Felix Salmon

Texas Governor Declares Weekend of Prayer for Rain. For real — Texas Tribune

My bet with John Gapper on the NYT paywall — Tumblr

Peter Hessler has the definitive take on Mortenson. Kristof, by contrast, looks silly — TNY, NYT

The Crash and Burn of an Autism Guru. NYT Mag profile of vaccine scare-doc Andrew Wakefied — NYT

Chris Hondros, at Work in Libya — NYT

Tim Hetherington’s amazing photo-essay/slideshow on Liberia — NYT

“Any vehicle that purports to be for the family needs to have, at a minimum, four cupholders per person” — BNet

Airlines Now Required to Refund Baggage Fee If They Lose the Baggage — Atlantic Wire

“Calling the Office of the Comptroller of the Currency a “regulator” is almost laughable. The Environmental Protection Agency is a regulator. The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees” — NYT

The Awl’s David Cho has an interesting post on web publishing today:

There’s a trend on the internet now to talk about how great you are…

The current rules in place to win at having a New York internet publishing entity are stupid and wrong, both in terms of perceived and actual success…

As far as actual success and how we are sort of too stubborn for our own good, it essentially comes down to the now standardized model that exists for how to build a large, behemoth, words-based content website. It’s sort of easy? Create a huge mountain of garbage statistics of audience and inventory, and then place a tablecloth of seemingly intelligent content to cover it like a veil. There are obviously exceptions to this model, the most exceptional, non-old publication to do this being Gawker, but when it comes to your HuffPo’s or whatever, that’s essentially the shady ass blueprint, and you know what, it works incredibly well.

If I were inclined to give Bill Keller the benefit of the doubt here — which I’m not — this is what I’d think that he was driving at with his talk of “adorable kitten videos”. Yes, there’s extremely high-quality original content on HuffPo. But there are lots of sites with high-quality original content. What differentiates HuffPo from those other sites is its sheer size: the astonishing number of pageviews it generates. And while some of those pageviews come from its page architecture, a lot of them come from pretty lowbrow content.

If you look at the most popular stories on HuffPo right now, it’s possible to find something like the screenshot at left. White stuff on a starlet’s finger, mobile homes changing hands for millions of dollars, Chain Restaurants Worth Visiting — this is all pretty much garbage content, which is very cheap to produce and which can generate enormous amounts of traffic and ad impressions.

On the other hand, if you look at the actual most popular stories on HuffPo right now — the first “most popular” page, rather than the second — it seems significantly meatier. All of them have more than ten times as many Facebook shares as those chain restaurants do, and they’re all real stories.

That said, none of these stories is HuffPo-exlusive reporting. And that’s probably what Cho is driving at — the really great content which HuffPo produces on its own is very worthy, but it’s really only a thin tablecloth compared to the mountain of cheap aggregated inventory which it produces and sells so effectively.

Now I happen to like cheap aggregated inventory. I think it serves an important and useful function — and millions of HuffPo’s readers agree with me. Still, when the thing you’re most proud of is relatively peripheral to your business but core to your self-image, there’s a disconnect which can look to outsiders somewhat hypocritical.

Truth be told, however, the NYT is not as far away from that model as Keller might like to believe. The expensive international reporting Keller’s rightly so proud of never pays for itself: it’s essentially cross-subsidized by glossy ads in T Magazine, and the neverending procession of lifestyle sections and supplements which accompany the main news section.

Here, for example, is the latest piece of journalism for the NYT by its former media reporter, Alex Kuczynski. The first thing you see when you visit that page is the photo, with a caption worth quoting in full:

INVESTMENT PORTFOLIO — With one outfit like this, you’ve got a wardrobe. Brunello Cucinelli jacket, $2,090. Call (212) 813-0900. Theory dress (worn as top), $295. Go to theory.com. The Row pants, $1,950. At Barneys New York. Call (212) 826-8900. Phineas Cole pocket square, $70. At Paul Stuart. Call (212) 682-0320. Hervé Van Der Straeten cuffs, $750 each. At Neiman Marcus. Call (888) 888-4757. Photograph by Sebastian Kim. Fashion Editor: Ethel Park. Fashion Assistant: Adam Ballheim. Hair by Syd Hayes at Premier Hair and Makeup using Bumble and Bumble. Makeup by Yadim using M.A.C. Manicure by Maki Sakamoto for Valley NYC. Model: Missy Rayer.

You see that $2,000 Bruno Cucinelli jacket? It’s an investment! And you too can buy it! Call (212) 813-0900! Now! (And, NYT, it’s Rayder, not Rayer.)

I’m a big fan of the Awl, and to its credit it doesn’t play the cross-subsidy game. It’s not relentlessly highbrow, by any means, but it does what it wants to do and is proud of doing, and that’s it. I wish David Cho the best of fortune in trying to turn this property into a real and profitable business — it certainly deserves to be one. But I’m also a fan of HuffPo, and the NYT, and ProPublica, and Reuters, and all the other business models that people use to put important and interesting content online. And frankly it doesn’t redound to anybody’s credit when an important employee at one of them starts calling a rival’s business model “shady”.

NYU Law School’s Institute for Policy Integrity has an important paper out today, explaining that the US is using a crazy system to determine whether to allow offshore oil drilling.

Under something known as the Revised Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, the Bureau of Ocean Energy Management, Regulation and Enforcement does a very basic cost-benefit calculation when deciding whether or not to allow drilling in a certain spot: it looks at the costs, and then at the benefits, and then if the benefits outweigh the costs, it gives the go-ahead.

What this calculation misses is the significant option value of doing nothing. The oil is, after all, not going anywhere — and if you don’t drill for oil right now, there’s a good chance that the costs of drilling for oil in the future, both economic and environmental, will be lower than the costs of drilling for oil in the present:

Once the decision to drill has been made, it cannot easily be unmade. But that does not mean the only choices are either to drill now or never: waiting to decide is also an option. Because safer drilling techniques and more effective cleanup technologies continue to be developed, the costs associated with drilling should decline over time—perhaps in fits and starts, but following a generally downward trend. Meanwhile, future market prices for the extracted oil are uncertain, jumping one day and falling the next. Given this uncertainly, it only makes sense for the American public to wait to cash in the value of their finite oil reserves until the price is right: when the oil can be sold high, but environmental costs are low.

Unfortunately, the government’s analysis has consistently failed to take into account the option value associated with waiting to drill, even though the methodology to do so has existed for decades. Because of this analytical failure, the government risks the possibility of selling the American public short to the tune of hundreds of billions of dollars.

It’s entirely possible to run a cost-benefit analysis on the value of not drilling for oil — or, more precisely, of waiting until the value of drilling is higher than it is now. If you don’t calculate the benefit of not doing something, then you’re much more likely to do it. And as a result, there’s probably a lot more offshore drilling going on right now than makes rational economic sense:

Calculations that fail to take into account option value are overly simplistic to the point of being misleading. As Dixit and Pindyck stated in their early textbook on the subject, failing to account for option value “is not just wrong; it is often very wrong.” An economic analysis that ignores the option value of waiting overvalues the net benefits of immediate exploitation and will systematically lead to inefficient overexploitation.

The paper makes the case that the current state of affairs is not only economically irrational, but is also both illegal and dangerous:

More complete economic models may have helped prevent the BP Gulf Coast Oil Spill. The value of waiting is greater for relatively more risky drilling activities, like the deep sea operations at the center of the BP spill. Such techniques are relatively newer, and inexperience increases the uncertainty about the extent of risks, the robustness of safety technologies, and the ability of cleanup and containment efforts to reduce harm. If the agency had used an adequate model of costs and benefits when evaluating this kind of deep sea operation, the benefits of waiting for better technologies might have exceeded the short-term costs of delay, leading to smarter use of our offshore resources and fewer risks imposed on the public.

The science of drilling for oil is improving very rapidly — and as a result, a moratorium on offshore drilling might actually cost nothing, once the benefits of improved future drilling techniques are taken into account. Wonks like energy secretary Steven Chu can understand this easily enough. But will they do anything about it?

Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.

This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either. Remember that back in November, the EU put out a statement laying out a mechanism for restructuring a member’s debt “in the unexpected event that a country would appear to be insolvent”. It clearly says that “any private sector involvement based on these terms and conditions would not be effective before mid-2013″.

But almost nobody believes that Greece can last that long any more. Landon Thomas has the story:

All of which reflects an emerging view, although it has not yet been officially stated, that it makes little economic sense for the monetary fund and the European Union to keep lending money to Greece so that the government can pay back private investors at double-digit interest rates — especially as Greek citizens suffer the effects of a severe austerity program.

“Behind the curtains, they are looking for a smooth restructuring,” said Theodore Pelagidis, an economist in Athens and the author of recent book on the Greek economy’s collapse. “The basic reality is that we cannot service our debt.”

A smooth restructuring, however, is going to be all but impossible to achieve. For one thing, the EU’s preferred mechanism for such things — the use of standardized collective action clauses — isn’t going to be in place before 2013. And more generally, as Lee Buchheit and Mitu Gulati show, there’s no easy way of restructuring Greece’s debts.

Buchheit and Gulati reckon there are two ways that Greece could restructure before 2013; they call the two scenarios “A Light Dusting” and “The Full Monty”. The former option would be something along the lines of a reprofiling: Greece would extend its maturities, but keep its principal obligations untouched. The problem with this kind of deal is that it’s not worth the trouble: the EU would have to go back on its promise, and Greece would publicly default on its bonds, all in the service of a restructuring which would be clearly inadequate, and which wouldn’t actually decrease its debt-to-GDP ratios at all. There’s no possible way that a light dusting could bring Greece to a position of sustainability, so it’s hard to see why they would bother.

On the other hand, the “Full Monty” approach doesn’t look very likely either. Here’s Buchheit and Gulati:

Having spent billions of Euros of taxpayer money to stave off any restructuring of Eurozone sovereign debt, will the political class in Europe really be prepared now to careen to the other extreme of countenancing a savage debt restructuring?

A major tremor of this kind affecting the Greek debt would indeed be felt in Lisbon, Madrid and elsewhere in peripheral Europe.

So maybe Simon Nixon is right, and Europe’s economists are wrong, and Greece won’t restructure before 2013, since doing so “would be a recipe for chaos”. The question, I guess, is whether Europe’s politicians are capable of acting in concert to avert such chaos. The consensus right now seems to be that they’re not.

Last Wednesday, I picked up on the excellent taxation story which David Cay Johnston syndicated to a group of 40 alt-weeklies. It got a fair amount of attention — but then, five days later, on Monday, it exploded:

Our web site crashed today for about 3 hours. We are now back up and it appears that the culprit is the David Cay Johnston story on “9 Things The Rich Don’t Want You to Know about Taxes.” For a period of time, we were getting 12,000 page views request per minute!

What caused this massive firehose of traffic to the Willamette Week’s website? It wasn’t Drudge, or Yahoo, or any other big gun on the internet. Instead, as far as I can tell, it was old-fashioned old media — specifically, radio. Monday, you see, was tax day — the deadline for any American to file their tax return. And on tax day every year, radio stations around the country all decide to talk about taxes.

David’s story was perfectly pitched as a topic for discussion on such shows: well written, controversial, and timely. And it seems that millions of Americans, all thinking about taxes and listening to radio hosts talk about the article, were sufficient to crash the Willamette Week’s website.

How did they all end up going to the same place, rather than to, say, the more central version at altweeklies.com? It probably helps that the editor of the Willamette Week is also the president of the Association of Alternative Newsweeklies, and was one of the key driving forces behind the article. The Willamette Week version was also the one that David himself linked to when he told his friends about the piece.

But thanks to Google’s search-ranking algorithm, someone was always going to end up with the lion’s share of the traffic for the article. Links like mine might not have generated a lot of traffic in and of themselves, but Google noticed them. So come Monday, when radio listeners were searching for the article, Google sent them to the version which had inbound links from places like Reuters — rather than to any other version.

I’ve been thinking a bit of late about what happens when the same piece appears in multiple different places online. Historically, publishers haven’t liked it when that happens, because they fear that the other websites might end up with traffic which is rightfully theirs. They also worry about SEO: that someone searching for an article will end up elsewhere, or that search engines will consider the content to be spammy on the grounds that it’s appearing in lots of different places.

But my feeling is that syndication — publishing the same article in many different places — is normally a good thing. If everybody’s asked to link back to the original version of the piece, that’s ideal: it’s a clear sign to search engines which version they should prioritize. But even if they don’t, there’s a very good chance that the winner of the Google lottery will end up being entirely deserving, as the Willamette Week was in this case — none of the other alt-weeklies which published the piece had a stronger claim to the traffic than the Willamette Week did, and there’s no way to spread the traffic around evenly.

And more generally, if you want influence, it’s a good idea to go to where readers are, rather than to force them to come to you. That’s why I’m happy for Seeking Alpha to republish my posts — the overwhelming majority of my readers there would never read my pieces if they weren’t there, but many of them, after discovering me on Seeking Alpha, become regular readers of my Reuters blog. Reuters probably gets precious little direct traffic from Seeking Alpha, but it does get mindshare and influence — and those will ultimately show up in a larger number of loyal visitors.

This is why I think that publishers are misguided when they complain about sites like the Huffington Post aggregating their content and linking back to them. It’s true that most readers of a HuffPo piece won’t follow the link to the original source — but that’s fine. They probably wouldn’t have read the original story anyway. Instead, HuffPo readers are getting exposure to that news source in a place and in a style that suits them. And HuffPo is giving that news source valuable Google juice, to boot. Which means that next time there’s a surge in Google searches on a given topic, the news source is likely to get more traffic. Everybody wins — unless, of course, the web servers end up crashing.

How do we know that the world is getting happier? It’s drinking more beer! Here’s the chart, from a new paper by Liesbeth Colen and Johan Swinnen:

What we’re seeing here is largely the China effect — and, more generally, a world where poor people, once they reach a certain minimum income, start hitting the hops.

By all indications, we’re still in the early days of this trend, whereby countries slowly converge in terms of per-capita beer consumption. For while China and Russia are soaring, the main beer-drinking nations of the world are all in decline:

In middle and low income countries which experience growth, such as China, Russia, Poland and India, beer consumption grows. In rich countries, however, further growth has led to a reduction in beer consumption per capita.

This is an economics paper, so of course there has to be some kind of regression analysis — in this case OLS, or ordinary least squares:

Our first important result is that we do indeed find an inverted-U shaped relation between income and per capita beer consumption in all pooled OLS and fixed effects specifications. From the pooled OLS regressions (Table 3), we find that countries with higher levels of income initially consume more beer. Yet, the second order coefficient on income is negative, indicating that from a certain income level onwards, higher incomes lead to lower per capita beer consumption. The first and second order effects for income are strongly significant and the coefficients are quite robust across the different specifications.

The fixed effects regression results confirm this (Table 4), so the non-linear relationship for income holds not only between countries, but also within individual countries over time. As a country becomes richer, beer consumption rises, but when incomes continue to grow, beer consumption starts to decline at some income level. We calculated the turning point, i.e. the point where beer consumption starts declining with growing incomes, to be approximately 22,000 U.S. dollars per capita.

I would imagine that this relationship could also be found within the U.S. — that states increase their beer consumption as they grow to an income of about $22,000 per capita, and thereafter see their beer consumption drop as their wine consumption increases.

I can also imagine that we’re going to see a China-driven surge in global wine consumption when the middle class population there starts earning that kind of money. In the first instance, most Chinese wine consumption will probably be domestic, but over the long term it’s surely inevitable that wine imports into China will stop being concentrated at the high end of the market and will start lubricating China’s middle classes on an everyday basis. But that’s probably not going to happen for a decade or two yet.

(Via Florida)

2D Glasses — Gizmodo

The Animated S&P Downgrade Warning — ZH

Brokers/scalpers won’t like this: Ticketmaster moving to flexible ticket pricing — LAT

Only 16 percent of Americans want the debt ceiling raised — WaPo

Gordon Brown is very comfortable at the IMF. He chaired its most important committee, the IMFC, for many years, and he would love to take the top job of managing director. There might be a vacancy soon, if the incumbent, Dominique Strauss Kahn, steps down to run for president of France. But it won’t be filled by Brown, now that UK prime minister David Cameron has made his opinions crystal clear.

Mr. Cameron told BBC Radio 4′s Today program: “I haven’t spent a huge amount of time thinking about this. But it does seem to me that, if you have someone who didn’t think we had a debt problem in the UK, when we self-evidently do, they might not be the best person to work out whether other countries around the world have a debt and deficit problem”.

He added: “Above all what matters is the person running the IMF someone who understands the dangers of excessive debt, excessive deficit, and it really must be someone who gets that rather than someone who says that they don’t see a problem.”

Mr. Cameron also said: “I certainly don’t want a washed-up politician from another country. It’s important that the IMF is led by someone extraordinarily competent.”

He suggested that the next IMF head could come from “another part of the world”, such as China or India. By convention they are usually chosen from European countries.

All of this is exactly right. Brown comes with way too much baggage: he’ll never be able to admit that enormous chunks of what he did as Chancellor turned out, in hindsight, to be disastrous.

The head of the IMF has to deliver tough news about debt and deficits to heads of state around the world — and Brown simply has no credibility on that front. And his diplomatic skills leave something to be desired as well.

More generally, it would be crazy to appoint a European to head the IMF right now, just as the biggest sovereign crises in the world look set to take place in Europe. If the IMF itself wants credibility, it must appoint a non-European to provide independent leadership in an era when the IMF will surely be asked to help bail out troubled European sovereigns.

It long since time that the head of the IMF stopped being a European. If and when DSK leaves, let’s replace him with someone highly qualified — someone who wasn’t a partial cause of the last financial crisis — from elsewhere in the world. It doesn’t really matter where, just so long as it’s not Europe or the U.S. Gordon Brown should be disqualified on both counts.

Well done to Tracy Alloway for calling it as it is, in a post headlined “Citi’s Basel-dodging, capital-avoiding, accounting switch”. At issue is a pool of $12.7 billion in assets, which is housed at Citi’s “bad bank”, Citi Holdings.

In 2008, Citi decided that these assets were not available for sale, and rather were going to be held to maturity. Presto — the bank no longer had to mark the assets to market, and could hold them on its books at par instead. And the difference between par value and market value went straight to Citi’s precious capital, helping it look stronger.

Now, in the wake of a massive bond rally. Citi has decided to switch the assets back. No longer are they held to maturity; instead, they’re available for sale. At a stroke, Citi has to recognize all the gains and losses in the portfolio immediately — that’s $1.7 billion in losses, and $946 million in gains. But the losses can be applied against profits elsewhere in the bank, to reduce the total tax burden. Which is nice, because we wouldn’t want too much money flowing from Citigroup to the taxpayers which bailed it out.

Of course, banks can’t just oscillate back and forth between classifying assets as being held-to-maturity or marked-to-market at whim, depending on how such a classification makes them look in their quarterly report. That defeats the whole point of classing assets as being held to maturity in the first place. If you say an asset is going to be held to maturity, it should be held to maturity, not held to the point at which it’s no longer held to maturity.

And so Citigroup had to explain to regulators what excellent reason it had for changing the classification. And you’re going to love the reason it came up with. The authors of the new Basel III capital adequacy rules, it turns out, managed to notice that assets being held at par and held to maturity are naturally riskier than assets which the bank can sell at any time and is marking to market on a daily basis. And so the capital requirements on held-to-maturity assets are higher than the capital requirements on assets which are marked to market.

So far so reasonable. But Citi’s brainwave was to cite the new Basel III requirements as the fundamental change which would give them an excuse to switch classifications now that the bond market is looking frothy again. Basically, Citi went along to its regulators, and said hey, the capital requirements on these held-to-maturity assets are rather onerous, would you mind if we reclassified them so that we don’t need to hold as much capital against them? And the regulators said by all means, go ahead!

Of course, the assets themselves haven’t changed at all — they’re the same assets, being held at the same bad bank. But now the bad bank has a lower capital requirement, since the assets have been reclassified.

All that remains is to wait until the bond market goes down again, and see what new reason the bright sparks at Citi will be able to come up with to explain that actually, they want to go back to classifying the assets as being held to maturity. It’s all very simple, really: when bond prices are low, assets are held to maturity, and can sit on your balance sheet at par. When bond prices are high, they’re available for sale, and your capital requirements go down. The bank wins either way, while the regulators look like schmucks. And if Citi’s doing this, you can be sure everybody else worked it out long ago.

What does the filler text “lorem ipsum” mean? Only a masochist wouldn’t want to know — Straight Dope

Spurious market causality of the day, CNBC edition — TBI

Hitchens on the royals: “There are so many of them! And things always have to be found for them to do” — Slate

“It’s unclear why News Corp was paying for security guards to tail former staffers for Ailes’ vanity projects” — Gawker

More on Florida’s rocket dockets, from Abigail Field — Fortune

Paul Steiger is rightly proud of his latest Pulitzer — the second for ProPublica in as many years. He’s right, too, that such things don’t come cheap:

One last point: to do this, it takes money. ProPublica is a non-profit, and contributions are tax deductible. We had more than 1300 donors last year and almost 500 so far this year. The median donation is $50, but whatever you can give will be greatly appreciated, and will truly help us make a difference. I invite you to celebrate with us by making a contribution by clicking here.

Sadly, individual donations — certainly not individual donations of $50 — won’t make a difference. According to ProPublica’s Form 990, Paul Steiger and his managing editor, Stephen Engelberg, made $959,811 between them in 2009 — $585,117 for Steiger and $374,694 for Engelberg. Senior reporter Dafna Linzer made $225,876. The total wage bill for 47 people for the year came to $5,267,678, or an average of $112,000 per person, not including things like pension contributions, other benefits, freelance costs, and payroll taxes.

It’s entirely within ProPublica’s rights to pay such salaries, but Steiger’s 1,300 donors, each pitching in $50, will generate a total of $65,000 — enough to pay Steiger’s wages for almost six weeks. If they all doubled their donation, he’d raise $130,000 — enough to pay ProPublica’s total wage bill for just over one week.

The fact is that ProPublica is funded, generously, by Herb and Marion Sandler; they, and a handful of other big-name funders, are the only donors who actually make a difference. According to ProPublica’s 2010 annual report, online donations for $86,000 were rather less than 1% of ProPublica’s total fundraising haul of $9,832,000 — the bulk of which came from board members. (For which, read the Sandlers.) ProPublica is not reliant on donations from the public, and if you’re prioritizing your charitable contributions, it makes sense to target your money at organizations which really do rely on such things.

In principle, I like the idea of a non-profit news organization which is funded by its readers. But ProPublica is not that organization. If you want to make a difference by funding investigative journalism, you’ll get more bang for your buck by giving money to the Investigative Fund at the Nation Institute, which doesn’t have a highly-paid permanent staff. Instead, it gives out grants of between $500 and $10,000 to reporters working on important stories like Kai Wright’s recent examination of the payday lending industry.

As ever, giving anywhere is better than giving nowhere — so if you are impressed by the Pulitzer-winning work of Jesse Eisinger and Jake Bernstein and want to support it with a donation to ProPublica, that will do some amount of good and no harm whatsoever. But if you’re going to donate that money to the cause of investigative journalism, you might want to look at other places too. Which might need it more than ProPublica does.

The Pulitzers are notorious for ignoring business journalism. But they made up for it this year: just about anything which could go to business journalism, did.

The Public Service award went to the LA Times for its investigation of corruption in the small municipality of Bell, California. The Investigative Reporting award went to Paige St John of the Sarasota Herald-Tribune for her great work covering Florida’s murky property-insurance system. The National Reporting award went to Jesse Eisinger and Jake Bernstein of Propublica for their big story on the Magnetar trade. The Commentary award went to the NYT’s wonderful economics columnist David Leonhardt. And even the Editorial Writing award went to Joseph Rago of the WSJ, who wrote even more about healthcare than Leonhardt did, from a very different perspective.

I wouldn’t care to hazard a guess as to why the 2011 Pulitzers, in particular, were so friendly to business journalism — but it’s certainly a gratifying development, especially for this year’s winners. Many congratulations to them all — and especially to ProPublica, which wins the first-ever Pulitzer award for a piece which never appeared in print. It surely won’t be the last.

Last week, Ira Stoll took issue with Dennis Berman’s column on SharesPost and SecondMarket, on the grounds that Berman lied about his own identity: he pretended to be his late grandmother. Stoll likened Berman’s behavior to Project Veritas’s entrapment of NPR — something the WSJ itself said failed to “meet the ethical standards of elite journalistic institutions, including of course The Wall Street Journal”.

Now SharesPost CEO Dave Weir has written his own take on the Berman column, and it goes much further than attacking Berman for lying about his identity. He also accused Berman of misrepresenting SharesPost’s policies, “leaving readers largely misinformed and our company unfairly maligned”.

I asked Berman if he had any response to Weir, and he replied by sending me a copy of his response to Stoll:

As you can appreciate, the integrity of these markets is based in part on honest disclosures by both buyers and sellers. My intent was to probe the strengths and weaknesses of a system that relies almost exclusively on buyers’ own disclosures for establishing whether they are “accredited.” That self-reporting standard enabled my grandmother to slip through. So might other people with intent to dodge the rules.

My approach and objectives were discussed in detail with the companies prior to publication. As you can see, the story also praises SharesPost for cutting off my access.

We take ethics and fairness very seriously at the Journal. We are in the business of truth-telling, not deception. In this case, applying a simple test to an entire way of doing business helped shed light on an important topic for investors and markets that ultimately serves the public good.

Weir was well aware of this response when he wrote his email, and aware too that it doesn’t come close to answering his substantive criticisms. In fact, Berman’s response to Stoll only serves to exacerbate the misinformation in his original column, since he says that the SharesPost system “relies almost exclusively on buyers’ own disclosures”. This simply isn’t true, as Weir explains:

-Mr. Berman failed to mention that his fraud only enabled him to view information on our site. Had he attempted to transact, he would have been required to undergo a second level of compliance review and direct dialogue with one of SharesPost’s FINRA registered brokers;

-Had he actually entered into agreements with a seller, those agreements would have required him to make multiple contractual representations to the seller, the company and SharesPost that he had provided accurate information and was in fact an Accredited Investor;

-Had he actually entered into a contract to purchase shares, the transaction would have been processed by U.S. Bank, a third party escrow agent, which first verifies buyers’ and sellers’ identities by collecting all the documents required under the Patriot Act and Anti-Money Laundering regulations.

Berman’s response is barely adequate as a reply to Stoll. There are many legitimate concerns about SharesPost, but the fear that people are lying about their identity to trade shares on the system is not one of them. Berman gives no reason to believe that has ever happened, or that anybody is silly enough to even attempt it: after all, no one wants to end up running the risk of having valuable shares taken away from them on the grounds that they were acquired under false pretenses.

The rest of Berman’s response is even weirder. Whether Berman subsequently talked to the companies under his own name is beside the point — and if the WSJ is “in the business of truth-telling, not deception”, why did Berman lie and deceive? His only defense is that doing so “ultimately serves the public good”. And that defense, as we’ll see, doesn’t stand up.

If Berman’s statement is weak as a response to Stoll, it’s clearly inadequate as a reply to Weir. If Berman’s intent was “to probe the strengths and weaknesses” of the SharesPost system, as he says, then why didn’t he mention any of the strengths of the system, which would clearly have prevented his late grandmother from buying shares?

And more generally, if Berman’s “in the business of truth-telling”, then why did he end up publishing a column which, as Weir says, “ignored and embellished the facts to suit his story line”?

There are lots of errors in Berman’s column, starting with its headline: “Meet My Departed Grandma, Fledgling Facebook Investor”. This is false: Berman’s grandmother failed utterly to invest in Facebook.

Berman goes on to say that his grandmother was “cleared” to buy Facebook shares, and that SharesPost certified her as an accredited investor. But as Berman himself admits later on in the column, in the first instance buyers certify their own credentials; the minute that the process reached the point at which SharesPost had to do any clearing or certifying, the company suspended the account.

Berman then says that trading on SharesPost is “especially prone to insiders’ whims”. It’s unclear what the literal meaning of that phrase is meant to be, but the message is crystal-clear: SharesPost is a Wild West haven for insider trading.

In case you missed the message the first time, Berman goes on to add that the SEC “is investigating potential abuses in these secondary markets, including conflicts of interest and insider trading” — a statement which as far as I can tell simply isn’t true. There was a story back in February about the SEC looking at “potential conflicts of interest” at SharesPost and SecondMarket, but there was nothing in it about insider trading. Berman’s assertion, which comes without any sourcing, is dangerous precisely because it’s unfalsifiable. But if he did have good sources, you’d think that he’d lead with the SEC’s insider-trading investigation, rather than with his dead grandmother.

In between musings about insider trading, Berman declares that on SharesPost, “prices can swing on just a few trades” — but again it’s unclear what he means exactly. Does he mean that SharesPost has seen wild price swings? I doubt it, since he doesn’t give a single example. He probably just means that in theory there can be big price swings — but that’s true of any market. Again, the real meaning is clear, even if the literal meaning isn’t. Berman’s saying that prices on SharesPost are particularly volatile. Is that true? Again, he doesn’t give us any reason to believe that it is. Instead, he looks at a wide bid-offer spread for eHarmony shares, which just says that the market in eHarmony shares isn’t clearing — and you can’t have price volatility in a non-clearing market.

What else? For one thing, Berman says that SharesPost and SecondMarket “give young companies and their employees new ways to raise capital” — simply not true. No company has raised capital on either platform.

He also says that “players in these companies’ shares couldn’t care less about the intricacies of market regulation”. Which is self-evidently not true: if you’re buying shares in these companies, you care deeply about who you’re going to be allowed to sell the shares to, and how, and when.

And he massively misrepresents how close he and his dead grandma managed to get to actually playing in this market:

A few have made small fortunes, cleverly snapping up shares of companies like Facebook and Groupon and riding into the sunset. Last week Grandma and I joined their ranks, spending a few days loitering, testing and playing in these private markets.

If I were to test a market, I’d test it by making some small trades to see how they went. That’s obviously not what Berman did, though: he never got anywhere near being allowed to make trades. So what he means by “testing” the markets is far from clear. As is what he means by “these private markets” plural, when in fact he only signed up for one market — SharesPost.

Berman even contrives to quote Ben Horowitz saying that he “expects these marketplaces to founder”, without mentioning Horowitz’s massive conflicts: Horowitz’s fund is a high-profile alternative option for investors wanting to get access to private equity, and indeed Horowitz bought a significant $80 million stake in Twitter on the secondary markets himself.

And as I said when Berman’s piece came out, his claim that “investors need to be comfortable that they can trade at will” manages to completely miss the point of these markets.

Most amazingly of all, Berman manages to miss all the good, real reasons to mistrust these markets while he’s busy spinning his silly yarn about the connection between his dead grandmother and insider traders. Quoting Ben Horowitz but not Tim Geithner — that’s just plain weird.

All of which makes me very sympathetic to Weir, who says reasonably enough that “the Wall Street Journal can and should do better”. Is what Berman did unethical? Yes — if you’re going to lie in the service of reporting a story, you need to be able to get information that way which you couldn’t get through normal reporting channels. It’s no great secret or revelation that people can put whatever information they like into a web form, and then start lurking in SharesPost forums, calculating bid-offer spreads and reading investors’ whines about not being able to buy into Groupon.

If Berman’s late grandmother had actually been allowed to buy shares, that would have been a serious security breach. But she wasn’t. So the ends don’t remotely justify the means here.

And this wasn’t some kind of deep investigation on the part of Berman: rather, it was a cheap stunt, designed to confirm Berman’s pre-existing prejudices. Something which can be justified in the former case can still be a very bad idea in the latter.

To make matters worse still, Berman isn’t some kind of overenthusiastic kid reporter who stepped a bit too far. He’s the deputy bureau chief for Money & Investing, helping to shape large chunks of the WSJ’s finance coverage. What he does is a clear signal to everybody who works for him about what is and isn’t acceptable in WSJ reporting. Unless, of course, he makes it clear that he has lower standards for his own work than he does for the work which he edits.

Paul Krugman, looking at Japan, says that today’s S&P news is “no big deal”, based on the fact that Japanese long-term interest rates stayed low even after the country was downgraded in 2002. But of course if the fate of the US over the next 9 years is remotely similar to the fate of Japan over the past 9 years, that’s going to be a very big deal indeed — for the US economy, for its fiscal ratios, and for the entire world.

The potential global downside here is large, as Mohamed El-Erian explains:

The world looks to America for a range of “global public goods” — including the reserve currency, the deepest and most liquid government debt markets, and the “risk free” standard. With no other country able and willing to step into this role, the result would be global efficiency loses and a higher risk of economic and financial fragmentation.

That said, however, there is a silver lining if you look hard enough. “Efficiency”, after all, is a nice way of saying “fragility”. As a general rule, the more efficient something is, the easier it is to break. So if we want to move to a more robust world with fewer major crises, there will necessarily be a price to pay in terms of global efficiency loses.

A slow move away from the dollar’s reserve-currency status might not be such a bad thing, seeing as how that status has allowed the US twin deficits to grow to previously-unimaginable levels. Just as car traffic expands to fill the road space available, national debt ratios naturally tend to go up rather than down, unless and until some kind of external constraint is imposed by the markets and/or ratings agencies. In that sense, the news from S&P is simply a necessary part of how the US is going to get its fiscal act together.

US treasury bonds are always going to be the most liquid government debt market, simply by dint of their sheer size. As such, they will always be the benchmark off which all other debt is priced. It’s conceivable that one day a debt instrument somewhere will trade through treasuries. That’s fine — there’s no particular harm in that. Does it mean that US debt is not risk-free? Yes, that’s exactly what it means. But realistically no one has ever considered US debt to be risk-free: there has always, for instance, been the very real risk of inflation.

El-Erian is absolutely right to worry about where the world’s growth is going to come from as we move from a unipolar global market to something which looks more like a G-Zero world. But I suspect that transition is inevitable in any case, no matter what happens to the US credit rating or its national debt. And there’s precious little that the US or its legislators can do about it.

It’s known as Stein’s Law: if something can’t go on forever, it won’t. And it’s the reason S&P has now revised its outlook on the US sovereign credit rating:

Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

Note the internal contradiction here: S&P first says that the US already has a significantly worse fiscal situation than its AAA peers, then there’s a slight backpedal to say just that it might be weaker than its peers, fiscally speaking, if it doesn’t bite the budget bullet by 2013.

The first statement is the more accurate. S&P has three macroeconomic scenarios: baseline, where the US debt-to-GDP ratio reaches 84% in 2013; optimistic, where it’s 80%; and pessimistic, where it’s 90%. “Even in our optimistic scenario,” they write, “we believe the US’s fiscal profile would be less robust than those of other AAA rated sovereigns by 2013.”

With debt-to-GDP north of 80%, it becomes very hard for the US to pay for another large shock. According to S&P, fully recapitalizing Fannie and Freddie could cost 3.5% of GDP, other government-guaranteed debt (like student loans) could also cause enormous losses; and another banking crisis could cost a whopping 34% of GDP. And that’s before you even start thinking about the inexorable rise in Medicare costs as healthcare costs rise and the US population ages.

Meanwhile, the US might not have foreign debt, but it has a very large amount of external debt — its external debt as a proportion of current account receipts “is one of the highest of all the sovereigns we rate”, says S&P.

Where S&P does not go into any detail is on the question of how any of this might end up with a debt default. That’s probably sensible: there are so many conceivable ways to get there from here, all of them very unlikely, that it’s silly to try to game them out. The US can always avoid default if it wants. But as the options for avoiding default become increasingly painful, in terms of fiscal cutbacks and/or inflation, the probability of a default, while always low, is liable to rise.

Now that the US is on negative outlook, there’s at least a one-in-three chance that the US will lose its triple-A credit rating in the next two years. Or that’s what S&P is saying, anyway. I’m not convinced: the entire S&P business model is based on the idea that creditworthiness is a one-dimensional spectrum which ranges from risk-free, at one end, to defaulted debt, at the other. If US Treasury bonds aren’t risk-free, then nothing is risk-free, and the triple-A bedrock on which the S&P ratings apparatus is built crumbles away.

Conceptually, that’s no bad thing. The search for risk-free assets was a major contributor to the global financial crisis, and forcing investors to navigate a relativistic world where risk can be allocated but not eliminated is a great way to help address the fundamental treachery of debt.

And the US losing its triple-A now, post-crisis, would not be nearly as harmful as if it had lost its triple-A before the crisis, just because at this point the ratings agencies have lost most of their credibility.

Still, it would be a huge shock to the financial system. Because of the way that sovereign ceilings work, a US downgrade would probably mean that just about everything else in the US which is rated AAA — including all municipal bonds, and thousands of structured products — would also get downgraded.

What would escape the scythe? Foreign sovereigns, perhaps, like France, Germany, Canada, and even the UK. (But does anybody really believe that the US would be less creditworthy than the UK or France, no matter what S&P says?) Maybe some multilaterals, like the World Bank. But certainly not enough to stop the global supply of triple-triple assets (that is, bonds which are rated AAA by three different ratings agencies) being essentially wiped out at a stroke.

As I say, I like the idea of a world where nothing is triple-A and everything is relative. But there’s a large and real cost of getting there from here. And a lot of that cost would be borne by S&P itself. Which is why I suspect that while the agency might threaten a US downgrade, it will ultimately hold off from pulling the trigger.