Felix Salmon

A quick reply to Matthew Bishop and Michael Green, which with luck will bring this exchange to an end: I’m not saying that they make the case for the status quo. But when Davos Young Global Leaders, like Bishop, intone importantly about how “there is an urgent need to tackle fundamental flaws in the economic system” and how CEOs need to concentrate on long-term enlightened self-interest rather than “short-termist behavior”, the very corporate chieftains they’re trying to reach are going to nod in serious agreement and claim in all sincerity to be part of the solution rather than part of the problem.

Never in the history of Davos has a CEO got up on stage and said “I’m trying to make as much money as I can before the board finds me out and fires me”. Which is precisely why CEOs don’t think that Bishop and Green are talking to them. And on top of that, the Philanthrocapitalists are happy reducing the pressure on any individual CEO even further with rhetoric like this:

A capitalism that is more responsible is not going to come from a few enlightened CEOs choosing to do good – it will only come from an overhaul of the way business is run.

That’s not a call to action, it’s a call to sermonize. And it will achieve nothing beyond getting Bishop and Green a few more speaking fees from companies which like to pat themselves on the back for being socially conscious. Which is why I say that Philanthrocapitalism is ultimately friendly to the status quo.

Bishop and Green don’t explicitly say that the status quo is a good thing: in fact, they explicitly say that it is profoundly broken. But they say that in an extremely CEO-friendly way, designed to allow leaders who think of themselves as long-term visionaries to also consider themselves to be downright philanthropic simply by dint of their enlightened strategic thought. It’s always other CEOs who are the problem. Or it’s not even CEOs at all: it’s the whole system.

The message of Philanthrocapitalism, then, is one which allows leaders to wriggle all too easily out of having to do anything. Which is why it’s not going to make the slightest bit of difference to the way the world is run, no matter how many important people read it.

The one thing you can be sure of, when it comes to the latest episode in the ongoing saga of the Greek bailout, is that it’s a mess. The WSJ is reporting that the bailout is secure, while Reuters is a bit more cautious, just saying that a deal is “closer”. Everybody knows what needs to happen — but a crucial vote in the Greek parliament still hasn’t happened, and the role of private-sector banks going forwards is also extremely vague:

European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.

The proposal foresees a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status, the sources told Reuters on Friday.

“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” said one senior banker.

Your guess is as good as mine when it comes to the meaning of “completely different composition”, but it sounds a bit like some kind of latter-day Brady bond, with principal guarantees or a rolling interest guarantee or some kind of participation from the EU, perhaps provided by the European Financial Stability Facility. Banks would happily swap Greek debt for bonds partially guaranteed by the EFSF, because such bonds would be more creditworthy; meanwhile, the swap wouldn’t be considered a default, since the exchange would be entirely voluntary.

But we’re not there yet, and in any case such a deal would only be a waystation on the road to a restructuring. Crucially, markets would look very hard at any collective action clauses written into the new debt, to see whether French and German banks, their arms twisted by their governments, could essentially cram a significant haircut onto other bondholders not subject to the same degree of moral suasion.

At some point, inevitably, a Greek restructuring is going to get ugly and fractious. But for the time being, it’s just messy. And we can stay in this muddle-through zone for a long time, while market participants position themselves for the inevitable dénouement. Let’s just hope that technocrats in Greece and the EU are getting their ducks in a row as well.

Last week, Bloomberg’s Joseph Galante published a story claiming that Skype investors in general, and Silver Lake in particular, were firing senior executives just before the company is sold to Microsoft, so that they don’t get their full share of the proceeds from the sale. This seemed pretty evil to me, but it wasn’t long before anonymous Skype investors started showing up on various blogs (SAI, TechCrunch, GigaOm) pouring cold water on the allegations, saying that the firings were all the doing of Skype’s CEO, Tony Bates, and had nothing to do with Silver Lake at all.

The stories were very consistent with each other, and all of them seemed to be based on anonymous sources (except for GigaOm’s, which was based on the word of an unnamed “company spokesman”). Because of this, it’s impossible to tell whether there are multiple investors all credibly saying the same thing, or just one investor doing the rounds of the blogs and trying to push back against Galante’s story.

But now Galante is back, with the story of Yee Lee, who left Skype after a significant chunk of his options had already vested — and still didn’t get any money from them.

After a month of back-and-forth with Skype’s human resources department, Lee learned that even his “vested” options were worthless. It turns out the investor group, led by private equity firm Silver Lake Partners that bought Skype from EBay (EBAY) in 2009, had secured a so-called repurchase right that gave them authority to buy back the shares at the grant price. “I’ve never heard of a company taking away vested options,” says compensation expert and Bloomberg News consultant Graef Crystal. “It invalidates the meaning of the word ‘vested.’ “

There are many more details in this blog post from Lee, which includes the letter he was sent by Ricardo Velez, Skype’s associate general counsel. I’m reasonably good at hacking my way through legalese, but this is downright incomprehensible — and clearly designed to be so.

Lee provides a copy of his 11-page stock option grant agreement, which is equally opaque. Here’s the relevant bit, buried halfway down page 3, at the end of a long clause which seems mainly interested in what happens when there’s an IPO.

If, in connection with the termination of a Participant’s Employment, the Ordinary Shares issued to such Participant pursuant to the exercise of the Option or issuable to such Participant pursuant to any portion of the Option that is then vested are to be repurchased, the Participant shall be required to exercise his or her vested Option and any Ordinary Shares issued in connection with such exercise shall be subject to the repurchase and other provisions in the Management Partnership agreement.

That one sentence, which is borderline unreadable and which makes no sense outside a deep understanding of the Managing Partnership agreement, an entirely separate document, was enough to render Lee’s vested options worthless.

Why on earth would Skype behave in such an evil way? Back to Galante:

Silver Lake declined to comment. When asked about Lee’s situation, Skype spokesman Brian O’Shaughnessy said, “You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave, therefore he doesn’t get that benefit.”

O’Shaughnessy seems to have been the source for the GigaOm blog post, and with this on-the-record quote he’s rendered himself utterly unreliable. Silicon Valley companies attract employees by giving them options which vest over time. Skype — uniquely, I think, although anybody else owned by Silver Lake should be taking a long cold look at their option grants right now — decided to more or less invalidate that vesting schedule with a highly opaque clause which was clearly designed to be incomprehensible to anybody without extremely good lawyers. The statement that the clause was designed “to retain the best and the brightest people” is clearly a lie, since Skype’s best and brightest had no idea it even existed, and Skype made no attempt to call their attention to it.

I no longer think that what Skype did here is pretty evil: I now think it’s downright evil, and destroys the balance of trust on which Silicon Valley has been built. What’s more, I simply don’t believe that Skype did all of this itself, without detailed input from Silver Lake. Here’s Lee again:

Working with Silver Lake was my first opportunity to witness up-close-and-personal how a PE firm does its business of restructuring a company that they’ve just taken over. And it was breath-taking. The firm inserted itself into every level of the company. At one point in my tenure at Skype, Silver Lake had representatives or consultants on the Board, in C-level executive roles, in technical leadership and operating roles, and all the way on thru the organization to the person actually running our software deployment schedule… So Silver Lake put its fingers really deeply into Skype’s pie and they started rearranging things.

You can agree or disagree with the practice of re-organization, but I personally had never been part of a restructuring that ran so deep in a company. During the year I was at Skype, the company:

lost a CEO

hired and fired a CTO

hired and fired a CFO

gained a CEO, CMO, CIO, and CDO

created an entirely new product development org structure

eliminated every Project Manager role

fired, re-interviewed, and re-hired Product Managers

created a two new business units

combined two business units into one

dissolved one business unit

opened a new office and hired several hundred people

the list goes on…

All of this makes any Skype investor saying “it’s not us, it’s the CEO” sound naive at best and, more likely, downright disingenuous. Unless and until such an investor wants to go on the record defending Silver Lake here, I’m going to believe Lee, and assume that it’s Silver Lake who’s largely to blame for the utter breakdown of employer-employee relations at Skype. I don’t know where they got these techniques from, but they’re very alien to Silicon Valley and indeed the rest of the business world. And they do no good at all for the reputation of private equity companies more generally.

Michelle Vaughan’s Twitter project is live, including my tweet — 100 Tweets

Gothamist has $5k they want to spend on a big feature article — Gothamist

Treasuries dip into negative-yield territory — Reuters

Yesterday something calling itself the Coalition for Sensible Housing policy put out a dense 13-page white paper entitled “Proposed Qualified Residential Mortgage Definition Harms Creditworthy Borrowers While Frustrating Housing Recovery”.

It’s all part of the lobbying campaign surrounding Dodd-Frank, and the eminently sensible idea that if a bank wants to securitize a bunch of mortgages, it has to keep at least 5% of those mortgages for itself. Somehow, in the course of putting Dodd-Frank together, an exception was carved out to that rule, called the Qualified Residential Mortgage, or QRM. For the small group of the most copper-bottomed mortgages, banks could sell off the whole lot, without having to retain 5%.

This gave the mortgage lobby an opening, and they’re attacking it aggressively. They want to open the QRM loophole as wide as possible, and are now kicking up a very loud fuss, complaining that consumers will be damaged if they can’t get access to a QRM loan. The main part of the QRM qualification that they’re upset about is the requirement for a significant downpayment, and so a central part of the lobby’s argument is that if you’re underwriting loans properly, increasing the downpayment doesn’t have much of an impact on delinquency rates. There’s other bits to the argument, too, such as the idea that non-QRM mortgages are going to be much more expensive, but for this post I’m just going to concentrate on the downpayment question.

The white paper explains — in bold type, on page 5 — that “boosting down payments in 5 percent increments has only a negligible impact on default rates”. It continues:

As shown in Table 3 (and in Attachment 2), moving from a 5 percent to a 10 percent down payment requirement on loans that already meet the defined QRM standard reduces the overall default experience by an average of only two- or three-tenths of one percent for each cohort year.

Of course, there are charts and tables. The table comes first:

This is so misleading and confusing that I’ve spent a large chunk of the past 24 hours trying to work out what on earth it’s actually saying, and where the data comes from. The raw data here is indeed being sourced from CoreLogic, and a company called Vertical Capital Solutions did analyze that data, in February 2010. The Vertical Capital report did not, however, have any of the information in this table. Indeed (and inconveniently, from the mortgage lobby’s point of view), it had a whole page which talks about how qualified loans have “substantially higher Delinquencies and Defaults on Qualified Loans with a LTV >80″. (Loan-to-value, or LTV, is the converse of the downpayment: the downpayment and the loan combined are 100% of the loan, since qualified mortgages by definition exclude piggyback loans were second mortgages are involved.)

What the Vertical Capital report does have is a chart of delinquency rates on qualified loans where the LTV is less than 80%, on page 7, and another chart where the LTV is more than 80%, on page 8. Put the two together, and you get something like this:

The difference in delinquency rates between the low-downpayment loans and the high-downpayment loans, here, ranges from 2.94 percentage points for the 2008 vintage, to 7.15 percentage points in 2006. Clearly much bigger differences than are implied in the white paper’s table. And if you look at the percentage increase in delinquency, it’s enormous: all of the delinquency rates more than double, with the lowest increase being 101% in 2006 and the highest being an amazing 502% in 2002.

The mortgage lobby’s own chart, of course, looks very different indeed. Here it is, from page 12 of the white paper:

What this chart purports to show is that non-qualified loans — the red bars — have very high delinquency rates, while qualified loans — the purple, green, and blue bars — have much lower and pretty similar delinquency rates, regardless of the downpayments they use.

But look more carefully. The non-qualified delinquency rates include all delinquencies for all non-qualified loans. But the qualified delinquency rates are not directly comparable, because all of them specifically exclude qualified mortgages with a downpayment of less than 5%.

I spent some time today talking to the man who put this chart together. (It’s sourced to Vertical Capital, but in fact these numbers came from Genworth’s own analysis of CoreLogic’s data, and Vertical Capital did none of this work.) His name is Anthony Guarino, and he’s the vice president of public policy at Genworth mortgage insurance — the company which initially commissioned the Vertical Capital report. I asked him, if he was showing the delinquency rates for all non-qualified loans, why wouldn’t he show the delinquency rates for all qualified loans? Well, he said, “the consortium didn’t want to even talk about zero downpayment mortgages. Why would we even show that? We’d lose credibility if we showed a qualified loan with no downpayment.”

Guarino was perfectly happy to tell me that by excluding all the loans with downpayments of less than 5%, “you’re throwing out the loans with the higher default rates. No one’s saying that downpayment doesn’t matter.” But compare that with the official tone of the white paper:

Based on data from CoreLogic Inc., nearly 25 million current homeowners would be denied access to a lower rate QRM to refinance their home because they do not currently have 25 percent equity in their homes… Even with a 5 percent minimum equity standard, almost 14 million existing homeowners – many undoubtedly with solid credit records – will be unable to obtain a QRM. In short, the proposed rule moves creditworthy, responsible homeowners into the higher cost non-QRM market.

This sounds very much as though even a 5% minimum downpayment is desperately unfair to millions of American homeowners; there’s no indication whatsoever, in the paper, that including a minimum downpayment of 5% in the definition of what constitutes a qualified mortgage might actually be a good idea. Yet when the consortium wants to publish a chart showing the delinquency rates of qualified mortgages, it’s very careful to first strip out any mortgages with a downpayment of less than 5%.

On top of that, the bars in the official chart all look very similar largely because they are very similar: the industry is essentially comparing a set of loans with itself, and declaring that there’s not a lot of difference. The purple bar is all the loans with a downpayment of more than 5%; the green bar is all the loans with a downpayment of more than 10%; and the blue bar is all the loans with a downpayment of more than 20%. The blue bar is a subset of the green bar, which in turn is a subset of the purple bar. The chart is designed, in other words, to look at similarities rather then differences.

I asked Guarino if he could send me the data sliced more naturally: how do loans with a downpayment of less than 5%, for instance, compare to loans with a downpayment of between 5% and 10%? To his credit, he did come back to me with some new data, even if it wasn’t exactly what I asked for: he refused to slice the loan tranches by year, as he did in this graph. Instead, he would only give me aggregate figures, for 2002-2008 and for 2002-2004. Here’s what they look like, charted:

When the mortgage industry starts complaining about the 14 million people who would be denied the chance to buy a qualified mortgage if they don’t have a 5% downpayment, it’s worth remembering that qualified mortgages for people who don’t have a 5% downpayment have a delinquency rate of 16% over the course of the whole housing cycle. (You can be sure the numbers were much higher still in 2006 and 2007, which is why Guarino didn’t give them to me.)

And you can see too why the 20% downpayment limit was put in place: it’s the point at which delinquencies fall to less than 5%. If you take one group of loans with a 20-25% downpayment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first.

The big picture here is that QRM is a distraction, which really shouldn’t exist in the first place. But given that it does exist, the downpayment requirements embedded within it are perfectly sensible. The lower the downpayment, the more likely a loan is to become delinquent. By far. That’s a simple fact which the mortgage lobby will go to astonishing lengths to hide.

Update: Guarino responds in the comments.

On Tuesday I moderated a panel at the New York Forum which featured, inter alia, Duncan Niederauer, the CEO of the New York Stock Exchange, and Richard Robb, the CEO of Christofferson Robb, a money management firm which does its fair share of speculation.

My question at the beginning of this clip, for Niederauer, didn’t come entirely out of the blue. Amar Bhidé had previously talked about the casino aspect of markets, and Andrew Ross Sorkin had talked about the distinction between speculation and investment. But Niederauer was not happy when I pushed him on these concepts. Wall Street is increasingly a game of speculation rather than investment, I said, and asked how a casino operator pushing people to make bets over the course of a millisecond was not part of the problem. Rather than engaging with the question, he simply shut me down: “I thought my job description was quite different than what you just described,” he said. “So you must be talking to someone else.”

Niederauer then used all his media training to pivot and give a mini-speech instead about how self-regulation was better than Dodd-Frank. But Richard Robb, to his credit, engaged, even if what he said doesn’t stand up to scrutiny. “I don’t know what the difference between investing and speculation looks like,” he said, throwing up a straw man of everybody working at peoples’ tractor collectives. Robb’s prescription was essentially to do nothing but ban a few of his competitors: stop big banks from doing what he does, leave him alone to do anything he wants, and “let innovation find its own way, and if it’s parasitic and unproductive, it will not be rewarded by the capitalist system.”

That’s clearly false, of course: we can all think of parasitic and unproductive Wall Street innovations which have made millions of dollars for bankers and traders and money managers. Richard Robb himself gave a good example earlier on in the panel: structured investment vehicles.

And so Sorkin jumped in, making the good and obvious point that “it’s actually very easy to see what speculation is and what investing is.” Here’s one simple distinction: speculation is where you buy something in the expectation that it will rise in price, where investment is where you put money into something so that over the long term you can make a profit from the resulting cashflows, be they coupon payments or dividends. And as Sorkin said, if you make an investment for two seconds, that’s clearly speculation.

Robb’s response to Sorkin I think was one of the most telling points of the panel. “How about two days?” he asked. “Two weeks? Two months? Where would you draw the line?”

I could barely believe what I was hearing — was Robb really suggesting that holding a position for two days might be considered investment rather than speculation? Or even two months? All of them are speculation — and the fact that the likes of Niederauer and Robb can’t see that is I think a big part of the problem.

The subject of the panel was financial innovation, and Robb genuinely believes that he’s something of a centrist on the issue: he makes great play of agreeing with his friend Bhidé, for instance. But the fact is that if you’re talking to alumni of Goldman Sachs (Niederauer) or the University of Chicago (Robb), or someone who used to run the derivatives desk at a too-big-to-fail bank (Robb, again), then their idea of what’s good for the world is always going to be pretty skewed. They’ve made millions of dollars in the Wall Street casino, and they’re precisely the people being put on panels to ask whether the casino is a good thing. It’s reasonably easy to predict what they’re going to say — and to discount it heavily.

I’m worried about the brinkmanship going on in the debt-ceiling talks which House majority leader Eric Cantor has just decided to pull out of. Cantor’s point seems to be that he is incapable of talking about tax hikes as part of the deficit-reduction negotiations with Joe Biden; instead, the only way such a conversation can take place is if it’s between Barack Obama and John Boehner.

What this says to me is that we’re still very far from the point at which any House Republican — let alone Eric Cantor — is going to be willing to vote for long-term fiscal prudence, as that term is commonly understood. Triggers and ten-year fiscal straitjackets and other such mechanisms are all well and good if your aim is deficit reduction. But Republicans, as we saw most spectacularly during the George W Bush administration, tend to be very bad at reducing deficits, and very good at increasing them. If you vote for tax cuts on a semi-regular basis and you never vote for tax hikes, then no amount of spending cuts is going to get you smaller deficits — especially if Medicare and Medicaid are pretty much off the table.

This is all out of the standard Republican playbook: cut taxes, raise deficits, and leave the consequences to future generations. But now there’s been an important change, in that the Republicans are trying to have their cake and eat it. They can continue to be fiscally irresponsible on taxes, which inevitably means a steadily rising national debt, or else they can start drawing lines in the sand when it comes to the debt ceiling, in which case they have to allow that some tax increases are necessarily going to have to be on the table. But they can’t have it both ways. Hence the punt by Eric Cantor. Something has to give, and he doesn’t want to be in the room when that happens: he’s kicking responsibility over to Boehner instead.

Let’s say the Obama-Boehner meeting happens. If Boehner does give in on taxes — and that’s a big if — then will Cantor and the rest of the House Republicans fall loyally in line and vote for such things? That’s far from a foregone conclusion. And if Boehner doesn’t give in, it’s hard to see how the deficit-reduction plan would have any credibility whatsoever in the markets, since the markets know full well that the deficit can’t be shrunk without some kind of tax hikes.

The whole point of a long-term fiscal plan is to give the markets confidence that the US has its debt situation under control. What I fear is that coming out of these negotiations we’ll end up with a plan which sounds impressive coming out of the mouths of politicians, but which has no real credibility or fiscal force. And that as a result we’ll have even more uncertainty when it comes to future fiscal policy — the exact opposite of what both sides in these negotiations say that they want. And that would be a good outcome, compared to the worst-case scenario where there’s no agreement at all come August 2.

So can someone remind me again why we’re even going through this whole Kabuki? It seems to benefit no one at all.

Update: Boehner’s no more grown up than Cantor is:

“Tax hikes are off the table,” he said. “First of all, raising taxes is going to destroy jobs….second, a tax hike cannot pass the US House of Representatives — it’s not just a bad idea, it doesn’t have the votes and it can’t happen.”

Price gap: Storage vs Bandwidth — Backblaze

What ‘Inside Job’ got wrong — WaPo

Larry Summers joins Square Board Of Directors — HuffPo

xkcd vs conoisseurship — xkcd (see also)

Pictures of China’s Ai Weiwei after release on bail — Reuters

The US immigration system is horribly broken. Jose Antonio Vargas’s amazing story should change minds — NYT

We know that infrastructure spending is a good way of creating jobs. But what kind of infrastructure spending? Heidi Gerrett-Peltier looked at pedestrian, bicycle, and road projects in Anchorage, Austin, Baltimore, Bloomington, Concord, Eugene, Houston, Lexington, Madison, Santa Cruz, and Seattle — and came to a pretty clear conclusion:

Bicycling infrastructure creates the most jobs for a given level of spending: For each $1 million, the cycling projects in this study create a total of 11.4 jobs within the state where the project is located. Pedestrian-only projects create an average of about 10 jobs per $1 million and multi-use trails create nearly as many, at 9.6 jobs per $1 million. Infrastructure that combines road construction with pedestrian and bicycle facilities creates slightly fewer jobs for the same amount of spending, and road-only projects create the least, with a total of 7.8 jobs per $1 million.

This finding isn’t new, but it’s worth remembering as signs of detente start to appear in the war on bikes. It’s hot out there, people: no one wants or needs to ride fast. You get to a red light, stop at it. Take the opportunity to catch your breath and minimize your sweatiness upon arrival. And while you’re waiting, you can ponder the idea that every bike lane represents badly needed jobs in a recovery which is going much less well than expected.

Randy Kennedy has a bullish article on Artnet’s nascent art-auction business, which is doing better the second time round than it did the first time round, but which is still tiny. I’m skeptical: value in the art world is very much reliant upon the institutional authority of auction houses and galleries, and Artnet’s auction system is designed to strip out all of that information. It can work for fungible editioned works of relatively modest value, but I do think that most collectors are always going to want a bit more hand-holding before buying art, not to mention the opportunity to actually see the art object before buying it.

That said, the decline of the Sotheby’s and Christie’s duopoly is real, and this is a great opportunity for Artnet or anybody else to try to make a name in a new world with many more players. Here’s some data which Artnet pulled for me, showing total global auction sales, split between the duopoly and everybody else. While sales totals rise and fall, the one constant is the decline of the big guys’ market share:

Next year, it’s more likely than not that Sotheby’s and Christie’s between them will have less than half the global auction market for fine art (which is the data used for this chart). A large part of this is the rise of China, which has hundreds if not thousands of auction houses, and where the big two have very small market share. But even outside China I think that Sotheby’s and Christie’s are both vulnerable, in theory, to lighter-weight business models like Artnet’s auctions or art.sy or the VIP Art Fair. Many of them will fail — but some will succeed. The big two will be faced with a tough choice: do they compete directly with the new entrants, or do they protect their own high-margin core business?

I moderated a panel on financial innovation yesterday, about which more when I get the video. But there was a lot of talk of leverage, which is the hidden turbo-charger in a lot of financial innovations, from credit default swaps to structured investment vehicles. And there was a general consensus that if you want to create prosperity and jobs, then leverage is in principle a good thing: more debt means more growth which means more prosperity. For a prime example, see this post from Gregory White, who reckons that whenever household debt is going down rather than up, “the economy will stink.”

In reality, however, things are rather more complicated. And Jared Bernstein has a great post up explaining one of the big problems: Over the past 30 years or so, unemployment has been high, compared to the previous 30 years, when unemployment was low. When unemployment is low, productivity gains go to labor; when unemployment is high, they go to capital. And that’s a big reason why median family incomes have been massively lagging productivity growth since 1979, even though the two moved pretty much in lockstep during the postwar period.

The challenge I put to the panel yesterday was to come up with an innovation which produces more growth with less leverage, after an entire generation in which debt has been growing much faster than GDP. Better yet, come up with an innovation which produces more jobs with less leverage. We still have healthy productivity growth. How do we channel that into employment, rather than dividends for plutocrats? The fund managers and CEOs on my panel weren’t much help on that front. But that’s the real challenge facing developed economies today, and I suspect that if we look at Germany, we might be able to find a few clues.

The problem with talking about federal infrastructure expenditures as “investments” is that someone like Dick Durbin is likely to take the term literally. He’s now introduced legislation which says that any time a state or city wants to privatize a transportation asset, it has to repay the federal government first. So if the government sunk a few hundred million dollars into a highway project, for instance, and then the state decided it wanted to sell off the right to collect tolls on that highway, then the toll operator or the state would first have to repay all the money that the feds spent.

Durbin explained to HuffPo’s Dave Jamieson what he was worried about:

As states and cities across the country face grim budgets, more and more are looking to stem their shortfalls by leasing existing assets, such as roads, lotteries or government buildings. The City of Harrisburg, Pa., may soon lease its parking meters to a private investors, as Chicago has already done for a 75-year period starting in 2008. Durbin remarked that he’s already watched the cost of parking soar in Chicago since that city’s deal was inked.

“It’s a caution to all of us,” Durbin said. “When we look at privatization, we have to look at the long-term.”

This is all a bit incoherent. For one thing, parking meters in Chicago and Harrisburg are a bad example here, because it’s hard to make a case that the federal government has a huge investment in them. And while Durbin is right that the 75-year contract in Chicago is far too long, he’s wrong to consider the rise in the cost of parking to be a bad thing: in fact, it’s the whole reason that the parking meters were privatized in the first place. Parking in dense urban neighborhoods should be expensive, but politicians are loathe to raise meter rates, so privatization is a way that they tie their hands and get to blame someone else.

The bigger picture here is that when the federal government invests in transportation infrastructure, it’s investing in a public good, and insofar as there’s a return on that investment, it’s seen in marginally higher tax revenues from the entire region. If some kind of private-sector involvement can improve the way that those assets are operated, so much the better. Remember that Durbin doesn’t have a problem with tolling roads, or charging for on-street parking: he only has a problem with the private sector having a contract allowing it to do such things. If local government does it, that’s fine — even if local governments are often hobbled by political constraints.

Somewhere in the Durbin bill is the germ of a good idea: preventing local governments from selling off valuable franchises for multi-decade terms in sweetheart deals at a fraction of their net present value, just to fill a yawning budget gap. Transportation privatization is hard to do well, and there’s precious little indication that most local goverments are any good at it. Wall Street can often make a fortune in such deals.

But that’s an entirely separate issue to the question of whether the project received federal funding in the first place, or how much money the feds spent. That’s a sunk cost: the federal government should in principle be happy if the private sector is now willing to pick up some of the tab.

A much more sensible way of doing things would be to set up the national infrastructure bank which the Obama Administration has been talking about since before it was even elected. The bank could be given oversight of public-private partnerships, could put together a set of best practices with regard to privatization contracts, and could generally professionalize an area which to date has been rather chaotic, politicized, and ad hoc. What’s needed here isn’t new legislation: rather, it’s the passage of old legislation which has been gathering dust for years. The infrastructure bank is a great idea, and someone should resuscitate it.

This week’s New Yorker has George Packer’s massive, 11,000-word article on Raj Rajaratnam, his prosecutor Preet Bharara, and financial prosecutions. Highly recommended. But there was one line in particular which jumped out at me:

If there are examples of people whom Rajaratnam unsuccessfully tried to corrupt, they have not surfaced in the voluminous public record on Galleon.

I asked Packer what he meant by this. Is it simply a narrow statement about “the voluminous public record on Galleon”? Is it possible that Rajaratnam never met someone he couldn’t corrupt? Or is it something in the middle, maybe that Rajaratnam had an extremely good nose for the kind of people who could be corrupted?

I wanted to know just how malign Packer considers Raj to be. If you or I had been approached by Raj in full flower, would he have corrupted us, too? I have an image of Raj as someone a bit like Javier Bardem in No Country for Old Men, only instead of killing the people who come across his path he just turns them into insider traders.

Packer replied:

From my work on this story, I’m certain there are people Raj tried to corrupt and couldn’t. And perhaps it’s not surprising that their names didn’t show up in the record, since we’re talking about a criminal investigation. It’s just striking that so many names of the corruptible do show up, how casually they show up, how easy it was for Raj to turn most of them. Also striking that not a single counter-instance happens to stumble into the record, with all the documents I’ve seen and wiretaps I’ve heard. You’d think that at least one example would appear. (And, to answer one of your questions, I’d to think that if you or I floated through this world, we’d have been that example.) And finally, it’s striking how many people who weren’t actively involved in the crimes must have known about them but apparently never raised a red flag, and certainly never went to regulators or other authorities. There’s a kind of code of silence on Wall Street that reminds me of omerta in the mob and the blue wall with the police, which obviously makes it all the harder for prosecutors to take on the vast scope of these crimes. Preet Bharara was cautious about what he would say to me, but one thing he did say was that insider trading is “everywhere you look.”

This is depressing, and rings true. I’m no expert on insider trading, but it does seem to me that prosecutions tend to come proactively as a result of deep investigations, rather than reactively as a result of companies or employees turning violators over to the authorities. Galleon employed about 70 analysts, fund managers and traders when Raj was arrested, as well as support staff; it’s reasonable to assume there were at least as many ex-employees too. It’s silly to believe that they were mostly ignorant of what Raj was looking for — and yet none of them said anything.

The key here, I think is the same slippery slope of complicity that I’ve written about before. Start with a job offer, and an office culture. And then slowly raise the money and the pressure, and bring as many people as you can inside the fold. Long before they do something illegal, they’re tainted, and won’t give up their colleagues.

I also wonder: hedge funds are famous for the barrage of interviews and personality tests that they put prospective employees through. Are some of those tests ferreting out precisely the sort of people who are the most corruptible? After all, corruption is a close relative of greed, which hedge funds are unabashed about prizing.

And remember too that all of Wall Street, even down to the level of individual investors, trafficks in exclusive information. Think of all those expensive newsletters offering an edge in the market, or the various subscription websites and boring conferences which promise to give people hugely valuable investment advice.

It’s a given, on Wall Street, that information can be prized and valuable. One time-tested way of making it big on Wall Street is to find information which others don’t have and then act on it: look at Muddy Waters for a prime example. Everybody’s looking for the information edge — and the point at which exclusive information crosses over into being inside information is maybe not always obvious from the point of view of an ambitious analyst. If I’m sitting on the Acela and overhear two businessmen talking about an upcoming deal, I can act on that knowledge perfectly legally. And the main problem with analysts’ information isn’t that it’s illegal, but rather just that it’s worthless.

All of which says to me that there’s a lot more insider trading going on than the number of prosecutions would imply, and that it’s going to be extremely difficult to crack down on. The very architecture of Wall Street is designed to encourage it, with only a thin layer of compliance people doing their best to warn people sternly about what they can’t do. They — along with prosecutors — are likely to remain mostly ineffectual, so long as everyone else continues to push for an edge wherever they can find one.

Google’s websites had more than a billion unique visitors in May — WSJ

The FBI knocked Curbed, Pinboard & Instapaper offline as collateral damage to a server seizure — NYT

A Visual Representation Of The Law School Bubble — ATL

Existing home sales fall to 6-month low in May, with prices down 4.6% yoy — Reuters

Adventures with debt ceilings, CDS edition — Reuters

I’ve long suspected that this is true, but now there’s a formal academic paper proving it:

Winemakers perceive that consumers demand wine with a stated alcohol content that is different from the actual alcohol content, and winemakers are willing to err in the direction of providing consumers with what they want. What remains to be resolved is why consumers choose to pay winemakers to lie to them.

Essentially, people like to think of themselves as sophisticates who go to art-house movies, even if in reality they’re much more likely to sit slack-jawed in front of some reality TV show. In the case of wine, they like the idea of buying something grown-up, with a relatively modest amount of alcohol; when it comes to drinking what’s inside, however, the more heat the better. So wine labels consistently show lower alcohol content than what’s inside.

This is especially true in the new world. Out of 43,908 tested new world wines, 24,561 under-reported their alcohol content, with the reds averaging 14.1% alcohol while claiming just 13.6%, and the whites averaging 13.5% while claiming to be 13.1%.

Interestingly, the smaller number of wines which either over-reported their alcohol content or got it exactly right all reported pretty much the same levels of alcohol: 13.1% or 13.2% for whites, and 13.6% or 13.7% for reds. On average, it seems, wine will just say that it’s 13% if it’s white and 13.5% if it’s red, but in reality it’s likely to be higher than that.

So wine is hot, and getting hotter. Is this a global warming phenomenon? No:

The coefficient on the heat index is approximately 0.05, suggesting that a one-degree Fahrenheit increase in the average growing season temperature everywhere in the world would cause the average alcohol content of wine to increase by 0.05 percentage points; it would take a whopping 20 degree Fahrenheit increase in the average temperature in the growing season to account for a 1 percentage point increase in the average alcohol content of wine.

Instead, it’s a style thing:

We can expect Old World (European) wines to have about 0.63 percentage points less alcohol than wine produced in the New World (the Americas, Australia, New Zealand, and South Africa)… compared with France, three countries produce somewhat lower-alcohol wine (Canada, New Zealand, and Portugal) while the rest produce higher-alcohol wine, with the effects being most pronounced for Australia (0.55 percentage points higher on average) and the United States (0.85 percentage points higher on average).

In Australia, red wine has increased in alcohol content by a whopping 1.4 percentage points over the past 18 years: it’s pretty much an entirely different drink, now, to what it was as recently as the mid-90s.

And yes, the wineries know exactly what they’re doing.

It is relatively inexpensive to measure the alcohol content of wine reasonably precisely (though some of the devices used may entail larger measurement errors), and it is necessary to do so to be informed enough to comply with tax regulations, at least in the United States. It is also an important element of quality control in winemaking. Consequently, we speculate that commercial wineries for the most part have relatively precise knowledge of the alcohol content of the wines they produce and that the substantial average errors that we observe are not made unconsciously. This speculation is based in part on informal discussions with some winemakers who have admitted that they deliberately chose to understate the alcohol content on a wine label, within the range of error permitted by the law, because they believed that it would be advantageous for marketing the wine to do so. In one instance, we were told specifically that the stated alcohol content was much closer to what consumers would expect to find in a high quality wine of the type in question.

If you want to explore the world of high-quality, low-alcohol wines, then, don’t always trust what you see on the label. And doing so is going to be much harder than it used to be. In 1992, white Bordeaux wines averaged 11.7% alcohol; since then they’ve been getting hotter at a rate of 0.35% per year, putting them at 12.5% today. And in the new world the numbers are much higher: Chilean reds, for instance, averaged 12.3% alcohol in 1992, and have been growing in alcohol at a rate of 0.82% per year since then. That means they’re now at 14.2% and rising.

How much further can this trend go? We’re beginning to see a backlash to high-alcohol wines, but I fear that the backlash is simply manifesting itself in lower numbers on the label, rather than lower alcohol levels in the bottle. Winemakers are convinced they know what consumers want — and I fear they’re entirely correct. And consumers, clearly, love to be lied to. So this is likely to continue for a while yet.