they nominally serve the public, still like to jealously guard their work. Noah Horowitz, in Art of the Deal, tells the story of Anri Sala’s Intervista, a 26-minute video projection which was sold to the Musée d’Art Moderne de la Ville de Paris in 2001. When the museum found out that Sala intended to release a single-channel edition for private use, in the form of 220 VHS tapes, the museum worried about its own version’s “diminished singularity, reinforced by the disparity in price the museum would be paying for the installation versus that spent by owners of the single-channel VHS edition. In the end, the museum won out, with a final contract annulling the proposed edition.”

Marclay and his gallerists want to cement his position in the institutional art world, and as it’s going to be unnecessarily difficult for the world to enjoy The Clock – just as it’s unnecessarily difficult for people to see Lady Gaga’s Grammy performance from last night. At some point, we’re going to break through these barriers. But it’s not going to happen any time soon.

Pimco’s $240 billion Total Return Fund is, by most measures, the largest fund in the world. A handful of sovereign wealth funds are larger, but none of them trade nearly as actively or aggressively as Bill Gross. Check out these two datapoints: in August 2010, the fund was 51% invested in US Treasuries. By January 2011, that number had declined to 12%. Which means that the Total Return Fund on its own liquidated over $90 billion in Treasury securities over the space of five months.

What happened, narrowly, is that Bill Gross changed his base view from worrying about deflation to worrying about inflation. But more broadly, he showed that he’s more than capable of repositioning his supertanker of a fund as easily and aggressively as if it were a hundredth of its size. He can do that because the Treasury market is the most liquid market in the world, and because he employs some spectacularly good traders.

Gross also showed, of course, that anybody following an “I’ll do what Bill’s doing” strategy is doomed to underperform. The holdings of the Total Return Fund are emphatically not what you should hold if you’re looking to work out your asset-allocation strategy over the medium or long term: instead, they’re held on an I-can-sell-these-at-any-time-I-want basis by arguably the greatest bond trader the world has ever seen. Which is why investing in the Total Return Fund (minimum investment: $1 million) makes a lot of sense. Copying it, by contrast, or trying to position yourself in light of Gross’s public pronouncements, makes no sense at all.

I’m sad that my NYT op-ed on the decline of stock exchanges went to press too late to include the bonkers rhetoric emanating from Chuck Schumer:

The New York Stock Exchange is the cradle of American capitalism. It is a national treasure. In America, we start each day in our Congress and in our classrooms with the Pledge of Allegiance, and we also start it with the ringing of the bell on the floor of the stock exchange.

The NYSE is in no sense the cradle of anything. A cradle is a safe place for the young to develop until they grow up and become more self-sufficient. Y Combinator is a cradle. The NYSE is place for algorithms and speculators to make bets on financial assets. It last funneled real amounts of money into the broader economy during the dot-com boom, leaving behind a lot of Aeron chairs and little else. Since then, I get the feeling that the big capital raises on U.S. exchanges have been by financial institutions, rather than the real economy; maybe someone can find a breakdown for me of which sectors raised the most money in primary and secondary offerings over the past ten years.

As for the idea that the NYSE is a national treasure akin to the Pledge of Allegiance, well, yes. Which is to say, its value is symbolic, and rooted in the days of old, when “allegiance” meant something more than who you’re friends with on Facebook, and when institutions were judged on the size and weight of their Corinthian columns.

There’s one other point I would have liked to make in my piece, which is that the tax code is a large part of the reason why the stock market is bad at capital formation. Look at the trillions of dollars cash on corporate balance sheets: why aren’t those companies paying it out as dividends to their shareholders? In an efficient capital market, they would do just that, and then raise new equity capital as and when they needed it in future. After all, sitting on billions of dollars in cash is hardly a core competency of most exchange-listed corporations.

But companies don’t do that. It’s partly because they fear that the money might not be there when they need it. But it’s also because the cost to shareholders of dividending out money now and then getting it back again in future is enormous. For one thing, the underwriters of the secondary offering are likely to require a hefty seven-figure fee when you ask them to raise that money for you. And more importantly than that, the shareholders you send the dividend to are going to have to pay income tax on it, at rates in the region of 35% to 40%. There’s no way that can be efficient.

I’m not saying that we should abolish the income tax on dividends. But it does help to explain why U.S. capitalism can be very inefficient, and why the stock market, broadly speaking isn’t working very well these days when it comes to its core function of capital allocation.

Nathan Myhrvold’s 30-course tasting menu — WSJ

About 6.2% of potential female births are aborted in India because ultrasound reveals the sex. That’s 480,000/year — Bristol University [PDF]

These are the worst charts the NYT has published in, like, ever — NYT

Me, on Reliable Sources, talking HuffPo — CNN

Nate Silver on The Economics of Blogging and The Huffington Post — 538

David Segal’s fantastic Google/SEO story — NYT

Londoners are insisting on secure bike parking, lockers and showers before agreeing to switch employers — Standard

Hosni Mubarak used last 18 days in power to secure his fortune — Telegraph

What happened with LCD Soundsystem tickets? LCD Soundsystem, AVClub

That was quick! Barely had my NYT op-ed on the decline of public stock exchanges hit the web this evening than Ira Stoll was ready with a trenchant reply.

Stoll is sanguine about the fact that the number of companies listed on U.S. exchanges has declined from 7,000 in 1997 to 4,000 today. “Suppose that the number went to 4,000 from 7,000 because many of the 7,000 companies merged with each other to become even larger and more dominant,” he writes, “and that the current 4,000 listed companies have three times the sales and three times the market capitalization they did in 1997.”

Actually, let’s not suppose that and instead let’s look at some numbers. I don’t have sales numbers, but I do have market capitalization numbers, from the World Federation of Exchanges. At the end of 1997, U.S. exchanges had a total market capitalization of $13 trillion; by the end of 2010, that had risen by about 24% to $17 trillion. Which in real terms actually works out as a slight decline in market cap. Meanwhile, GDP grew from $8.3 trillion in 1997 to $14.7 trillion in 2010 — that’s an increase of 76% in nominal terms, three times the rate of growth of U.S. stock market capitalization.

But more broadly, Stoll is making my point for me — that the U.S. stock market is increasingly made up of enormous and dominant companies and features ever fewer of the smaller, fast-growing companies which really drive the economy. When public companies are acquired or delisted or go bankrupt, there’s not nearly enough in the IPO pipeline to replace them. The result is a market of dinosaurs.

I also claim that the market is doing a bad job at allocating capital efficiently — after all, the market hasn’t allocated any capital to Apple since 1981. I don’t for a minute think I have a better idea than Steve Jobs what to do with Apple’s cash pile and in fact have said quite explicitly that it shouldn’t be paid out in dividends. But when investors buy Apple stock, their money doesn’t go to Apple, but rather to the other investors that they’re buying the stock from. The stock market becomes a money-go-round for speculators, rather than a way of directing capital at companies.

Finally, the “ultra-rich elite” I’m talking about is not the broad universe of people who are considered accredited investors by the SEC, but rather the tiny group of individuals who are given the opportunity to invest in private companies. If you’re well connected in Silicon Valley — if your name is Ron Conway or Vinod Khosla — then you have loads of such opportunities. But the rest of us don’t, whether we’re formally accredited investors or not.

I’m not making any policy recommendations in this piece — I don’t think that the rules about accredited investors should be weakened further, or that all Americans have some kind of automatic right to be able to buy a piece of Facebook. But I do think that the public stock market is less important now than it was in the past and that its decline is going to continue in future decades just as it has done since 1997.

The advantage of being pseudonymous is that you can be honest. Here’s TED:

The most egregious example was the time I had to fly 18 hours, on short notice, from a mid-sized European city to Beijing for a two-hour pitch and fly right back to London for business the next day. In terms of cost-effectiveness, best use of senior bankers’ time, and sheer expense, this was pretty ludicrous.

And here’s James Gorman, showing what bankers have to say if they’re speaking on the record:

I pitched for 450 client meetings last year. I flew to China for a 20-minute meeting and then got on a plane and flew back. It was right for me to do it, and we got the deal.

It’s conceivable that both are true. I’m pretty sure that TED was flying commercial while Gorman was flying privately. That makes a huge difference in terms of productivity, especially while airborne. On the other hand, Gorman’s logic is pretty flimsy. He seems to think that if Morgan Stanley got the deal, then flying to China was obviously the right thing for him to do. But in fact it’s a bit more complicated than that.

As TED notes, the expenses incurred on Gorman’s trip were pretty big. Cash costs of course were huge, but opportunity costs were larger still: there was surely a significant number of meetings that Gorman didn’t make because he was stuck on a plane going to or from China, where he could have added value for the firm. On top of that is the basic probabilistic calculation: what is the probability that Morgan Stanley would have got the deal had Gorman not travelled to China? And what are the chances that Morgan Stanley might have lost the deal even after Gorman showed up for his 20-minute meeting?

Then there’s a bigger question still: what are the chances that getting the deal is going to end up being a good thing for Morgan Stanley? John Hempton has a post today about Guanxi — the way that Chinese business deals are generally based on personal connections and relationships.

In the United States the Guanxi guys will work for single-digit millions annually and think they are well paid. That is all they are entitled to. Such limitations on entitlement do not exist in Asia – and the Guanxi guys are likely to see Western funded private equity shops like Carlyle as piggy banks to loot… And the looting will not be a million or two dollars here and there – it will be for every penny they can extract…

The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash – for the benefit of your investors. But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless…

Only after the collapse of network capitalism will the system be cleaned up and capital be allocated on the basis of analysis rather than connections.

It’s possible that the deal Gorman flew to China for was a purely advisory one which didn’t use Morgan Stanley’s balance sheet at all. But I doubt it. And as a result, no one will know whether the deal was a good one for Morgan Stanley for many years yet. If the likes of Hempton and Jim Chanos are right, then in hindsight just about every flight to China these days could turn out, with hindsight, to have been a very bad idea indeed.

Anshu Jain — yes, that Anshu Jain — has filed a lovely column for Newsweek on the subject of the cricket World Cup. Even as a magazine writer, he still behaves like the investment banker he is:

My picks for the Cup? I’ve learned always to heed the ineffable wisdom of market pricing, and only then to essay my own view… Here are the odds at the time of writing (from Bet365.com): India, 3.75; Sri Lanka, 5.5; South Africa, 6.0; Australia, 6.5; England, 7.0; Pakistan, 8.5; and the West Indies, 21.0.

I find Australia, Pakistan, and particularly the West Indies good value at those prices…

My perhaps parochial pick is India playing Australia or Pakistan in the final.

Jain has managed to name four different teams, here, as his picks; if you take Bet365.com’s pricing, the odds of one of those four teams winning the Cup are about 59%. So, he’s not exactly going out on a limb here.

I’m also fascinated by this:

West Indians will, more than a little wistfully, recall “Super Cat” Clive Lloyd’s 102 in the inaugural cup in 1975… I doubt there’s an Indian across the spectrum of caste, age, and language who doesn’t thrill, still, to the images of a feline Kapil Dev sprinting 30 yards to catch Viv Richards and set India on course for its only World Cup win, in 1983.

Jain is old enough to remember both of those events, but it’s worth noting that most of the people in India and the West Indies weren’t even born in 1983, let alone 1975. And frankly you had to be there: those thrilling images of Kapil Dev are pretty grainy and mundane taken out of context and presented on YouTube.

But that’s sport for you. As Jain says, the World Cup will render a billion and half people agog, while the rest of the world is oblivious. Still, that’s more than enough to value the broadcasting rights at some $2 billion, and to force a large chunk of the US population to shell out $149 for the ability to watch it on DirecTV.

Rex Sorgatz asks for my opinion on who’s going to win his bet with Nick Denton over Gawker Media pageviews. Can Denton get them up to 510 million in September?

I’m having a very difficult time answering this question, because it really could go either way — it isn’t a foregone conclusion by any means.

There’s no doubt that pageviews are down, right now, post-redesign, rather than up. And a glance at the comments on this post makes it clear why: Gawker’s readers (and the readers of all the other Gawker sites) hate the redesign. They certainly hate it enough that they’re not visiting as much as they used to, and some of them hate it enough that they’re no longer visiting at all.

Commenter “ihatediamonds”, in a comment that I can’t link to right now, says that “Gawker is just giving up on the joyfully literate” — and that seems exactly right. Gawker was built on snark and literacy, both in its posts and in its comments. And Nick Denton is demoting both of those qualities in favor of high-impact photos and video — areas where he doesn’t have the same kind of comparative advantage.

As a result, if Denton’s to win the bet, he’s going to have to replace joyfully literate readers with the kind of readers who love to look at shiny objects. So that’s the first thing I find very hard to predict: can Denton attract such readers? They’re out there, for sure, and Denton has learned that posts with lots of photos and video got the most pageviews under the old design. But what’s not clear is how loyal such readers are, and whether Denton can get enough shiny multimedia content up on his various sites every day to get them into the habit of coming back for more on a regular basis.

There are also technological reasons why the redesign might fail. Hash-bang architecture is fragile, and the technological glitches we’ve seen since the sites went live are severe enough that one can’t be particularly optimistic that Denton is going to be able to build a smoothly-running machine between now and September. Gawker’s tech department does not have a fantastic reputation for reliability, and it has a lot of work ahead of it: tags need to be reintroduced, for one thing, and maybe sections, and navigation to specific pages or comments needs to be vastly improved. I’m all in favor of launching with something not-quite-perfect and then iterating. But this design has been in the works for over a year, which says to me that nobody really has a clue how long it might take to perfect.

On the other hand, Denton has built a blog empire by going ever more mass market, leaving behind various elites along the way. If the commenters are aggrieved, so be it: he wants millions of new readers who haven’t been visiting his sites for years.

And I’ll say this for the new design: once you’re there and you’ve loaded up the first page, it’s incredibly easy to click around lots of other stories in quick succession. Where before you’d look at the teaser text on the home page to decide whether you wanted to read a particular blog post, now you just call up the post itself, and if you don’t like it you can move on to the next one very quickly. That’s fantastic for pageviews — I’m pretty confident that pageviews per session will rise substantially under the new design.

So Denton can win this bet a couple of ways. Either he replaces his departed readers with even more new ones, or else he relies on the increase in pageviews per session to make up for the decrease in visits.

I’ve had a couple of bets myself with Nick over the years, and I’ve invariably lost them. So, licking my wounds, I’ll give him the benefit of the doubt on this one, and say there’s a good chance he’ll win. But it’s entirely possible that he’ll lose quite dramatically, if his revolution fails.

On Wednesday, before this morning’s Treasury report on mortgages came out, I talked about the issues facing the market with my favorite fixed-income pundit, Agnes Crane. America, it seems, still loves housing. Does it have what it takes to bite the bullet and reform the market?

I’m impressed with Treasury’s long-awaited report on reforming the US housing market. It’s a good length — it comes in under 11,000 words, which makes it shorter than, say, Michael Lewis’s Vanity Fair article on Ireland. It’s written in a very clear manner, laying out in a simple and honest way exactly what went wrong, and what Treasury is proposing. And although it might look as though providing three different options for reform is a bit of a cop-out, in fact they’re not as far apart from each other as you might think, and all of them would constitute a radical change from the status quo.

The message is clear: what we have right now is unacceptable, and we need to do something big; the main choice facing Congress is between a modest government housing guarantee, a tiny one, or none at all.

It’s worth reading the rest of the report, too, not just the section laying out options at the end. One very welcome theme running through the report, from the beginning of the introduction, is that an important part of “affordable housing” is giving people “rental options near good schools and good jobs” which don’t take up an inordinate proportion of total income. This kind of language appears all too rarely in papers on mortgage-market reform:

Today, renters often face significant affordability challenges. Half of all renters spend more than a third of their income on housing, and a quarter spend more than half. And for low-income renters, adequate and affordable homes are increasingly scarce. For every 100 extremely low-income American families, for example, only 32 adequate rental homes are affordable.

The report is also clear-eyed about two aspects of the US mortgage market which seem to be sacrosanct: the pre-payable, 30-year fixed-rate mortgage, on the one hand, and the mortgage-interest tax deduction, on the other. It notes that both are pretty much unique to the US, and cause significant distortions and risks: “tax incentives like the mortgage interest deduction can encourage investment towards housing over other sectors in the economy”, the report says, adding that investment in those other areas “may lead to greater long-term growth or job creation.”

There’s even a nod to the concept of covered bonds — look closely, it’s buried in a subordinate clause at the bottom of page 14, but it’s there. Such things are hard to understand, but they’re very attractive from a policy perspective. The problem is that banks don’t like them, and so it’s going to be hard to implement them given the lobbying power of the banking industry.

But banks are going to have to start putting a lot more of their balance sheets at risk in the housing market whatever happens, if any of the options in this report are adopted. The idea is to replace the current system, where the government guarantees nearly all the mortgages in the country, with a private system where government is involved only at the low-income end of the market or in the event of a major crisis.

If any of the choices are adopted, then mortgage rates will continue to rise — they’re already above 5%, and that’s a good thing, since the cost of a mortgage should reflect the risks inherent in it. It will be harder to get a pre-payable 30-year fixed-rate mortgage. But if you do get one, your monthly cost might not be much higher than it is right now, since as Dean Baker calculates, the headline price of your house is likely to be lower. The obvious cost of such a system, then, is that it would increase the number of homeowners with negative equity, and thereby increase, at the margin, the number of defaults and foreclosures that we’ll be seeing going forwards.

More generally, it’s far from clear that there’s enough private money at all which is willing to fund such a system. The main problem I have with Treasury’s report is that it simply assumes that if government support for the housing market is slowly removed, then private money will come in to take its place — at a higher price, to be sure, but at some price.

The big risk is that private money won’t come in, at any price, if there isn’t a guarantee — that the amount of private funding for the US mortgage market will be substantially lower than the demand for mortgage loans. The result would be a broken, non-clearing market, with people stuck in their homes because they can’t sell them, and the idea of a “market price” being somewhere between a purely theoretical entity and an outright joke.

That’s why my preference would be for Treasury’s third option, where the government guarantee remains extant, just with a lot more safeguards than it has right now, in a system where it’s priced rationally rather than well below market. Fannie and Freddie would go away, and be replaced by private mortgage insurers; the government would reinsure the mortgage insurers, rather than insuring the mortgages directly. And the government would only lose money after the private insurers had lost all of their money.

Are there private-sector players who would step up and insure mortgages in such a system, willingly providing a buffer between banks and the government? Treasury simply says that “a group of private mortgage guarantor companies that meet stringent capital and oversight requirements would provide guarantees for securities backed by mortgages that meet strict underwriting standards” — but it’s not immediately obvious to me who those companies might be. If such companies can be found, and if they’re well-capitalized enough to credibly backstop an enormous proportion of the entire US mortgage market, then this solution is I think a good one. But those are two very big ifs.

There are a lot of financial-sector players who have every incentive to claim that such private-sector companies will never appear, and that a broader government guarantee, like the current one at Frannie, is sadly necessary. As this debate moves to Congress, it’s going to be crucial to be able to examine such claims impartially, and to decide whether Treasury’s optimism regarding the future risk appetite of private capital is justified. Any bright ideas as to how to do that? Because I can’t think of anything offhand.

Whitney Tilson’s 13-page report on “Why We Covered Our Netflix Short” — Value Investing

Jason Linkins on why HuffPo doesn’t pay its bloggers — HuffPo

A revolution in healthcare costs awaits! Don’t ingest the medicine, just write down its name on paper, and eat that — Stuff and Nonsense

The Unemployment Chart at 2000 Participation Levels — TBI

“Since the start of 2008 the labour force has not grown at all”: Greg Ip is very good on unemployment stats — Economist

Tragic, but not surprising. Seaport Museum Struggles to Stay Afloat — DNAInfo

2-way bike lanes mean fewer injuries — Daily

Former SF police chief Heather Fong has a $229,500/yr pension – 22% higher than her final-year base pay — SFGate

In the standard narrative of the mortgage crisis, there were prescient bears who got it right, and then a head-in-the-sand majority which missed what was going on until it was too late. But in a fascinating article about a lawsuit against former Lehman subsidiary Aurora Loan Services, Kate Berry of American Banker shows that it’s a bit more subtle than that.

A large part of the bear case, when it came to mortgages, was that there was a huge number of adjustable-rate mortgages whose “teaser rates” were going to expire, landing homeowners with massive monthly payments they could never afford. In reality, however, the notorious “exploding ARMs” didn’t explode at all. And now a chap named Andrew WeissMalik is  suing Aurora because his ARM didn’t explode, and he wants all the benefits that should have come his way as a result of his interest payments going down.

It turns out that in July 2008, Aurora wrote to WeissMalik — he says he never got the letter — telling him that they were going to modify his loan, and that it would lock in his teaser rate of 5.875% rather than let it explode. He didn’t need to do anything to accept the offer, he just needed to keep on making his monthly payments. Which he did, and his rate stayed at 5.875%, rather than falling as low as 2.625%, as it would have done had the loan not been modified.

Aurora certainly didn’t make it easy to opt out of this modification, which WeissMalik claims has cost him some $20,000:

The form letter, which WeissMalik eventually obtained, says that “we will assume that you have accepted this offer if you make two on-time payments following your adjustment date at your current, unadjusted monthly payment amount.”

The letter describes only one way to decline the offer: it told borrowers that if they did not make the two required mortgage payments, the servicer “would assume that you declined our offer and we will adjust the interest rate and monthly payment as provided in your mortgae note.”

“To reject Aurora’s ‘offer’ for modification,” Davidson said, “WeissMalik would have to be required to default on his mortgage loan … thereby damaging his credit score and putting himself at risk of other adverse risks of nonpayment.”

There’s a malign view of what Aurora did — which is that it could see the writing on the wall, reckoned that the Fed would be forced to slash interest rates in order to save the economy, and therefore locked in the teaser rates before they fell sharply. I don’t buy that entirely.

More likely, I think, is that Aurora knew that its borrowers couldn’t afford to see their interest rates explode, and had no ability to refinance. So it decided to just keep them on their teaser rates instead, on the grounds that it would have many fewer defaults that way. And because it was an incompetent Lehman Brothers subsidiary, Aurora failed to modify the loans in a legally or ethically defensible way — even if its heart was in the right place.

Still, I don’t think Aurora has a remotely colorable defense in this case. I wonder how many other people accepted the modification and don’t even know how much money they’ve lost as a result.

Count me in with Paul Kedrosky: there’s something extremely irritating about Shira Ovide’s Deal Journal blog post this morning kvetching about how high the mooted valuation of Twitter is.

The valuation — somewhere between $8 billion and $10 billion — is explicitly not based on Twitter’s current revenues. Yet Ovide insists on calculating silly ratios designed to make the valuation look as outlandish as possible:

Twitter’s revenue last year was $45 million, our Journal colleagues reported. So a $10 billion valuation would be more than 200 times the company’s revenue, or nearly 100 times its estimated 2011 revenue of $100 million to $110 million. Help me out here, folks: has any real business ever been slapped with such a high multiple?

Or, let’s pick another valuation metric. At $10 billion, Twitter is valued at $105 for each of the 95 million tweets its users write every day. (I’ll wait for my share of the check for those Twitter messages.)

I’m sorry, Shira, but “capitalization per tweet per day” is not a “valuation metric.” And in any case, your share of the check is likely to be pretty small: you’re averaging 0.4 tweets per day yourself, so far this month.

And valuing Twitter based on its revenues is exactly what Twitter’s suitors aren’t doing:

“Are these prices justifiable based on financial multiples? No,” said Ethan Kurzweil of venture capital firm Bessemer Venture Partners. But these start-ups are building social services and have lots of data about their users and “the market is valuing that mightily right now.”

In fact, the value of Twitter’s user data is just a part of what’s making it attractive right now. The interesting question about Twitter’s valuation is not how high it is, but rather the way in which it can be justified. People are putting real cash money into Twitter at massive valuations — the company just raised $200 million at a $3.7 billion valuation, and Andreessen Horowitz just bought $80 million of stock in the secondary market at levels which might well be higher than that. These investors aren’t stupid, so what’s their reasoning?

Ovide actually provides a hint, early on in her post, although she doesn’t realize it:

Twitter has swaths of devoted users, but it still requires repeated explanation to my mom –- and to many regular Joe Web users. Of the people who use the Internet, just 12% use Twitter, according to a recent survey by Pew Research Center. Compare that to Facebook (used by 62% of Internet users), and text messaging (used by 74% of cell phone owners), Pew found.

If you take Ovide’s own comparisons, Twitter’s valuation makes pretty good sense. If Twitter is 20% the size of Facebook, and Facebook is worth $50 billion, then Twitter can be worth $10 billion, no? And the proportion of the market capitalization of all the telcos around the world which can be attributed to text messaging is so mind-bogglingly enormous as to make $10 billion seem like a rounding error.

The point here is that Twitter is becoming central to how people communicate with each other — a key part of the new social architecture. Maybe not for Ovide’s mom, to be sure. But Twitter serves a very important purpose in the lives of the people who have adopted it, and it’s likely to serve the same purpose for ever more people as its user base grows and people start feeling left out if they’re not on it. Take a look at Owen Thomas’s wonderful essay on how he used social networking to lose weight, making important distinctions between various different networks:

When I went to the gym, I also checked in on Foursquare, announcing my location to friends and eventually winning the rank of “mayor” of my local gym. When I completed my food and exercise diary, the computer informed my Facebook friends; when I lost weight, it broadcast the news to the world on Twitter…

I post my exercise calories and announce the completion of my daily food diary on Facebook, while limiting Twitter posts to weight-loss milestones. I share the details only with other MyFitnessPal users.

Or, more powerfully still, listen to Louisa Lim’s story on how microblogging is reuniting families of abducted children in China.

Twitter has already, to a very large degree, supplanted blogging for millions of people; even people like me who cling loyally to the old-school blog format tend to find ourselves doing ever more of our job on Twitter. Twitter is the ultimate democratization of the commons: never has it been easier to publish material online, for all the world to see and respond to. And at the same time it’s also intensely social: it’s fantastic at strengthening bonds between individuals. I’ve befriended people I never knew before thanks to Twitter, and at the opposite end of the spectrum I’ve learned a substantial amount about my wife just from the material she posts on her Twitter account. (Go follow her! She’s great!)

How exactly will crucial social infrastructure get monetized in the future? Nobody knows for sure — but everybody knows that it’s not simply going to happen by scaling up current-day revenues from promoted tweets and the like. Twitter’s on track to make $100 million this year without even breaking a sweat, but the one thing all of its investors understand is that priority number one for the company is to become an indispensable service for millions of people around the world.

Twitter has a couple of hundred million dollars of cash in the bank: it’s not like it’s running out of money. And the chances are that as Twitter succeeds in cementing itself into the way that people live their lives each day, it will be bombarded with opportunities to monetize its position. In the history of humanity, everybody who owns the means by which people communicate and socialize with each other has been very rich and powerful. That might be less true going forwards than it was in the past, but it’s unlikely to disappear entirely.

On top of that, the putative $8 billion to $10 billion valuation is for the company as a whole: it surely includes a substantial control premium. If Google and Facebook are fighting over Twitter, a large part of its value to each company is that the other one won’t own it.

Twitter is a highly speculative investment, of course, and in fact only a very select group of carefully-qualified and extremely rich investors can invest in the company at all. Everybody putting money into the company right now is well aware that they’re taking a calculated risk: in order to capture the potential upside, they’re willing to accept a lot of downside as well.

The news yesterday from Andreessen Horowitz that it has bought an $80 million stake in the company is particularly interesting, because the shareholding was acquired on the secondary market. The idea behind VC firms like Andreessen Horowitz is that they provide expertise and guidance along with their money, and that they generate alpha by acting as real owners, rather than simply as passive shareholders. But in this case, their stake is much more speculative.

Why would Andreessen Horowitz invest this way? Kara Swisher I think hints at the answer:

Sources said that the firm made the move because it is already deeply invested in other key companies in the social space, including gaming giant Zynga, location-focused Foursquare, local discounting phenom Groupon and general social networking behemoth Facebook.

The idea here, I think, is that it’s hard to pick individual winners in this space, even if you’re convinced that the space itself is going to be extremely valuable. The last thing that Andreessen Horowitz wants, after making an enormous bet on social media, is to find that it isn’t invested in one of the handful of companies which will generate massive returns. And so it’s spreading its money around all the possible winners, trying to buy every ticket in the lottery.

Looked at this way, the valuation of Twitter makes sense even if it will probably go down. That’s the way of lottery tickets: their value is nearly always higher than their payout. And people looking to buy into Twitter at a $5 billion or $10 billion valuation aren’t doing so because they’ve discounted a bunch of predictable cashflows and decided that the present value is that ginormous. Instead, the investment is more in the form of a hedge. Twitter just might turn out to be one of the most important and valuable companies in the world. And if it does, then everybody will have wanted to get in around now. If you have that opportunity, it’s a hard one to turn down.