Felix Salmon

Chris Kirkham has a fantastic story at HuffPo today about Ashford University, a small college in Iowa which was acquired for its accreditation in 2005 and is now the face of the billion-dollar for-profit education company Bridgepoint Education.

I’m reminded a bit of how Chris Flowers is buying banks for their national banking charter, except for that the situation with Bridgepoint is sleazier than anything Flowers could ever dream of doing.

The goal, employees say, is getting “starts”: students who fill out the paperwork for student loans and make it through at least four weeks of their first five-week course. That is the point at which the university is able to keep the student’s federal aid money, regardless of whether they continue their studies. After that, according to the Ashford employees, any form of counseling drastically drops off.

“There were numerous times when I enrolled students and thought, ‘All I’ve got to do is babysit them for four weeks,’” said a former leader in the admissions department, who spoke on the condition that he not be identified because he is still employed at another for-profit university. “I’d be thinking, ‘Come on, this person is clearly not ready to go to school.’ But I’d call you, pump you up, keep you confident for four weeks, and once I knew you completed, you were forgotten. It’s easy when I’m counting the money.” …

According to the Ashford employees, the pressure drives recruiters to enroll students who they know have little chance of success: people who openly say they have no regular access to a computer or the Internet, despite the exclusively online course offerings, and even those who acknowledge they have difficulty reading.

Bridgepoint has among the highest withdrawal rates of any publicly traded school in the industry, according to a Senate report last year. Based on a pool of students examined between 2008 and 2009, more than 80 percent of those in an associate’s degree program had exited within two years of enrollment, and nearly 65 percent of bachelor’s degree students had left the company’s schools in the same timeframe.

Last year, Bridgepoint posted its best year ever: netting income of more than $127 million, almost triple the year before. The company spends about 37 percent of operating costs related to education; the rest goes to marketing, corporate compensation and overhead.

Kirkham gets former recruiters on the record about Bridgepoint’s practices: Kristy Smith recruited one 22-year-old with a learning disability, holding his hand through the first five-week term and making sure he got Cs and Ds before leaving him to his own devices. And Brent Park recruited one woman for an online course who didn’t know how to type in a URL, and who needed an hour of coaching just to fill out the online application.

Kirkham’s report comes on the eve of a Senate committee hearing into Bridgepoint, which with any luck will help convince lawmakers that something drastic needs to be done to fix the broken for-profit education system. Online learning is all well and good. But as a general rule just about anybody enrolling in one of these shops would be better off watching a bunch of Khan Academy videos for free. It’s weird, but the more you pay for an online education, the worse that education seems to become.

John Gapper makes a good point: management consultants in general, and McKinsey consultants in particular, have made their entire business out of exploiting the moral grey zone surrounding confidential information.

The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them. But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors. So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information.

Here’s Gapper on McKinsey:

The accumulation and sharing of privileged knowledge is integral to how it works…

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

In this sense, a management consultant is a bit like an art dealer, or anybody else who traffics in valuable information asymmetries. The consultant knows more than the client, when it comes to strategic issues within the industry in question. If the client wants access to that knowledge, he has to open his own kimono to get it, thereby putting the consultant at yet more of an information advantage.

For pretty much Rajat Gupta’s entire career, then, he was trading in information that he obtained in confidence by dint of his position. When it comes to corporate intelligence, management consultants are pretty much unique in this regard: while other professionals like lawyers and accountants certainly encounter a great deal of confidential corporate information, they don’t trade in it in the same way — no one ever feels the need to hire Ernst & Young just because they audit a major competitor. The only profession which might come close to consultants, in this regard, is M&A bankers, and maybe a handful of extremely senior lawyers like Rodge Cohen.

None of this remotely explains or excuses what Gupta is accused of doing, of course. But as Gapper notes, there’s a long history of management consultants violating the spirit of the confidentiality agreements they enter into — he tells the tale of Booz Allen Hamilton’s John Burns taking lots of IBM knowledge with him when he took a job as president of the computer maker’s fiercest rival.

In any case, McKinsey can and should find itself in serious reputational jeopardy here. Gapper concludes his column portentiously, saying that “McKinsey must devoutly hope that there is no third man” in addition to Gupta and Anil Kumar, the McKinsey partner who has already admitted giving confidential information to Raj Rajaratnam.

And, predictably, it now looks as though there is just such a third man after all. Three McKinsey consultants all channeling confidential information to a single hedge-fund manager who wasn’t even a client? That’s not bad apples, it’s a culture of corruption. At this point it’s unimaginable that it wasn’t happening elsewhere as well.

Bank of America is setting up a bad bank, which will be run by Terry Laughlin. Roughly half of its 14 million mortgages are going to be carved off and put into the bad bank, in an attempt, according to FBR analyst Paul Miller, “to get investors focus on the good” and as “a way to talk about good things and ignore the bad.” The presentation which Laughlin handed out talks about how his new group will work on loan modifications for delinquent customers: “as borrowers default,” he said, “we’ll evaluate them for a loan modification.”

Essentially BofA is doing two things here. One is to try to sweep its bad loans under the carpet by creating the new Legacy Asset Servicing unit; the other is to step up its pushback against the proposed mortgage-servicing settlement, which quite explicitly does include loan modifications for borrowers who aren’t in default. Check out part II.K.8:

Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.

This is something BofA hates — because it opens the door to underwater borrowers who are making timely payments being able to get a loan modification and thereby reduce the value of the loan. And BofA CEO Brian Moynihan is on the warpath against it, saying that such a system would be unfair to borrowers who don’t get their loans modified.

As Adam Levitin points out, Moynihan’s line of argument is pretty disingenuous. There’s nothing in the proposed settlement which forces BofA or anybody else to do anything unfair: indeed, BofA is encouraged to draw up its own set of standards and then apply them to all of its borrowers in a consistent manner. The real reason that BofA is fighting back is simple: if it behaved according to the settlement’s guidelines, it would lose some of that $35 billion to $40 billion a year that Moynihan reckons it should be able to make going forwards.

I’m pretty sure that no bank in the history of the world has ever made $40 billion in one year, and that no bank ever should, with the unique exception of the Federal Reserve. Bank of America is far too big to fail, and as such it benefits greatly from an implicit government guarantee. The least it can do in return is treat its borrowers fairly.

Linda Stern has replied to my post about her dreadful advice to leverage up as much as you can to buy a house right now. And she’s not backing down:

My job is to write about what’s good for the consumer, not the bankers and brokers. And, for a young person who wants to own a house, the numbers say it’s better to squeeze together your 3.5 percent down payment and lock in a 30-year fixed rate loan now, at 4.87 percent (with deductible interest).

Got extra money? I’m guessing a nice balanced mutual fund will do better than 4.87 percent over 30 years…

And if you banked your cash instead of tying it up in your house, doesn’t that give you more leeway to pay your bills while you sort out your finances?

The line about “what’s good for the consumer, not the bankers and brokers” is truly astonishing. The argument here, if you don’t want to follow it back to the beginning, comes down to a simple choice: do you buy a house now with very little money down, or do you save up for a larger down payment? Linda recommends the former course of action, I think the latter is much more prudent. But what’s undeniable is that bankers and brokers will end up making much more money if you follow Linda’s advice than if you follow mine.

After all, the more that banks lend, the more money they make. If you maximize your borrowings, as Linda recommends, that’s extra profit for the banks. On top of that, Linda reckons it’s a good idea to use any excess cash not for your down payment (which would lower the amount you have to borrow and therefore lower the amount of money the bankers make) but rather for long-term investment in “a nice balanced mutual fund.” Which of course means profits for the fund managers and stockbrokers involved in selling you that fund. And we’re not done: the house you buy will probably be sold by a broker, who will profit 6% or so of the sale price. More money going to intermediaries.

And has Linda forgotten this bit, from her original post?

To get one of those 3.5 percent down payment loans, though, borrowers have to pay one percent up front and annual mortgage insurance premiums. Beginning on April 18, those premiums will rise 0.25 percentage points, to 1.1 percent for borrowers who put at least five percent down, and to 1.15 percent for borrowers who only put 3.5 percent down.

That’s 1.15% of the value of your mortgage every year for 30 years — all going directly to insurance premiums, which are a crucial part of the financial-services profit machine.

So if you want to do what’s best for the financial-services industry, and for bankers and brokers, you should definitely follow Linda’s advice.

Meanwhile, Linda does seem to be a bit fuzzy on what exactly you should do with the money you don’t put towards a down payment. On the one hand, she says it should be tied up in that mutual fund for the next 30 years, in the hope that it will return more than 4.87%. But on the other hand, she says that it should be “banked” so that you can “pay your bills.” Well, you can’t have it both ways. If you want the cash to be liquid and available for bill-paying, you shouldn’t invest it on a 30-year time horizon. (After all, as we saw during the crisis, people have a tendency to need cash at exactly the time their investments plunge in value.)

As for Linda’s “numbers,” I’m completely unconvinced that there’s any clear math showing that buying now makes lots of sense. Linda’s argument is based on speculation about the future — that interest rates and house prices are both going to go up over the next five years. That’s possible, of course. But it’s hardly an obvious mathematical truth. In recent years lots of people have lost lots of money by making exactly that bet. Which would seem to indicate that a bit of prudence, and saving up money for a decent down payment, makes a lot more sense than a speculative plunge into a highly-leveraged and extremely illiquid asset.

Emily Badger’s article on slugging in DC is a really fantastic piece of reporting. She doesn’t just explain not only the interesting phenomenon of people giving lifts to strangers so that they can drive in HOV lanes, she also puts it in its proper broader context, complete with useful hyperlinks:

Americans drive cars everywhere because gas relatively cheap (half what it costs in Europe), because only 6 percent of the interstate highway system requires tolls, because insurance rates are unrelated to how many miles people drive. We pay for the land we live on, but we expect the parking spot out front to come free of charge. The federal government has lately encouraged drivers with tax breaks to buy, variously: a new car, a hybrid or clean-diesel vehicle, a truck or SUV weighing more than 6,000 pounds, or any upgrade from a “clunker.” Then, regardless of what we drive, the IRS invites lucrative tax deductions for work travel, now at 50 cents a mile.

Go ahead, all the signs (and car ads) seem to suggest: Buy your own car — and ride in it alone!

You can embrace this or you can rail against it, but either way it’s a fact of life. And slugging is a Pareto-optimal way of improving it.

What if, instead of one bus with a capacity of 50 that came along every 30 minutes, five cars came along every few minutes, each with a capacity to carry five people? Looked at broadly, Oliphant says, slugging is a kind of public transit, because public subsidies pay to pave and restrict the HOV lanes on which slugging relies.

My favorite part of the piece is the way in which local government is trying to encourage slugging, but is doing so incredibly quietly, so that the sluggers themselves don’t notice.

Chris Hamilton, the Arlington County Commuter Services bureau chief, understands this better than anyone. Sitting in the 11th-floor office where he hosted Oliphant’s symposium two months earlier, he confesses that Arlington has been quietly funding LeBlanc’s website with an annual $10,000 grant. For 10 years. The site doesn’t disclose the connection, and Hamilton seldom does.

“It’s not public knowledge because we don’t want people to know; it works fine the way it is — that people think it’s just this little slugging community,” he says. “The slugging community has always had that idea about themselves, that this is their own thing, and they’ve created it, and they don’t need anybody else to muck it up.”

In terms of bang for the buck, quiet support of slugging initiatives is surely the cheapest and most effective way that government can improve its citizens’ commuting experience. And it still looks very cost-effective even if reasonably serious amounts of money start getting spent on building new HOV lanes. The big unanswered question though is whether it can be scaled or recreated elsewhere — it’s pretty much nonexistent outside the Bay Area and DC. Badger explains the social forces which make DC slugging work:

The homogeneity of Washington’s work force may play a role in this casual acceptance of strangers in cars. With so many federal employees and military personnel, people here even look alike, sporting uniform haircuts, black briefcases and government IDs. “If you’re a government employee or in the military, you’re taught ‘the group,’ not individualism,” suggests Donald Vankleeck, a civilian on his way to Bolling Air Force Base one morning in September at 80 miles an hour. “So it’s nothing to get in a stranger’s car. You may have been all over the world serving with people whose first names you never knew.”

I’m no expert on the cultural differences between various US metropolitan areas, but in principle I can’t see why this couldn’t work in, say, Charlotte. It clearly can’t work in a sprawling city like LA, since it relies on the existence of central hubs. But there are many US cities with poor public transportation and delineated office zones with parking spaces. It would be hard to get slugging up and running in any of them. But once it’s established, it can become a very popular and powerful force.

Aaron Naparstek has a masterful demolition of John Cassidy’s bizarre anti-bike-lane rant, but he somehow skips over the most wonderful bit of all:

I view the Bloomberg bike-lane policy as a classic case of regulatory capture by a small faddist minority intent on foisting its bipedalist views on a disinterested or actively reluctant populace.

Yes, you read that right: the New York populace, it seems, is basically comprised of cars, to the point at which bipeds are “a small faddist minority”.

Now it so happens that I’ve met Mr Cassidy a few times and he’s always looked perfectly bipedal to me. And for all that he enjoys parking his Jaguar XJ6 on Manhattan streets — he’s just written 1,250 words on the subject, after all — I’m quite sure that he always gets out and saunters happily among the other New York pedestrians as he makes his way to his dinner in the West Village.

It can hardly have escaped Cassidy’s notice, on his regular peregrinations from car to restaurant and back, that New York’s streets are positively bustling with bipedal life. There’s good reason for this: New York is a very dense city, in which 8 million or so bipeds — birds not included — cram themselves into a rather small area. His Jaguar XJ6 takes up about 100 square feet of street space; if everybody in Manhattan was so greedy, we’d turn the city into something more akin to Manhattan, Kansas.

And so New Yorkers turn to other modes of transportation. Primarily, we walk, taking up very little space while doing so. When we don’t walk, we cram lots of people into efficient vehicles like subways or buses. And sometimes we bike, since doing so makes a great deal of sense in a pretty flat city where space is at a premium.

Driving a car, on the other hand, is an enormously expensive thing to do, with most of the costs being borne by people other than the driver. Yet here’s Cassidy, the economics correspondent of the New Yorker:

From an economic perspective I also question whether the blanketing of the city with bike lanes—more than two hundred miles in the past three years—meets an objective cost-benefit criterion. Beyond a certain point, given the limited number of bicyclists in the city, the benefits of extra bike lanes must run into diminishing returns, and the costs to motorists (and pedestrians) of implementing the policies must increase. Have we reached that point? I would say so.

Well yes. If indeed the limited number of bicyclists in the city was a given, then Cassidy might have a point here. But it’s not. Bike lanes attract bikes no less effectively than roads attract cars and the number of cyclists in New York has been growing just as fast as the city can create new lanes for them. See if you can follow Cassidy’s logic here, because I can’t:

From San Francisco to London, local governments are introducing bike lanes, bike parks, bike-rental schemes, and other policies designed to encourage two-wheel motion. Generally speaking, I don’t have a problem with this movement: indeed, I support it. But the way it has been implemented, particularly in New York, irks me to no end…

Thanks to these four-wheel friends, I have discovered virtually every neighborhood of the city and its environs, and I would put my knowledge of New York’s geography and topography up against most native residents…

Let us have some bike lanes on heavily used and clearly defined routes to and from the city—and on popular biking routes within the city and the boroughs. But until and unless there is a referendum on the subject—or a much more expansive public debate, at least—it is time to call a halt to Sadik-Khan and her faceless road swipers.

The message here is that cars can and should be able to go anywhere in the city they like — that’s part of what makes them so great. Bikes, on the other hand, should be confined to a few “heavily used and clearly defined routes”, which would probably run parallel to existing subway lines. If you want to use a bicycle to explore the city, then you’re just going to have to take your chances in traffic, like Cassidy did in the 1980s.

In those days, there were few cyclists on the roads, and part of the thrill was avoiding cabs and other vehicles that would suddenly swing into your lane, apparently oblivious to your presence. When I got back to my apartment on East 12th Street, I was sometimes shaking.

Sorry, John, but the purpose of biking is not to “thrill” you so much that you end up shaking. And you surely know, even if you’re loathe to admit it, that traffic expands to fill the roads available: if you build more road space, you don’t reduce congestion, you just increase the number of cars. And similarly, if you reduce the amount of road space, you don’t increase congestion so much as you reduce the number of private cars. Which is a feature, not a bug.

Cassidy is convinced that the addition of bike lanes has increased the time he spends stuck in traffic, or looking for his beloved free on-street parking. (As Naparstek notes, his argument can basically be boiled down to “Street space should not be set aside for bike lanes. It should be set aside for free parking for my Jaguar XJ6″.) But the fact is that impatient motorists will always want to blame someone else for traffic, when, clearly, they themselves are the main culprit in that regard.

Cassidy has no problem with the vast number of parked cars which take up precious road space in New York because he regularly aspires to transcending his bipedal nature and becoming one of them himself. But if you replace those parked cars with a healthy, efficient and effective means of getting New Yorkers safely around town, then watch him roar. Jaguars — whether they have four wheels or four paws — are good at that.

Update: Adam Sternbergh piles on too, and Cassidy responds to us all.

I know that memories are short on Wall Street. But are they short on Main Street too? Reading Linda Stern’s latest paean to leverage and housing risk, it certainly seems that way. Saving for a down payment is hard, she says. It can take time!

And that doesn’t seem to pay. If you think about the cost of paying rent for five or more years, you may be better off jumping into a home with a low down payment now. That’s true even if you have to spend more money on fees and mortgage insurance to get one of those low down payment loans.

Well, yes, let’s think about the cost of paying rent for five or more years. In fact, let’s plug all our numbers into a rent-vs-buy calculator and see where we’re at after five years. The problem with Linda’s formulation here is that it helps to reinforce the common fallacy that 100% of rent payments are “wasted,” in a way that mortgage payments are not. But that’s simply not true. In both cases you’re paying money every month for your shelter; in the rental case that money goes to the landlord, while in the ownership case it goes to the bank.

Some small part of your monthly payment may or may not end up helping you build equity in your home, if house prices move up rather than down and depending on how much of your payment goes towards principal. But remember that the alternative here is saving up for a down payment — which is essentially the same thing as building up equity in a future home. If you save up $250 per month for five years and then put down $15,000 as a down payment, then you immediately start off with $15,000 of equity in your home. By contrast, if you buy today with no money down and start making mortgage payments, there’s a good chance your equity will be much less than $15,000 in five years’ time.

But Linda’s on a roll here, and manages to come out with one of the most astonishing pieces of personal-finance advice I’ve seen since the crisis hit:

Even if you have the money for a bigger down payment, there can be good reasons to save your cash. Mortgage rates continue to skirt all-time lows: Why not put your money to work for yourself and borrow as much as you can reasonably afford, on a monthly basis, at today’s rates? You can put the money you’re not paying into a down payment to work elsewhere. If home values rise, you will have done your best to leverage a small down payment into bigger equity. If they fall, you’ll have less skin in the game, and that could put more pressure on your banker to improve your loan terms lest you walk away.

This, in a nutshell, is everything that was wrong with the housing market before the crash — everything that we want to avoid going forward. Can’t Linda look around at the current devastated state of many people who bought with little or no money down, and see the dangers here? Evidently not. Instead, she seems to think it’s a bright idea to borrow more money than you need, to the point at which you’re pushing the envelope of what you can reasonably afford. And then take the cash you’re not using for a down payment, and “put your money to work for yourself.”

I barely know where to start on this. Here’s one way of thinking about it: banks are not charities, and that they expect to make money from their loans. They have a cost of funds which is lower than the mortgage rate that you’re paying; the difference between the two rates is their profit. You, however, if you follow Linda’s advice, have a cost of funds which is your mortgage rate: if you wind up getting a lower return on your savings than you’re paying on your mortgage, you would have been better off just using the money for a down payment. Needless to say, if there was an easy way of getting a higher return on capital than the mortgage rate, the banks would have done it already, rather than lending you the money. And it’s pretty delusional, frankly, to think that you can invest better than say JP Morgan. Yes, there are tax benefits to having lots of mortgage-interest payments. But they’re not sufficient to make the difference here.

Here’s another way: let’s say you own your home outright. Would you take out a mortgage against 95% of your home’s present market value, and then invest that money in the market somehow, trying to “put it to work for yourself “? Of course not: you don’t have remotely that kind of risk appetite. Borrowing money against your house to invest in the market is, always, stupid. But that’s exactly what Linda’s proposing you do.

And here’s one more: shit happens. Sometimes, you end up needing money, in an emergency. If you’re already borrowing as much as you can reasonably afford, that’s a big problem. If you have a bit of fiscal breathing room, you’re much better off. If you end up in a situation where you’re in a position to put pressure on your banker to improve your loan terms lest you walk away, that’s not a good situation to be in. It means you’re broke. It’s something you want to avoid, whereas in Linda World it seems to be something to actively court.

Linda’s also convinced that house prices are going to rise: if you buy now rather than later, she writes, that means you’re buying “while housing prices are low.” That’s debatable — they still seem quite expensive, on some measures: the price-to-rent ratio, for instance, is still well above its historical average. And more generally, buying low doesn’t help you in the slightest if prices just continue to grind lower.

Linda’s conclusion is that “the less you put down, the better off you are.” Which is true so long as you keep on making all your mortgage payments without any problem, and nothing goes very wrong either with your personal economic situation or with the US economy as a whole. That’s the way that leverage works: it makes everything sunny, so long as things go right. And then it plunges you into misery when things go wrong.

The scariest part of Linda’s post, for me, is when she talks about how it’s a good idea to “do your best to leverage a small down payment into bigger equity.” It’s not the dollar amount of the equity she’s talking about here, it’s the leverage used to get there, and the higher the leverage the better off you are. Following that advice got us into our current mess. And taking it now is a recipe for disaster.

Edward Wyatt has a big piece in the NYT on the banks’ last-ditch attempts to weaken the rules reducing debit-card fees — attempts which might be working, especially given Barney Frank’s long-standing opposition to the rule.

I’m not a fan, though, of the way that Wyatt presents the banks’ side of the argument without trying to work out whether it makes sense. For instance:

Banks contend the proposed cut in fees — to 12 cents per transaction from an average of 44 cents — will leave many of them unable to afford to issue debit cards to customers or will force them to raise other consumer banking charges to cover the costs. They also claim retailers will reap unfair profits.

This is ludicrous on its face: there’s no chance that banks will be “unable to afford to issue debit cards to customers”. In most cases, your debit card is your ATM card, are they really suggesting they can’t afford to give out ATM cards?

As for the costs of debit cards, they’re largely the banks’ own fault, for constantly exhorting people to use the insane abomination that is signature debit, and even implying that signature debit is safer than using a PIN. If you tell your customers to use an unsafe method of payment, it’s a bit rich to then turn around and complain of high fraud costs.

It seems to me that Wyatt should have stopped and asked what the people he was quoting were talking about:

“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., the president of Gerber Federal Credit Union of Fremont, Mich., told a House of Representatives subcommittee last week.

In what possible sense will credit union members “shoulder tremendous financial burden” if this rule is enacted? I’m having difficulty thinking of one. The cost they pay for goods bought — the amount of money that leaves their account — will be unchanged. The only question is how much of that money goes to the merchant, and how much gets kicked back to the credit union. Technically, it’s true, credit unions are owned by their members. But I’m not seeing any tremendous financial burden here.

And that’s not the only part of the story which doesn’t make sense:

Lawmakers tried to soften the blow by exempting smaller banks from the fee cap. But now even those institutions with less than $10 billion in assets oppose the law. They say that if they continue to levy the current, higher fees, their debit cards will not be able to compete against the big banks, which will charge lower fees because they have no choice.

This just stumps me: I’m open to any conceivable interpretation, if you want to help out here. Compete on what front? For customers? Why on earth would consumers care how much the debit interchange fee is? A lower interchange fee doesn’t save them any money. For merchants? No: the cards are all going to be either Visa or Mastercard, and merchants have to accept them. They can’t accept low-fee cards and reject high-fee cards.

In general, it seems to me, banks compete on how high their debit interchange fees are, not how low. The higher the fee, the more perks they can kick back to their depositors, in the form of reward points or cash back or the like. I simply can’t for the life of me work out how banks with high debit interchange fees “will not be able to compete against” big banks with low fees.

And Wyatt’s article as a whole is greatly tilted towards the bank lobby. By my count, he gives the banks’ side of the story eight different times, by quoting bankers directly or just recounting what “banks contend”. By contrast, the merchants get cited only twice, and their argument doesn’t really get parsed at all. And Wyatt makes no attempt at all to reach any consumer representatives to see what might be best for us.

Debit interchange is a complicated subject: it should be treated analytically, instead of as a political horse-race issue where lobbyists get to say anything they like without being fact-checked. I hope that the Fed’s rule stays in place. But if the banking lobby wins this one, stories like this will be part of the reason why.

Andrew Ross Sorkin examines the weirdnesses surrounding the Rajat Gupta case today, and comes to the conclusion that the government “appears” not to have recorded any of Gupta’s phone calls after all. That’s a reversal from what things looked like on Friday, but the one thing we can be sure of in this case is that the whole thing is very murky.

Sorkin also raises the question of criminal charges:

Given the seriousness of the claims — insider trading by an executive who had reached the upper echelons of corporate America — why not bring criminal charges against Mr. Gupta? …

Not only has the Justice Department not brought a criminal case, at least not yet, but the S.E.C. decided to bring its case in front of an administrative law judge instead of in a Federal District Court, where a defendant has full discovery rights. The S.E.C. is using a new provision in the Dodd-Frank Act to bring the case this way…

Statistically, it is notable: of the 26 Galleon-related cases the S.E.C. has brought, all have been brought in federal court. None have been brought in front of an administrative judge.

I think the question of discovery rights is a bit of a red herring here: I doubt they’re all that important to Gupta’s defense. And personally I like the fact that the SEC is making use of new provisions in Dodd-Frank. Fully-fledged lawsuits are time-consuming and expensive things to put together, and if it’s easier to bring something in front of an administrative law judge instead, let’s see more of that. I mean, no one has suggested that Gupta will get anything other than a fair trial.

Of course there’s a question as to why Gupta in particular got this treatment, rather than anybody or everybody else. It’s a good question, and I look forward to getting the answer. But someone needs to be first.

More generally, if Gupta is guilty, it’s in the public interest that we be able to convict him. One of the problems with insider trading is that it’s so hard to prove, people do it with impunity. Maybe a few more cases like Gupta’s will help on that front.

Where I disagree with Sorkin is when he says that the SEC case doesn’t make Gupta look “much like a sinner.” Actually, that’s exactly what it makes him look like. It’s true that Gupta might not have made money personally on these trades. But that’s clearly not the only reason he’d pass on information to Rajaratnam. It might, on the other hand, be the reason the SEC is going to an administrative law judge. Maybe they reckon that insider dealing for purposes of showing off is somehow a lesser crime than insider dealing for personal profit. After all, if Gupta had just shown off to Sorkin instead of Rajaratnam, he probably wouldn’t have committed a crime at all.

Update: John Carney reckons that there are tapes, but that the SEC wasn’t entitled to have access to them.

Measuring teacher performance is really hard. But who cares about getting tenure if you’re thinking of leaving anyway? — NYT

With Sir Michael Gambon, as Blenheim Palace, and a brief but scene-stealing turn from Dame Judi Dench, as a wingback chair with cabriole legs — TNY

Kinsley on movie math — LAT, see also me in 2008

Open City, Closed: Acclaimed Literary Journal Says Goodbye — NYO

The TechCrunch experience with Facebook Comments — TC

The best part of Newsweek’s interview with Larry Summers is the photo caption — Newsweek

SCOTUS eliminates a FOIA exemption — HuffPo

Emily Badger’s great article on Slugging, the People’s Transit in DC — Miller-McCune

Since when does the WSJ consider a 4-digit sum a “Big Payday”? When it’s “for Some Hill Staffers” of course — WSJ

No wonder the proposed settlement with mortgage servicers is proving too hard to write about: it’s really hard to read. There might be a lot of Elizabeth Warren in its substance, but there’s none of her in its style.

For those who can wade through it, however, it really is a code of best practices for servicers and it’s sorely needed. There’s much to love here, but it all basically comes down to the golden rule: treat your borrowers with honesty and humanity and common sense and you’ll be fine. Do servicers really need to be told that if they make more money from a loan mod than from a foreclosure, they should do the loan mod? Or that “sworn statements shall not contain information that is false”? Evidently, yes, they do.

I do have my doubts about whether all of this is feasible in the real world. Consider II.C.4:

Servicer shall create a Single Electronic Record for each account, the contents of which shall be accessible throughout the servicer, including to the Single Point of Contact, all mitigation staff, all foreclosure staff, and all bankruptcy staff.

Or II.F.1:

There’s even a bit later on (see page 19), where the servicer is asked to “consider”, whatever that means, partnering with Kinko’s or Wal-Mart to allow borrowers to scan and email documents for free.

All of this is reasonable, on one level — but at the same time it’s also setting the servicers up to fail, since few if any of them have the ability to implement all of these changes. Some of the settlement is easy: if you’re currently doing force-placed insurance, stop doing it. But the parts of it which involve massive IT overhauls will certainly break and go over budget and not play well with various legacy systems and generally be incredibly difficult to get working.

As a result, the big question here isn’t whether the settlement is reasonable — yes, it’s entirely reasonable. Instead, we should ask what the penalties for non-compliance are, since just about every servicer will be non-compliant for the foreseeable future.

Those penalties come at the end of the document and they’re extremely vague: there’s talk of “monetary penalties and additional remedial actions”, but there’s also talk of “failure to meet timelines”, which implies that much of this stuff could be pushed off far into the future and of “a special master or referee to resolve violations”, with no indication of how such a person might be chosen.

I’m reminded of the tale of the scorpion and the frog. In this case, the servicers are the scorpion and the frog is a legal settlement which can get them some kind of protection in law. The two will get, uncomfortably, halfway across the river and then the servicers, unable to go against their nature, will doom them both.

Ultimately I still feel the same way I did in November, when I said that only a radical restructuring of the entire securitization architecture—and especially the broken relationships between investors and trustees and between trustees and servicers—has any chance of actually working. The settlement’s heart is in the right place. But I have no faith in the ability of the servicers to implement it successfully.

Cheyenne Hopkins, of American Banker, has a great coup today: she’s found the famous 27-page term sheet laying out exactly how the state attorneys general are trying to force mortgage servicers to “change a dysfunctional system”, in the words of Iowa AG Tom Miller. There’s a lot of material in here, and unfortunately I’m a bit pushed for time right now and can’t give it a full go-through until later tonight.

So have at it, and let me know what you find — do you think this will actually result in a lot more principal reductions, as outlined on pages 18-19? I do hope so, but that bit about being “reserved for further discussion” does give me pause. It’s certainly the part which would cause the greatest immediate harm to banks’ balance sheets — much more than any fine the AGs might come up with.

27 Page Settlement

What exactly happened at the Ten Ones blog? I asked NYT spokesperson Kristin Mason, and she replied with this:

It was a copyright issue. The Tumblr blog was positioned as a NYTimes.com account, and it contained many images from NYTimes.com for which The Times did not own or control the necessary rights.

I’m not entirely sure what this means, but I can guess. Newspapers often rent rather than own illustrations: the illustrator owns the copyright, and gives the paper rights to use it in certain cases (like this newspaper or that website). What I’m suspecting happened here is that the Ten Ones blog, run by a former NYT staffer and filled with NYT content, looked as though it was a semi-official NYT property. And if the NYT were publishing certain illustrations on Tumblr as opposed to nytimes.com, that might violate the terms of their license with the various illustrators.

I can understand that much. But then things go a bit weird — it seems that the NYT’s Senior Counsel, on learning of this possibility, went nuclear and effectively destroyed the entire blog. Which is a massive overreaction to what was only ever a theoretical risk based on a possible misunderstanding. After all, Ten Ones was not a NYT property, so the NYT would not have been liable for anything appearing there.

More generally, with the NYT paywall coming Real Soon Now, the paper should be bending over backwards to encourage exactly the kind of inbound links that Ten Ones had very many of. One of the big unanswered questions about the paywall is how much it will reduce the amount of inbound links to nytimes.com — a huge number, and one which is extremely valuable to the NYT. We bloggers have been assured that our readers will be able to read anything we link to on the NYT site, even if they’ve already exceeded their monthly quota — but it still might feel a bit weird, sending someone to a site where they’re boxed in and can only read that one article, banned from navigating anywhere unless and until they cough up a subscription fee.

There’s another possibility here, though. Maybe the NYT nuked Ten Ones because of the paywall: they’re actively trying to shut down sites which do nothing but link to NYT stories, since such sites are effective ways around the paywall. That would be extremely short-sighted, if true. One of the NYT’s hardest tasks, post-paywall, will be remaining a central part of the conversation. It needs loyal readers like Ten Ones just as much as Ten Ones needed the NYT.

Henry Blodget has a great post about the Business Insider business model, in which he reveals that his mini-empire basically broke even in 2010 on $4.8 million in revenue. There was a pretty impressive profit in the fourth quarter of the year — breaking out the Photoshop measure tool and applying it to this chart makes me think that TBI made about $210,000 in those three months, on about $1.9 million in revenue.

Payroll for the quarter was 45 full-timers, plus a bunch of paid interns and freelancers. That makes sense: if TBI’s all-in cost of employing someone, including finding office space for them, averages out to say $10,000 a month, that works out to about $1.35 million in the fourth quarter, plus interns and freelancers, plus other expenses like hosting fees and travel. All in all it’s easy to see how expenses could be about $1.7 million in the quarter.

But there’s something else quite interesting going on in the chart. Look at the difference between revenue and operating income to get quarterly expenses, and it ends up looking something like this:

Compare that to the readership chart:

What you wind up with is something like this. It’s necessarily a bit fuzzy: I’m using quarter-end uniques as a proxy for uniques over the quarter as a whole, and the numbers are volatile. But the big trend is pretty clear:

What’s happening here is that since TBI really started getting going at the beginning of 2008, its expenses have been rising at pretty much exactly the same pace as its audience — it’s been spending between 23 and 36 cents per unique visitor the whole time, with the trend decidedly flat.

This is probably just as it should be: a startup should ramp up its expenses as it grows. Still, I’m not seeing any economies of scale, not even in that huge fourth quarter, where expenses managed to rise just as fast as the visitor count. Maybe there were year-end bonuses or something in there, skewing the figures. But the overall impression is that when Blodget wants growth, he has to pay for it, leaving little money left over for high-prestige luxuries like, say, John Carney. (See that drop in expenses in the third quarter of 2010? A chunk of it is Carney’s departure.)

Blodget writes:

Our newsroom salaries for full-time employees, for example (which include bonuses and benefits) are now higher than at many companies in the traditional news industry. Because the digital news business is quite different from the traditional news business, we often promote from within, and we’ve had the huge pleasure of watching folks who joined us as interns grow up to take leadership positions. True, we can’t yet toss around the $300,000-$500,000 a year per brand-name columnist that Huffington Post and Daily Beast are now reportedly tossing around. But, in future years, if we keep doing what we think we can do, we should be able to pay our top people a lot more than we do today.

(We also give our folks stock options, which helps make them feel and act like they own some of the place. Which they in fact do.)

TBI doesn’t really go in for brand-name writers: there’s talent on the masthead, but nothing that Tina Brown would want to poach for $500,000 or even $200,000 per year. The firing of Carney sent a clear message that insofar as there’s a star culture at TBI, it’s internal, based on pageviews: external fame and visibility is not something Blodget is particularly interested in seeing in his staff.

TBI got some decidedly backhanded respect from Time magazine today, when it placed 25th out of 25 on Time’s list of top financial blogs. Most of the write-ups on the list came from other people on the list, but the magazine doesn’t seem to have been able to find anybody willling to write about TBI, with the result that Time’s Stephen Gandel had to do it himself. “The thinking man’s finance blog it is not,” he wrote, adding that “the site has a reliable market commentator in Joe Weisenthal, though the length of his articles, like those on the rest of the site, seems to have dramatically shrunk”.

It’s pretty clear, at this point, that Blodget has given up on the idea of producing premium content for an elite Wall Street audience. Just like Nick Denton before him, he’s decided that there’s no money in micropublishing, and that if he wants to be very profitable, he’s going to have to go mass-market. Already he claims 8 million unique visitors, and he clearly looks forward to seeing that number rise substantially; there’s nothing elite about an audience that size, and when blogs grow that big they invariably leave their more elite readers behind.

So when Blodget promises that TBI is “going to get bigger and better”, I believe him on the first count. But I’m not so sure about the second.

I missed this on Friday:

Prosecutors intend to introduce audiotapes showing that Rajaratnam got inside tips from his friend Rajat Gupta…

Prosectors’ use of wiretaps has been a hallmark of the U.S. hedge fund insider-trading probe, which has resulted in more than two dozen arrests and at least 19 guilty pleas.

Rajaratnam is the central figure in the probe. Prosecutors have said they may present 173 intercepted phone conversations as evidence in the trial.

I find this fascinating, because there’s no indication in the complaint that the phone conversations were recorded at all. There’s lots of information which could have been obtained from phone-company records, about exactly when phone calls were made, what phones they were made from, and how long they lasted. But the big weakness of the complaint seemed to be that it included nothing about the contents of those calls.

Prosecutors of course don’t need to lay out their hand in full when they file their complaint — but if they’re going to come out a few days later and say they have wiretaps, what’s the purpose in keeping that information secret?

It’s possible, I suppose, that those 173 intercepted phone conversations don’t include any of the calls from Gupta, but I doubt it. It’s almost as if the Gupta investigation took place entirely separately from the Rajaratnam investigation, and that only after Gupta was charged could his investigators have access to the Rajaratnam tapes. In any case, it’s all a little odd, to say the least.