Felix Salmon

Antony Currie has a response today to those who say that the Fed’s U-turn on swipe fees “makes it look as if it can be cowed by the kind of intense lobbying the banks unleashed.” (Yes, that would be me.)

Antony reckons that the final figure of 21 cents “is actually a decent compromise,” and that “the Fed made the right call” — but it’s not entirely obvious why he thinks that. He says that the lower 12-cent figure was opposed by banks (duh) and “other senior banking authorities”; this is true, but it’s not in and of itself a reason to backpedal.

Banking regulators are interested in safety and soundness, and a multi-billion-dollar stream of risk-free income, in the form of debit and credit interchange fees, undoubtedly makes banks safer and sounder. But is that is not a good reason to gouge merchants every time someone makes a purchase using a debit card. And as Antony points out, banks somehow seem to survive elsewhere with much lower interchange fees: America’s are by far the highest in the world.

The farce that is “signature debit” is a big reason why, as Antony writes:

Though it rethought the fees, the Fed still missed an opportunity. U.S. debit fees are higher than elsewhere because Americans still sign for almost two-thirds of transactions — and banks keep pushing signature debit despite its being more susceptible to fraud. Browbeating banks to use PIN codes more would be safer and cheaper for all.

Behind this is the bizarre logic of US banks. First they encourage consumers to sign for debit purchases despite the fact that such purchases are much less secure; then they argue that they need high interchange fees because they have high fraud costs. This is financial chutzpah incarnate: the equivalent of the man who kills both his parents and then pleads for clemency on the grounds that he’s an orphan.

The Fed is well aware of how hollow this argument is. And it can persuade banks to move to PIN purchases in one of two ways: either by “browbeating,” as Antony would have it, or by simply making the finances of interchange uneconomical for signature debit. The second is what the Fed proposed in December, and it was powerful. The missed opportunity here was precisely to keep debit interchange at 12 cents. Now, the Fed can attempt the browbeating route, but it’s not clear what kind of browbeating Antony has in mind, and it’s even less clear that any such “moral suasion” would actually do any good.

Antony sees a pattern in the Fed’s behavior: start off extreme, and then compromise on something more reasonable.

The Fed made the right call. The trouble is it started with such an extreme stance. By digging in so early, it jeopardized the Fed’s important task of building a reputation as a regulator with a stiff resolve. Similarly, markets moved earlier this month when Fed governor Daniel Tarullo suggested banks should hold capital reserves of up to 14 percent — only to see international standards come in capped at around 10 percent.

Personally, I disagree that 12-cent interchange (which would be entirely unremarkable elsewhere in the world) is “extreme.” I also think that there’s a strong case to be made for forcing too-big-to-fail banks to hold so much capital that they have a real incentive to shrink.

But Antony is absolutely right about the pattern, and the message it sends: that the Fed is open to negotiation and compromise, and that as a result lobbying it aggressively and continuously is a no-brainer for the banks.

So let’s hope this is the end of the Fed going wobbly whenever Jamie Dimon starts having a temper tantrum. The Fed needs to show a lot more testicular fortitude going forwards, and, as Antony writes, “needs to be careful to be seen as a watchdog and not a lapdog”.

The problem is that the Fed has never been seen as a watchdog with teeth — Dimon is a director of the New York Fed, ferchrissakes. He’s literally governing his own regulator. And every time the Fed retreats from an initial position, it only looks weaker. Which is bad for the Fed, bad for America, and even, ultimately, bad for the banks being regulated. The Fed’s good at talking tough. Its job now is to actually be tough. Which is much harder.

Felix TV: Talking to Justin Wolfers and Charles Kenny about the economics of happiness — Reuters

Felix TV: The one industry where power is shifting from capital to labor — Reuters

David Tepper has $99,864,731.94 in his savings account, after paying that $2.75 ATM fee — Dealbreaker

Ben Stein says owning 11 houses is “a psychological gift.” Which is maybe not the word I’d use — CT Post

I could really do with a lot more transparency from the Fed on why exactly it’s decided to almost double the maximum permitted debit interchange fee. The bank lobby certainly had a lot to do with it — but the bank lobby always said that the Fed was simply doing what it was forced to do under the Durbin amendment to Dodd-Frank, and that therefore Dodd-Frank itself had to be changed.

When the Durbin amendment survived, however, suddenly the banks realized they had a Plan B — to lobby the Fed. And the Fed, it turns out, is even more susceptible to such lobbying efforts than Congress is. The sole dissent among the Fed governors was from Elizabeth Duke, who said that the new fee was too low.

Clearly the facts on the ground didn’t change between December, when the Fed came up with its 12-cent figure, and today. And now the Fed has proved itself susceptible to intense lobbying, you can be sure that the banks will keep their lobbyists active on all manner of rules and regulations which have to be promulgated under Dodd-Frank. Never mind what the law says, just make sure the regulators do what you want!

The optics of this are terrible — the Fed hasn’t even attempted to justify the hike, and indeed no matter how many times you read its press release, you’ll never be able to see that there was any hike at all. There’s talk only of the final fees, and no talk at all of the fact that they were raised substantially from the initial 12-cent proposal. The closest that we get is this, from Ben Bernanke:

We received input from more than 11,000 commenters on our proposed rule. We have taken the time needed to review these comments carefully; they have been very helpful to us and the final rule reflects changes suggested by commenters.

The message, here, is clear: keep on lobbying us! The more you lobby us, the more we’ll listen!

Why Bernanke’s sending that message, on the other hand, I have no idea.

My favorite bit in this video comes towards the end, when I ask Charles about the wonderful tweet he sent out last Friday, after the gay marriage bill passed the New York senate.

I wanted to know, was this just a lovely sentiment, or does Charles really think this is going to happen? The answer is the latter, and Charles gives two strong reasons why that might be the case.

One is the way that the world is getting smaller and more interconnected. Countries make hundreds of agreements with each other, they set up organizations like the UN and the EU, and in general behave much more pleasantly towards each other than they ever have in the past. And at some level that has to be because doing so is what their people want.

Charles’s second point was about mobility and immigration, and it’s a great one. Greater levels of immigration aren’t just a fantastic idea from a national-security standpoint and a fiscal standpoint, they’re also demographically necessary for an aging America which has a lot of labor-intensive needs in a service sector which can’t be outsourced. “The self-interest of people will weaken the effects of borders,” says Kenny, which is surely true. Americans don’t like immigration, but they love the low prices that immigration brings for their golf courses and swimming pools and McMansions.

There’s a long distance between appreciating the upside of immigration, on the one hand, and extolling the idea of completely open global borders, on the other, where everybody has the same right to work in the US, no matter where they were born. There’s many people who would push for the former, and almost nobody who would push for the latter. But as the economic distance between countries shrinks, the problems associated with such a policy will get smaller. And Charles points out too that there will be increasing numbers of Americans who want to live abroad; those Americans would in principle be quite happy to sign bilateral open-border agreements with the countries they’d like to live in.

None of this is going to happen in our lifetimes, but if you look at how far the world came over the course of the last century, there’s reason for optimism about how much more progress it can make in this one. Countries already go to war with each other much less frequently than they did in the past; the insane cost of war alone is one good reason why that might be. And without wars to make us hate each other, we’ll surely continue to get friendlier towards each other.

Sometimes, too, change can happen astonishingly fast. David Schlesinger touched on this in his chat with me yesterday — look at the way in which the Chinese government is successfully serving the interests of the Chinese people today, compared with 20 or 30 years ago.

The main official obstacle to Chinese people traveling around the US today is not China’s government, it’s America’s. And while we fear China in many ways, the spectre of mass Chinese immigration to the US is not one of them — to a large degree, America could and should welcome an influx of Chinese entrepreneurialism, which could quite possibly be funded with some of China’s trillions in foreign exchange reserves. From a US perspective, much better all that investment and job creation happen here than in China.

They put something in the water, here in Aspen, which makes people very optimistic. (Although maybe it’s inactive early in the morning: both Steve Adler and I were unimpressed by the latest demographic analysis purporting to find a centrist, consensus-driven majority in America.) But the world really is getting better, and has been for a couple of centuries now, and it’s very likely to continue doing so, in its lumpy and unpredictable way. Which means that, sooner or later, there’s a good chance that Charles’s dream will come true.

I’ve felt for a while now that the kind of blogging I do — one person writing a series of blog posts in reverse-chronological order — is dying, even if it’s not quite dead. There are still lots of great blogs out there, but my Portfolio.com guide to the econoblogosphere, now almost four years old, is not nearly as out of date as it should be, and very few new voices have emerged since then.

One of the foremost exceptions to that rule is Alexis Madrigal at the Atlantic, so I asked him how he managed to break out as a name-brand blogger in a world where most big blogs are now written by pretty substantial teams. His home at the Atlantic is clearly part of it, as is the fact that he’s incredibly talented. But even he agreed that old-fashioned single-person blogs are largely a thing of the past, with the exception of enthusiastic practitioners in the fields they write about, be it banking or science or anything else. And those people normally blog independently, rather than as part of an old- or new-media company.

This is not necessarily a bad thing. There’s convergence going on — news organizations are becoming bloggier, and blogs are becoming newsier — and that process works to the benefit of both, even as it makes the status of “blogger” less interesting or meaningful. And as Alexis says, blogging is a lot of work, and it’s hard to sustain that level of intensity over the course of a career.

And the most interesting new development in the blogging space is Tumblr, which makes publishing much easier than Moveable Type or WordPress, and as a result is putting up some truly astonishing figures: 355 million unique visitors per month, and 400 million pageviews per day. I’d guess that’s substantially more than the entire blogosphere could boast during any golden age — Tumblr and Twitter have truly democratized publishing and helped to eradicate the distinction between writers and readers. Which is much more important than the emergence of any number of media-published individual voices.

Whether or not you agree “Obama Has Finally Become Dick Cheney,” admin’s threat to jail James Risen is pretty troubling — Atlantic

Afghan central bank governor Abdul Qadeer Fitrat flees — BBC

Skype had a plain-English explanation of its evil options scheme all along — AllThingsD

For me the interesting thing about Christine Lagarde becoming the new managing director of the IMF is not the news itself. I said she’d get the job as long ago as May 15, and I’ve considered her a lock since May 20. Rather, the interesting thing for me is the timing: everybody expected the announcement on Thursday, the 30th, but instead it came today, the 28th. Why push things up?

Because in the fraught negotiations with Greece, every day counts — the IMF disbursement was originally due tomorrow, the 29th, and can’t wait much longer than that before Greek debt maturities in July start piling up and forcing a default. And the headless IMF, it turns out, has not been an effective actor in those negotiations. Here’s Mohamed El-Erian, an old IMF hand:

The post of managing director is not to be taken lightly in an institution that operates like a well-disciplined army, with staff looking up to the unquestioned general for decisive leadership.

This is why the resignation of Dominique Strauss-Kahn has been so disruptive to the functioning of the IMF.

With Lagarde now moving swiftly from an international campaign to actual management of the Fund, the world’s technocrats will all be hoping that she will prove a forceful and decisive leader on the urgent subject of Greece. The Greeks have a certain amount of freedom here, since it’s pretty much unthinkable that Lagarde’s first act would not be to disburse bailout funds. But one sign of a leader is getting results even when your actions are severely constrained. Lagarde has an immediate opportunity to prove herself, and it’s absolutely in Greece’s long-term interest to make her look tough and effective. She might well put these extra two days to very good use.

I went to a fantastic education panel this morning called Game Changers, with three inspirational educators: John Hunter, Salman Khan, and Katie Salen. Sal Khan needs little introduction, at this point; if you haven’t seen his TED talk, go watch it now. The other two were new to me, however: John Hunter invented the World Peace Game to teach his 10-year-olds; it’s a lot more chaotic and inspirational than it sounds. And Katie Salen is the executive director of the Institute of Play, which has already built one school in New York, and has another on the way in Chicago.

What all of these people have in common is an emphasis on teachers ceding control of the classroom and their curriculum. In its place, more than anything else, is gameplay. The Khan Academy gameplay is highly structured; the World Peace Game is more fluid; and the Quest to Learn games are in many cases designed by the students themselves. But in all cases the students are learning from each other, and indeed the teachers are dynamically learning from the students too. This is not surprising when you find 5th graders in Los Altos diving gleefully into Khan Academy’s calculus modules and becoming expert in undergraduate-level mathematics; and indeed another thing these teachers have in common is that they’re all fans of mixing up ages and abilities in classrooms.

Inspirational teachers are nothing new, of course, and it’s probably true to say that an inspirational teacher is always going to do great work, whatever the tools they have to work with. But Khan made the great point that high school students, in particular, can and do make incredibly inspirational teachers themselves, if only you give them the opportunity.

All of this boils down to what Hunter called “embracing chaos”. This appears in many ways: you have to encourage kids to make mistakes; you have to let them develop their own ways of learning; and, on a more mundane but in many ways much more important level, you have to give them much more access to the internet than they generally have right now.

Salen was very strong on this last point, complaining about how internet access is very limited in most schools, and that typical filters stop kids from going to any site with the word “game” in it. I asked about one of the things which worries me most about the present generation of kids — which is that they have not developed the critical abilities necessary to distinguish reliable from unreliable information on the internet. The classic example of this is the Pacific Northwest Tree Octopus, which kids believe in when they read about it on the internet, even if they’re initially skeptical. But Hunter was reasonably convincing that simply telling 5th-graders about the tree octopus is a very powerful lesson for them about not always believing what they read. And Salen was even more convincing that if we want kids to develop critical abilities, we need to give them access to the unfettered internet rather than confining them to canonical encyclopedias and the like.

None of which necessarily lends itself to pat solutions which can be scaled easily across a state or nation’s classrooms — although it’ll be very interesting to see what happens when the Khan Academy curriculum is adopted across the whole Los Altos school district for 5th and 6th grade. But I do think that there’s reason for optimism on the education front in the long term. I’m enormously excited by (and a little bit jealous of) many of the opportunities and resources available to today’s kids, even if they’re largely outside formal classrooms. And I can’t help but feel that somehow they will show up in improved productivity and creativity down the road. The panelists here in Aspen show how such things can be formalized and implemented by visionary educators; as their ideas spread, they’ll be remixed and reinvented in ways that none of us can currently imagine, quite possibly by people under the age of 12. The possibility space, in other words, is bigger than it’s ever been. And in a random-walk kind of way, it’s bound to be filled somehow, with games and game-changers both.

This private equity shop can’t possibly be evil! The founder went to Wharton twice! — Influx

“Is the nation waiting with bated breath for us to get to the Calvin Coolidge coin? No!” — NPR, see also.

Felix Investments Sues SecondMarket over a failed Facebook deal — PE Hub

Emanuel Derman, now blogging at Reuters — Reuters

RIP: “Google said it will terminate its PowerMeter service on September 16″ — Reuters

Against Google directions — wwword

On the strength of one opening afternoon at the Aspen Ideas Festival, I think I like it a lot. And that’s a surprise to me: I was expecting that Alpine gabfests would tend to have more similarities than differences. But this is a world away from Davos, and not just in terms of longitude or season. At Davos, everybody is self-importantly “committed to improving the state of the world”; in Aspen, the stakes are much lower, and the emphasis is on what you’re saying rather than who you are.

The economics of conferences dictate, of course, that there be a smattering of bold-faced names who will do their bit in attracting the paying public and large corporate sponsors. But it’s surprisingly easy to avoid the politicians and the blowhards, and to find sessions on subjects about which you know very little and therefore can learn a lot.

There’s something about Aspen in general, and the layout of the Aspen Institute in particular, which engenders a friendly informality. The setting, of course, is stunning — and it’s also wide open, with lots of space to enjoy the beautiful grounds or wander off to nowhere in particular. Davos doesn’t lend itself to long, discursive conversations: it’s too cramped, too intense, too busy, too urgent. Aspen is relaxed, and informal, and — wonderfully — open to the (well-heeled) public. Security here is almost invisible; there are no heads of state, no metal detectors, and not even much sign of corporate meetings and dealmaking.

The opening session was a rapid-fire salvo of quick three-minute Big Ideas, ranging from the striking to the silly. I had favorites, of course. Salman Khan, of the Khan Academy, talked about how it might be possible to set up a credentialing system so that if you’ve become as knowledgeable and adept as a Harvard graduate, Harvard or some institution like it could certify you as such — even if you didn’t go to an expensive formal college. It’s one of the few ideas which could really make a dent in academic cost inflation, and maybe even drive it down.

The Atlantic’s Ta-Nehisi Coates had a fantastic little talk about the increasing respectability of professional athletes, to the point at which Americans tend to side with them, now, rather than sports team owners, when there’s a dispute. And that’s partly because, he said, “we have a less racist country”. In the 1980s, he said, there was a feeling that African-American athletes “didn’t deserve the salaries that they were getting”, while now we have “a situation where players command much more respect”, with much less in the way of racial undertones, even as team owners get less respect than they used to. It’s one of the very few areas of America where power has shifted away from capital and towards labor over the past couple of decades.

And David Leonhardt recapitulated his great column about the sad fate awaiting mothers in the workforce. Companies have to realize, he said, that there’s an enormous pool of untapped and underutilized talent out there — and any economy or sector which manages to get the most out of mothers is going to have huge potential.

Then, after dinner, I got the opportunity to see a Larry Lessig slideshow in the flesh — something I can highly recommend. In this case, it was an expanded and signficantly tweaked version of this talk, on the way that US institutions in general, and Congress in particular, have become corrupted by corporate money.

The talk is quite a tour de force at this point, and was followed by a fascinating Q&A period in which smart questions were asked and Lessig actually answered them. Paul Romer got the final question, asking whether some of the problem could be fixed by moving powers away from the legislature and into the executive. That question elicited a quite astonishing five-minute response, which I’ll try to transcribe here with only minor elisions. Remember, this is entirely extemporaneous:

We’ve seen that. We have pretty powerfully shifted power to the executive. And what that does is just relocate the place in which the influence is going to have its effect. Now you could have an executive who very strictly regulated the legislature. We might be left with that as a second best solution.

But I think that there’s something weak about democracy that depends upon these extremely powerful executives. And if you look at the American constitution today, relative to the framers’ Constitution, the framers envisioned Congress at the core. That was the jewel of their democracy. And these two necessary evils on each side. An executive, like the president, who they were fearful would become a king; they tried to limit his power so that he couldn’t. And the courts, who were hated at the time, because courts were just tools of the King. So courts and the executive were two sideshows, and Congress was a jewel.

Of course what we’ve done over the past 200 years is everything we can to inflate the power of the courts. People love the courts. Even after Bush v Gore, people still have enormous respect for the Supreme Court. Everybody wants them to fix what the democratic process doesn’t. And we’ve expanded dramatically the power of the president. So the power of the presidency today looks more like King George, and the Queen today looks much like George Washington. We’ve somehow reversed their roles because we’ve pushed to solve this problem of a failed democracy.

When I get this kind of pushback, it feels like a kind of splash of cold water, of the form “none of the changes you’re talking about are ever going to happen, so what’s the second best?” And the reality is you might be right. It might be impossible. And I got that question directly once, in Dartmouth. And I had this thought when she said this. If a doctor came to me and said your son has terminal brain cancer, there’s nothing you can do — would I do nothing? Just look at the doctor and say OK?

When you think about what it is to love, the willingness to act compassionately for something, that kind of emotional need, love for country: there are people who go risk their lives for that kind of love.

All of us have to have this kind of irrational love for country. Which says yes, maybe it’s impossible. But we’re going to act even if it’s impossible. And nothing I’m asking anybody to do is anything like the soldiers who go for love of country and fight our wars. Nobody’s going to die from this fight. It doesn’t take two years away from your family. All it takes is commitment, as citizens, not to let politicians continue to destroy the republic.

There’s no reason not to start that fight. So I flew myself for 24 hours here to Aspen because if that fight starts anywhere, it starts in places like this. With people like you.

Now you can agree or disagree with Lessig’s rhetoric — but his arguments surrounding the jurisprudence of corruption are sophisticated and interesting, and also laced through with real passion and vision. And he’s absolutely right that Aspen is one of the places where such ideas will take root, if they are to have a real effect. What’s more, Aspen is a place where it isn’t embarrassing to have such ideas and ideals.

This isn’t a place where grandees chair a “policy and initiatives coordination board” which will “analyse, assess and coordinate the prioritization, development and impact of multistakeholder initiatives within the global system” in order to “support the global agenda”. Instead, it’s a place where individuals can discuss ideas with passion and sophistication, and learn from literally hundreds of other people doing the exact same thing. Which is a pretty fecund place to be, if it’s done right.

Obviously, there’s a lot more Ideas Festival to come — it’s barely started — and for all I know it could yet get hijacked by politicians and stale debates. But on the evidence of the short first day, I’m optimistic about what might transpire here. Especially since my hotel has a small fleet of Trek Districts which I can use to get to the campus and back. Or maybe it’s just the altitude going to my head, and I’ll be over it in a couple of days.

How much harm is being done to Silver Lake by the relentless bad press about the way it’s treating its Skype employees? TED reckons that there will be ” real long-term effects on its viability as an investor in Silicon Valley” — but I’m not so sure. Look at what happened to Goldman Sachs after details of the Abacus deal came out — its reputation was damaged, but somehow its business, which is largely a function of its reputation, continued mostly unscathed.

Certainly it’s hard to see how the Skype deal — the biggest home run in Silver Lake’s history — is going to make current or potential LPs stay away from the firm. Like hedge-fund managers, private-equity honchos are in the business of maximizing AUM, and the Skype deal is fantastic from that perspective.

The main reputational problem facing Silver Lake, then, is that it might now find it harder to attract talent. Fred Wilson is good on the history of the kind of clauses that Silver Lake is so keen to include in its contracts:

I’ve seen option plans that have repurchase rights in them. They used to be more common twenty five years ago when I entered the venture capital business. The theory was that employees would have to stay until the exit if they wanted to keep their equity (be in it to win it). But in practice, once employees realized that was the deal, they were actually incented to leave because they didn’t trust that the equity they were vesting would ever produce a payday for them. So they went elsewhere and created value for an employer with a better deal.

But this is one area where the difference between venture capital and private equity becomes huge. Most venture-backed companies go to zero: equity in such companies is a lottery ticket at the best of times, and if you start adding in-it-to-win-it clauses to lottery tickets, no on is going to value that equity at anything above zero.

Private equity companies like Silver Lake, by contrast, buy established companies which already have real value. Their failure rate is much lower than that of venture capitalists, and as such equity in their companies is much less of a lottery ticket. On top of that, because the companies are already established and have real cashflows, they can pay substantial base salaries for top talent in a way that startups generally can’t.

Dan Primack says that the bad press will have immediate negative repercussions for Silver Lake’s portfolio companies:

Right now, Silver Lake is getting pounded for this situation – and it will reverberate when it looks to hire for other portfolio companies (GoDaddy HR execs cannot be happy right now).

This might be true. But the fact is that GoDaddy’s HR executives were always going to find it difficult to attract talent by means of stock options at the best of times. And one thing we know from Yun Lee is that Silver Lake is not shy about inserting its own people at all levels of its portfolio companies: if it can’t find someone else to do the job, it’ll probably just parachute in a few of its own hotshots.

With the amount of money that Silver Lake has, and the savings it’s likely to realize by firing lots of people, it will always be able to attract the talent it wants. Some people will buy in to the in-it-to-win-it philosophy; others will simply be happy with a large paycheck. In the wake of the publicity surrounding the Skype deal, Silver Lake won’t be able to pull the same stunt of making employees think that they own their vested equity when they don’t. But in terms of Silver Lake’s future success or failure, I don’t think this episode will really make much difference either way.

Update: TED responds in the comments.

Investment bankers like me will remind clients of this incident (if they need reminding), because we are always interested–other things being equal–in getting good investment partners for the companies we sell. We keep track of PE firms’ bad behavior and reputations very closely, because it matters.

Often, a PE firm with a good reputation as a partner will win an auction against one with a bad one, even if the bad one offers more money. Sure, Silver Lake has lots of money, but so does everyone else in PE land. Silver Lake’s money is no greener than anyone else’s, and there is no shortage of potential PE buyers for any company.

I really do think this public tarring will hurt Silver Lake’s business at the margin for some time going forward. Will they fold, or fail completely? Of course not, if only because some sellers–often the ones who don’t plan to stick around after the buyout anyway–couldn’t care less whether their new majority owner is a bunch of a**holes. But many do.

Danny Black, in a series of comments on my post about Raj Rajaratnam and insider trading, points out how small Raj’s insider profits were, compared to his net worth and the size of his fund:

One of the interesting things is just how [relatively] tiny the sums the insider trader makes. Rajaratnam was worth 1.8bn USD at one point. The upper end of what he made was 60mn. If I told you I could increase your wealth by 3% over a number of years but you might spend a decade or so in federal jail would you take up the offer?

This I think is doubly wrong. For one thing, $60 million is emphatically not an upper bound for the amount of money that Raj made on insider trading. Raj was not new to this game when his phones started being tapped, and it’s incredibly naive to think that all of his insider dealing was conducted, in one way or another, over the phone. $60 million is the upper bound for trades which the authorities considered prosecutable; it’s nowhere near being an upper bound even for what he made while his phone was tapped, let alone what he made over the course of his career.

But even that understates the value of insider trading to a hedge fund manager. Raj made his billions by collecting 2 and 20 from outside investors in Galleon: the path to hedge-fund riches is, always, to maximize assets under management. And if there’s one thing that hedge-fund investors are looking for, it’s alpha — that small edge which the best managers are believed to have over the market as a whole.

To a hedge-fund manager, then, $60 million in excess profits can be worth vastly more than $60 million. If it persuades outside investors that you can generate more alpha than anybody else, and those investors end up giving you an extra few billion dollars to invest as a result, and you take 2-and-20 on those extra few billion dollars, then at that point you’re making real money.

Running a hedge fund, in this sense, is a way of leveraging any insider trades you find many times over. They don’t just make money in and of themselves: they also help you attract all-important AUM. Given that calculus, it’s easy to see why Raj found insider dealing so attractive. Without it, he might never have become a billionaire in the first place.

Basel has spoken, and the Sifi surcharge — the amount of extra capital that will have to be held by systemically important financial institutions — will range from 1% to 3.5%, with no bank in the first instance being subject to a surcharge of more than 2.5%.

This is more or less in line with expectations, and in fact is maybe a little bit tougher than was expected by some of the pessimists. It’s not the size of the surcharge which is particularly impressive, but more its nature: it’s made up only of the highest-quality capital — no CoCos allowed. And the fact that it’s based on a sliding scale means that it has the important feature of both dissuading the biggest banks from getting bigger and indeed giving them an incentive, at the margin, to get smaller.

The surcharge doesn’t end too big to fail, of course. Bethany McLean is absolutely right that capital requirements aren’t some kind of panacea, and that in and of themselves they don’t prevent crises. But they’re still a crucial part — along with liquidity and leverage constraints, and a crackdown on off-balance-sheet vehicles — of making the global banking system more robust, less pro-cyclical, and less prone to catastrophic failure.

And while the Sifi surcharge won’t stop banks growing to the point at which they have to be bailed out in extremis, it might make such growth significantly less profitable than it was in the past.

One of the peculiarities of the global financial crisis was the behavior of Citigroup’s deposits — here was a huge and insolvent bank, most of whose depositors were not insured. (Citi has many more deposits outside the US than it has domestically.) I was very worried about this: if those depositors moved their money out of an insolvent bank and into something safer, the consequences for Citi could have been disastrous. But the bank run never happened, and in fact over the course of the crisis Citi’s deposit base went up. That’s known as the moral-hazard play: depositors the world over trusted the US government to bail out Citi, as in fact it did, and knew that as a result their money was safe, backstopped by an implicit US government guarantee. Which you certainly can’t say about money held in a foreign branch of a mid-sized community bank.

That’s just one of many advantages to being huge, and as a result it’s great that Basel is forcing the likes of Citi to hold more capital than their smaller counterparts. It might be a relatively small victory, but every win counts.

Central bankers agree on bank capital surcharge plan — Reuters

The president’s trademark approach to leadership: “the fierce urgency of sometime later” — HuffPo

James Murdoch sounding more and more like the CEO of News Corp — FT

Teams, & how John Paulson didn’t see China for the Sino Forest trees — Bronte

Atop TV Sets, a Power Drain Runs Nonstop — NYT

Ex-media mogul Conrad Black sent back to prison — Reuters

The Skype/Silver Lake story is refusing to die, with Yee Lee’s revelations bringing out the same anonymous investor-group sources defending Skype’s actions. But if the defenders are comfortable in their anonymity, it seems only fair for me to share an anonymous email I got this morning from “Skype Insider”.

Remember the history of what happened here. First it was alleged that Skype was firing senior executives just before the Microsoft deal closed, thereby ensuring they don’t get their full payout. Then Lee came along and said that employees who left voluntarily were denied their vested equity in the company — which, as Graef Crystal has noted, does grievous harm to the plain-English meaning of the word “vested”. Dan Primack explains how Skype pulled this stunt by changing its options agreement after it was acquired by Silver Lake:

A source familiar with the situation says that many former eBay employees who remained with Skype have options that more resemble typical Silicon Valley (i.e., vested=yours). Moreover, the majority of Skype employees are in Europe, where the structure also is different.

But for U.S.-based employees who joined after Silver Lake and crew took over, you had to “be in it to win it.” In other words, these particular Skype employees wouldn’t get paid until the private equity firms also got paid.

We’ll get to the attempted defenses of Skype’s actions in a minute. But up until now we’ve been dealing with two classes of screwed-over employees: executives who got most but not all of their payout because they were fired just before the deal closed; and people who were hired after Silver Lake bought the company and who found that their vested options were worthless.

But according to my source, it’s actually worse than that. There’s a third class of employees, who were treated particularly badly: executives who were fired for cause, “based upon various trumped up justifications”, in the words of my tipster, thereby losing all their vested equity.

This is a particularly nasty move for Skype to pull, because such executives are naturally going to be reluctant to go public with their story. Any journalist would immediately ask Skype for comment, and the company would quickly start explaining, either on or off the record, just how bad the executive in question was. And no one wants to be the subject of that kind of public debate.

Importantly, if you were a Skype employee fired for cause, your options could be clawed back even if you had the old-school options contract. Former eBay employees who had had vested equity for years could suddenly find themselves with nothing.

Do I know for a fact that Skype did this? No — but I’d certainly be interested in hearing from anybody this happened to, in strictest confidence. And it’s consistent not only with the Skype-is-evil meme, but also with the message that Skype’s defenders are pushing. Here’s Henry Blodget:

Private equity firms have a different view of option compensation than VC firms, the Skype investor said. Specifically, private-equity firms recruit executives with a very specific mission: To fix the company and then sell it, a process that often takes several years. In private-equity’s view, executives only deserve a piece of the equity pie if they see that mission through.

Essentially, only one group of employees matters in PE-backed deals, and that’s the ones still standing when the exit arrives. You’ve “got to be in it to win it”, which means that anybody who’s not “in it” is, by definition, a loser, to whom the company owes nothing.

And the investors are quick to blame the losers here. See for instance Sarah Lacy:

As standard as getting to keep vested options if you quit before an investment is closed is in the venture capital world, it’s equally as common that you have to stay through the close of acquisition to keep them in the private equity world. Indeed, our source says the Skype contract is a boilerplate agreement for all the companies Silver Lake invests in. And all of this was in the paperwork the employee signed. He just didn’t read it carefully, at his own admission, because he assumed it was like other option contracts of venture-backed companies. That’s not really Silver Lake’s fault.

Actually, as Mike Arrington and Dan Primack and I have all tried our best to point out, the notorious clawback was not something which Yun Lee or anybody else could find by reading paperwork carefully: it’s impossible to read the clause in question and understand what it’s saying, since it references “the repurchase and other provisions in the Management Partnership agreement” — a completely separate document which Lee might not even have been given access to. (Arrington reckons he probably wasn’t.)

As for this suddenly-important distinction between venture capital and private equity, has Lacy forgotten that the public face of the Skype acquisition was not anybody from Silver Lake at all, but rather Marc Andreessen, a venture capitalist? Indeed, Arrington’s coverage of the deal had Andreesen Horowitz leading it, with Silver Lake a mere tagalong participant. And Silver Lake is hardly KKR or TPG: if you pop along to the CrunchBase profile page for the firm, you’ll see its headquarters are on Sand Hill Road, the boulevard synonymous with venture capital. Yes, Silver Lake is technically private equity rather than VC — but it does its best to hang out with VCs, co-invest with VCs, and generally inveigle itself into the VC world as much as it possibly can. Lacy’s sources might be very keen right now on the idea that they have “a different mentality and a different culture” to VCs. But the average Silicon Valley employee can easily be forgiven for failing to grok this distinction.

And this just doesn’t withstand scrutiny at all:

If the amount is so small, why not just give him the vested shares? Because this is their standard contract, Silver Lake can’t without opening themselves up to lawsuits from all the other buyout deals where employees have to live by the same agreed-upon contract.

Er, no. Silver Lake had no obligation, under the terms of the contract, to claw back Lee’s shares. Remember the letter sent to Lee? It’s very explicit on this front:

Pursuant to Section 8.01 of the Partnership Agreement, Skype has the right (the “Call Right”), which it intends to exercise, to repurchase up to all vested shares underlying your Options at a per share price equal to the exercise price applicable to the shares being repurchased.

Skype had a right to claw back the options. It made a positive decision to exercise that right. It had no obligation whatsoever to exercise its Call Right, and everybody’s actions would have been perfectly consistent with the signed documents if Lee had held on to his vested equity.

The fact is that there’s no good reason at all for Skype to be behaving this way — and there’s also every reason to believe that Skype’s decision to turn evil was entirely a function of Silver Lake’s corporate culture.

In any case, all of Silicon Valley is now to understand that the relationship between Silver Lake and the employees of its portfolio companies is a fundamentally adversarial one, where incentives are actually opposed rather than aligned, and everybody needs to lawyer up before doing anything. That kind of attitude goes down badly everywhere, but especially in Northern California. And that’s the fundamental reason why this story is refusing to die.

Oh, and one last thing, from my tipster:

Employees did not actually receive stock options at all, but rather shares in a Cayman Limited Partnership, Skype Management Partnership, LP. This complex partnership arrangement was concocted solely to avoid the possible application of employee-favorable laws in California and Luxembourg.

You fancy a lawsuit against Skype and/or Silver Lake? You’ll have to show that California courts have jurisdiction first. Since Skype isn’t even an American company, and the shares were in the Caymans, that’s not going to be easy.