Felix Salmon

The new Amex prepaid card is a huge improvement, from a consumer perspective, over any prepaid alternative. It’s free to buy, there’s no monthly fee, and there’s no fee for making purchases: compare the competition, things like RushCard’s $9.95 per month, or Walmart MoneyCard’s $3 per month, or BanXcard’s $2.95 per month. And that’s just the beginning of the charges you find with such cards — charges which are increasingly resulting in subpoenas and other attacks on opacity.

The Amex card is so attractive, indeed, that it’s even beginning to start being compared to checking accounts. A checking account is still a better bet than a prepaid card if you’re good at avoiding nasty fees, of course. But the Amex card is never going to surprise you with something nasty and unexpected in the way that checking accounts are prone to doing.

Amex isn’t doing this for love, of course — the idea is that it’ll be able to make enough money on interchange fees to make the product profitable. (For reasons which are a bit obscure, prepaid cards were exempted from the Durbin interchange-fee reduction.) But the fact is that no one has managed to come up with a product this attractive in the past, and none of the other prepaid-card merchants have been able to produce a card with no monthly fee. (Well, there’s the pay-as-you-go RushCard, but that costs $1 per transaction, plus $1.95 per ATM withdrawal.)

It can’t possibly be a coincidence that Amex is launching this product just as Durbin is slashing debit interchange fees. But there’s nothing in Durbin which makes this product any more profitable for Amex — the income that Amex gets will be the same now as it would have been if they launched this a year or two ago. So what’s going on here? Why is Amex launching this now?

My feeling is that Amex is looking at this as a game with an asymmetrical payoff. Amex has been pushing gift cards for a long time; this is basically a glorified reloadable gift card, and as it starts getting adopted by people who would never normally use an Amex card, it increases the pressure on merchants to accept Amex as payment. And there’s always a chance that this product could become hugely popular — if banks start making their current debit cards extremely unattractive in the wake of Durbin.

I don’t believe that banks will start charging for debit cards, or applying fees to debit-card transactions, or the various other horribles which they threatened during the big debate over debit interchange. But it’s possible. And if that happens, people with checking accounts are going to start looking for alternatives to their current debit card, and Amex will be right there waiting for them. The prepaid card is also safer than a debit card, in that it’s easier to contest fraudulent charges and have them refunded.

More generally, we’re entering a world where there’s going to be a lot of disruption in the payments space, with clearXchange going up against PayPal and many other dot-com startups, including Square. No one knows who’s going to win this war. It’s possible that no one will: payments might simply fracture into dozens of different systems with relatively small market share. Given the huge uncertainty in payments, it’s probably a good idea to have as many different products as possible and push them hard during this rare period of upheaval and change. You might not make a lot of money in the short term. But if you’re not aggressively in the game, you’ll never have a hope of winning.

It’s the big Dealbook debate! In the red corner, there’s Andrew Ross Sorkin, defending Goldman Sachs from Senator Carl Levin’s accusations of egregious behavior during the financial crisis. Sorkin’s main point: that depending on how you measure it, Goldman might not have been quite as short mortgages as Levin suggests. And now, in the blue corner, we have Jesse Eisinger, saying that it really doesn’t matter how big or small Goldman’s short was: the real problem, as has been clear from the day the SEC filed charges against Goldman over a year ago, is that it lied to its clients.

There was the lie that Goldman peddled to potential buyers of Hudson Mezzanine, that “Goldman Sachs has aligned incentives with the Hudson program”. In fact, Goldman had a huge net short against Hudson. There was the lie that the Hudson assets had been “sourced from the Street,” when in fact they were sourced from the festering pile of nuclear waste that was stinking up Goldman’s own balance sheet. There was Lloyd Blankfein’s lie that Goldman was simply acting as a market-maker in these securities, when in fact it was aggressively trying to sell them and had no interest at all in buying them at any point. There was the lie seen by the Israeli bank which bought Timberwolf assets at 78.25 cents on the dollar, presumably on the understanding that Goldman was making markets in such assets and that their value was in that ballpark. (In fact, Goldman had marked those assets at just 55 cents.)

And then there was the way in which Goldman gratuitously maximized the total mortgage losses in the global financial system by creating new mortgage-backed assets out of thin air:

Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.

By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.

Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.

Jesse concludes:

Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.

One of the problems here is that it’s easy to get caught up in endless discussions about whether Goldman’s actions were illegal or not. Best to leave that to the prosecutors, I think. But Goldman’s actions were undoubtedly harmful: to its clients, to the financial markets generally, and to its reputation as an honest broker. Goldman’s trying to revisit those days and persuade us that it wasn’t that bad after all. Jesse’s right: if they’re raising the subject like this, it’s incumbent upon us all to remember exactly what they did, rather than letting them snow us with revisionism.

It’s not easy to find an economist who thinks the mortgage interest tax deduction is a good idea, but the NYT has managed it, with this column from Casey Mulligan. Unfortunately, it makes no sense. Here, for instance, is the first paragraph, in full:

The home-mortgage interest deduction does not by itself significantly distort housing markets. Too much owner-occupied housing has been built because housing is excluded from sales and other taxes owed by businesses.

That’s the last we hear about sales tax: the argument isn’t fleshed out anywhere else. But apparently if you’re an economics professor at the University of Chicago, then this is all the argument that’s needed: houses aren’t subject to sales tax, therefore the mortgage-interest tax deduction doesn’t distort housing markets. It’s a non sequitur, and the bit about sales taxes isn’t even true. In New York City, for instance, real property transfer taxes, plus the “mansion tax” on properties over $1 million, plus the mortgage tax, can amount to 4.75% of the purchase price between them.

But never mind that, because soon we’re getting to the meat of Mulligan’s argument:

One person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income.

More home-mortgage borrowing means more home-mortgage lending, and the latter means more interest income that can be taxed. In theory, home-mortgage borrowing could even add revenue to the Treasury if the lender is in a higher tax bracket than the borrower (or if the borrower is not itemizing her tax deductions).

This is quite possibly the silliest thing I’ve seen the Economix blog ever print. Confidential to Professor Mulligan: mortgages are made by banks, and the margins on mortgage lending are razor-thin: it’s simply impossible for the taxes on the profit a bank makes from a mortgage to exceed the amount of the tax deduction on that mortgage. Oh, and right now, most mortgage lending is done by the government, in one form or another. How much tax are Fannie and Freddie paying on the mortgages they write?

Mulligan’s not finished, though:

Landlords can also take out mortgages on their properties and deduct the interest payments from their taxable income (that benefit may, in turn, affect the rent they set). In that sense, the possibility of deducting mortgage-interest payments from income taxes does not by itself discourage renting rather owning.

It’s that “does not by itself” construction again! Which doesn’t make any more sense the second time it’s used. Of course the mortgage interest tax deduction discourages renting rather than owning, because it’s available only to owners rather than renters. And as any Chicago economist knows, rent is set by the market: landlords will look to maximize the amount of rental income they get on their properties, regardless of what their taxable income might be. Does Mulligan have any evidence that the deduction decreases rents? Of course not, because there is no such evidence.

Naturally, Mulligan completely ignores the host of excellent reasons why the deduction should be abolished, from the fact that it’s distributed incredibly unevenly, mainly going to rich people on the coasts, to the more salient fact, in these fiscally-conscious times, that it costs a whopping $100 billion a year. I can think of a lot of better uses for that kind of money — including simple deficit reduction — and few worse ones. Which is true no matter how many times someone comes up with a facile argument about how one man’s loan payment is another man’s income.

THR rounds up the Spider-Man reviews. They’re bad. Very bad — THR

The 100 greatest non-fiction books — Guardian

How Businesses Fare with Daily Deals: A Multi-Site Analysis of Groupon, Livingsocial, and Opentable, Promotions — SSRN

Wall Street’s The Same as It Ever Was: my contribution to the Atlantic’s Big Ideas issue — Atlantic

Amex’s new no-fee prepaid card looks like it could & should be a game-changer — Bloomberg

Dalberg is an international consultancy which explains, on its About page, that “we value social impact above profit but recognize that a sustainable business model is essential to our success”. Makes a certain amount of sense: if you want to do a lot of good in the world, it’s helpful not to be having to beg for money all the time. And of course that mission makes it much easier for Dalberg to charge huge sums of money and help its owners on their path to wealth and fortune.

Daniel Altman is an economist who glories in the title of Director of Thought Leadership at Dalberg, and he’s now written a paper which essentially seeks to eradicate the distinction between social impact and profit altogether. Social impact, he says, along with similar ideas like double bottom lines or corporate social responsibility (CSR) and creating shared value (CSV),

are inefficient workarounds or substitutes that should ultimately lead back to a single bottom line – profit – with a long time horizon and rational expectations. Executives targeting profitability with a sufficiently long time horizon will make investments that generate social benefits because these investments serve the interests of their companies. Moreover, companies that take this approach will generate social benefits more efficiently and sustainably than those using typical strategies for CSR or CSV.

Altman’s paper cites Philanthrocapitalism. That book’s author, Matthew Bishop, has a similar essay this week in the Economist, comparing IBM to the Carnegie Corporation and concluding that the former has done more for society than the latter.

All of this is profoundly silly. Both Altman and Bishop are all in favor of companies engaging in philanthropic initiatives, although only Altman goes so far as to say that they have to be justifiable on a P&L basis. He writes:

If companies view social initiatives as cost centers rather than contributors to profitability, then these initiatives are likely to become procyclical, being cut in downturns and then reinstated when balance sheets are flush again. Their budgets will be arbitrary rather than being linked to a rate of return. As investments expected to be competitive and profitable, by contrast, social initiatives will enjoy more durable support from executives and become a core part of corporate operations.

The problem here is that Altman’s idea of profitability turns on the idea that “the time horizon for a company’s decision-making should be infinite” — and if he’d ever spent any time running a for-profit company, he’d know full well that in downturns, corporate time horizons are anything but. Even the most enlightened CEO will increase the discount rate with which she calculates distant profits when she runs into short-term trouble — and if you’re calculating philanthropic returns on an NPV basis over an infinite time horizon, a small tweak to the discount rate can easily mean the difference between profitability and being axed.

But the point in the paper at which Altman becomes a complete laughingstock to any genuine capitalist is in his third hypothetical of how corporate philanthropy can be profitable:

The chief executive of a major electronics manufacturer is deciding whether to develop a line of low-cost smart phones for sale at a small margin in poor countries. This investment would cost $100 million and generate an expected rate of return of only 2 percent. However, the chief executive is convinced that the investment is a moral one, and she would get substantial personal satisfaction from making it. Her salary is due to increase by $3 million during the period in which the investment would take place, but she will accept a raise of only $1 million if the investment goes forward. With this additional factor in mind, the expected rate of return on the investment doubles to 4 percent; it is now more competitive with the other investment opportunities in the company’s portfolio.

I had to read this a few times to be sure I understood it right: apparently the CEO of a major electronics manufacturer is going to take a $2 million pay cut just so that she can get “substantial personal satisfaction” from selling phones in poor countries. I can just imagine her presentation to the board: “we’ve created this wonderful line of phones which is profitable, but not very profitable, so in order to make it reach an adequate IRR, I’ve decided to ask you to pay me $2 million less.”

Bishop’s article doesn’t have anything quite that ridiculous, but it is based on an equally silly premise: that we can learn something useful from comparing IBM to the Carnegie Corporation, just because they were both founded 100 years ago:

Comparing the records of those giants of 20th-century American capitalism—or “philanthrocapitalism”—can shed light on a question that is keenly debated today: whether philanthropy or business is more effective at “Making the World Work Better”, to borrow the title of the book celebrating IBM’s centenary.

Well, no, actually, it can’t. Bishop’s conclusion is that Carnegie wins the first 50 years while IBM wins the second 50 years and the prize. But you’d want Carnegie to be front-loaded, since that’s how philanthropy works best. Bishop admits as much:

100 years is too old for a philanthropic foundation…

Many of today’s philanthropists aim, as Carnegie did, to give away all their money by the time they die, or at least put a time limit on the lifespan of their foundation after their death. The Gates Foundation will have to be wound down 50 years after the second of Bill and Melinda Gates dies.

On top of that, Bishop’s choice of IBM exhibits massive survivorship bias. The Carnegie Corporation was the only mega-philanthropy in the world in 1911: Bishop has chosen 100% of the big philanthropies of the day to see how they fared. But IBM was just one of thousands of companies founded that year, and it’s almost certainly the only one which could even come close to giving Carnegie a run for its money in this particularly weird competition. Carnegie never aspired, when he created his foundation, to outperform every single corporation ever to be founded. Instead, he simply aspired to make the world a much better place, which is exactly what he did.

The good news here is that these attempts by Altman and Bishop to elide the distinction between capitalism and philanthropy — to make rapacious executives feel good about being greedy — are such transparent failures that with any luck they’ll mark the turning point at which people do good to do good, rather than simply declaring that the best way they can do good is to chase profit as zealously as possible. You can’t just invest money in the stock market and declare it the best way to do good in the world, any more than you can start an arms or cigarette manufacturer and claim that your pursuit of profits is the best way to improve global welfare. And I must admit it’s a little depressing to find the likes of Altman and Bishop helping the global plutocracy think otherwise.

In the Republican presidential debate last night, there was unanimity on most issues, including the new orthodoxy on the right that bank regulation — like any other regulation, for that matter — is a Bad Thing, and a sign of the government overreaching. It’s important to remember that this is not the way that right-wing parties behave elsewhere in the world. Consider for instance the UK, which seems to be cracking down on banks in a manner which would make even Barney Frank blush:

Britain’s biggest banks will be forced to put a firewall around their retail operations, the chancellor will announce on Wednesday at the Mansion House…

This was the central proposal made by the Independent Commission on Banking (ICB) in its April interim report…

By putting retail banking into a separate legal subsidiary, ring-fenced from the trading and investment banking activities of a big bank, the vital parts of our giant banks will be less exposed to danger in a crisis.

The idea is that the retail banking bits of Barclays, HSBC and Royal Bank of Scotland will have more capital to absorb possible losses…

The ICB’s interim report suggested a minimum capital ratio for retail banks of 10%, which Mr Osborne is understood to support, although he won’t quote any precise number for the new minimum capital ratio.

A source close to the chancellor said there was “nothing sinister” in Mr Osborne’s reluctance to quote a particular number for how much capital above the international floor should be held by British retail banks. “Ten per cent is certainly the right ballpark”, he said.

This is bold and welcome thinking. From a regulatory perspective, banks have good profits and bad profits. Bad profits are the ones coming from risky structured products and leveraged trading desks; good profits are the ones which come from the lending investment capital to individuals, small businesses, and large companies. State-insured deposits should be use to fund good businesses, not risky and speculative businesses — as should any access to central bank liquidity windows.

So if you’re not going to break the big banks up, then the next best thing is to force their riskier arms to operate outside the protective walls of their too-big-to-fail retail operations. And the retail operations should be as bankruptcy-remote as possible, with extremely stringent capital requirements on the order of 10% of total assets.

Now the 10% figure, although it sounds tough, might not be quite as harsh as it seems at first glance: I’m sure that it’s based on risk-weighted assets, for one thing, and so the details of the risk weighting will be very important. And I suspect that banks might be able to put all manner of capital into that 10% bucket, beyond tangible core equity: the UK is likely to allow them to use their beloved CoCos, for starters.

All the same, Britain’s politicians are thinking constructively about how to rein in the more dangerous tendencies of its biggest banks. The same can’t be said, sadly, of their U.S. counterparts. There are bank regulators at the Federal Reserve and elsewhere who are trying to put in place higher capital requirements for systemically important financial institutions — but those will be negotiated on the international stage, in Basel, and will phase in very slowly. The UK policy, by contrast, could simply be implemented unilaterally, and would make that country significantly less prone to systemically-dangerous bank crises. Just don’t think for a minute that it’s likely to be replicated here.

Michael McDonough has this wonderful chart:

Clearly the “new normal” meme is on the decline, and equally clearly “kicking the can” is developing a life of its own, having won the battle of minds against the cutesy rhyming phrases (“extend and pretend,” “delay and pray,” “fake it till you make it”).

I prefer “kicking the can” to “new normal,” on the grounds that it actually contains the tiniest morsel of actual meaning. But still, the cliché has definitely reached the annoying stage at this point. Any suggestions for what is going to supplant it, once it begins its inevitable decline?

Update: Jim Ledbetter informs me that Kick the Can is a popular US children’s game, which has nothing to do with its economic meaning. If it’s not the game which is the source of the phrase, where and when and how did people start talking about “kicking the can down the road”? Is that something people do? And what’s in the can?

Dan Primack has some huge news today: new legislation being put forward is likely to radically change the calculus which currently forces companies to go public after they have more than 500 shareholders. If the bill being proposed by David Schweikert and Jim Himes becomes law, most VC-backed companies would never run into a shareholder limit: not only would the number be raised from 500 to 1,000, but employees and venture capitalists and other accredited investors wouldn’t count towards that total.

Schweikert tells Primack that the bill could get enacted by year-end, and that it’s likely to “move substantially on its own” rather than being subject to horse-trading. Certainly it doesn’t seem to be particularly right-wing or left-wing, and Schweikert says he’s got support even from the exchanges. There’s no natural constituency to oppose the bill, or lobby against it, which certainly helps its chances.

The bill would certainly be very popular in Silicon Valley, which is an important source of campaign donations in a presidential election year. And conceptually it makes sense. There’s no reason to force companies to go public just because of anachronistic rules, not when going public is such a drastic and irreversible move.

On the other hand, I do worry that if this bill goes through, the number of companies going public will fall even more, and the investing public will have access to even less of the investable universe than it does at present. Is it a good idea that only VCs and plutocrats have access to asset classes like fast-growing VC-backed companies? Probably not. But I’m also not sure that’s in and of itself reason to oppose this bill. The key constituency here is the SEC: if they’re OK with this, it’ll go through. And maybe Facebook won’t go public after all.

Hitchens feels a tap on the shoulder — Ebert

The American propensity to fawn over mediocre British pundits — Tumblr

IMF boots Fischer from race for top job — Reuters

SoCal home prices take steepest dive since 2009 — HW

Rights to Ben Stein’s Dreadful Documentary for Sale — WSJ

University of Alberta dean of medicine Philip Baker, egregious plagiarist — CBC

It’s been more than six months since sales chief Chris Batty left Gawker Media as Nick Denton decided he was going to tear up the old way of doing thing and try something new. Since then, Denton has relaunched his sites to general dismay, and entered into a bet with Rex Sorgatz, which he will lose if Gawker Media fails to generate 510 million pageviews in September. My take, at the time, was noncommittal but ultimately on Denton’s side; since then, I became more bearish, and then more bullish again. Now I think that Rex ought to be very worried:

This is a chart of Gawker Media’s rolling monthly pageviews, and it shows a spectacular jump of well over 100 million impressions since the lows in March. Gawker Media’s traffic is now higher than at any point except the iPhone 4 coup; it will almost certainly start hitting new all-time highs very soon. It’s thisclose to reaching that goal already, in the US.

Altogether, an impressive recovery from a very difficult transition — more impressive, I think, than most observers dreamed possible. As I said in February, it’s always dangerous to bet against Denton.

Financially, Denton claims that the past six months — which, remember, have seen Gawker Media without a permanent sales chief — have been extremely successful, with ad sales up 35% over the same period last year. And maybe as a result of these strong sales and impressive traffic gains, Denton has managed to lure Andrew Gorenstein from Condé Nast to replace Batty.

Denton’s still tweaking the redesign, too: he says that “the next iteration of the design should cement the recovery.” Certainly the old-fashioned blog view format is looking pretty good these days, although it remains to be seen how much of it Denton will borrow for the main website.

It’s even conceivable that Gawker Media might overtake HuffPo at some point, depending on the degree to which AOL decides to train its traffic firehose on its flagship content site. Quantcast puts HuffPo’s global pageviews at 531 million a month, just about 10% ahead of Gawker Media; they’re certainly not growing as fast and in fact have declined noticeably over the past month: they were up at 589 million at the end of May. (Incidentally, Denton’s not the only person hiring from Condé: Arianna can do the same.)

So color me bullish on Gawker Media for the time being: something has clearly clicked and is going right. Anecdotally, I’ve recently found myself visiting Gawker much more than a year or even six months ago; I no longer think that they’re giving up on the joyfully literate. Denton, it seems, might just have done it again.

Caroline Graham’s interview with Bill Gates has lots of interesting nuggets, but this bit in particular, about the amount of money his children will inherit, got me thinking:

He won’t specify what they will get, but the reports that they’ll receive ‘only’ $10 million each can’t be far off, because he concedes, ‘It will be a minuscule portion of my wealth. It will mean they have to find their own way.

‘They will be given an unbelievable education and that will all be paid for. And certainly anything related to health issues we will take care of. But in terms of their income, they will have to pick a job they like and go to work. They are normal kids now. They do chores, they get pocket money.’

He is determined that his family life should be as unaffected as possible by his fortune.

It probably goes without saying that if you want your family to be unaffected by your fortune, you probably shouldn’t bring up your family in a $100 million house and invite your friend Bono to stay the night when he’s playing a local gig. And that if you have $10 million in the bank as you’re just entering the workforce, your investment income is almost certainly going to vastly exceed anything you can earn from picking up a job and going to work. So if Gates wants to force his children to “find their own way,” he’ll either have to give them much less than $10 million, or else encrust that money with so many restrictions on how it can be spent that the absolute amount doesn’t really matter anyway.

Still, the bit which stuck with me was where Gates said that “anything related to health issues we will take care of.” I have no idea where to even begin answering this question — so maybe one of my readers can help. Here goes:

How much would it cost for Bill Gates to buy a lifetime’s worth of gold-plated health insurance for one of his daughters, covering any conceivable medical expense, in full, not only for her life but also for any future spouse and all future children she may have? Assume this is a single-premium deal, where he simply writes a check today and his daughter and her hypothetical future family are covered for the rest of their lives.

While there’s a certain amount of moral hazard here — his daughter could turn out to be some kind of sanatorium addict — let’s assume for the sake of argument that the kid is perfectly healthy and well-adjusted today. If you were a big health insurer, how much would you need to charge before taking on that kind of liability?

It seems to me that this is a product which would be of interest not only to Bill Gates but also to many other high net worth individuals looking to ensure that their kids are medically looked after for as long as they live. Is the problem that it would be too expensive for even a billionaire to buy? Or is it just that no insurance company would ever dare write it?

Willem Buiter weighs in on the ECB Target2 debate, contra Martin Wolf — Citi

NY AG Schneiderman targets Bank of America in a new probe — HuffPo

The Economy and D.C.: Republicans’ Tax-cutting Fantasia — NYT

1Gbps fiber for $70—in America — Ars Technica

Bitcoin digital currency market has its first bank run — Daily Tech

The Onion scooped the Washington Post by one day — Onion, WaPo

3-Way Street: bikes, pedestrians, cars, taxis, trucks, all behaving very badly at 28th & Park — Vimeo

Will Self questions the rituals of our digital life — Tumblr

Clinton says she’s not pursuing World Bank job — Reuters

Richard Dreyfuss reads the iTunes EULA — CNet

Man finds $17,000 in cash on sidewalk, gives it back — Reuters

Cop pulls over a female cyclist for wearing a skirt while biking — Streetsblog

NYP reckons that Weiner can’t afford to quit his job ‘cos his wife only makes $154k — NYP

Werner Herzog has recorded an audio version of Go The F**k To Sleep especially for this NYPL event — NYPL

Stan Fischer’s quixotic decision to throw his hat into the ring as a candidate for managing director of the IMF has been lauded by Mohamed El-Erian, who reckons that “he would likely prevail in an open, transparent and merit-based selection process.” Insofar as this is true, it’s a bit depressing.

I’m no great partisan for Christine Lagarde, whose main qualification for the job is that she’s French. But she’s smart, she’s tough, she’s an able politician — as the latest endorsements of her candidacy attest — and she has the ear of the European heads of state who are going to be forced to make some very tough decisions during her inevitable tenure at the Fund.

The job of IMF managing director is a particularly tough one. Everybody else at the Fund can kid themselves that they’re working for the managing director — the boss. But the managing director himself works for a fractious and highly opinionated board of directors which can be counted on to micromanage and second-guess every important decision. As such, the main skill needed in a managing director is to be able to manage those delicate relationships with great finesse, while at the same time projecting enough power and authority that any interference is kept to a minimum in the first place. It also helps to be respected by key heads of state, who ultimately direct the board.

This is where Fischer’s interview with the WSJ is revealing, and not in a particularly flattering way. Remember, here, that Fischer was number two at the IMF during the Asian financial crisis:

“There are serious economic issues” that need to be addressed, Mr. Fischer said, and IMF staffers often offer conflicting advice. “Without having that [economic] training, it’s very hard to know who’s right and who’s wrong,” he said…

Since the global financial crisis of 2008, the IMF has eased up on some of the requirements it once imposed on countries that accept emergency loans. Mr. Fischer said he approved of those changes and had tried to do something similar when he was at the IMF a decade ago but couldn’t win sufficient support from the IMF’s board.

This is the view of someone who sees the biggest issues facing the IMF managing director to be technocratic, rather than political. I have no doubt that Fischer is better at adjudicating economic questions than Lagarde — this is the man, remember, who co-authored a hugely respected economics textbook (now in its 11th edition) with none other than Rudi Dornbusch. But Fischer by his own admission is bad at winning support from the board. Either that, or in fact he was perfectly happy with the IMF’s economic orthodoxies in 1998-9. Which is quite likely, given that he quite literally wrote the book when it comes to economic orthodoxy. I remember those days reasonably well, and I certainly didn’t get any impression from Fischer at the time that he had any issues at all with the policies he was espousing.

One other thing is worth remembering about Fischer’s role as first deputy managing director: the job is always held by an American, and he got the job by dint of his US citizenship. It’s therefore a little rich for him to turn around and start complaining that he’s up against the very same set of conventions which allowed him that job in the first place.

It’s also worth remembering, while we’re on the subject of failed economic orthodoxies of the recent past, that Fischer spent three years, from 2002 to 2005, at Citigroup, working very closely with Bob Rubin. Indeed, he’s the only person I can think of who actually formally reported to Rubin, whose reputation has been comprehensively demolished by the financial crisis. As the co-author of an incredibly lucrative economics textbook, Fischer didn’t need the money; it’s fair to say that he saw no particular problem with taking the contacts he built up over a long public-sector career and turning them into profits for Citi shareholders, just so long as he got paid millions of dollars for doing so.

My feeling about Fischer is that he would be a managing director not dissimilar to the French technocrats who ran the shop during the 80s and 90s, Jacques de Larosière and Michel Camdessus. He’s not an agent of change; he’s a throwback to the past. And although he claims to be “full of vigor” at the age of 67, he’s probably a one-term MD at best, in an institution which has had altogether too much turnover in that role since Camdessus stepped down in 2000.

Of course it is high time that a non-European became managing director of the IMF. But Fischer is not the kind of break with tradition that the Fund needs — by non-European nobody means American, and Fischer would have a very hard time trying to present himself as an African, even if he was born in what is now Zambia.

So when Lagarde inevitably gets the job, let’s not shed too many tears that Fischer didn’t get it instead. In some kind of technocratic utopia, he’d be perfect. But in the messy real world, with his age and his US citizenship and his Citigroup years and his actions during the Asian financial crisis all counting against him, his candidacy is a non-starter. I’d be surprised if anyone at all, bar Israel, ended up voting for him.

Mark and Joseph over at Observational Epidemiology have come to the end (I think) of a fantastic series of posts about Groupon which get to the heart of the question I was trying to ask here: does Groupon actually work, in practice, in the way it’s meant to work, in theory?

A lot of the recent analysis of Groupon has concentrated on the financials, which have a habit of proving whatever you want them to prove. Yes, Groupon is losing ever-increasing amounts of money — but it’s doing so because it can, and because it’s convinced that all the money it’s spending on customer acquisition today is going to be repaid in spades tomorrow. If Groupon stopped spending money today on customer acquisition and marketing, it would be extremely profitable already, at its present size. It just wants to get even bigger and more profitable still, as fast as possible: a perfectly respectable capitalist goal.

Which brings us to the question of whether size matters, when it comes to Groupon. Insofar as Groupon has a moat — something which protects it from competition — it’s scale. But is scale particularly useful for Groupon? Where are the economies, there?

The simple and obvious answer is that the more customers Groupon has, the better it can get at targeting deals. Groupon is all about local — but if you live in a big city, some restaurant over on the other side of town ain’t local. If, thanks to its scale, Groupon can show you places much closer to home, or otherwise targeted to what you’re interested in buying, it will have a huge advantage over most of its competitors.

And then there’s the “Group” part of “Groupon” — the social aspect of the site, with people turning deals into opportunities to get together with their friends in the real world. Again, as with any network, size is crucial.

Mark started off the thread by pushing back against my assertion — sourced to Groupon itself — that diners spending their Groupon at a restaurant averaged a check 80% greater than the face value of the Groupon. Looking at the offers in his area, he reckoned that diners both could and would spend almost exactly the amount of the Groupon.

Joseph then followed up with more anecdote, buttressed by provocative thinking:

A good mate who owns a restaurant and did one of these deals after said it was outright amazing – many people would come in and spend EXACTLY the amount of the coupon. They didn’t want to go 50c under and heaven forbid they went 50c over and have to pay more at full price

Even worse, you seem to have to more effects. One is a priming effect. New customers assume your $30 entree is worth $15. That is poison.

I’m generally unpersuaded by argument from anecdote, and I don’t think the priming effect is all that strong. But the post was a great one if only because it set off a whole stream of posts from Mark, starting with the smart thesis that people buying Groupon shares are basically buying a lottery ticket. It’s true that if Groupon cracks the targeting nut, then it will be worth many billions of dollars. But there’s no evidence that it knows how to do that, or that it has yet done so, or that it’s going to be able to do so in future.

While it’s true that almost all marketing is targeted to some extent and a few companies have been able to take that targeting to a relatively high level, identifying customers who have a high likelihood (rather than a slightly higher likelihood) of buying something remains an extraordinarily challenging business problem…

Groupon has to worry about non-responders (who are still associated with some costs), and about bargain hunters who use the offer then never come back (who cost Groupon’s partners a substantial amount), and about regulars who use an offer for a visit they would have made anyway (who represent a double loss).

Separating all this chaff from the customers you want would be daunting even with the best of data and you will not have good data. How do I know? Because I’ve been there. I’ve dealt with third party data and I’ve written the hundreds of lines of SAS code needed to produce clean, usable data-sets. And I was only dealing with data from four or five sources, not trying to tease out a badly defined target variable from data collected from thousands of merchants.  (remember, we’re trying to identify customers who made their first visit using a Groupon offer and have since returned on their own dime.)

In a follow-up post, Mark tried to work out how Groupon was targeting its offers, based on the offers he was receiving. Except it was pretty clear, from an offer he got for a 24-Karat-Gold Specialty Facial and Chocolate Foot Scrub (only $125!) that there was really no targeting going on at all. Which impression was buttressed by the fact that Groupon was advertising as “New” its attempts to get its readers to hand over basic information about themselves, such as their sex and zip code.

And Mark’s smart when it comes to noticing the strategy behind Groupon’s messaging, too: the company is signing up subscribers by promising to save them money, rather than help them discover new merchants. Maybe that’s the best way to get new subscribers in the door — but it does hint at a quantity-over-quality mindset which isn’t entirely alien to Groupon’s founders:

The people behind Groupon have proven extraordinarily adept at running up big numbers and generating hype, but they have shown remarkably little interest in setting up a sustainable, profitable company. Their targeting strategies would have been considered somewhat primitive a decade ago. Their attitude toward customer data is nonchalant. They’ve used a carpet bombing approach to advertising (including the inevitable Super Bowl ad) which generates large email lists but seldom produces high quality ones.

All of this makes me wonder if these people are more focused on the stock price in 2012 than in the solvency of the company in 2020.

If there’s a weakness here it’s that Mark is being way too scientific about the fuzzy art of marketing when it comes to small local merchants. Groupon can carve out an impressive business just by being better than a billboard, if enough merchants come back for more. And so far, Groupon’s merchants have shown themselves to be quite willing to be repeat customers. But will that last? I suspect Mark might be right about this:

Merchants keep coming to Groupon despite its mediocre list and the fat slice it takes out of every deal (from Wikipedia):

As of 2010, it is difficult for local merchants to get Groupon interested in agreeing to a particular deal. According to the Wall Street Journal, seven of every eight possible deals suggested by merchants were dismissed by Groupon.

Just to be clear, merchants spend time and effort putting together offers that will probably be rejected and, if they’re not, will probably bring in a lot of customers they don’t want. They do this because Groupon has successfully branded itself as the next big thing.

This is not something the company stumbled into. Groupon has aggressively pursued fast growth, generated ubiquitous buzz and has done its damnedest to portray itself as part of the social media movement. The ‘social’ aspect of Groupon’s business has always been trivial to the point of cosmetic but it plays a large, even dominant role in the public image of the company.

I do worry that Groupon is as famous for being valuable and fast-growing as it is for providing the first-ever scalable solution to the problem of how small local businesses can leverage the marketing power of the internet. It feels like a momentum play, in contrast to say Google, which is a stock I’d happily own on a multi-decade time horizon.

Mark concludes:

In one sense, Groupon’s strategy has worked very well. After all, the people who started the company will almost certainly walk away with a great deal of money. Eventually, though, the company will have to make the transition to former next big thing and since being the current next big thing is an essential part of the company’s model, that transition is not going to be pretty.

I can definitely see Groupon recapitulating the arc of AOL. It will build a solidly profitable core business, which will go into decline, and then will have to work out whether and how to pivot to something else.

At the same time, I can also see Groupon — and especially its nascent Groupon Now business, if it ever takes off — becoming part of life as it’s lived on a daily business, a bit like local cable TV. As Mark says, it’s a lottery ticket. And if you buy it on the first day of trading, after it’s already had its first-day pop, then you’d better be feeling lucky.

How much would you pay for an empty lot in a highly desirable location? If you fancy moving to southern California, Pimco’s Bill Gross might have the perfect place for you: an 18,150-square-foot bayfront lot in Harbor Island which he’s selling for $26.5 million. According to Redfin, the buildable square footage on the site is 9,734, which puts the price at $2,722 per buildable square foot or $1,460 per raw square foot.

It’s instructive to compare, here, the most famous sale of an empty lot in Manhattan: the area bounded by Central Park West, Broadway, 61st Street, and 62nd Street. The lot eventually became 15 Central Park West, where the apartments ended up selling for a total of $2 billion.

The price on that lot was $401 million: a record $690 per buildable square foot, or roughly a quarter of what Gross is asking. On a raw-square-foot basis, a bit of fiddling with Google Maps and the Photoshop Measure tool puts the lot size at about 63,000 square feet, which means that the lot was sold for about $6,365 per raw square foot — and remember that 15 Central Park West has 201 units and rises as much as 35 stories.

The difference is partially a function of construction costs: 15 Central Park West cost a good $1 billion to build, while a California mansion can be put up for a small fraction of the value of the lot. But still, in the context of property values continuing to slump across the country, it’s striking that the top end of the market seems to be immune to such pressures. While everybody else is hurting, the plutocrats — whether in Manhattan or Newport Beach — just go on accumulating their millions, blithely unaffected by any downturn.

(Via Carney)