Felix Salmon

How safe is Janette Sadik-Khan’s bike-friendly legacy? — NYT

Roger Lowenstein on the cost of avoiding muni default — NYT

The Newsweek redesign — SPD

Overstock.com’s Latest Risk: Social Media — Weiss

Stiglitz and Schiffrin with a fantastic review of Spousonomics — NYM

Frat boys in a box — Gothamist

A transcript of David Einhorn’s FCIC interview — Santangel

“Twenty minutes later, possibly under their own steam, the snails arrive.” — VF

TBI made $2k in 2010 — TBI

General Atlantic to invest $65m in Facebook at a $65B valuation — CNBC

Anna Holmes on Charlie Sheen and domestic violence — NYT

The Twitter Story Fail — Techcrunch

How incompetent are mortgage servicers? So incompetent that faced with one of the most prominent journalists at one of the most prominent newspapers in the country, they contrived to subject him to, in his words, “a months-long odyssey: rates misquoted, interest charged on a phantom account, legal documents issued in wrong names, a mortgage officer who disappeared for days at a time (first it was his birthday, then his laptop was in the shop), a bounced check from Citibank’s own title company, and the freezing of our bank accounts”.

These stories are less shocking than they should be, these days, just because we’ve heard them so many times. Which is why the banks are going to find it very difficult to say no to the 27-page proposed settlement being offered by the states’ attorneys general. Does anybody have a copy of this thing? I’d love to see the details of the principal writedowns and the like, but although everybody is writing about it (see for instance American Banker, Bloomberg, WaPo, NYT, WSJ) and the NYT in particular says that they have a copy, no one seems to have posted it.

The one thing which does seem clear is that the OCC is still completely captured by the banking industry. It’s the one arm of the government not signing on to the proposed settlement, saying that $20 billion is too much money and could harm banks’ finances. Which is ludicrous, given that banks are chomping at the bit to eat into their capital by paying out dividends. $20 billion is tiny, by the standards of the size of the U.S. banking industry and mortgage market. Anything less would be a slap on the wrist and tantamount to a nod and a wink giving banks the green light to go on treating people like Dana Milbank just as they’re being treated right now.

I had a hard-to-follow Twitter debate yesterday about the FT’s paywall, where a couple of FT types — Alan Beattie and John Gapper — told me that the latest numbers for digital subscribers show that I was wrong when I criticized the FT’s strategy in October 2007. I’m often wrong, so that wouldn’t come as a surprise. But in this case I think I was right.

Because the FT is a subsidiary of a much larger corporation, it can confine itself to releasing only the numbers it wants to release. But a few things are clear at this point.

Firstly, the success of the website — if indeed it is a success — has not helped stop the bleeding in terms of print subscribers. Daily print circulation was 485,000 at the end of 2000, and dropped at a rate of about 5,000 a year to 440,000 at the end of 2008. The rate of decline has accelerated sharply since then: print circulation is now 390,000, which means the paper has been losing around 25,000 print subscribers per year over the past couple of years.

The good news is that digital subscribers have been arriving more quickly than print subscribers have been leaving. In the past year alone, the digital subscriber base has risen from 121,000 to 207,000 — an increase of 86,000 people, all of whom are paying print-like subscription rates.

Exactly what those rates are is not easy to determine. FT.com managing director Rob Grimshaw told me a couple of years ago that he loved the kind of airline pricing models where someone who paid $45 for their ticket can be sitting next to someone who paid $945 for the same service. So there’s a lot of opacity built in to the system. But I can tell you a few different rates.

Here in New York, if I lock myself in to an annual subscription, the FT will give me website access (including mobile and iPad) for $259 per year, or “premium” website access, including the Lex column and a couple of other bells and whistles, for $389 per year. If I want the physical newspaper delivered as well, that costs $440 per year. If I sign up monthly rather than annually, the minimum cost for the website is $312 per year, with premium access at $468 and the combined print-and-online subscription at $528. The newspaper-only subscription, with no website access, is annual only, at $348.

All of these numbers are significantly lower than they are in the UK, where a basic web subscription is $380 pear year, the premium subscription is $549, and the combined paper-and-online subscription is $845.

There are a few messages being sent here. Firstly, the FT is taking full advantage of its quasi-monopolistic status among UK consumers who are not particularly price-sensitive to charge very high subscription rates there. But it’s keeping its US rates lower because it’s still having difficulty breaking into this market. Secondly, the FT charges a significant premium if you subscribe monthly rather than annually — which says to me that monthly subscribers have tendencies to disloyalty and letting their subscriptions lapse. And finally, the FT is happy to sell a physical newspaper subscription for less than the price of accessing the same content (including the Lex column) online — indeed, the newspaper-only subscription cost is probably less than the cost to the FT of printing and distributing the physical newspaper six days a week.

While the FT loves to tout its combined subscriber base, then, it’s clearly following two different models at once. The newspaper business is the same as it ever was: lose money on printing and distributing the physical product, but make it all up with ad revenues. The online business, by contrast, is all about the subscription revenues, with ad sales being much less important. Gapper goes as far as to say that 207,000 digital subscribers could actually be worth more to the FT than 20 million unique visitors.

Conceptually, what the FT is doing here is holding onto the ad-supported model for as long as it can, while moving aggressively to a newsletter model for the online product. And the problem here is that while newsletters can be profitable, they’re never important*, and they never go viral: they cut themselves off from substantially the enormous world of opportunity afforded by being online. Successful websites get that way because people share them, with their friends and colleagues and Twitter followers — every reader is also a potential content distributor. Under the FT model, by contrast, the FT itself is at pains to be the only content distributor, and tells readers redistributing its content in incredibly natural ways that they are copyright infringers and in violation of the site’s terms and conditions.

Gapper reckons that the newsletter model means higher cashflow, higher CPMs, lower volatility, and higher p/e ratings. I’m pretty sure he’s wrong on the p/e front: there’s no way that the FT is worth anything like the multiples we’re seeing in the online-content space, whether you look at price-to-earnings, price-to-revenues, or any other ratio.

As for the other metrics, cashflow and low volatility are nice things to have, but massive growth is nicer. And for a news organization which aspires to grow from its UK base to become a genuinely global brand, it’s crucial. The FT’s paywall is structured very aggressively — you have to register after reading just one article per month, and then unless you subscribe you’re cut off after 10 articles per month. That’s good at maximizing short-term cashflow, but it clearly hurts growth: the FT doesn’t release numbers for unique visitors, but both Quantcast and Compete show FT uniques falling significantly over the past year, and actually being overtaken by Business Insider. What I said back in 2007 was that the FT was removing itself from the conversation; that’s exactly what seems to have happened.

I don’t doubt for a minute that the FT’s CPMs are very high. But they’re getting there the wrong way, by minimizing the Ms (the number of pageviews) rather than maximizing the Cs (total ad revenues). Eventually, the FT is going to be such a niche product, compared to other business and finance publications, that global B2B advertisers simply won’t see the point in buying it any more. What it should be doing is becoming so big and important outside the UK that major advertisers feel the need to buy it even if they have no desire at all to reach the UK audience. But it’s nowhere near that point yet, and it doesn’t seem to be getting there, either.

And if the FT isn’t serving advertisers well, it’s not doing so well for readers, either. Paywalls should always be completely invisible to subscribers, but the FT’s fails miserably on that front: subscribers keep on running into that wall on a regular basis, especially when they try to visit ft.com from their mobile device, or when they try to follow a link sent to them by a non-subscriber.

Meanwhile, it’s not just the cost of a subscription which is opaque — the broader FT franchise seems set up to make no readers at all happy with what they’re getting.

Let’s say, for instance, that you’re very interested in China. There’s China content in the FT, of course, which will cost you a few hundred dollars a year to read. If you want wonkier and more in-depth material, a great place to look is FT Alphaville, which regularly takes FT content and then adds very sophisticated analysis and data. Confusingly, Alphaville content is free. And then there’s the Long Room, an elite forum for financial professionals to discuss such matters: that’s free, too. Over to the side, there’s also FT Tilt. That has its own proprietary China content for which it charges thousands of dollars, alongside contributed content which is free with registration. And finally there’s China Confidential, a newsletter which comes out every couple of weeks or so, costs even more than FT Tilt, and which has recently launched a spin-off called China Confidential Funds which doubtless costs more still.

The whole structure feels a bit like Scientology: every time you reach one level, you realize there’s another, more expensive level awaiting you. The China story is of course absolutely central to the FT’s mission of explaining global business and economics — but instead of corralling its resources and creating the best coverage for its readers that it can possibly put together, it balkanizes those resources and has one group of people writing for the paper, another for Alphavile, a third for Tilt, a fourth for China Confidential, and a fifth for China Confidential Funds. From a sheer journalistic-quality perspective, this can’t possibly make sense. And it’s not like there’s a strong correlation between the price of the products and the quality of the journalists, either. It’s really just a mess, a desperate scrabble for revenues from a company which ought to be building the best unified global business coverage it can.

Overall, the FT strategy is exactly the strategy I would choose if I was faced with an industry in terminal decline, and wanted to extract as much money as possible from it before it died. And that’s sad, because the FT can and should be a major global player in perpetuity. Pearson should sell it now, to someone who can invest in it and make it relevant to a fast-growing business audience worldwide. If Pearson fails to do so, the annual decline in the value of the FT franchise will always exceed the dividend that Pearson manages to extract from it.

*Update: I’m getting pushback on this one bit in particular, where I said that newsletters are never important. They can be important within small, specialized groups or industries. But they’re never important to a general audience, or even a general business audience: they only become important when they start targeting very narrow groups like private-equity general partners or hedge fund prime brokers.

Update 2: Gapper responds. He talks about earnings growth at the FT Group as though it proves something — but it doesn’t, because that says nothing about earnings growth at the FT. (One would expect FT Group earnings to be increasing, if only because Pearson keeps on adding things like Medley Global Advisors to the group.)

More to the point, Gapper seems to have convinced himself that the FT’s high CPMs are entirely a function of its paywall, rather than a function of who its readers are. He compares revenues at the FT to those at the Guardian and at Gawker Media (!), and on that basis decides that the FT could never make an ad-supported model work. But of course the FT could still charge very high CPMs even if it was free, they would never come down to general-interest levels.

Gapper seems to think that I said that ad revenues from 20 million unique visitors would exceed subscription revenues from 207,000 subscribers. I never said that. But, pace Gapper, let’s do the math. He seems to think that Gawker Media is a good example of a site with 20 million uniques, so let’s use that as our example: it gets about 300m pageviews a month — 3.6 billion pageviews per year — from its 20m US visitors.

Gapper’s estimate for FT digital subscription revenues is $52 million per year. In order to get $52 million from 3.6 billion pageviews, you’d need revenue per 1,000 pages of about $14. Let’s say you have two ad units per page, and you can sell two-thirds of your inventory. Then in order for your ad revenues to exceed $52 million, you’d need CPMs of about $10 on average. I’m sure the FT can charge much more than that.

Meanwhile, the value of the FT itself is surely much greater with 20 million global readers than it is with 3 million — after all, the media business is all about building as large an audience as possible. Yes, it’s nice to have a diversified revenue stream, which is why Pearson owns lots of subscription-based products and is buying more. But that doesn’t mean the FT itself has to move aggressively away from advertising and towards subscriptions.

The jobs report this morning showed average hourly earnings increasing by 1 cent to $22.87 over the past month; that brings weekly earnings up to $782.15, on average, up 2.3% on last year. That’s a modest improvement, but an improvement all the same.

But Michael Greenstone and Adam Looney decided to take a step back, and look at median earnings across the population overall, rather than just in the working population. The resulting picture, especially for men, is pretty gruesome:

They write:

This analysis suggests that earnings have not stagnated but have declined sharply. The median wage of the American male has declined by almost $13,000 after accounting for inflation in the four decades since 1969. This is a reduction of 28 percent!

There’s a lot going on here, but a large part of it is that between 1970 and today, the share of men without any earnings at all increased from 6 percent to 18 percent. Many of those men are in prison, but a lot more are simply discouraged.

The blue line in this chart can be read as showing the competitiveness of working-class Americans in an increasingly globalized economy. It’s in secular decline, it’s not coming back, and it has been exacerbated greatly by the loss of 12 million jobs over the course of the Great Recession. Those jobs aren’t coming back, either. The US is going to have to create millions of new jobs going forwards. But it’s also going to have to look after the growing ranks of the unemployed — those who are looking for work, to be sure, and also the growing ranks of those who don’t even bother any more.

Megan Garber has a great column at Nieman Lab on the effect of paywalls on journalists:

For writers, both professional and non-, both compensated and not, exposure is generally a paramount goal — not for themselves, necessarily, but for their work and their words. That’s why they’re “writers” and not “diarists.” And when it comes to exposure, nothing beats the wide-open web…

Pay models, as walls or any other form, aren’t just business-side structures. They’re both medium and message, and affect all aspects of the news — from the reader to the writer to everyone in between.

There are three points I’d add to Megan’s thesis. The first is that not all writers are equally affected by paywalls. The more you want to take part in the conversation, the more allergic to paywalls you’re likely to be. And Frank Rich is omnivorous in that respect: he loves grabbing ideas from all over the web, linking to them generously, connecting them together, and remixing them in very smart ways.

By its nature, that kind of activity is much harder to do effectively when you’re behind a paywall, since it’s reliant on the people you’re linking to being able to respond to you in turn, and continue the conversation. By contrast, a shoe-leather Metro report about a shopkeeper in the Bronx, say, constitutes essentially a one-way flow of information from the writer to the reader. If fewer readers have access to it, that doesn’t directly affect the quality of the writing.

Secondly, it’s easy but very dangerous to conflate the readership of a website or print publication with the readership of any given writer on that website or in that publication. Jack Shafer does it, and so do sites like Mediaite, when they rank influence according to print circulation and online unique visitors. (Apparently Frank Rich lands somewhere between Rafat Ali and Sebastian Mallaby in the columnists ranking.) But as Nate Silver will happily explain, just because you appear on a high-readership site like the Huffington Post doesn’t mean you actually have any readers — he reckons that the average unpaid blogger on the site gets about 550 pageviews per post, and presumably a similar number of monthly unique visitors.

It seems that Rich is thinking of moving in a sensible direction, at New York: a faster and more vibrant online presence, which can interact with the rest of the web more as it happens rather than weekly, combined with a longer-from monthly column in the magazine, where he can move more in the meaty-and-timeless direction.

It’s entirely possible that Rich’s total online readership at nymag.com will exceed the post-paywall readership he’d have if he kept going with his weekly column at nytimes.com. And it will certainly be more loyal: weekly columns don’t work well on the web, especially not Sunday columns. Shafer talks about the “obvious cues—Sunday morning bagels and coffee, for example—that it’s Rich time”, but I doubt many people look at their sesame-seed bagel with lox and get reminded that they really ought to go find the latest Frank Rich column online. Shafer, of course, knows this better than anybody, working as he does for an online publication which found it necessary to move its publishing pace “from weekly to daily to several times a day” as it embraced the natural velocity of the web.

Finally, Rich is a columnist, and as such he’s a brand in his own right. The NYT has been great at helping Rich build that brand — it’s unrivaled in its ability to bestow traffic and influence on key individuals. But post-paywall, loyal Rich readers will have to pay to read his content, unless they carefully avoid all other NYT articles, or unless they search the web to find a direct link to Rich’s column from somewhere outside the NYT website. Rich’s natural audience is never going to overlap perfectly with that of the NYT; it makes sense that he’s embracing this opportunity to find his own base, rather than continue to piggy-back on that of the Times.

After all, while it’s true that writers care how many people read their stuff, they care even more about who reads their stuff. To take an extreme example, most opinion writers would surely happily sacrifice a million pageviews for the sake of being read by Barack Obama. Rich aspires to a broader audience than that of NYT subscribers: outside the NYT paywall he can reach anybody in the world, and build a web-based franchise where his readers don’t ever need to worry about using up their precious pageview quota. I wish him the best of luck, and I’m quite sure it’s going to be very exciting for him.

The general reaction to this morning’s jobs report is “meh”, as you might expect, given the release, where the phrases “changed little”, “about unchanged”, “little or no change”, “unchanged”, and “essentially unchanged” all appear in the first five paragraphs. But that’s largely a function of the fact that the release attacks the unemployment figures first; when it comes to payrolls, they rose by a statistically significant amount — 192,000 jobs, and the trend, while modest, is clearly in the right direction:

Since a recent low in February 2010, total payroll employment has grown by 1.3 million, or an average of 106,000 per month.

The really good news in this report is that it’s looking increasingly as though the sharp drop in the unemployment rate over December and January, when it fell from 9.8% to 9.0% in two months, is less of an aberration than it might seem. The 8.9% rate, while undeniably unacceptably high, is the first time we’ve seen an 8 handle on this figure in almost two years. And remember that in October 2009, the number was 10.1%.

Given that unemployment by its nature falls more slowly than it rises, a decrease of 1.2 percentage points in 16 months has to be taken as an indication that something is, finally, going right. (Other unemployment rates, like the much-discussed U6, are also down sharply: it’s now 15.9%, from 17.0% in November.)

Even the worst news of the report, in table A-12, is something of a statistical aberration: while the mean duration of unemployment hit an atrocious new high of 37.1 weeks, that’s mainly because the upper bound for for unemployment duration was changed this year to 5 years from 2 years. The median duration fell, to 21.2 weeks. There’s still an American underclass of about 2.5 million long-term unemployed, but it does seem to be shrinking a little.

As for payrolls, everybody wishes they were growing more quickly. The current pace is far too slow, and isn’t even enough to keep up with population growth. Or, to put it another way, 2011 is a great year for the jobs report to look good, since for demographic reasons it’s the year when the total number of jobs would rise naturally at the fastest pace, thanks to the growing US population. It’s a good idea to mentally compare the payrolls report to the baseline in this chart, which sobers things up a bit.

The big picture here, then, is that the pace of recovery in the employment sector is real but disappointing. And given the new atmosphere of fiscal cutbacks at both the federal and state levels, I doubt it’s going to speed up any time soon.

I enjoyed my chat with Nick Denton at PaidContent 2011 today. He wasn’t shy about ducking questions he didn’t want to answer — he wouldn’t put a number on Gawker’s revenues, for instance, and he wouldn’t say why Gawker refused to publish that Scientology story. And to nobody’s great surprise he was still very bullish about the Gawker redesign — even after admitting to having made big mistakes in rolling it out, and even with the site far from being fixed, three weeks after the launch. I asked him about his bet with Rex Sorgatz; Denton said he’d recently offered to double the stakes.

For me the most interesting part of the conversation was how aggressive Denton was when it came to AOL’s acquisition of the Huffington Post. Before we went up on stage, he leaned over to me and told me to be sure to ask him about the deal, which he has been very vocal about criticizing. As he was today: he claimed to be very disappointed in Arianna Huffington’s decision to sell. “They should have gone all the way and become the liberal Fox News,” he said. “They could have bought MSNBC.”

This comes as little surprise, coming from Denton: when Jason Calacanis sold Weblogs Inc to AOL in 2005, Denton said he’d sold “10 years too early”. And Denton himself made very clear, later on in our conversation, that Gawker is not for sale and will not be for sale. If you want to buy a stake in Gawker, he said, he might be open to that — but only on the explicit understanding that you’re buying a very long-term income stream, rather than a chance to get rich quick.

I don’t really understand Denton’s position here. At AOL, Arianna Huffington has much deeper pockets to be able to invest in growth, not least by trying to get some real value out of the hugely expensive Patch franchise. And I’m pretty sure she has more freedom now to build something great over the long term, than she did when her company was owned by venture capitalists looking for an exit. Denton is highly prejudiced against AOL for reasons which aren’t entirely clear: while admitting that some AOL franchises, like Engadget and Joystiq and Techcrunch, are excellent competitors, he still said that attacking AOL was like “kicking a blancmange”.

Denton’s reference, I think, is to a wonderful Clive James review of Judith Krantz from 1980, where he wrote that “to pour abuse on a book like this makes no more sense than to kick a powder-puff”. The review is required reading for anybody who thinks that snark didn’t exist before the Internet — but it’s worth noting that James’s review in a highbrow, low-circulation magazine, and its subject was a huge bestseller which tapped straight into the mass market which Denton so covets.

There’s a longstanding tension in the Gawker universe, between cultivating smart and important and witty readers, on the one hand, and building a mass audience, on the other. Denton was very complimentary about my post on the end of micropublishing — and it’s my feeling that if he wins his bet with Sorgatz, it will be by gaining more of a mass audience while further eroding the amount he’s read by the media elite. On the other hand, if you look at the people Denton hires, they tend to be funny in a very Clive James kind of way, as opposed to having the mass appeal of say Sugar, the network Denton reckons AOL should have bought. Denton likes to sacrifice the highbrow for a mass audience anyway he can, and boldly said he’d be bigger than HuffPo next year. (I’ll take that bet.) But sometimes he can’t help himself.

The statement of Denton’s which got the most pushback on the Twitter backchannel was when he said that Gawker was a technology company rather than a media company. I agree with the snark mob on this one: for all that Denton has invested a lot in technology and is very proud of what he’s built, he knows journalism in a way that he doesn’t know technology. (He could take over as editor of Gawker any time he likes; he could never take over as CTO.) Gawker has a long history of technological chaos, and the relaunch mess only serves to underline how difficult it is for Gawker to get its tech ducks in order. Denton wants to be a tech company. But he’s not.

Wherein I talk to Amy Eddings about LCD Soundystem tickets — WNYC

Is McKinsey & Co. the Root of All Evil? — Ritholtz

“Advice to Galliano’s lawyer: Tell the press your client was referring to another Hitler, maybe a hitherto-obscure designer of hats” — Atlantic

NYT Magazine articles now include name & email address of author and editor — NYT

Cricket can be a gripping sport — Guardian

Lindgren on NYT Mag: “it needed an improvisational, we-just-did-it-this-week kind of feeling” — Yahoo

The RGE report on muni bonds is very good, and I’m sad I’m not allowed to share it with you. (On the other hand, according to former CEO Camille LeBlanc, “pick a bank, pick a hedge fund—they’re probably a client.” So if you know anybody on Wall Street, they might well have a copy lying around somewhere.)

I can, however, share the five-word executive summary from authors David Nowakowski and Prajakta Bhide: “Overblown default risk, underestimated problems.” It’s a neat formulation, since it helps to concentrate attention on the real fiscal issues facing the states, without getting alarmist and unhelpful about a possible wave of defaults.

There have always been some muni defaults, of course, and chances are that number is going to rise over the next few years. But RGE isn’t all that worried on the default front. For one thing, muni bonds tend to be pretty robust in downturns, for another, defaults will likely be clustered in non-rated issues. And from a systemic perspective things look even better: banks and other leveraged institutions don’t hold much in the way of muni bonds, and it tends to be leverage, rather than default itself, which causes the real damage.

On the other hand, the effects of avoiding default will be large and painful, with layoffs and tax hikes seemingly unavoidable.

RGE takes a very long view, looking at the history of US municipal debt since 1790. The worst that it ever got was the 1873 Long Depression, when muni bondholders suffered 25% defaults and 15% losses. They write, plausibly enough:

In RGE’s view, this period following Civil War, Reconstruction and Carpetbagging, and economic collapse goes far beyond stress tests and even most tail risks.

Two datapoints underline just how bad the 1873 depression was: indebtedness in the south was 295% of GDP, much of it money which had simply been trousered by corrupt politicians. And wealth in the south fell by 59% between 1860 and 1870. We’re nowhere near that bad today, or in the foreseeable future.

My own view of the the tail risk in the muni market is that it’s linked to monoline wraps: that if defaults rise high enough that munis can’t borrow any more, the political cost of default is diminished by the fact that bondholders will still get paid by insurers. In other words, you don’t need economic collapse for munis to default, you just need a critical mass of lots of other people doing it, and a colorable claim that default will be painless for most of your constituents. But RGE’s point is well taken — munis are pretty tough, as 220 years of history demonstrates. Let’s not write them off just yet.

And if you’re holding general obligation bonds, there’s another thing helping to support them: the diversification of revenue sources available to state and local governments.

You can see this graph as bad news, showing that states are increasingly reliant on fiscal transfers from the federal government. Or you think of it as good news, showing that when push comes to shove the government is willing and able to bail out the states, which are after all too big to fail in many cases. And as for the other revenues, only income taxes have failed to bounce back from the financial crisis. All other revenues, even property taxes, have stayed pretty stable, as tax rates have tended to rise to offset any fall in property values.

All that said, the fiscal situation facing the states is pretty bad. Fiscal transfers are certainly going away for the next couple of years, and expenditures are growing even as revenues aren’t. The figures for a state like, say, New Jersey are alarming indeed: a 2011 deficit of more than $10 billion, unemployment of 9.2%, and a debt-to-gross-state-product ratio of 11.8%. There will be cuts, and they will be harsh.

Finally, there’s the question of legal protections, and it turns out that bondholders are pretty well situated on that front:

The laws regarding debt restructuring are complex, and the status of bondholders in such cases is much higher in the “capital structure;” in many cases, more akin to secured creditors at an operating company level than a typical senior unsecured corporate bond at a holding company level…

The U.S. court system is highly unlikely to allow a state to impose permanent losses on investors in GO debt…

Bond security is very strong for most debt issuances, and is provided for in state constitutions, statutes, covenants with bondholders, and local ordinances. U.S. state and local government bonds are usually secured by a general obligation of the issuer. For local governments, this is generally accompanied by an unlimited property tax pledge and such taxes are senior to the property’s mortgage obligation. Other commonly issued municipal bonds are secured by a first lien on sales or income taxes.

The RGE report is very strong on this, and has set quite a few of my worries to rest. I feared that bondholders would have little recourse in the event of default, but it seems the opposite is true: they really hold all the cards, and even in the case of Chapter 9 bankruptcy they’re pretty well positioned.

None of this means, of course, that muni bonds are going to go up in value rather than down. If retail investors leave the asset class and institutional investors are forced to step in, they’re likely to demand much higher yields since they don’t get the same level of tax benefits. Or to put it another way, just because default risk is low doesn’t mean that credit spreads are going to be low too — there are a lot of supply-and-dynamics going on here which can pull prices far away from their fundamentals.

But it does seem that the main thing to worry about is muni bond prices falling, rather than municipalities actually defaulting. If prices fall, there will always be talk of default — but talk is cheap. Default, by contrast, at least for the time being, remains very expensive.

On Monday, it looked like Muhammad Yunus was going to survive as head of Grameen; today, it looks as though he’s out. As David Roodman explains, it’s all very complicated and murky, but the base-case scenario is that everything will be decided in court, and that the courts will side with the Bangladeshi government.

This is a major diplomatic issue: if Yunus is indeed ousted, the US has promised to end all high-level diplomatic interaction with Bangladesh. Yunus has powerful friends, but that doesn’t seem to have helped him here.

Yunus himself, of course, will be fine whatever happens. The worry is what happens if and when the Bangladeshi government seizes control of Grameen. It seems that the attempt to oust him is a reaction to his anti-corruption campaigns, and the obvious risk here is that Grameen itself will become a vehicle for graft — especially if, as prime minster Sheikh Hasina reportedly wants, the government’s stake in the bank is raised to 60%. (Right now, it seems that the government owns about 3.4% of Grameen, although by law it’s meant to own 25%.)

Nick Kristof is clear about how important this is:

If Grameen is turned into a state bank, that would be a catastrophe — above all for the impoverished people who depend on it. And if a Nobel Peace Prize winner can be shunted aside, then all of civil society is in jeopardy.

This would be dreadful, too, for the broader cause of microfinance. Grameen is the shining example of how microlenders can avoid disastrous implosions by dint of being owned by their borrowers. If that changes and it becomes the shining example of how governments can swoop in and seize ownership and control for their own ulterior motives, then it becomes very hard to envisage any ownership model which looks strong and sustainable over the long term.

Today’s news, then, is a stark reminder of the huge amount of tail risk in microlending. The weakness of the model isn’t in high default rates, it’s in the way that extreme events, often orchestrated by politicians, can strike even the biggest and most successful lenders. If Grameen and Muhammad Yunus aren’t safe, then no one is.

A couple of big names are out with cautious bond market views this week. For the big picture, turn to Bill Gross, who’s worried about what’s going to asset prices — both bonds and stocks — when QE2 comes to its scheduled end on June 30. He has two main points:

• For the duration of QE2, the Fed has been buying 70% of all new Treasury-bond issuance, and foreigners have been buying the other 30%. When the Fed stops buying, who will step in to replace it? After all, with a $1.5 trillion budget deficit, there’s a lot of new supply coming.
• Treasury yields are about 150bp too low. The yield on the 10-year Treasury is typically the same as the GDP growth rate; it’s now 150bp below that. Real 5-year Treasury yields are normally about 1.5%; they’re currently negative. And, of course, the Fed funds rate is artificially low. All of this implies that yields will rise. When that happens, it’s reasonable to assume that discount rates and credit spreads will rise along with them, driving all asset prices lower.

This need not happen immediately upon QE2′s demise, but it might: Gross foresees “immediate uncertainty and fear” come June 30, and strongly implies that he’s not going to be venturing far out the curve unless and until rates rise significantly. For the time being, he’s derisking: “PIMCO’s not sticking around,” he tells us.

Meanwhile, on the state level, David Nowakowski and Prajakta Bhide of Roubini Global Economics have a big report out called “States of Despair,” in which they estimate that muni defaults could reach $100 billion over the next five years. They do stress, however, that the recovery value on those defaults is likely to be very high — roughly 80 cents on the dollar — and that “state and local debt problems are not systemic in nature, and will not infect the financial system, though they will dampen economic recovery.”

Indeed, the report is actually bullish on the muni market: if recoveries really are 80%, then you’d break even buying the MCDX index even if the five-year default rate hits 34%. In other words, even if there are $100 billion of bond defaults over the next five years, you’d still make good money buying munis at these levels.

There’s lots of very good analysis in the report, which I’ll come back to later today. But my main takeaway is that this is clearly a market requiring good analysis — it’s not something that individual investors should buy blithely, as they have in the past, on the assumption that muni bonds are not only tax-free but also risk-free. As such, the muni market has a similar problem to that facing the Treasury market: when the biggest buyer of the bonds goes away, who will replace them? So far, the answer in both markets is very unclear.

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New paper suggests JPM’s Madoff profits almost double what was previously thought, $907m — SSRN

“Climategate” and epistemic closure — Grist

Frank Rich, a true blogger, moves house as the NYT moves to a paywall — NYMag

Neil Barofsky, TARP’s outspoken overseer, will resign — WaPo

John Carney asks why Rajat Gupta might have done what he’s accused of doing:

Gupta ran McKinsey. He sat on the board of Goldman. He is the ultimate insider.

One of the reasons we rarely see insider trading charges against people who have the stature and wealth against Gupta is that insider trading makes so little logical sense for such people. There’s really no reason Gupta should leak confidential information to a hedge fund manager. He doesn’t need money, access, prestige or any favors at all.

If he did tip off his hedge fund manager friend, it was something darker than greed or ambition. It was something close to sociopathic narcissism—perhaps a belief that he was somehow above the law, immune to the rules that govern the rest of us.

“Sociopathic narcissism” is one way of putting it, but I think there’s something very human here. And John and I see it every day, at CNBC and Reuters: reporters get phoned up by very rich and important individuals, and get told information which can’t conceivably benefit the person doing the leaking, except psychologically. It doesn’t matter how rich or how important you are, the idea of being able to show off like that — to demonstrate that “I know something you don’t know”, to be cultivated and praised and effusively thanked — is very appealing.

Gupta, if he did give inside information to Raj Rajaratnam, wasn’t doing it for the money. He was doing it to feel important, to get the respect of his friend, to demonstrate just how plugged in he was to some of the most important decisions being made at the height of the financial crisis.

The moral of this story, then, is that if you ever feel that human need for validation and need to unburden yourself of a valuable secret, make sure you phone a journalist, rather than a hedge-fund manager. That’s not illegal, and it’s just as gratifying.

Back in April of last year, I was indignantly informed by Rajat Gupta’s PR people that he wasn’t being investigated by the SEC, just examined. “This is an important distinction,” they told me. Well, it seems that either the examination subsequently turned into an investigation, or else that the distinction wasn’t that important after all:

The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.

The insider dealing seems to have been pretty blatant: minutes or even seconds after getting off board conference calls with Lloyd Blankfein, Gupta would pick up the phone and call Rajaratnam, who would then make huge trades in Goldman stock:

A Special Telephonic Meeting of the Goldman Sachs Board was convened at 3:15 p.m. on September 23, during which the Board considered and approved a $5 billion preferred stock investment by Berkshire in Goldman Sachs… Gupta participated in the Board meeting telephonically, staying connected to the call until approximately 3:53 p.m. Immediately after disconnecting from the Board call, Gupta called Rajaratnam from the same line. Within a minute after this telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused the Galleon Tech funds to purchase more than 175,000 additional Goldman Sachs shares…

Gupta dialed into the October 23, 2008, Board meeting around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam… The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam… explained that Wall Street expects Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share.

It wasn’t just Goldman, either: the SEC complaint says that Gupta did substantially the same thing with inside information about P&G, where he was also on the board.

This is just a civil complaint at this time, but if the SEC wins I fully expect criminal charges to be forthcoming. And the question must be asked: is it fair to blame Goldman for hiring Gupta to its board? I’m not sure about that. On the one hand, it’s impossible to catch all criminal tendencies of potential board members. On the other hand, Goldman historically didn’t seem to care much about its board, which seems to have existed largely to rubber-stamp the decisions of management. I think it cares more now, however. It’s learned its lesson.

Update: Gupta’s counsel has released a statement.

Statement of Gary Naftalis, Counsel for Rajat Gupta

The SEC’s allegations are totally baseless. Mr. Gupta’s 40-year record of ethical conduct, integrity, and commitment to guarding his clients’ confidences is beyond reproach. Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder. There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo. In fact, Mr. Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity.

Steven Greenhouse has a long article in today’s NYT about an attempt by the states to deal with their “strained” pension funds by moving to defined-contribution pension plans. Here’s the lede:

Lawmakers and governors in many states, faced with huge shortfalls in employee pension funds, are turning to a strategy that a lot of private companies adopted years ago: moving workers away from guaranteed pension plans and toward 401(k)-type retirement savings plans.

What’s a “huge shortfall”? Amazingly, nowhere in the 1,500-word article does Greenhouse actually say. Instead, we get incomprehensible tales like this:

Utah decided to adopt a 401(k)-type plan after the stock market plunge in 2008 caused the shortfall in the state’s pension plan to balloon to $6.5 billion…

Under the new plan, [state senator Dan] Liljenquist said, the state’s retirement contributions for new workers will be roughly half that for current employees, potentially saving $5 million a year for every 1,000 new workers hired.

So, the state of Utah has been putting insufficient money into its pension plan, and now there isn’t enough money there to meet upcoming liabilities. And the solution here is for the state, in future, to contribute “roughly half” of what it’s been spending up until now in pension contributions.

Needless to say, this makes no sense on either front. The liability to existing workers doesn’t go away if a different plan is adopted for new workers, so the problems at the pension plan aren’t being addressed. On top of that, it’s hard to see how contributing much less to new workers’ retirement is going to help them at all, either. From a pensions perspective, there’s no winner at all: the only entity better off is the state, from a cashflow perspective.

On top of that, Greenhouse makes no attempt to put numbers like $6.5 billion or $5 million in any kind of context. Are they big? Who knows.

The only way I could make any sense at all of Greenhouse’s article was to read it in parallel with Dean Baker’s paper on the origins and severity of the public pension crisis. The table he includes, which includes all state public pension funds, is invaluable; here, for instance, is Utah.

What this shows is that the Utah pension fund, at the end of 2009, was about $2.8 billion in the hole. If it rose by 15% in 2010, which is a pretty reasonable assumption given the performance of the stock market, the gap is likely to have been all but eliminated. But even the gap at the end of 2009 was less than one tenth of one percent of Utah’s state income.

All of these numbers are fuzzy, of course. Valuing assets is hard enough; coming up with a present value of future liabilities is much harder, and depends crucially on which discount rate you use. But Baker’s numbers are pretty reasonable, and show that there really isn’t anything to panic about here.

More generally, as Teresa Ghilarducci notes elsewhere on the NYT website (but not in the paper), the idea that moving from defined-benefit to defined-contribution plans is going to help anybody at all is highly problematic.

401(k) plans are bad deal for taxpayers. Dollar for dollar, a traditional pension plan yields more pension benefits than do 401(k) plans because 401(k) management and investment fees are three times higher. And professionals who manage money in pooled pension funds usually get higher returns than workers who manage their own 401(k) accounts. The only clear winners when pensions switch over to the 401(k) plans are brokers and bankers…

The unintended effect of widespread 401(k) plans is more volatility. In contrast to traditional pensions and Social Security, 401(k) plans fuel bubbles and make recessions worse. When the economy is booming, 401(k) plan asset values soar, making people spend more and work less. Not what you want in an expansion.

Worse, when the economy plummets and takes 401(k) assets with it, people do the opposite; they cling to the labor market and rein in spending – again, two things you don’t want in a recession.

On top of that, defined-benefit plans have a mutual-insurance component to them: shorter-lived workers subsidize longer-lived workers, helping to increase everybody’s standard of living.

The fact is that the states’ move to defined-contribution plans is a blatantly political one, born of Republican ideology conflating such plans with individual freedom and choice. For rich professionals who jump from job to job every few years, 401(k) plans do make a certain amount of sense. For public servants spending a lifetime in the police force or in elementary schools, by contrast, they emphatically don’t. As for the state pension plans, the only way that the state governments can help them make up their actuarial liabilities is if they pour more money into them. Not less.