Felix Salmon

Gillian Tett takes a look at the VIX today:

Last week, for example, a record 1m Vix options contracts changed hands on one day after a spate of bad news from Japan and the Middle East. This beats the previous daily record of 715,000 contracts recorded in December 2009 and is several times the level of anything seen even during the crisis of 2008…

In theory, this could potentially be very beneficial for the market. After all, the more liquidity that exists in any product, the more accurate prices are likely to be and the smoother any adjustments. And the Vix certainly does provide a powerful barometer of sentiment that can be quickly grasped by investors (or journalists) alike…

But as sociologist Donald Mackenzie points out in his book An Engine Not a Camera, when new financial measures and models emerge, they do not simply offer a “snapshot” of activity, they can drive behaviour and change it too.

If 1 million contracts changed hands with the VIX at 30, that’s a total contract volume of $30 billion in one week. (One contract is $1000 times the VIX.) Annualize that, and you get to over $1 trillion a year — we’re talking real money here.

(Update: As gbojangles points out in the comments, Tett was talking about VIX options contracts, not the VIX futures contract. My bad. The options contract is $100 times the VIX, not $1000, so total volume is nowhere near the $1 trillion-a-year level.)

Tett concludes that “creating the Vix has been beneficial,” on the grounds that “more transparency is good.” But I’m not sure I buy this argument: trading volumes don’t increase transparency, and it was always possible to measure the implied volatility of the stock market long before it became a futures contract. The prices of the VIX are always accurate, and not particularly interesting: they’re just the implied volatility of the S&P 500.

(Update: Since we’re talking options not futures here, the options price does actually have new information: it’s an indication of the volatility of volatility. Why this is something we need to know, I’m not entirely sure.)

I suppose it’s true that with the VIX turned first into a futures contract and now into various ETFs, it’s become much easier to see at a glance just how volatile the S&P 500 is. Stock prices, after all, are much easier to find than implied probabilities. Maybe one of the reasons that nobody much looks at the TED spread any more is that it never got turned into a product.

On the other hand, I don’t really buy Tett’s point about reflexivity, either — the idea that the VIX tail could end up wagging the S&P 500 dog. Her examples from the CDS market aren’t especially relevant, because CDS-based indices were based on highly opaque underlyings — contracts and credit spreads which were pretty much impossible to find in public. The VIX, by contract, is based on one of the most liquid underlyings in the world, and it’s highly unlikely that a lot of VIX trading activity — even in the trillion-dollar range — would actually affect stock prices.

My feeling is that the rise in VIX volumes is dangerous mainly to the people trading the VIX, especially in ETF form. From a systemic perspective, there isn’t much to worry about. But neither is there anything to celebrate. Individual investors and the financial media have a distressing tendency to concentrate mainly on ticker symbols when looking at the markets, and to ignore indicators which can’t be expressed in that form. Now that the VIX is a ticker symbol, it’s getting a lot of attention. But the problem isn’t with the CBOE’s futures contract. Instead, it’s with a mindset which discounts indicators which aren’t easily tradable. And that mindset, I’m afraid, is here to stay.

NY Fed’s Bill Dudley visits Queens. It doesn’t go well — NYPost

Intriguing thesis: NYT is deliberately nudging people away from the iPad app & towards the browser, to cut out Apple — Poynter

Wherein mobile payments are described as “pretty much a goat rodeo until someone works it out” — NYT

James Murphy, of LCD Soundsystem, is not on Twitter a lot. In the past month, he’s tweeted precisely eight times. But when he was trying to sell tickets to his final show at Madison Square Garden back in February, he was very active. He started on Tuesday February 8, with two tweets to announcements of a ticket presale on February 9. And then after the presale released tickets onto the market, he started getting angry, with a series of eleven tweets expressing violent and profane anger towards scalpers in general and StubHub in particular. It seems his ire was raised by someone selling a single ticket for $1,500.

But there’s something very interesting going on here. I talked to Glenn Lehrmann of StubHub today — himself the subject of an irate Murphy tweet — and he said that when Murphy started sending his tweets out, there were roughly 1,000 tickets for the LCD Soundsystem show available on StubHub. Most of them were priced at about $130 to $140, with about 90% under $200. The tweets, however, “significantly raised demand” and the perceived value of the tickets. By the time that tickets officially went on sale to the public on the morning of Friday February 11, fewer than 30 tickets had asking prices of less than $200, and the average price was around $500.

When the tickets went on sale, no one got any. And so the demand moved naturally to StubHub — of the 1,915 tickets to LCD Soundsystem’s MSG show that StubHub has sold to date, roughly one third were sold on February 11, when prices were at their peak. Right now, prices are much lower; the average is $212, and the lowest-priced tickets are about $100.

Lehrmann confirmed to me that StubHub saw no increase in the number of tickets available for sale after 11am on Friday. The official James Murphy theory — that scalpers with bots had bought up all the tickets and were flipping them with StubHub — is simply not true: substantially all of the tickets which sold on StubHub that day came from the American Express pre-sale on the 9th.

“It’s not humanly possible to sell 9,000 tickets in one minute,” Lehrmann told me, adding that if MSG or Bowery Presents (the promoter) or Murphy himself simply published the manifest for the show, that would clear everything up, by showing to the public just how many tickets were sold on February 11 when the bulk of the tickets ostensibly hit the market. “The artists and promoter aren’t going to share the ticketing manifest, so they hide behind the bots theory,” says Lehrmann. “But if the bot theory was true, wouldn’t you be waving the manifest from the tallest mountain?”

The fact is that the number of LCD Soundsystem tickets sold on StubHub is entirely normal for the venue — the Lady Gaga show in February, for instance, saw more than twice as much activity on the site.

So what’s going on here? “I’m not revealing any huge industry secret,” says Lehrmann, “when I say that the majority of tickets are held back, and are sold either to local brokers or directly resold on a secondary site.”

Essentially, what happens is that bands set the face value of the tickets artificially low, so as not to look as though they’re ripping off their fans. But they only release a fraction of tickets to the public at face value. Lehrmann told me that a Taylor Swift show at National Arena last year sold just 13% of its tickets to the general public, with another 30% going to American Express and to the fan club. Fully 57% of the tickets were sold through some kind of back channel, presumably at a substantial mark-up from face value. In the case of MSG, it’s clear that’s going on: “at $40 face value,” says Lehrmann, “the promoter probably isn’t even paying the rent on the building.”

Between them, the band and their promoter build up long-standing relationships with ticket brokers, who then sell on their wares in a variety of ways. Some appear on StubHub and other secondary-market sites; others are sold directly to clients; others still are hawked on the street on the evening of the show. The risk is borne entirely by the brokers: the promoter has sold its inventory to them, and then leaves it up to the brokers to determine how, where, and when those tickets might appear for sale.

In the case of LCD Soundsystem, it looks very much as though the overwhelming majority of tickets went to brokers, and few if any were sold at face value on the public on-sale date. Murphy can rage against the scalpers as much and as loudly as he likes. But looking at the numbers from StubHub, it seems that Murphy himself — and/or his promoters at Bowery Presents — are exactly the people putting those tickets into the scalpers’ hands. If Murphy wants to go around blaming people, he should first come clean on how much his own behavior caused the very problem he’s complaining about.

In the wake of demonstrations protesting the ouster of Muhammad Yunus from Grameen Bank, the US publicity machine is gearing up, with a “special theatrical event” (Robert De Niro! Matt Damon! Suze Orman!) scheduled for March 31. Judging by the trailer, it’s going to be full of fluff, not particularly timely, and will concentrate mainly on the minuscule Grameen America — which has currently raised $275.40 towards building its first branch.

Microfinance is trendy these days, especially with the granola set — the Whole Planet Foundation has raised $3,185,685 to date in its annual microfinance campaign, mostly from shopper donations at Whole Foods checkout counters, as well as employee donations of $1.94 per paycheck. As a frequent Whole Foods shopper myself, I took advantage of my trip to Austin last week to pop in on the foundation, and had an interesting chat with Joy Stoddard, the main microcredit fundraiser there.

In principle, I’m a fan of giving grants to microfinance organizations to help them scale up and become self-sustaining. I think it’s a much better model than investing equity capital and then extracting dividends when the bank becomes profitable. But Whole Foods is conflicted about giving money to microlenders. Technically, that’s what it’s doing. But it goes to great lengths to try to ensure that all of it is used directly for “on-lending”, so that donors can be told that their money was lent out to poor borrower somewhere. (The main criterion for qualifying for one of these loans is that you’re poor, or, better yet, “the poorest of the poor.”)

The result seems to me to be a gratuitous step backwards: rather than leverage the power of fractional-reserve banking, Whole Foods essentially insists that the lenders it backs lend out pure capital. Wouldn’t it make much more sense for the lender to use the Whole Foods money as permanent capital and then fund itself in the domestic wholesale markets? Or, better yet, from local microsavings? Possibly it might. But then it becomes harder for Whole Foods to send out the simple message that your dollar is donated directly to a needy borrower.

Whole Foods, of course, has brought Yunus on as an adviser, which is one reason why some of the money raised — about $150,000 — has gone to Grameen America. Which isn’t nearly as revolutionary as the documentary makes out: community development credit unions have been doing something substantively identical for years. They just don’t tend to have the same star power.

I’m looking forward to talking about all of these issues at my Microfinance USA panel on May 24. US microfinance in particular is going to be a hot topic of discussion: do we need entities like Grameen America to parachute in and try to reinvent the wheel? Or should we be working harder to bolster and grow existing institutions, like my own? For the record, my answers to the posed questions are that borrower-owned institutions are always preferable to lenders owned by rich shareholders, in any country; and that microsavings, small dollar consumer loans, and alternative payday products are all absolutely part of microfinance.

More generally, what I’m looking forward to is a world where microfinance is viewed in a much more sophisticated way. But the world seems to be moving in the opposite direction: initiatives like Grameen’s theatrical event, or the Whole Foods fundraising drive, tend to oversimplify the issues at stake massively — even as the literature remains extremely unclear on the key question of whether microfinance really helps reduce poverty on a macroeconomic level. I’m sure the panel in May is going to be enlightening. But I do wonder whether any of that discussion is going to trickle down to the public-facing front lines.

Paul Amery on the spike in Japanese ETF bid-offer spreads following the tsunami — Index Universe

The best journalism-job want ad ever — Mother Jones; see also Romenesko

Lloyd Blankfein, representing: “We’re did you grow up?”…”Brooklyn,” [he] replied — Bloomberg

Newt Gingrich has a neck of purest brass — Think Progress

There has got to be a better way to donate after a disaster — Good Intents

Here’s the difference, Arthur: stealing a paper on 6th Ave is illegal — Forbes

A lovely David Leonhardt column on Charles Kenny — NYT

British rock stars to play Japan benefit concert — Reuters

It’s not just me worrying about the implications of fewer companies going public. Tim Geithner thinks the same way:

At the earliest stages of funding, small companies have become more reliant on angel investors, universities, or sector-specific investment shops.

And as these small companies find their footing, they are waiting longer than ever to go public – financing themselves instead through multiple rounds of private equity or venture capital.

The number of IPOs in the U.S., for example, has decreased during the last two decades. And even though IPOs have picked back up in the wake of the financial crisis, an increasing number of U.S. companies are going public in other countries, or even deciding to stay private and access different sources of funding.

The reaction to my piece has been illuminating. Stephen Bainbridge, of course, blames Sarbox, citing survey data, among other things. I’m unconvinced, although I do agree that it’s a boon for accountants. Derrida, in the comments on my post, reckons that a stock-market transaction tax would help. I like that idea more: liquidity can be a bad thing, and throwing sand in the wheels of the stock market would almost certain bring correlations there down, thereby reducing the diversification benefit to investing in private equity. It would also, of course, make buying and selling stocks more expensive — and that’s arguably a good thing too, if we want shareholders who act like owners rather than short-term speculators.

The most interesting pushback came from Ryan Avent. It’s worth taking his points one at a time:

Mr Salmon hasn’t managed to convince me that this recent trend is actually a threat to American capitalism. For one thing, he’s argued persuasively that private ownership is likely to be advantageous for firms that don’t need to raise money in public markets. It spares them the need to deal with pushy, impatient, litigious shareholders, allowing the firm to focus on its private goals and long-term growth. From a public policy perspective, the incentives facing firms are of some consequence.

Well yes: which is why it’s a good idea to nudge incentives more towards public markets and less against them. In America for pretty much all of the 20th Century, and in the rest of the world even today, public markets have shown themselves to be a really good thing when it comes to value creation. Before we simply come to the conclusion that we were doing it wrong all along, and that the rest of the world is still doing it wrong, it might be worth asking whether public markets shouldn’t by rights be more attractive than they are. It’s also worth asking whether pushy, impatient, and litigious shareholders are creating or destroying value. I genuinely don’t know the answer to that one.

Ryan continues:

I’m also not convinced that this trend is likely to leave private investors shut out of capital ownership. If millions of Americans want to invest their savings in equity of some sort, and if firms are out there looking for funding (and if there aren’t firms out there looking for funding, the economy has a bigger problem than stock ownership), is it really plausible that the financial system won’t find ways to match the two? There are many things to be said by way of criticism of the financial system, but its inability to exploit a profit opportunity is not one of them. And letting trillions in small investor savings trickle into low-yielding bonds would represent a massive missed profit opportunity.

I’m not for a minute saying that individual investors are going to wind up in low-yielding bonds as a result of all this. I’m saying something worse: that individual investors are going to wind up in low-yielding stocks as a result of all this. The US stock market is still worth some $17 trillion — there’s no shortage of stocks to invest in. But I worry that individuals investing in the stock market are just going to be buying and selling stocks to each other, while being gamed all the while by high-frequency traders. The more important work of capital allocation, meanwhile, is being done by private equity and venture capital shops.

The point here is that while demand for stocks to invest in might well be a profit opportunity for Wall Street, firms are smart enough now to realize that things which make lots of fee income for Wall Street aren’t necessarily good long-term ideas. So given the choice between a Wall Street investment banker who says “I can make you rich in an IPO”, and a Silicon Valley VC who says “you’re already rich, I can give you all the money you want, I can personally help you become even richer, and you won’t need to worry about being public,” the latter looks a lot more attractive. Does that VC dream of an exit-via-IPO at some vague point in the future? Maybe, maybe not. But a delayed IPO is still better than one tomorrow. Meanwhile, individual investors will continue to invest in the stocks that already exist. They just won’t make that much money from them. Which brings me to Ryan’s final point:

A different question is whether small investors will earn a lower rate of return than the big, rich, connected guys. I’m going to go ahead and ruin the suspense: they will. Now, Mr Salmon wants to make the point that defined-benefit retirement plans can earn better returns than defined-contribution plans, because managers of the big plans can play on the same field as the rich, well-connected investors who get to put money in Facebook. Perhaps that would remain the case, or perhaps that premium would disappear if a larger share of workers invested in defined-benefit plans. I can’t say. But that’s a fundamentally different question from whether falling numbers of public stock offerings threaten to end ownership of capital by the masses.

Ryan forgets, here, that a larger share of workers did invest in defined-benefit plans, for most of the stock market’s heyday. And that during those years, defined-benefit plans did pretty well, considering.

I’m not worried that falling numbers of public stock offerings threaten to end ownership of capital by the masses. What I’m worried about is that the masses will end up owning the dregs of the capital world — the overpriced stocks which nobody else wants, and which they get automatically when they buy their index funds. Meanwhile, private companies will be owned by plutocrats, and will comprise an ever-increasing share of the US economy. Which might be good for both the companies and the plutocrats. But it’s clearly not so good for those of us with 401(k)s.

Antony Currie wants a bit more clarity on why the Federal Reserve seems to be happy with Bank of America paying a dividend of 1 cent per quarter, but unhappy with a dividend of 5 cents per quarter. “It’s not clear,” he writes, “whether the Fed is worried about BofA’s core earnings falling short or about potential losses being higher than the bank projected, to pick a couple of possible concerns.”

My feeling is that the Fed’s logic wasn’t nearly that granular. There are basically three states that a bank can be in: it can pay no dividends at all; it can pay the minimum possible token dividend of 1 cent per quarter; or it can pay out a full and generous dividend. The Fed, in the wake of its latest stress tests, has determined that both Citigroup and Bank of America belong in the middle group. They can pay one cent a share, but no more — and in Citi’s case, they can only pay that much after doing a 1-for-10 reverse stock split and bringing the share price up above $40.

Paying a dividend is important from a symbolic perspective. It signals that the bank isn’t worried about insolvency, and it forces the bank to pay all dividends on preferred shares in full. If banks are paying dividends, that helps shore up confidence in the banking sector. If banks aren’t paying dividends, that keeps investors worried about what problems might lurk under the surface.

At the same time, the Fed has every interest in forcing banks to keep anything over one cent per share as precious capital, rather than sending it out to shareholders. The shareholders can’t do much with the money — not in this environment — while the system as a whole is clearly more robust the greater the amount of capital that banks manage to build up.

When Shira Ovide, then, characterizes the Fed’s stance towards BofA as “No Dividend for You,” she’s going too far. The Fed’s happy with BofA paying a dividend — indeed, astonishingly, BofA has been paying a dividend all along, with no objections from its top regulator. It just doesn’t want BofA paying out a dividend which is linked to profits. Not yet. For the time being, just like Citigroup, it’s being kept at that flat 1-cent-per-share level.

Update: I’ve heard a lot about mutual funds which are only allowed to invest in stocks which pay a dividend — sometimes with an explicit Berkshire Hathaway exception. Insofar as such funds exist, and I’m unclear on how prevalent they are, it makes a lot of sense to pay a de minimis dividend of one cent.

Liz Rappaport reports that the NCUA is getting tough with Goldman Sachs and other banks which sold corporate credit unions billions of dollars of toxic mortgage-backed securities:

In one of the broadest accusations that Wall Street helped cripple financial institutions during the crisis, the National Credit Union Administration, or NCUA, has threatened to sue several investment banks unless they refund over $50 billion of mortgage-backed securities sold to the five institutions, called wholesale credit unions…

Regulators seized the five wholesale credit unions in 2009 and 2010, inheriting a pile of battered bonds now worth only about $25 billion, or half of their face value.

This seems to me to be yet another form of weird selfishness on behalf of regulators who should really have the national interest, rather than their own self-interest, at heart. The FDIC’s suing WaMu directors? Yes, because the FDIC suffered losses. The NCUA’s threatening to sue Goldman? Yes, because the NCUA suffered losses. But what we’re not seeing here is any kind of government action against these banks which draws the logical conclusion: if Goldman needs to buy back all the bonds it sold to WesCorp, shouldn’t it also have to buy back all the identical bonds it sold to other investors?

What’s happening here is that Goldman is fighting a number of substantially identical claims on a case-by-case basis. Here’s its SEC filing:

Various alleged purchasers of, and counterparties involved in transactions relating to, mortgage pass-through certificates, CDOs and other mortgage-related products (including the Federal Home Loan Banks of Seattle, Chicago and Indianapolis, the Charles Schwab Corporation, Cambridge Place Investment Management Inc., Basis Yield Alpha Fund (Master) and Landesbank Baden-Württemberg, among others) have filed complaints in state and federal court against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material facts and material omissions and generally seeking rescission and damages. Certain of these complaints also name other firms as defendants. Additionally, the National Credit Union Administration (NCUA) has stated that it intends to pursue similar claims on behalf of certain credit unions for which it acts as conservator, and the firm and the NCUA have entered into an agreement tolling the relevant statutes of limitation. A number of other entities have threatened to assert claims against the firm in connection with various mortgage-related offerings, and the firm has entered into agreements with a number of these entities to toll the relevant statute of limitations. The firm estimates, based on currently available information, that the aggregate cumulative losses experienced by the plaintiffs with respect to the securities at issue in active cases brought against the firm where purchasers are seeking rescission of mortgage-related securities was approximately $457 million as of December 2010. This amount was calculated as the aggregate amount by which the initial purchase price for the securities allegedly purchased by the plaintiffs exceeds the estimated December 2010 value of those securities. This estimate does not include the potential NCUA claims or any claims by other purchasers in the same or other mortgage-related offerings that have not actually brought claims against the firm.

We’re given no indication, here, of the total amount of these bonds which was sold by Goldman: instead, we’re given the fraction of the bonds which are actually being litigated. And since the NCUA hasn’t filed suit (yet), that number is relatively small — less than half a billion dollars.

So long as government-run entities like the Federal Home Loan Banks and the NCUA look out only for their own self-interest here, both they and Goldman have every incentive to settle these suits out of court. But the government is meant to have a broader interest than that. Let’s say I bought one of these bonds but don’t have access to the government’s expensive lawyers. Why is it fair that the government should get Goldman’s money in an out-of-court settlement while I get nothing?

Yes, there are class actions pending against Goldman too, or at least putative class actions — they don’t seem to have been certified yet. But those class actions don’t have the extra force that comes from being brought by the government. If the government really believes that Goldman et al did something seriously wrong here, they should come down on those banks on behalf of all the victims. Not just the state-owned ones.

Berkeleyside axed from Google News — Davos Newbies

Truth is stranger than fiction: wasn’t a boring version of this story a subplot of Franzen’s Freedom? — Rolling Stone

Insane: cops giving Central Park bicyclists speeding tickets for going >15mph in the early morning twilight — Gothamist

George Monbiot with a strong essay on how the lesson of Fukushima is that we need more nuclear power — Guardian

There’s one aspect of the NYT paywall which hasn’t got as much attention as it deserves — and that’s the idea that the NYT will be able to charge higher CPMs for ads behind the paywall than it currently gets for ads on a free site. Gordon Crovitz, the former publisher of the WSJ who now has a paywall product of his own, points out that if people pay for a subscription, that’s an excellent indicator of the “engagement” that advertisers and agencies are looking for. As a result, he says, publishers can charge a CPM premium of about 30% for behind-the-paywall pageviews.

Of course, it’s hard to know whether the NYT can get that kind of premium. At the NYT, after all, most behind-the-paywall pageviews will come from people who aren’t paying for a digital subscription: either they’re print subscribers who get access to the website thrown in for free, or else they’re online-only readers who have taken advantage of the Lincoln offer. Do people who get free access behind the paywall count as “engaged” from an advertiser’s perspective? I’m sure the NYT sales team will do its best to persuade media buyers that they are.

What’s more, if those people are told clearly that they’re getting something worth hundreds of dollars for free, then they might end up using it more. So even if CPMs behind the paywall don’t go up a lot, it’s reasonable to assume that readers with a get-past-the-paywall pass will end up reading more NYT stories than they have done up till now.

Against that, of course, is a certain drop-off in traffic from readers who don’t want to pay for access, who haven’t taken advantage of the Lincoln offer for whatever reason, and who have no desire to engage in clever tricks any time they want to read a NYT story.

It’s all a lot of swings and roundabouts, but think about it this way: let’s say that 2 million web denizens have access behind the paywall, by the time that the NYT is done with its introductory offers, multiple accounts for home-delivery family members, and the like. I’m running about 150 articles a month, but I’m a heavy user; let’s assume that on average those 2 million people read 75 articles per month. That’s 150 million articles per month, and with some articles containing multiple pages, let’s call it 200 million pageviews per month, or 2.5 billion pageviews per year.

How much extra money could the NYT get from those 2.5 billion behind-the-paywall pageviews? If it manages to raise its revenue per thousand pages (RPM) by $10 for pages behind the paywall, then we’re talking about an extra $25 million in ad revenue — which compares to total digital ad revenues running north of $300 million per year.

It’s a big if, of course — the digital account for the family 9-year-old is a nice perk to keep the print subscription coming, but it’s not going to attract a lot of advertisers. But if the NYT can make the sale, then that $25 million could go a long way to helping to make up for any reduction in total pageviews which comes from introducing the paywall. At that point, the subscription revenues don’t need to offset a decline in ad revenues: they just need to pay for the cost of building the paywall in the first place, help to diversify the NYT’s income streams, and encourage readers to buy the NYT in its highly-profitable print form.

The point here is that the paywall is responsible for multiple revenue streams, not just its own narrow subscription revenues. It will drive marginal readers to the print product, especially at weekends — and thereby shore up or even increase print-ad revenues from the weekend paper. It will dissuade current print subscribers from dropping the paper on the grounds that they can get all the same content for free online. It will allow the digital ad-sales team to charge a premium for readers who have access behind the paywall. And, as we’ve already seen, it will allow deals where advertisers like Lincoln pay good money to sponsor that access.

Add them all up, and I’m beginning to come around to the idea that the paywall can make good financial sense — if everything goes according to plan. This is a complex system, and therefore prone to misunderstandings and mistakes: there have been predictable glitches in Canada already, and I was talking to one NYT staffer on Monday who was convinced that all of the blogs were free, rather than just the “blog fronts“. But over time I suspect that the NYT will manage to simplify both the system and the messaging, which Ken Doctor points out has proven rather tough and unfriendly at launch.

The NYT will surely proclaim the paywall to be a success no matter what happens. But if total pageviews don’t fall and digital advertising revenues increase, then it’s going to be pretty hard to make the case that the paywall was a bad idea.

If the paywall does succeed, I’ll be very happy indeed to have been proven wrong — the NYT is a great newspaper, and it deserves some financial good fortune. It’s a real possibility; let’s hope it becomes a reality.

I had a pretty involved Twitter conversation with TED today on the implications of the fact that fewer companies are going public. We’re both agreed that from a corporate-finance perspective, the trend makes perfect sense: the all-in cost of private equity is lower than the cost of going public. (For reasons why that might be the case, see here or here for starters.) But broadly speaking, from a public-policy perspective, is this a good thing or a bad thing? My thesis is that it’s a bad thing.

There are a few different reasons for this, but they basically boil down to the idea that it’s a good idea for stock ownership to be as broad as possible. What we don’t want is a world where most companies are owned by a small group of global plutocrats, living off the labor of the rest of us. Much better that as many Americans as possible share in the prosperity of the country as a whole by being able to invest in the stock market.

I’m not saying that individual investors should go out and start picking individual stocks. But I am saying that equities provide bigger returns, over the long term, than other asset classes. And that therefore it’s not good public policy for the ability to invest in an increasingly large part of the equity universe to be restricted to an ever-shrinking pool of well-connected global plutocrats.

Historically, this wasn’t much of an issue. Yes, there were private companies, but once they reached a certain size, they generally went public. Even after private-equity firms started becoming important players, those firms were largely funded by pension plans which were ultimately invested on behalf of relatively small individuals.

Nowadays, however, things have changed. There’s much more equity capital available for investment in the private markets than there has ever been in the past — which means there’s much less need for private companies to go public. On top of that, most of us aren’t invested in big pension funds and never will be: the country has moved from that model, based on defined-benefit pensions, to a model of defined-contribution pension plans where individuals invest their own money for retirement. And those of us with 401(k) plans or IRAs don’t have any real way of investing in private equity: our mutual funds and ETFs invest only in public equity and debt.

This is one of the important ways in which defined-benefit plans are better than defined-contribution plans: they give individual investors access to the kind of sophisticated pension-plan managers needed to be able to invest in private equity successfully. I’m not a big fan of the idea that middle-class individuals should be encouraged or allowed to invest directly in private equity — the risks and fees are too large, and invariably the real money ends up getting made by someone else. As for TED’s suggestion that we should just buy stock in Blackstone — well, for one thing Blackstone is a public company, not a private company, so it suffers from all the same problems of high correlation with other public stocks. And for another thing it’s pretty obvious that there’s a world of difference between buying a stake in a publicly-owned asset manager, on the one hand, and buying a stake in a privately-owned company, on the other.

My point here is one that Michael Kinsley has been making for a while:

Look. Small businesses are businesses like any other, and small business owners are people just like others—except that they tend to be wealthier…

There is an anthropomorphic fallacy here. Big businesses are not owned by big people, and small businesses aren’t necessarily owned by small people. The typical shareholder in a big business is a worker in some other big business whose pension fund has chosen to invest in that company. Or a retiree who has bought this stock as his or her nest egg. Or it’s somebody’s 401(k).

Broadly speaking, there are two ways of building wealth: returns to labor (work hard), and returns to capital (invest wisely). If you work for a company with a defined-benefit pension plan, then it will invest wisely on your behalf. If you’re stuck with a defined-contribution plan, however, the onus of investing wisely is on you — whether you’re qualified to do that or not. And the universe of asset classes that are available to you significantly smaller than the universe available to pension plans. As a result, defined-benefit investors outperform defined-contribution investors significantly (by about 3 percentage points per year, if I recall correctly; my internet connection right now isn’t good enough for me to get the exact number).

So American workers are facing a double whammy here: they’re losing access to private equity at exactly the point in time where private equity is becoming a very large and important part of the international capital markets. Meanwhile, it’s the rich foreign clients of Goldman Sachs — the global rentier class — who are getting that coveted access to equity in Facebook.

It’s not just Goldman Sachs, either. SecondMarket (a private company itself) now has a platform designed to match buyers and sellers of private equity in more than 12,000 companies; the company has also registered some 55,000 participants who are qualified to take part. Needless to say, those participants are not exactly representative of middle-class America.

So how do we put the brakes on this trend? Should we force companies to go public when they reach a certain size? Should we allow individual investors to have much more access to private equity and venture capital than they have right now? No: both of those are bad ideas, I think. The reasons for staying private are good ones, and the reasons for restricting investment in illiquid private companies are also good.

How about making a public listing more attractive by relaxing rules like Sarbanes-Oxley? Again, I’m not a fan: the literature is far from compelling that Sarbox was a significant contributor to the decline in public listings.

Indeed, I’m not putting forward any policy prescriptions at all here. I’m just pointing out a problem, while noting that it doesn’t seem to be an issue in the rest of the world. Maybe this move will just be an extra nudge pushing American investors out of the US market and into more international diversification. Which might not be a bad thing after all.

Interesting use of the Groupon strategy: offer a $50 coupon for a place where the average check is surely much lower — OpenTable

“If you don’t link to primary sources, I just don’t trust you” — Guardian

The NY Fed launches a blog. And immediately truncates its RSS feed — NY Fed

Wife Said No, Apple Said Yes — MacRumors

The video of my paidContent talk with Nick Denton is now online — paidContent

File under “improbable, but cute” — Atlantic

Om’s take on the AT&T merger with T-Mobile — “Everybody (Except AT&T) Loses — GigaOm

“If a Twitter feed or a blog carries the Reuters name, then the same standards of editing and sourcing apply” — Emirates 24/7

I had a long conversation with Jesse Eisinger today on the subject of second liens and the proposed mortgage settlement from the state attorneys general.

Second liens are clearly causing a huge problem in both the mortgage market and the banking market, as Mike Konczal clearly explains. They’re being held on banks’ books at what looks like extremely inflated values, and those banks are also overwhelmingly the entities servicing first-lien mortgages. As such, the banks are quite happy when homeowners default on their mortgage — that frees up cashflow to continue paying the second-lien loan.

It’s not at all obvious why homeowners would continue to pay their second mortgage even when they’re delinquent on their first, but that seems to be exactly what’s going on: the CEO of JP Morgan Chase Home Lending has said that some 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. This is unfair to investors in first liens, who are senior to the banks with the second liens but who are in many cases more likely to be asked to take a haircut on their loan.

The AGs seek to deal with this problem by saying that if a first-lien mortgage is modified, then the second lien must be marked down at least as much. That seems sensible to me, but it’s insufficient to Jesse, who reckons that treating the two liens equally is going to become some kind of de facto standard.

That said, the proposal is clearly an advance on what we have now, where the best-case scenario for second-lien holders is to see the first lien modified while the second lien gets paid off in full and on time. And it’s not at all obvious what would improve on the AGs’ proposal. Writing second liens down to zero is too harsh: it would unnecessarily damage the banks, and it would render pointless all of the underwriting they did to ensure that there was some kind of debt-repayment capacity beyond just collateral.

Jesse thinks that if the banks are forced to write down their second liens to something a bit more realistic, or if at least they’re required to increase the reserves they have to hold against them, then they will be more likely to accept write-downs on those loans. He might be right: I’d love to see some research on that front. In principle, banks have every incentive to fight to extract as much money as possible out of every loan that they own, whether they’ve written it down on their books or not. But here’s the difference: if they’ve written it down they’re chasing profits when they do that, and if they’re holding it at par then they’re trying to avoid losses. If banks fight harder to avoid losses than to chase profits, then forcing write-downs might do some good. Certainly humans feel that way, so it’s not impossible.

I also had one idea of my own. It’s probably not original, but I haven’t seen it anywhere else, so I don’t know what the objections are. In any case, how about this: any time a first lien is modified, the second-lien holder loses their security interest in the home. The debt outstanding remains just as payable as it ever was — it just remains unsecured. So if the first-lien holder writes down the mortgage to less than the value of the house, the second-lien holder can’t then swoop in and foreclose if there are payment difficulties.

In most of these cases, the second lien is de facto unsecured anyway: this rule would turn secured debt into unsecured debt, which would force the banks to make more sensible reserves against it — and would also allow homeowners to only fear foreclosure if they default on their modified mortgage, rather than on either the modified mortgage or their second mortgage/Heloc. Meanwhile, the banks which own the second loans wouldn’t have to write them down if they felt that the homeowner was a good credit.

It’s not going to happen, of course: anything along these lines would require new legislation, and there’s no chance of that. But I’d still be interested in what people thinking about how to deal with second liens react to the idea. It might at least help clarify some of the issues involved.

Jeremy Peters reports on the NYT’s internal paywall math:

The Times will not say publicly how many online subscribers it hopes to get. But company executives have said privately that the goal for the first year is 300,000. And Mr. Sulzberger and Ms. Robinson insist that the plan is not intended for short-term gain.

“This is not a bet on this year,” Mr. Sulzberger said. The question that remains to be answered is whether that bet pays off in 2015, 2020 or ever.

300,000 subscribers paying on average $200 per year (some will pay more; others will not renew every four weeks for a whole year) works out at $60 million — or less than 20% of the NYT’s digital advertising revenues. It’s a big enough number that I can certainly see why the NYT spent a long time considering this move. But it’s not so big as to be a no-brainer.

That said, if the NYT can get 300,000 paying subscribers — not including people from the Lincoln deal — and it can do so while maintaining online ad revenues, then I think the paywall will have worked. One huge unanswered question here is whether advertisers will be willing to pay a premium for reaching readers behind the paywall — if they are, then it’s conceivable that ad revenues might even go up. (And that would also explain why Dealbook is free: it already gets premium ad rates.)

Still, that’s a lot of ifs. Which is where I take issue with David Carr:

The Web was built on collaboration, open networks, and a friction-free flow of information. And the Times attempt – however considered, however nuanced – is an offense against that theology.

And that’s what it is: a theology. One need only read many of the bloggers and commentators in the wake of the announcement to see that what the Times is being accused of is not greed, but heresy.

In reality, the theology comes in statements like this:

“I believe that our journalism is very worth paying for,” said Jill Abramson, The Times’s managing editor for news. “In terms of ensuring our future success, it was important to put that to the test.”

There are two theological statements here, which I hear a lot from NYT journalists. The first is the idea that if you can charge for certain content, then obviously you should. And the second is the idea that charging for content will automatically “ensure future success.” Neither is exactly self-evident. Nor, for that matter, is Arthur Sulzberger’s idea that if the NYT suddenly turns the meter to zero in the wake of a big event like 9/11, then the readers will come flocking back the minute they’re able to. They won’t: once you become habituated to avoiding the NYT, and learn to get your news elsewhere, you’ll continue to do that no matter where the meter is set.

But for the record: I’m skeptical that the NYT will be able to get to 300,000 paying digital subscribers this year. If it does, then the paywall will definitely be more successful than I anticipated, and I’ll happily eat a little bit of crow. Here’s hoping!

This time last week, I was asked if I would go on Piers Morgan’s CNN show to talk about donations to Japan. I said yes, and reckoned that if I was going to go on national TV talking about such things, I ought at least to have a blog entry up on the subject. So I wrote this.

It’s the job of an opinion writer to stake out clearly-defined and controversial opinions, and anybody in this business has to have a reasonably thick skin. And I knew, more or less, what I was getting myself into: the very reason that I was asked onto the Piers Morgan show to begin with was that I’d written something very similar about Haiti, and a lot of people didn’t like that.

In the end, the Piers Morgan appearance was canceled. But my blog post went viral, and not in a particularly good way. One week, 248 comments, and 7,269 Facebook recommendations later, I’m wondering what happened.

I’m used to criticism — I even got an honest-to-goodness death threat once, after I warned (erroneously) that Morgan Stanley was toast and likely to get nationalized. But the degree of anger and hatred leveled at me over the past week is nothing I’ve ever experienced.

It’s worth making very clear, in case anybody was wondering, that this is one of those situations where my opinion is most emphatically not that of my employer, which is putting a lot of effort and money into raising earmarked funds for Japan.

The debate is clearly an important and meaningful one. My advice was entirely in line with the detailed analysis from GiveWell, which concludes that “the relief/recovery effort does not have room for more funding” and that “you as a donor do not have the power to improve the relief and recovery effort in Japan.” It’s also in line with Stephanie Strom’s reporting for the NYT. And so far, I haven’t seen any real pushback to the substance of what they’re saying.

The media reaction to my post was generally somewhere between respectful and positive — see Weekend Edition’s coverage, for instance, or Slate’s. And in general it’s hard to find independent commentators who think that donating earmarked funds to Japan is a particularly good idea. Tyler Cowen probably comes closest: he says that there are no corruption worries in Japan; that sending money is an important signaling mechanism showing US solidarity with Japan; and that even though you could give unrestricted funds instead, you probably won’t, and that therefore something is better than nothing.

But substantive debate was something sorely missing in the comments to my post, which rapidly generated into a startling series of ad hominem attacks on myself personally — I’m evil, I’m racist, I deserve to die, I should be fired, that kind of thing — interspersed with other comments pointing out that the attackers didn’t seem to have read and understood what I’d written.

Where did all those comments come from? I suspect that a lot of them came from people following a link from Facebook, where my story showed up like this:

There’s no nuance there, just a stern-looking headshot, a stark headline, and what looks very much like gratuitous provocation. People who have donated money to Japan, or who have friends or family in the affected area, are naturally going to respond aggressively if they see something like this. By the time they click through to the actual article, it’s too late for my argument to carry the day: they’re angry, and they’re going to express that anger in my comments.

Those comments were particularly effective because they were read, by myself and by many other people inside and outside Reuters. That’s not always the case, online: if you’re a writer or editor for HuffPo or Yahoo, the volume of comments is simply too great to even think about reading them all. So if a comment thread degenerates into a flame war, people tend not to notice as much. Even in my own case, I get thousands of comments on posts which are republished on Seeking Alpha, and generally read none of them.

But I’m very proud of my commenters here at Reuters, I respect them a lot, and know full well that on any given subject I have many readers who are much smarter and more knowledgeable than I am. And it turns out that when I get a large number of commenters who aren’t regular readers of my blog, it’s hard to snap out of the habit of reading them with a certain degree of respect.

My blog is a place for pretty high-level debate and discussion surrounding issues in the news. It assumes, for instance, that people implicitly understand the orders of magnitude between the amount of donations being targeted at Japan and the amount of money that it’s going to cost to rebuild the country and aid the victims of the earthquake and tsunami. Or that Japan, with its overvalued currency and too-low inflation, would actually welcome any short-term inflation and depreciation which came from printing money to pay for reconstruction.

But while these are familiar concepts to my blog’s regular readers, they’re not necessarily familiar to people on the internet more generally. “There’s nothing you can do to help” is never a pleasant message to convey, and people tend to react strongly against it. On top of that, decades of fundraisers sending the message that “every penny helps” have clearly done their job — which is to conflate, in the public’s mind, the act of helping with the act of donating money, to the point at which a message of “don’t donate to Japan” is read as saying, in substance, “don’t help Japan.”

Would it have been better, then, for me to make the same point less forcefully? A large contingent of the commenters on the post think so: they’re the ones saying that the message is fine, but the headline is insensitive and needlessly provocative in a time of great emotional turmoil and strain. I’m torn on this one, but I think that in general sugar-coating and euphemism are invidious: if you’ve got something you want to say, you should just come out and say it. And given that it’s impossible to know in advance when a post is going to break out from my normal readership, the result of such a policy would surely be a lot of unnecessary and harmful self-censorship.

On top of that, as Nick Denton never fails to remind me, commenters are by no means representative of readers as a whole. If a tiny fraction of 1% of the readers of the post have a strong negative reaction to it and leave angry comments it, that’s entirely consistent with 99% of my readers understanding exactly what I was trying to say, and maybe even learning something and viewing the world of aid and philanthropy in a way they hadn’t thought of before.

In hindsight, I do wish that I’d spent a bit more time on the post instead of rushing it out between panels at SXSW. But I doubt that would have made a huge amount of difference. In future, though, I think I will be more conscious of how the headline and first two sentences of my posts are likely to come across on Facebook. When I’m aggregated by humans, they make sure to get the message across quite clearly. But Facebook’s bots aren’t that smart, and the message can easily be lost completely.