Felix Salmon


Felix Salmon
May 16, 2011 05:55 UTC

The disgraceful interrogation of LA school librarians — LAT

Great photo of DSK — Coveritlive

A couple of notes about that hotel suite — Tumblr

David Carr’s piece on a Pew study about Drudge has links to neither the study nor the Drudge Report — NYT

Ben Stein, Arabist. Is there no beginning to his talents? — CBS News

LVaR + ETFs = volatility and flash crashes — Reuters

When piracy helps the original: How PDFs Of A Bedtime Book Exploded The Old Publishing Model — Fast Company

As far as you know, what is Reuters? — Tumblr

“Covering conflict is thrilling. Addictively so.” — CLP

How to make wifi work at tech conferences: “Calculate 2.3 devices per attendee” — Nonblocking

“Part of Intellectual Ventures business model is to sell its patents or patent rights to aggressive patent trolls” — Tumblr

The Lilac Continuous Uniform Distribution is my favorite. Formula on the back! — Tumblr

Warhol accounted for $168.7m of the $579.4m raked in at the NYC evening sales this week — Artinfo

“Not all psychopaths are violent! We’ve gotten a bad rap by Hollywood…” — Ronson

Norris on the Friend Finder IPO: “Its largest asset, by far, is good will. Even counting that, it has a negative net worth.” — NYT

UK Judge issues gag order for Twitter — Reuters

Arianna on why people will blog for free: “The truth is, self-expression has become the new entertainment.” — WWD

With almost five million out of work, Spain’s unemployment crisis rages on — Iberosphere

Britain’s government plans to sell off some of its stock of fine wines to pay for cheaper bottles — Reuters


I saw this whole thing play out on Law & Order SVU… Liv and Elliot will nail him if he did it.

Of all the stupid things Ben Stein’s come out with this is easily the dumbest.

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Why Lagarde will be the next IMF managing director

Felix Salmon
May 16, 2011 00:24 UTC

It now seems more likely that Dominique Strauss-Kahn will end up in a prison cell than that he will be elected president of France. Either way, his career at the IMF is over, which means that the race to succeed him is on.

Gordon Brown would love the job, but he’s not going to get it, which is great. The front-runner is Christine Lagarde, who would be better than Brown. But France has held the top job at the IMF for 26 of the past 33 years. It’s time for a change, on that front.

Historically, the IMF managing director has always come from Europe; if Lagarde doesn’t get the nod and the tradition is continued, then the obvious name is Italy’s Mario Draghi. But there are very good reasons why the head of the IMF, at least this time round, should not be a European — not least that Strauss-Kahn himself, along with various European finance ministers, said when he was nominated in 2007 that this was the last time Europe would get to railroad its own candidate into the job.

The competition was tougher in 2004, when two serious heavyweights were nominated to contest the election of a European — Stanley Fischer and Mohamed El-Erian. I suspect that El-Erian’s far too happy at Pimco (and in California) to throw his hat in the ring this time round, but he’s been so vocal on public-policy issues of late that it’s just conceivable he could allow his arm to be twisted. Fischer is still a contender, but he’s 67 years old now — as is Montek Singh Ahluwalia, another potential nominee. The age limit on IMF managing directors is 65 for a reason, and although it can be changed by a vote of the Fund’s member countries, that extra hurdle is likely to be enough to prevent either of those two men from getting the job. And Fischer has other counts against him — he was vice chairman of Citigroup during the bubble years of 2002-2005, for starters.

What’s more, there would be something a bit weird about the first African managing director of the IMF being a white Jew — culturally, Fischer is closer to Strauss-Kahn than he is to, say Trevor Manuel, whose elevation to IMF managing director would be a very visible and welcome change in the way the international financial architecture is run. Manuel is pretty light-skinned, but he grew up on the wrong side of the color line in apartheid South Africa, and has the years in South African detention during the 1980s to prove it. The men who have run the IMF to date are the heirs to Europe’s colonizers; Manuel very much counts as one of the colonized.

If the IMF is looking for an international technocrat, rather than a politician, then Mexico’s Agustín Carstens is likely to be in contention — but I very much doubt that he’ll get the job, if only because the head of the World Bank is (as ever) an American, and the rest of the world would not stand for both institutions being run by North Americans.

South Americans, by contrast, would be fine: one dark-horse candidate might be Brazil’s Arminio Fraga.

The top name on Alan Beattie’s list, however, and the most likely non-EU head of the IMF, is Turkey’s Kemal Derviş. Richard Adams says that he “ticks all the boxes”, but the IMF has more power than ever these days, and is going to be called on to make incredibly important decisions with respect to troubled European sovereigns over the course of the next managing director’s tenure. Whether Derviş is up to such a task is very much open to question:

Dervis carries limited political weight. He was his country’s economic affairs minister for just two years and his career has been spent mostly with the World Bank (20 years) and five years as head of the UN Development Program — not an organization that inspires achievement.

Add it all up, and my guess is that the French are going to do it again: Christine Lagarde will become the first female managing director of the IMF. She has the political skills and the economic credentials to get the job, and Europe will feel much more comfortable with a European in the role over the next few turbulent years. The US won’t object, and the Asians will go along with the choice since they don’t really have a candidate of their own. As ever, there will be some pro-forma gnashing of teeth about how a non-European should really get the job next time. But I’m not holding my breath.


“THere are so many conspiracy theories out there as a result of this story already……..” Yes, and then perhaps he inadvertantly grabbed his willy and shoved it in her mouth by mistake.

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The pinot heat debate

Felix Salmon
May 15, 2011 06:54 UTC

Mike Steinberger has delivered it. First, he explains the problem, as he sees it:

Critics of higher-alcohol wines tend to frame the issue as a question of balance, the implication being that wines above a certain threshold are inherently out of whack. But balance is a wholly subjective—one might even say amorphous—concept; alcohol is merely one component that contributes to a sense of harmony or lack thereof; and some wines can deceive you. Setting arbitrary cut-off points, as some sommeliers and at least one retailer have done, strikes me as an especially bad idea.

Check out Steinberger’s modifiers here: cut-off points are “arbitrary”, and the very idea of them is “especially bad”. But all cut-off points are arbitrary; that doesn’t make them all bad. Does Steinberger think that speed limits should be abolished just because they’re arbitrary and some people can drive safely at faster speeds?

Beyond being arbitrary, it’s not at all clear why Steinberger hates cut-off points so much. Any wine store or restaurant, no matter how big its list, is going to offer only a tiny fraction of the great wines out there. And so it makes sense, in some circumstances, to specialize. In my neighborhood, I have one store which sells only Spanish wines; another which specializes in Italy. Would Steinberger shun those, too? California has no shortage of restaurants and wine stores selling big, fruity, high-alcohol wine. What harm is done by one or two which shun it?

Besides, there’s a lot more to criticism of high-alcohol wine than simply moaning about “balance”. Alcohol is a way of hiding sins, of turning unpleasant juice into something big and sweet enough to enjoy. (I dislike grapefruit juice, for example, but I’m happy to drink a Greyhound.) There’s a certain purity to lower-alcohol wines: they’re better at expressing terroir, and they better at revealing subtlety and beauty than their high-alcohol cousins, in the way that you can appreciate the complex structure of a string quartet more easily than you can a loud rock group. And, they don’t give you nearly as bad a hangover.

In any case, Steinberger has proof of his thesis!

This last point was convincingly demonstrated at an event in March called the World of Pinot Noir. The weekend-long gathering included a panel discussion on the subject of alcohol and balance. Participants included winemaker Adam Lee of Siduri Wines, which produces pinots in California and Oregon, and Rajat Parr, a San Francisco sommelier who has a policy of not serving pinots that are above 14 percent alcohol at one of his restaurants. Unbeknownst to the other panelists, Lee had switched the labels on the two wines that he served. One had 13.6 percent alcohol, the other 15.2 percent. You probably know where this is going: Parr, a formidable taster, liked one of the wines so much he asked Lee to buy some, and it turned out the wine he liked was the 15.2 percent. Parr was gracious about the ruse, and I think Lee’s stunt underscored the perils of litmus tests when it comes to the alcohol issue.

That Steinberger considers this stunt to be a convincing demonstration of anything at all says much more about Steinberger than it does about high-alcohol pinot. This wasn’t a blind tasting, with all of the problems associated with those things — it was worse. Parr knew exactly what he was tasting, but he was deceived by Lee. If you’re told that the wine you’re drinking is 13.6%, and it says that on the label, why would you ever think that the wine was 15.2%?

Lee is perfectly happy with high-alcohol wines, to the point at which he serves them at his restaurants — including at the Mina steakhouses for which he wanted to buy that wine. Steak is one of the few foods which goes well with high-alcohol reds, including high-alcohol pinots. And if you can get some of that power in a wine with 13.6% alcohol, so much the better.

There’s no “peril” here. It’s worth going back to how Parr described his policy at RN74 when it was his turn to speak on the panel:

It’s the old name of the road through Burgundy, and it’s my dream restaurant. I was going to leave Michael Mina to start it, but Michael asked me to do it within the fold. I decided that since the restaurant was going to be an homage to Burgundy, I decided I would only list wines that were made in a style of Burgundy. For me that means balance. I picked Pinot Noir or Chardonnay only 14% or below. The reason I picked that was, if you don’t know, that Burgundy actually has a maximum alcohol that is legislated at no more than 14.5%. So I did that and there was a lot of criticism, mostly from producers. I was surprised. We’re this is one little restaurant, it’s not going to change the world. The rest of our restaurants don’t have this rule.

RN74 has many wines over 14.5%, just not pinot, since pinot over that level isn’t Burgundian, and the restaurant is an homage to Burgundy. Yet somehow Steinberger takes this fetching idea and turns it into a “litmus test” of quality — something it isn’t, and was never intended to be.

Steinberger’s on a roll now:

There’s another thing to consider: A lot of people enjoy buxom wines, a fact that has largely been ignored in all the frothing over alcohol levels. One of the gripes about full-throttle wines is that they can be difficult to pair with food, which is true: The flip side of all that alcohol is that the wines are low in palate-cleansing acidity. But for many wine enthusiasts, this apparently isn’t a problem: A recent survey found that most of the wine consumed in the United States is not drunk with meals.

Well, the survey actually found that just 25% of wine was drunk without food; 56% was drunk either at dinner or while preparing it. At weekends, when most wine is drunk, 89% of wine was drunk before, during, or after a meal.

None of this means that there aren’t people who enjoy hot wines, or that winemakers shouldn’t make them if they’re so inclined. But the fact is that no one’s making that case: Steinberger is tilting at straw men here. Those of us who like lower alcohol and more acidity aren’t trying to deny the fact that if you drink those wines without food, or in a blind tasting, they’re likely to taste less good than their fuller-bodied counterparts. You want to drink a glass full of overripe drunken blackberries? Go right ahead, be my guest. But it would be great if I had the choice of a few more lighter options.

Which brings us to Steinberger’s grand finale:

What kind of pinot drinker are you? Here’s one way to find out. Go to your local wine store and buy two pinots with significantly different alcohol levels—say, 13 percent and 14.5 percent. Next, find someone who can open and pour the wines and serve them to you blind. Taste the two wines, pick a favorite and then ask your designated pourer to reveal which was which. Although I’m a paid-up member of the anti-flavor wine elite, I recently put my palate to the test with two California pinots. One was from the aforementioned Adam Lee; I tried his 2009 Siduri Santa Lucia Highlands Pinot Noir ($26), which clocked in at 14.5 percent exactly. The other was the 2008 Au Bon Climat Santa Barbara County Pinot Noir ($21), which was 13.5 percent.

This is astoundingly silly. For one thing, the difference between 13.5% and 14.5% is not all that great: it’s within the margin of error for reporting the alcohol content in the first place. Try comparing a 12.5% wine with a 15.5% wine instead.

Secondly, if you’re tasting these wines blind, without food, you’ll probably prefer the heavier, sweeter one. That proves nothing. There’s really no reason to believe that the kind of wines which you like in artificial, food-free blind tastings are the kind of wines you’re likely to prefer when sitting down to a nice meal with friends and family.

Steinberger’s a wine writer who is fully invested in the idea that if you simply taste a wine, raw, in the glass, and then spit it out into a bucket, that’s all you need to know in order to make a concrete determination as to its quality. He’s wrong about that. Wine is a living, organic thing, and it’s highly context-specific. It flowers best with great company and great food, in a setting where no one is trying to trick anybody else or think too hard about which of two wines they might prefer.

So here’s my test: live your life. Go to restaurants. Cook dinner. Have meals with friends. Enjoy yourself. And at some point in the evening, glance at the alcohol level of the wine you’re drinking. When you find a wine which really makes the whole experience sing — which enriches the evening in ways subtle and profound — my guess is it’s going to be lower in alcohol. And when you find a wine which bullies its way onto your palette, by contrast, and shouts rather than sings, it’s going to be higher in alcohol. But don’t take my word for it, work it out for yourself. And then start buying more of the wine that you love, for the contexts that you love it in.

My method isn’t as simple as Steinberger’s, and it’s a lot more time-consuming. But it’s less artificial, and much more reliable. Just remember: it’s only the high-alcohol partisans who retreat to the world of blind tastings to make their point. And no one, in the real world, tastes wine blind for pleasure.


Felix, please do not quit your day job. We do not need any more not-ready-for-prime-time wine writer wannabes, and sadly, you decided to take potshots at someone who has forgotten more about wine that you appear to know. And he is a better writer in the bargain. Slow day on the financial desk at Reuters?

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Why politicians hate taxes

Felix Salmon
May 13, 2011 20:45 UTC

Ezra Klein wonders what the intellectual justification is for hating on taxes; my question to Ezra is why there needs to be one in the first place. Sure, it’s always nice if a politician can point to an economist or two to provide some pointy-headed backup for his policies. But it’s hardly necessary. Remember that Hilary Clinton, one of the more intelligent and sophisticated politicians in the country, was happy to say that “I’m not going to put my lot in with economists” when she was challenged on the fact that none of them were buying in to her silly idea to suspend the gasoline tax.

Ezra’s fixated on economic growth as the goal which politicians are aiming for. But that’s not the goal at all. The real goal is the same as it’s always been: to get re-elected. And if you want to get re-elected in America, a hard-line stance against any kind of tax hike looks entirely rational.

This doesn’t mean that people like John Boehner are lying when they say that it’s better to risk a federal default than it is to raise taxes even a little bit. It’s just that incentives matter. And the kind of people who believe those things tend to do quite well in today’s Republican Party — especially since the Tea Party became a serious political force.

Americans, in voting for politicians who run on a hard-line anti-tax-hike policy, are not acting in their own best interests. But the politicians, on the other hand, are.

Steve Waldman wrote a great post examining this situation back in January — the Republicans are much better at surfing the tide of public opinion than are the Democrats, who are more likely to push the kind of policies which they think make the most intellectual sense.

The only thing you need to understand the Republican position on the debt ceiling is this number: 47% of Americans oppose raising the debt ceiling, while only 19% support it. Republicans will vote no on this for the same reason that they voted no on TARP — politically speaking, doing so makes all the sense in the world.

When asked why they’re voting as they are, they could simply cite the will of the people, which is quite a good reason in a democracy. Others will attempt some kind of economic justification. But an appeal to economists was never particularly compelling even before the crisis; now, it’s pretty much worthless. A political party trying to win election on the basis of “economists love us” is never going to get very far.

Still, this debate does make me chuckle a little, coming as I do from an emerging-markets background where one of the most common complaints of economists is that taxes are far too low. Look at Mexico, or even Greece for that matter: the fact that most people don’t pay taxes is extremely corrosive to both civil society and the public fisc. Politicians who try to drive us towards that state of affairs are being highly irresponsible. But highly irresponsible politicians can do very well, from time to time.


I like this link (http://truthout.org/actually-rich-dont- create-jobs-we-do/1305380742) on the subject of Actually, “the Rich” Don’t “Create Jobs,” We Do. It talks about the Ayn Rand influence on taxation. I don’t agree with a statement in this linked article about taxes being based on revenues minus costs. We have plenty of regressive taxes that hit lower income folks harder than the wealthier (payroll taxes, sales taxes, “use” taxes, as in the use tax in currently state income tax free Washington state), which is why I think income taxation should be much more progressive than it currently is, to make overall taxation progressive. Bill Gates Sr.’s campaign to introduce a WA state income tax would have done away with the use tax, which is a tax on the depreciated value of business assets, whether they are earning you income or not. The devil is in the details, and I’m not at all sure that his good intentions would be properly executed, but I think Mr. Gates was on the right track.

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Felix Salmon
May 13, 2011 08:18 UTC

More levered ETF performance simulators — Symmetric Info

Seniors, Guns and Money — Krugman

I wonder how much money various trustees, lawyers, and fund managers have extracted from this fortune over 92 years — Daily

Yunus Resigns — Tumblr

Big Joshua Yaffa profile of Tufte — Washington Monthly

Fun With Charts: Making the Rich Look Poor — Drum

Has anybody used data search tool Zanran? Looks like it could be very useful — Zanran


Good reply on the aluation blog: http://bit.ly/ioaoTM

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The Gaussian copula function tattoo

Felix Salmon
May 13, 2011 08:02 UTC


Heidi Moore has found the owner of the Gaussian copula function tattoo — it’s advertising copywriter Jared Elms.

Jared’s professional work is great stuff — I particularly like his idea of pitting the Chrome browser against a potato gun in a speed test. His body art, by contrast, is more emo grad student: his first four tattoos were inspired by Samuel Beckett, Jean-Michel Basquiat, Ludwig Wittgenstein, and the Uruguayan-born French surrealist Comte de Lautréamont.

And now, to that list, you can add David X Li.

Why is Li’s ill-fated formula tattooed across Elms’s forearm? Here’s how Elms explains it:

All my tattoos are all concepts that are smarter than me that I’ll be chasing my entire life. It’s how I know I will never regret getting them, because these are concepts I never want to forget…

It’s pretty corrupt. It’s been hitting me pretty hard what happened just a few years ago. Then you see Carl Levin and the Senate looking to bring criminal charges against Blankfein. There are some key learnings that came out of that period in history, and it felt like it was a really appropriate thing to eulogize on my body…

To me this represents the recipe for human greed. It was severely misappropriated by traders, the way it was oversimplified and reduced it to a single gamma number – and they couldn’t stop using it even knowing the inherent fallibility in it…

I’m only now learning what was taking place and how it happened, because there are all these amazing books and documentaries, like David Harvey’s Enigma of Capitalism. And obviously Inside Job did an amazing job of articulating what happened, how it could all ripple and global…

I was just reading The Violence of Financial Capitalism, and that book got really deep into what was going on [during the crisis] from a trading standpoint. It’s a world I have very little knowledge about, how trading occurs and what those guys are doing. I wondered: Was there something they were all paying attention to, what were the tools they were referencing?

I remembered googling it and coming across that Wired article. It was an amazing article. I was really thankful for pieces like that. It was such a powerful concept to me, and when you realize how much [the Gaussian copula] embodies the potential for human greed, it ends up being a pretty powerful and poignant lesson. [The way companies communicate financially is] all predicated in obfuscation, like if we don’t understand, we don’t question. We should be vigilant and not forget, and this is the way I do not forget it.

The tattoo, then, is the work of a guy who very much buys the argument of David Harvey, who wants a Communist revolution which will overthrow the current capitalist regime. Elms is also a fan of this book, which as befits a Semiotext(e) publication includes lots of writing along these lines:

Crowdsourcing technologies, based on what Alexander Galloway called “protocological control,” represent the new organic composition of capital, i.e., the relationship between constant capital (as the totality of “linguistic machines”) dispersed in society and variable capital (as the totality of sociality, emotions, desires, relational capacity, and… “free labor”) deterriotorialized, despatialized, despersed in the sphere of reproduction, consumption, forms of life and individual and collective imagination.

Ellipsis, needless to say, in the original.

As someone who doesn’t want to overthrow capitalism and who has never read more than a few paragraphs of a Semiotext(e) book without needing to lie down and recuperate slowly, it’s natural for me to treat Elms with some prejudice — even though he does describe my Wired article as “amazing”, which is very nice of him.

But I do think Elms is onto something here. The financial crisis was a major event which was caused by Wall Street’s shortsighted greed — a greed which is epitomized in the way that the copula function became ubiquitous even though risk managers and even Li himself knew full well that it was extremely limited in how it should be used. If we want to “be vigilant and not forget” the destructive potential of Wall Street, then the Gaussian copula function is actually a really good thing to get as a tattoo.

There’s an irony here too. Elms got this tattoo, in part, because of its very incomprehensibility — the way it epitomizes the way that Wall Street is “predicated in obfuscation”. But Wall Street embraced Li’s formula for the opposite reason — that it was very tractable and easy to understand, at least if you were a quant with a degree in finance.

Elms’s tattoo is the version of the formula which I used in the Wired article — but it’s not, actually, the version of the formula which was used day-to-day on Wall Street. In fact, it took me a long time to find the formula written down in a manner which looked like an old-fashioned formula, and which I could annotate graphically — here’s the gamma, here’s the copula, here are the distribution functions. Most representations of the copula look nothing like that, and are much harder to understand.

All of which shows that Elms is absolutely right, at heart, about the copula function and what it represents. To Wall Street, it’s simple and easy — disastrously so. To the rest of us, however, it makes a Semiotext(e) book look like a Sesame Street lyric. And that, I think, is why Levin and Elms are going to be disappointed, and Blankfein is going to remain out of jail.

Back in 1933, when Ferdinand Pecora uncovered huge scandals on Wall Street, they were easy for all Americans to understand, and easy to protect against. This time around, Wall Street’s activities are incomprehensible not only to the lay person but even to senior bankers: a big part of the reason why the crisis was so big and so bad is precisely that people like Stan O’Neal and Bob Rubin failed at their job of understanding the risks their banks were taking. They were knavishly foolish, but still more fools than knaves — which means that it’s extremely hard to make a strong case in front of a jury that what they did was criminal.

And so maybe it makes sense to get a tattoo of the copula function — it’s a way of remembering not only the financial crisis, but also the dangers of believing other people who claim to have found a clever and simple way of improving the world. Such claims have a tendency to be entirely true, until they’re not.


Thank you, Uncle_Billy! Excellent link and suggestion.

Greg was very thorough. Doctor_Rx grumped about it at the very end. I think Greg might know what he is talking about though. (Doctor_Rx is sadly misinformed about the nature of blog comments. But that was back in 2009. People may have been more civil back then….)

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How to set up an insider-trading network

Felix Salmon
May 12, 2011 16:30 UTC

Do you want to set up a network of insider-trading tipsters? Well, Peter Lattman and Azam Ahmed are here to tell you exactly how to do it, using the secrets of the master of the art form, Raj Rajaratnam.

Different techniques work for different people, of course, but often the direct way — a lot of money, mixed with equally large amounts of flattery — is the easiest:

As Raj Rajaratnam and Anil Kumar, a McKinsey consultant, walked out of a fund-raiser in Manhattan, Mr. Rajaratnam pulled his old friend aside and made him an offer: would Mr. Kumar provide him with insights for $500,000 a year?

“You have such good knowledge that is worth a lot of money to me,” he said, according to Mr. Kumar.

Mr. Kumar faced an agonizing choice. His employer barred its executives from outside consulting, but an extra half-million dollars a year — and the chance to do business with a powerful hedge fund manager — was tantalizing.

Weeks later, Mr. Kumar accepted.

It’s worth noting that at this point neither man has done anything illegal. If found out, Kumar could lose his job — but being fired, even for cause, is not a criminal offense.

Yet the die, at this point, has been cast. Raj has both a carrot and a stick with which to control Kumar: money, and the fact that he knows that Kumar has been accepting it. The two are bound into a secret conspiracy, and once you’re in such a thing it’s impossible to get out without inflicting serious pain onto yourself.

So when Raj started asking for inside information — when he started asking Kumar to do things which were actually criminal — it was easy for Kumar to say yes, and very hard for him to say no.

With other people, Raj used different techniques. Adam Smith (yes, Raj really was getting inside information from a man named Adam Smith) was probably the easiest: Raj simply brought him into Galleon as an employee, making their interests pretty much fully aligned.

With Rajiv Goel, there was a real friendship — or at least Goel thought there was. And while money changed hands as well, it wasn’t money for tips, not directly: it was more that the rich friend, Raj, helped out with things like buying a house or caring for a sick parent, while the poorer friend, Goel, desperately tried to curry Raj’s approval in the only way that he could get it.

Incidentally, only in the world of Wall Street is it unsurprising to find mid-level Intel executives being described as “hapless” and “in need of money” — Goel had a job that most people can only dream of, but was permanently dissatisfied. Maybe if his friends had less money than he did, instead of more — if they were in the bottom 99% of the population, rather than the top 0.01% — then he would have been happier, and would have felt much richer. Lesson of the story: don’t vacation with people who are a lot richer than you are.

And then there’s Kumar, who’s the weirdest of the lot, seeing as how he was already earning several million dollars a year at McKinsey. He was set for life, yet he accepted Raj’s $500,000 a year, and also the occasional bonus:

In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies…

In December, Mr. Rajaratnam told Mr. Kumar that Galleon was paying out big year-end bonuses. “I want to give you $1 million,” Mr. Rajaratnam said.

“I almost fell off my chair,” Mr. Kumar testified.

$1 million is a lot of money for almost anyone, but in Kumar’s case it was not enough to change his standard of living at all, and it didn’t make him significantly richer than he was before. So how come Raj’s money had so much effect on him?

Kumar sticks out here in other ways, too — he’s the only informant who could be considered even more successful than Raj was, at least professionally if not in terms of raw cash. Raj had money, more money than he really knew what to do with, but Kumar had much more societal acceptance and prestige — things you definitely need if you’re going to make it all the way to the board of Goldman Sachs.

And, of course, Kumar still hasn’t been criminally charged. But I suspect that particular shoe is going to drop at some point. Now that Raj has been convicted of all 14 counts, Kumar is surely next.

Update: As EnricoPalazzo points out in the comments, it’s Rajat Gupta, not Anil Kumar, who made it onto the board of Goldman Sachs.


Sure, the money may have been a motivation. Or it may just have been a way of keeping score. But it sounds like a lot of what was going on was what used to be called, back in the day, “wanting to be a BSD.”

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Felix Salmon
May 12, 2011 06:52 UTC

NYT pageviews drop 24% in April — AdAge

HSBC still hasn’t resumed foreclosures — HuffPo

“One of the odder lots is a crystal decanter filled with a mysterious brown liquid” — Bloomberg

Pondering the ontology of the “exclusive Gaga unicorn”, and wondering what exactly “exclusive” means in this context — TBI

Only 14% of Afghan army and police recruits are literate. Not a single soldier one company needing medevac knew their coordinates — Guardian

The Gaussian Copula Function, tattooed — Tumblr

What To Do If Your Wallet is Stolen — Credit

James Stewart to take over Nocera’s Sat column at NYT — TBN

On the Treasury’s Curious Denial That Geithner Blocked Deal on Irish Debt — NC


Felix, here is a juicy read about an Assistant AG caught moonlighting as a ROBOSIGNER along with her sister-in-law. The corruption runs deep…


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The difference between public and private stock markets

Felix Salmon
May 12, 2011 00:47 UTC

SecondMarket put on a conference in San Francisco this morning, where I got to talk to chief strategy officer (whatever that means) Jeremy Smith. I asked him about my theory that it’s easy to make big acquisitions if you’re public, using a hypothetical Facebook-Skype deal as my example.

Jeremy pushed back a bit: anything Facebook could do as a public company, he said, it could do as a private company too. Leverage? Banks would be lining up to lend money to Facebook right now. A big capital raise? Again, there’s no shortage of people wanting to invest in Facebook, or of banks willing to give Facebook a bridge to such a raise.

There is however a huge difference if Facebook wanted to pay in stock. For one thing, illiquid stock in a private company is much harder to sell than liquid stock in a public company. And while a VC fund might be willing to accept stock as payment on the understanding that it would sell that stock pretty quickly, it would be impossible to persuade any such fund to accept another form of illiquid equity. They’re meant to be making an exit here, not a new investment. If Facebook is buying a small company owned by its founders, they might be willing to take stock in payment. But exiting venture capitalists, not so much. (Unless the exiting fund could then sell that stock to a younger fund run by the same company; I’m not sure whether that would work.)

I learned quite a lot at the conference about the nuts and bolts of listing on what SecondMarket likes to call its “liquidity platform” — it’s not nearly as onerous as listing on the NYSE, but it’s still not easy, and it does require a fair amount of legal legwork. So far, the smallest company to use it had a valuation of about $150 million; it’s designed for companies worth $1 billion or so. That’s big money — but still small enough that we’re talking about a set of companies which are too small to go public, judging by the size of IPOs in recent years.

In any event, most of these companies won’t go public: they’re nearly all VC-backed, and 90% of VC exits are via M&A rather than via IPO. And this is where the real value of a SecondMarket listing becomes apparent: in an M&A transaction, the acquirer is always going to feel the need to offer some kind of premium over the latest value that the shares fetched on SecondMarket. Without that price being out there, negotiations can be harder, since the buyer wouldn’t be able to see the price that a significant number of buyers with ready cash are willing to pay for equity in their target.*

And one panelist, I forget who, pointed out another clever way that SecondMarket is changing the way that companies and investors interact: historically, secondary offerings, of stock held by existing shareholders, always took place after an IPO. Now, with SecondMarket, they’re taking place on a regular basis before an IPO. That removes an important incentive to go public, and will only serve to make the average age of companies at IPO even higher.

Meanwhile, all the signals on Capitol Hill seem to be pointing towards the SEC making life easier for companies like SecondMarket, and embracing the new halfway house between private and public. That would make the government far more responsive to this development than the law world, where Wilson Sonsini’s Yokum Taku said that he be “shocked” if the standard provisions in the structure of VC-backed companies, which haven’t really changed since about 1974, were changed at all in his lifetime.

The most interesting panel was moderated by Dan Primack, who asked a good question: what happens when the bubble bursts? Right now SecondMarket is riding high because pretty much all the companies using it to trade their stocks are seeing their valuations float effortlessly ever higher. But once those valuations crash, will people still be willing to sell? And who will want to buy? Will there be vulture secondary investors?

My worry is that these markets are a bit like the housing market, where people remember the valuations at the peak of the market, refuse to sell for substantially lower amounts, and the market stops clearing. After all, the primary market in private equity — the capital-raising rounds which are marked as Series A, Series B, and so on — is highly allergic to “down rounds” and does tend to seize up during market downturns. Why should the secondary market be any different?

The public markets, by contrast, go up and down all the time — they have no problems at all with stocks going down. So the open question is whether private secondary markets are more like public secondary markets, or more like private primary markets. We’ll find out, I guess, when the current dot-com bubble finally crashes.

*Update: In a classic example of the way that public shareholders get less information than anyone else looking to buy a stake in the company, it’s worth noting that this information does not make its way into the IPO prospectus. LinkedIn’s S1, for example, says that its shares have been trading on SecondMarket. But it doesn’t say for how much.


Interesting article. Because the stocks that “trade” in the secondary markets are trading in a much more controlled environment and are being purchased for 100% cash (not margin) by investors with long term investment goals, we are not going to see a big bubble burst like we have experienced in the past. For the first time in history we are witnessing a dynamic combination of technology advancing communications at lightening speeds, companies generating actual revenue at unprecedented rates and an untarnished long-only marketplace that does not facilitate shorting, margin, derivatives and small retail investors. Getting to bubble bursting territory would require the involvement of small retail investors buying in on margin. This new flock of investors will drive prices higher and higher until there is no more support and the marging calls begin. We are still a long way away. Check out http://nextstreetjournal.com for additional insight.

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