Felix Salmon

Letters to First Great Western — Letters to FGW

Glenn Mulcaire Legal Fees Halted by News Corp — NYT

“iPad was a $6 billion business last quarter. That is twice as big as Dell’s entire consumer PC business.” — NYT

Predictably fantastic analysis of the Murdochs’ testimony by Nick Davies — Guardian

Piers Morgan vs Louise Mensch on CNN — YouTube

After taking phone calls about Rupert Murdoch on Brian Lehrer’s show this morning and then immediately doing an hour-long diavlog with Alex Massie on the subject, I’m beginning to get a little Murdoch-ed out. But there are three newish points that are worth raising.

Firstly, what was the mechanism by which it was agreed that Rupert and James Murdoch would appear in parliament together? Having James by his side was a godsend for Rupert, and James clearly took his role as a shield for his father very seriously. I’m sure the more aggressive MPs would have preferred to be able to grill Rupert on his own, as they did Rebekah Brooks. How did that not happen?

Secondly, according to Michael Tomasky, there is a strong case that News Corp really could be prosecuted under the Foreign Corrupt Practices Act in the US, were the Justice Department so inclined.

And thirdly, just check out the number of Murdoch defenses on the WSJ op-ed page over the past couple of days:

• The original, notorious, anonymous op-ed;
• A paean to Murdoch by Robert Pollock, the WSJ’s editorial features editor;
• Bret Stephens arguing that the News of the World was less bad than the Guardian and the New York Times;
• An argument by two former Justice employees that News Corp should not be prosecuted under the FCPA;
• Holman Jenkins saying that phone-tapping was “tolerated, routine and abetted by official agencies”;
• James Taranto attacking Joe Nocera’s complaints about the WSJ; and
• James Taranto, again, the following day, attacking other Murdoch’s attackers, and clamoring for press freedom.

I’m sure that there will be many more to come. But I’m sure this is far from what the Bancrofts expected when Murdoch promised them that the WSJ would enjoy total editorial independence.

Update: Here’s Bloomberg’s Max Abelson on those WSJ defenses of News Corp; he not only did it better than me, he also did it faster.

It’s never possible to know for sure, at any given time, whether it’s a better idea to rent or to buy. If rents and prices both go up in the future, then buying’s likely to have been a good idea. And if they both go down, then renting is sure to have been the better idea.

But never mind the future — what about the past? In a wonderful paper, Eli Beracha and Ken Johnson went back and actually did the math on whether it would have been better to rent or buy over the past 30 years. And the answer is clear: it would have been better to rent.

This very strong result is expressed in this particularly ugly chart:

This needs a little bit of explanation. Basically, you consider two people, one of whom rents and the other of whom buys. If it costs more to buy than to rent, the renter takes the difference and invests it in the market — a mixture of stocks and bonds which has the same amount of risk as home equity. After eight years, the buyer sells. Then you see who’s worth more money.

The lines on the chart above are what you get when you take the amount of money that the renter has and subtract the amount of money that the buyer has. When the number is positive, the renter wins, when the number falls below zero, you would have been better off buying.

The chart looks at rolling eight-year periods, starting with people who bought in 1978 and ending with people who bought in 2001; while there are significant regional variations in the northeast, which had a nasty property slump in the 1990s, the big picture is that there are a hell of a lot more datapoints above zero than below it. And The only negative datapoints are the ones which involved selling during the bubble. Here’s how the paper describes the chart in English:

When the U.S. as a whole is considered, renting was preferred to buying 75% of the time. On average, the annual required appreciation return was 2.04% higher than the actual appreciation. In retrospect, the period spanning the mid 1990s to the early 2000s was the only time frame in which buying was preferred to renting. This narrow time period is associated with homeowners that purchased a home just before the recent boom and sold it shortly before its sequential bust. However, because most homeowners never transfer back to be renters, it seems unlikely that most homeowners, who benefitted from home appreciation during the boom period, avoided the subsequent housing collapse.

The authors go to great pains to make this as accurate a comparison as possible. Specifically, they do a lot of things which weight the scales toward owning rather than renting:

• They assume a standard 30-year mortgage with 20% down and no nasty tricks.
• They give the owner the option to refinance every year.
• They give the owner the benefit of the mortgage-interest tax deduction.
• They don’t allow homeowners to lose money on an underwater mortgage: the authors assume that you’re buying in a non-recourse state, and that the rational homeowner will strategically default rather than lose money on a sale if that’s the most lucrative option.

Even so, renting still comes out ahead. The people at e21 explain why:

Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property…

The principal component of each mortgage payment – i.e. the portion of the mortgage payment that goes towards reducing the principal mortgage balance instead of interest – is an added expense renters don’t have. During the housing boom, the wealth created from housing was not principal amortization, but rather large price gains on a highly leveraged asset. A 20% increase in the price of a house purchased with 5% down results in a doubling of the homeowner’s equity. These wealth gains proved illusory and were a function of the leverage involved (20-to-1 in the case of a 5% down payment) rather than anything related to housing.

There is an important proviso to add to all this. Back to the paper:

Individuals, on average, were better off in economic terms to have rented for most of the years in the study period. This first result is strongly dependent upon fiscally disciplined individuals that, without fail, reinvest any residual savings from renting…

While this first finding might seem to fly in the face of the homeownership paradigm (specifically wealth creation), it is reasonable to find that most individuals still preferred homeownership during the sample period because ownership is in essence a self-imposed savings vehicle… while renting may have been wise, any extra savings from renting might be spent on non-wealth enhancing goods resulting in any benefits from renting versus owning disappearing in a cloud of consumption spending rather than savings.

To put it another way, a mortgage is a commitment device. You’re forced to spend all that money on your mortgage each month; if on the other hand you rent, you’re very likely to simply spend the excess, rather than save it. The e21 people reckon that only “myopic households” would not otherwise save the difference, but that’s just not realistic. People stretch to make their mortgage payments, and without the mortgage there there’s no need to stretch so hard, and you can enjoy your life more instead — go out, go on holidays, buy nicer clothes or extra iPads.

But the exercise in the paper is well worth running all the same. People get real value out of consumption, and so when you buy rather than rent you’re essentially denying yourself all that extra fun and pleasure. And if you both rent and deny yourself the extra fun and pleasure, then you’ll end up with more money than the buyer.

One other proviso: if you’re a super-long-term buyer who has no intention of ever selling your home, then this analysis starts to break down. The paper assumes you sell after 8 years; if you don’t sell, then you save a bunch of transaction costs for starters. And if you hold on to your house for more than 30 years, you get to live in it rent-free, which is wonderful. (Although if you do that then you lose out on the full refinancing opportunities built in to the model — they assume that you always refinance with a new 30-year mortgage.)

Finally, the authors note that we’re in a historically unusual point right now, with very low mortgage rates and historically reasonably low price-to-rent ratios. Which means that now might be one of those rare times when it actually makes sense to buy rather than rent. But these things are very contingent on local prices and rents. As a general rule, the more of a premium you pay to buy rather than rent, the better off you’re likely to be just renting.

Indeed, that seems to be what we’re seeing in the latest housing statistics: the rise in housing starts was concentrated in multiple-family homes, which are generally rental units, and a huge proportion of existing home sales were cash purchases, which also indicates that they might end up on the rental market. It’s hard for a professional landlord to take a single-family suburban home and turn it into a rental, but I am seeing hints that the US is moving back to renting rather than owning. Which is a great thing over the long term, especially for labor mobility. But it’s certainly bad for single-family house prices in the short term.

(via Salam)

After my post on financial advisors last week, Josh Brown, a/k/a the Reformed Broker, got in touch saying that at some point he and I should discuss action bias — the way in which advisors feel the need to do something just to make their clients think they’re earning their keep. I was happy to oblige.

Josh is convinced that the new Pimco Total Return ETF is going to be the big game changer in the battle between mutual funds and ETFs: I think he’s right about that, since there’s no conceivable reason why you’d want to pay a 1% fee on a Total Return mutual fund when you can pay 0.55% on a Total Return ETF instead.

In the short term, this means a loss of income for Pimco, as investors rotate out of their mutual funds and into cheaper ETF flavors of substantially the same investment pool. But as Ari Weinberg will tell you, the main job for Pimco is to gather up as many assets under management as it can; the income flows from there. And the ETFs mean many fewer headaches for Pimco, too:

Mutual funds no longer have to divide the rents from buying/selling mutual fund shares on their behalf. In fact, with in-kind creation, they don’t even have to pay commissions internally to collect assets. Assets just walk in the door through creation.

Funds operating this way can now keep even more of the expense ratio and, theoretically, spend more of it on doing what they are supposed to be doing: providing returns for investors.

One of the ugliest parts of the mutual-fund world is the way in which many fund managers essentially bribe brokers to push their funds by loading them up with enormous fees and then kicking back commissions to the broker in question. ETFs don’t have that problem. But they do pose another risk: they’re so easy to buy and sell that many brokers and advisors are tempted to trade in and out of them far too much. That’s the action bias.

Frankly, you don’t want a broker or advisor keeping an eye on a fluctuating market and actively investing on your behalf. You want someone who will tell you that you’re overreacting, and that the best thing to do is nothing. That’s a truly valuable service.

I’ve always had a bit of a cognitive disconnect with respect to Larry Summers. Many of the people I respect the most, and pretty much everybody I know who has spent much time with him, are clear: he’s absolutely brilliant. Most of them would give him some kind of Japanese-style Living National Treasure status.

On the other hand, if you judge Summers by his actions, either in word or in deed, he’s much less impressive. Reading his journalism tends to feel like wading through sludge while being nagged by a persistent feeling that he’s not writing for you anyway. Seeing him interviewed isn’t much more fun, at least when he’s holding political office. And everywhere he goes he’s accompanied by controversy, be it memos at the World Bank or financial deregulation at Treasury. As for Harvard, his career there has been academically successful but otherwise disastrous, whether you’re talking about interest-rate swaps or speeches about women’s aptitude or scandal over Andrei Shleifer’s role in Russia in the late 90s.

But Summers is out of the White House now, and clearly doesn’t have much in the way of immediate ambitions: he’s not going to re-enter politics for the foreseeable future, and he’s certainly not going to become president of Harvard again. He’s free to take lucrative gigs at companies like Square and Andreessen Horowitz, and live the very comfortable life of a Harvard University Professor. And so he’s loosening up a bit, and in his interview with Walter Isaacson at Fortune Brainstorm yesterday you can see why people come away from talking to him so very impressed. (And you can also see why the likes of Square and Andreessen Horowitz love to have access to him.)

This is Larry at his most relaxed and brilliant: when he isn’t overthinking what he wants to say and how he wants to say it, he has a natural fluency with ideas and can actually get them across very clearly indeed.

He starts off disarmingly, talking about the Winkelvii: “if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities,” he said. “One is that they’re looking for a job and have an interview; the other is that they are an asshole. This was the latter case.”

Then he launches into one of the best summaries of our present macroeconomic situation that I’ve seen. It’s worth quoting at length:

I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970′s, and have inflation and have excessive borrowing.

But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.

Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be.

That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.

So I think the President has been right to be focused, and I think he could even focus more intensely on what is, I think, the central problem, which is how to get enough demand and enough confidence going, so that this economy achieves escape velocity from the recession.

We’ve been flying out of the recession, but we’ve been flying out of it dangerously close to stall speed, and doing something about that should be our top priority. I mean it is crazy.

MR. ISAACSON: Does that mean more stimulus?

DR. SUMMERS: Well, you can call it that. That’s one part of it. It is crazy if you think about it, that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls.

We can borrow money to invest in fixing that, at 2.8 percent. Twenty percent of the people in the country who are doing construction are unemployed, and we’re not trying to do something about that, when we have a major demand problem? It just doesn’t make any sense.

We have infrastructure in this country — I mean you can argue whether we need a new high speed rail system or whether we don’t need a new high speed rail system. But I don’t know what the argument is for letting bridges collapse. I don’t know what the argument is.

I mean every time, and unfortunately it’s fairly often, I fly in and out of Kennedy Airport to any other airport in the world that you might fly to from Kennedy — you can fly to Europe, you can fly to Asia, any of those places, and you compare Kennedy Airport with the airport where you land, and you ask yourself which is the airport of the greatest country, richest, most powerful country in the world?

I mean, and you know, you can say airports aren’t that important or whatever. But it is symbolic of an approach to infrastructure that probably never made any sense, and certainly doesn’t make any sense when you can borrow money at 2.8 percent and you’ve got 20 percent of the construction workers unemployed.

So I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit. Those are deficits that we need to focus on also.

Yes, in the long run right now, thanks mostly to what happened during the Bush administration, the United States of America taxes 14 percent of GDP. Fourteen percent. That’s about four and a half percent below the average of what we’ve done over the post World War II period, and we now have the oldest population that we’re ever going to have, a larger debt than we had before.

We have, apart from the aging of the population, a public sector that’s heavily involved in health care, and in every country in the world, health care has grown relative to GDP. The idea that somehow 14 percent is adequate, or that the priorities starting at 14 percent should be to cut taxes, is crazy.

Summers covers a lot of bases here, in plain English. “I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit.” That’s powerful, and undeniably true, and it’s a cause for great regret that no one in the Obama administration seems to be capable of saying such things in public.

Later on, Summers has great insights about the move from a manufacturing economy to a services-based economy and how the importance of advances in healthcare to national wellbeing, even if such things don’t show up in GDP statistics. He also has this very interesting observation:

If you look at the price earnings ratio for technology companies relative to the price earnings ratios for all industrial companies, you take that ratio, PE technology divided by PE industrial, you can plot that ratio over the last 40 years, and it is at the lowest point that it’s ever been.

Does someone have this chart to hand? I’d love to see it. Obviously, Summers is talking his book here, now that he’s a venture capitalist. But at the same time, his arguments are strong:

The Internet, the last time there was an Internet bubble, was 120 million people dialing up.

The Internet today is two billion people and two billion mobile devices, with wireless connectivity at a far more rapid pace. Today, the businesses have cash flow, which they didn’t ten years ago. So I think it’s a little facile to assume that just because the numbers are big, that it’s obviously a bubble.

This, then, is the Summers who is liked and admired by the people who like and admire him; I’m glad he’s finally giving the rest of us a glimpse of that Larry. And I’m beginning to think that instead of asking him to write a monthly column for us, we at Reuters should just phone him up unexpectedly, ask him a couple of good questions, and simply transcribe the answers. The result would probably be significantly more fluent and more interesting than anything he laboriously constructs on his own.

Utterly depressing column by Nathan Myhrvold, patent troll — Bloomberg

How to differentiate an economist from almost anyone else in society — Gelman

Paying taxes your employer keeps, by David Cay Johnston — Reuters

Wendi Deng’s Five Best Enraged Expressions — Awl

SNL’s “Ronald Reagan mastermind” sketch — YouTube

US Treasury Awards $142.3 Million to Benefit Organizations Serving Economically Distressed Communities Nationwide — CDFI

“Hackgate” – the movie trailer — YouTube

Apologies to everybody here who would normally warrant a whole blog post of their own, but I’m way behind when it comes to catching up on the Felix Salmon smackdowns and so I’m going to clear them all out in one fell swoop, starting with:

Yves Smith, who hates my post on triple-A debt so much that she accuses me of “spending too much time with lobbyists from ISDA and SIFMA”. Her main beef is with my contention that an excess of overcaution was responsible for the enormous demand for triple-A debt. That can’t be true, she says:

If there was “overcaution” you would have seen a wide spread between AAA bonds and lesser-rated bonds.

The first thing to remember here is that there were so many triple-A bonds at the height of the bubble that all the other bonds in the world combined were in the minority. The supply of triple-A debt expanded to meet the demand for it; lesser-rated debt had its own supply-and-demand dynamics and spreads became tight as the Great Moderation thesis took hold.

On top of that, the bond bubble generally was indicative of overcaution: if cautious people buy triple-A-rated debt rather than other debt, they also buy bonds rather than stocks. An overcautious world has too many bonds relative to stocks and too many triple-A bonds relative to other bonds. That’s exactly what we saw.

Yves has her own explanations of the rise in triple-A-rated debt. One is the rise in the derivatives market, which meant a similar rise in the demand for triple-A-rated collateral; the other is regulatory arbitrage, in that under Basel II, banks could hold triple-A debt on their books with zero capital requirements.

Both of these explanations are entirely true, but they’re not really dispositive of my thesis; in fact, both are symptoms of the very overcaution I’m talking about. Collateral is designed to protect you in the event that your counterparty makes bad bets and can’t pay; by asking for triple-A-rated collateral, Wall Street essentially outsourced its diligence to the ratings agencies while being able to say that it had extremely high standards. And the Basel II rules, too, gave triple-A-rated debt a zero risk weighting because they wanted to encourage banks to stay cautious when it came to the quality of their assets.

Next up comes Richard Smith, also at Naked Capitalism, with a very long post taking issue with my very short dismissal of the idea of coin seignorage as a tool to get around the debt-ceiling problem. I should probably explain my position in slightly more detail: yes, there is an argument to be made that coin seignorage is legal and that it could be done without Congressional approval if the coins were made of platinum or maybe palladium. But just because something can be done doesn’t mean it should be done. We shouldn’t rule via loophole, and more importantly, we shouldn’t take monetary policy out of the hands of the Fed and put it into the hands of Treasury. Sometimes, in a crisis, loopholes are the only way to get things done. But we’re not in a real crisis right now — insofar as we’re in a crisis at all, we’re in an utterly fake one. So let’s deal with the root of the problem, which is Congress, rather than trying to ignore it with the use of dangerous loopholes.

Then there’s Brad DeLong, who isn’t impressed with my take on Larry Summers:

Let us parse this:

1. Summers says that peripheral countries that cannot access the private market cannot repay their debts if the strong countries of Europe charge them high premium interest rates.
2. Summers says that peripheral countries that cannot access the private market can repay their debts if the strong countries of Europe charge them the interest rates at which the strong countries can borrow.

Both of these statements by Summers seem to me to be true. It is often the case that debt loads that are unsustainable at high interest rates are very sustainable indeed at low interest rates.

But to take a very salient and obvious example, the debt load of Greece is clearly not sustainable, even if it were brought down to German-government interest rates.

Brad also has a clever way in which the ECB can take $10 billion of French and German money and turn it magically into $471 billion of liquidity which could be provided to Italy. But bringing the ECB into this doesn’t help matters: yes, of course the ECB can lend $471 billion to Italy and it could probably do so even without a French and German guarantee. But it won’t, because (a) doing so would be politically impossible and (b) doing so would violate Article 123 of the Lisbon Treaty, which bans monetary financing.

Finally, there’s John Hempton, with his novel thesis that “the last ethical newspaper company is News Corp”, on the grounds that it’s the one company where the proprietor doesn’t ask for journalists’ sources. I’ll leave the rebuttal of this one as an exercise for the reader, I think; I’ll simply note that Rupert Murdoch is perfectly happy dictating his newspaper’s front pages, sometimes with highly embarrassing consequences. Does that sound like a company where the proprietor is assiduously disinterested in his newspapers’ content to you?

Do keep the smackdowns coming. They’re the true essence of blogging.

The biggest surprise for me, at the Murdoch hearings today, was the lack of political theater and crocodile tears of remorse. I was expecting a ceremonial piling-on — a group of politicians all jumping at a very rare opportunity to tell Rupert exactly what they thought of him, with the billionaire mogul just sitting there and taking the insults, reiterating over and over again just how very sorry he was about everything that has happened.

But that’s not how it turned out at all. The politicians didn’t grandstand nearly as much as their US counterparts are wont to do, and instead asked substantive questions. The Murdochs, for their part, spent more time blustering and denying knowledge of key events at key times than they did apologizing.

The defining moment of the hearing, at least until Rupert Murdoch got pied, was when Jim Sheridan asked him a straight question — “Do you accept that ultimately you are responsible for this whole fiasco?” Rupert certainly gave a straight answer: “No.”

The message, repeated ad nauseam from both Rupert and James, was clear: they’re very important people running very large businesses, and they simply didn’t know what was going on far below them in the News Corp org chart.

I doubt anybody really believes it — not given Murdoch’s longstanding reputation for being a hands-on micromanager where his newspapers are concerned. But in its own way, the Murdochs’ decision to push back against MPs was a show of strength — a clear sign that they were going to fight rather than let this scandal bring them down. Their regular professions of ignorance even with regard to very important questions — whether News Corp is still paying Glen Mulcaire’s legal fees, for instance — were carefully pitched to come across as stonewalling rather than incompetence. James Murdoch, in particular, were quite impressive in his ability to answer questions at length, in borderline-incomprehensible language. As Dan Sabbagh says, he “had facts, information, and answers so long you couldn’t remember (or care) what the question was.”

So I’m with John Abell on this one: the hearing felt more like the end of the beginning rather than the beginning of the end.

But the Murdochs are by no means out of the wood. For one thing, Rupert Murdoch promised that if he were legally allowed to, he would stop paying Glen Mulcaire’s legal fees. That’s big: Mulcaire has been hiding behind a very expensive wall of lawyers for over four years now, and if that wall is taken away from him, he might well have no choice but to tell all. And more generally, the current police investigation into News International is quite likely to reveal an endemic culture of illegality at the News of the World, if not at other News International papers. Beyond that, there’s the very real possibility that US authorities might find evidence of illegal activity on this side of the pond; that would set off a whole new news circus, complete with calls that Murdoch sell off all his news properties.

Tonight, the Murdochs have survived the battle — won it, even, if you take Wendi Murdoch into account. She was the real breakout star of the day. They stood their ground and admitted nothing; given how badly the hearings could have gone, that counts as a win. If you take their answers at face value, neither of them is remotely qualified to run a large organization. But no one is taking their answers at face value. And as a result Rupert Murdoch is likely to continue to run News Corp for at least until the results of the UK police investigation are made public.

When it comes to the fiscal debate in Congress, the worst-case scenario is clear: no agreement at all, and a default. The best-case scenario is also clear: a bipartisan agreement on a credible long-term fiscal plan which allows a large measure of certainty and predictability going forwards. Something along those lines looks more likely today, and markets are rising as a result.

In the middle is the McConnell muddle-through approach — something which avoids immediate disaster but doesn’t address any long-term issues at all. That’s fine — Congress has never been particularly good at addressing long-term issues. But the world is changing, and both Moody’s and S&P have said that the US could lose its triple-A credit rating if it doesn’t make a credible attempt to get a grip on the national debt.

Will Congress make a serious effort at achieving the best-case outcome? I think it will. But there’s risk associated with doing so: the more time and effort you put into a substantive deal, the more difficult it becomes to cobble together a McConnell-style Plan B in the event that it falls apart at the last minute. Congress showed, during the first TARP vote in 2008, that measures which need to get passed can still fail.

My fear here is that if the ambitious plan becomes the main focus of attention, no one will really have a clue how easy or difficult it might be to pivot to Plan B should it fail. The House Republicans, in particular, can be highly unpredictable. So while today’s optimism is warranted, it’s also tinged with danger. This kind of brinkmanship is emphatically not the way that long-term fiscal policy is best hammered out.

The increasingly-fragile nature of Rupert Murdoch’s hold on News Corp has refocused attention on its dual-class share structure. As John Gapper noted last week, such structures aren’t particularly good for minority shareholders like you or me. And if you plug today’s share price into the Breakingviews Murdoch discount calculator, you’ll see that the company is trading at roughly 30% below its fair value. Or, to put it another way, if Murdoch and his voting control were to disappear tomorrow, the shares could jump a good 45%.

Murdoch has a seemingly inviolable 39.7% position in the Class B voting shares of News Corp. No one else comes close: the only other shareholder with more than 2% of the Class B stock is Prince Alwaleed, with his 7% stake. The Class B shares are exactly the same as Class A shares, with the single difference that Class B shares have voting rights at the annual meeting and Class A shares don’t. Both classes of share trade on the Nasdaq; here’s a chart of how they’ve behaved over the past few years. The blue line is the B shares, the red line is the A shares, and the yellow line is the difference between the two. It’s currently about 45 cents per share, down from a high of $2.60 per share in April last year.

Why do the voting shares trade at a premium, if Murdoch always gets what he wants in any case? One reason is that if Murdoch’s successor wants to adopt a single share class, the holders of B shares will want to be paid a premium for allowing that to happen. Another reason is that Murdoch himself is only interested in voting shares: if and when he looks to increase his own shareholding in News Corp, it’s the B shares he’s going to buy, and he’ll happily pay a premium to do so.

But still: the fact is that Murdoch has only about a 12% interest in News Corp, and less than a 40% voting interest. What would happen if an aggressive corporate raider of some description came out with a knockout bid for the company at say $23 per share? Such a bid would come straight out of the Murdoch playbook — it’s how he bought Dow Jones. And even if Prince Alwaleed stuck loyally to Rupert’s side, the rest of the voting shares could end up approving the deal.

What’s more, under News Corp’s certificate of incorporation, the holders of A shares do actually have a vote in the event that there’s a vote on a takeover bid which would change control of the company. (See section 4(a)(i)(C).)

News Corp would not last long in its present format were any takeover bid to prove successful: it would surely be chopped up and sold off in pieces. But that just makes it that much more attractive to corporate-raider types — there’s a pretty predictable going rate for the cable, TV, and movie-studio assets, and even the newspapers would likely spark an interesting bidding war. I can certainly see Roger Ailes easily lining up funding to buy Fox News and turn it into an independent company.

None of this is exactly likely — for one thing, there are precious few bidders out there with the wherewithal to raise $60 billion or so in takeover funds for a media company. In its decision today to put News Corp on ratings watch negative, S&P didn’t say anything about the risk of a leveraged buy-out. And frankly you’d need to be more than a little crazy to enter into a hostile takeover bid against Rupert Murdoch.

But there’s one final twist here: Rupert Murdoch is adamant that he doesn’t actually control 39.7% of the Class B shares. Indeed, his personal holding is decidedly modest, at just 1.3% of the Class B shares. The other 38.4% belongs to the Murdoch Family Trust. Here’s what the proxy statement has to say about all this:

Cruden Financial Services LLC, a Delaware limited liability company (“Cruden Financial Services”), the corporate trustee of the Murdoch Family Trust, has the power to vote and to dispose or direct the vote and disposition of the reported Class B Common Stock. In addition, Cruden Financial Services has the power to exercise the limited vote and to dispose or direct the limited vote and disposition of the reported Class A Common Stock. As a result of Mr. K.R. Murdoch’s ability to appoint certain members of the board of directors of Cruden Financial Services, Mr. K.R. Murdoch may be deemed to be a beneficial owner of the shares beneficially owned by the Murdoch Family Trust. Mr. K.R. Murdoch, however, disclaims any beneficial ownership of such shares.

If Murdoch’s children — the beneficiaries of the Family Trust — come to the conclusion that either they won’t or that they don’t want to inherit News Corp as a monolithic entity, then it’s conceivable that even Murdoch’s own stake in the company might not automatically vote against a compellingly high bid. Certainly a break-up and cash-out would make the fraught question of who inherits what a lot easier: at the moment there’s quite a lot of tension surrounding the question of what exactly will end up going to Murdoch’s two youngest daughters.

All of this is highly speculative, of course. But it’s definitely going to be worth watching Murdoch’s parliamentary testimony tomorrow quite carefully. If it turns out to be something of a disaster, and he loses the support of his independent directors or his family, then all of News Corp might start being in play.

Larry Summers reckons that “with last week’s tumult in Italian markets, the European financial crisis has entered a new and far more dangerous phase”; he’s right about that. But his prescriptions for what must be done, laid out in the second half of his column, are a mess. For one thing, they’re impossible to implement from a political perspective. For another, they contradict Summers’s own diagnosis of what the problem is, as laid out in the first half of his column. And in any case they’re a textbook case of too little, too late: even if implemented they wouldn’t actually fix the problem.

Summers is quite right, in the first half of the column, to write this:

The approach of lending more and more from the official sector to countries that cannot access the market at premium rates of interest is unsustainable. The debts incurred will in large part never be repaid, even as their size discourages private capital flows and indeed any growth-creating initiative.

It’s hard to see how he can square that with his prescription in the second half of the column:

First, for program countries. Interest rates on official sector debt will be reduced to a European borrowing rate defined as the rate at which common European entities backed with joint and several liability by all the countries of Europe can borrow. A default to the official sector will not be tolerated so there is no reason to charge a risk premium, since charging a risk premium needlessly puts the success of the whole enterprise at risk.

Somehow, Summers has magically gone from “the debts incurred will in large part never be repaid” to “default to the official sector will not be tolerated so there is no reason to charge a risk premium,” without ever explaining how he got there from here.

It seems, here, that Summers has gone effortlessly from “you can’t just extend and pretend that there won’t be any default to the official sector” to “let’s extend and simply declare that there won’t be any default to the official sector.”

It’s precisely this kind of thinking that the tumult in Italian markets makes untenable. As the chart in Summers’s column makes clear, Italy has $471 billion of government debt maturing in less than one year. If the private-market window for Italian debt closes as it has done for Greece and Portugal, then the official sector would be on the hook to lend Italy that entire sum itself. And there’s simply no way that Europe can find that kind of money, especially not if it’s lending it out at close to risk-free rates.

And then it gets worse:

Third, there must be a clear and unambiguous commitment that whatever else happens, the failure of major financial institutions in any country will not be permitted. The most serious financial breakdowns—in Indonesia in 1997, Russia in 1998, and the USA in 2008–come when authorities allow there to be doubt about the basic functioning of the financial system. This responsibility should rest with the European Central Bank with the requisite political support and cover provided.

The implication here — although Summers doesn’t quite spell it out — is that the debt of a country’s banks can and should be safer than the debt of the sovereign. That’s something which has never worked in the past, and it’s very hard to see how it could possibly work in the future. After all, if you look at the assets of any given country’s banks, sovereign debt in one form or another constitutes a huge proportion of that number. And look what Summers wants to do to that debt:

Creditors gain nothing from breakdown. They have signalled that they will support an approach based on a menu of options. Some will want to sell out of their exposures at prices marginally above their current market value. Others who still regard sovereign European debts as worth par should be provided with appropriate reduced interest rate, longer maturity options. Debt repurchases are a possibility if the private sector accepts sufficiently large present value debt reductions. The key standard by which any approach should be judged is the genuine sustainability of program country debt repayments on realistic assumptions.

If the present value of the banks’ debt plunges, then the banks become insolvent and fail. If that will not be permitted, then the present value can’t go down very much. In which case you’re unlikely to get to the “genuine sustainability” that Summers wants.

In general, if you have a private-sector debt restructuring where reprofiling is an option — where principal value is untouched and maturities just get termed out with lower coupons — then that’s not going to make enough of a difference to the stock of sovereign debt to make the difference between unsustainable and sustainable. On the other hand, if you take a serious hatchet to the stock of sovereign debt, then there’s no way that any country’s domestic banks could avoid failure.

Summers says of his plan that “much of this will seem unrealistic given the terms of Europe’s debate.” But frankly most of it seems unrealistic just on its own terms — it doesn’t bring countries back onto a sound fiscal footing, and it punts the questions of how much they can be lent by the official sector, and how much the ECB would have to spend to bail out their banks. Summers is quite right that the European debt situation is dangerous. But he doesn’t have much of a plan to deal with it.

Bloomberg is sounding out News Corp’s independent directors, and they’re not happy:

Independent directors of New York-based News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed, said two people with direct knowledge of the situation who wouldn’t speak publicly…

News Corp.’s independent directors, who hold nine of 16 board seats, have expressed frustration over the quality and quantity of information they’ve received about the scandal and concern about management’s ability to handle the crisis given how slowly the company has responded, the person said.

Some directors said Murdoch, the company’s 80-year-old chairman and chief executive officer, appeared to be in denial over the fallout from the scandal in an interview he gave last week to the Wall Street Journal, one of News Corp.’s newspapers.

And that’s not all: in another article, Bloomberg says that even parts of the Murdoch family are turning on its patriarch:

Some people close to the Murdoch family and News Corp.’s directors said last week they thought it would make sense for Murdoch to relinquish his job as chief executive officer and stay on as chairman.

Independent directors constitute the majority of News Corp’s 16-person board, and so in theory have significant power over Murdoch’s future. If they are talking about “a leadership change,” shouldn’t that help boost the depressed News Corp share price? Instead, it continues to fall today.

There are two reasons why the massive Murdoch discount built in to the News Corp share price refuses to go away and indeed is increasing. First, the markets still don’t believe there’s a real chance he’ll actually relinquish his position as CEO. And second, he’ll still control the company even if he does.

“Rupert Murdoch controls the votes of the company through the Class B shares,” Elson said in an interview. “He can just replace them if he wants. They may do something, but it will be temporary. Maybe he becomes chairman, but this is still his company and he can do what he wants. When he controls the stock, he controls the board.”

My feeling is that the markets are being a bit too pessimistic here. Murdoch lives to control his company, it’s true, but he also knows that real control comes through his ownership of Class B shares, rather than through his office as CEO. If his directors and even relations — along with his crisis managers at Edelman — start telling him that it might be time to install Chase Carey as CEO, the pragmatist in him might be tempted. Especially if the tough questions about him refuse to go away, which seems like a reasonable base-case scenario for the time being.

That wouldn’t necessarily mark the last time that a Murdoch ran News Corp, either. Given his control of the voting shares, Rupert could still install his daughter Elisabeth as CEO in future.

How much of a Murdoch discount would be reasonable at a company where Rupert was chairman, Carey was CEO, and Elisabeth was being groomed to replace Carey? Some kind of discount would still exist — but a much smaller one, I think, than what we’re seeing now. If you think that Rupert’s job is in peril, then maybe News Corp shares are a buy at these levels: in a weird way, at this point, the worse the news for Rupert, the better the implications for his company’s shareholders.

Half of Gingrich’s campaign debt is owed to Moby Dick Airways — Daily Caller

Les Hinton’s memo & resignation letters — All Things D

Why is Fortune adding Tiger Woods’s divorce costs to his mortgage? Wouldn’t he have used the latter to pay the former? — Fortune

“Maybe the debt ceiling was the wrong place to pick a fight” — Sen. Bob Corker — Think Progress

24,000 Pentagon files stolen in major cyber breach — WaPo

The new, green, downright sassy East River Waterfront Esplanade — Curbed

Twitter drives 4 times as much traffic as you think it does — Awe.sm

Michael Wolff Knows Nothing About Baseball. Just Ask Him! — All Things D

“Inordinately proud of their own work, newspapers and cable news networks tend to lard their home pages with copy produced in their own shops” — Slate

The abrupt departure from News Corp today of Rebekah Brooks (early) and Les Hinton (late) is yet more proof that News Corp is flailing around and incapable of getting out in front of the phone-hacking story. It’s a bit like the way in which the cost of bailing out Lehman Brothers would rise by a few billion dollars an hour at the height of the financial crisis in 2008: every day of bluster and delay just makes this crisis worse for News Corp and for Rupert Murdoch.

If the News of the World had been shut and Brooks and Hinton both defenestrated back in 2009 when the hacking allegations first surfaced, that would have been more than enough to signal that News Corp was taking them seriously, was saying that such behavior was unacceptable, and was drawing a firm line under an unfortunate and illegal episode. Now, however, such actions only serve to make News Corp look even more guilty — especially since the time gap between the resignations served to draw the story out over two news cycles and makes the whole thing look ad hoc and teetering on the back foot. There’s now a clear sense that the virus is moving up and across the News Corp org chart, from the News of the World to News International to Dow Jones, with no sign that its virulence is diminishing.

Next up: the show trial on Tuesday, where James and Rupert will be ceremonially roasted by various UK MPs. If they express only contrition for what happened, without accepting personal responsibility or admitting any culpability, the reaction will not be pleasant: Rupert, in particular, is known as an assiduous reader and manager of everything that goes on at his newspapers, and he can’t credibly plead ignorance of what they were doing. Similarly, James spent two years hand-in-hand with Les Hinton covering up the hacking and approving seven-figure payoffs to victims designed to keep them quiet. Indeed, his plan to cover up the wrongdoing rather than come clean might even have worked, were it not for the tireless reporting of Nick Davies at the Guardian and the unexpected revelation that the hacking affected not only politicians and celebrities but also the victims of personal tragedy.

On the other hand, any admission of personal responsibility will certainly result in calls for that person to resign. The loss of Brooks and Hinton is personally painful to Murdoch, but it’s not remotely sufficient, at this point, to satisfy the pitchfork-wielding mobs. As Jack Shafer says, “everybody who ever had a grudge against Murdoch for his journalistic crimes, his battles against unions, his acts of political skullduggery, and his brilliant business innovations has sharpened and fixed bayonets to oppose him.”

Which is why I suspect that the endgame will involve both James and Rupert falling on their swords, with the pragmatic technocrat Chase Carey taking over as CEO of News Corp for the time being. Rupert won’t give up his Class A shareholding, of course, and would continue to wield enormous power and influence behind the scenes. Eventually, the time will be right for Carey to give way to Elisabeth Murdoch, one of News Corp’s most expensive hires: the company paid $674 million to bring her on board by buying her company, Shine.

Neither Carey nor Elisabeth Murdoch has any particular love for newspapers; if the Dow Jones special committee starts causing nuisance, or if News International needs to be sold, they’re perfectly capable of letting that business go. Television is where the big money is, and neither of them wants to see News Corp’s global TV ambitions permanently derailed by a bunch of tabloid hacks. Murdoch’s empire might well yet be inherited by one of his children. But that empire might well be very light on newspapers. Actions like spending $5 billion to acquire Dow Jones, which never made economic sense, are now a thing of the past. Rupert’s top lieutenants — and his children, too — understand that. And Rupert himself, at this point, has very little choice but to come around to their way of thinking.

Adam Knight has a smart take on why Netflix is unbundling its DVD service from its streaming service:

The Internet’s memory is short so let’s go back a week ago to when Netflix lost the Sony movies and almost lost Starz. Why did that happen? Netflix WI subscribers passed a certain number specified in the contract with Starz and Sony and so they lost the right to stream that content. After some talks they came back online and now, one week later, Netflix is breaking apart their WI subscribers from their DVD subscribers. I find it hard to consider this a coincidence.

Having a ton of DVD viewers that are not using WI artificially inflated their WI subscriber numbers and almost invalidated a content contract. The only way to lower that number is to remove their access and only let people that want WI subscribe to it and pay into the service. So now WI isn’t a bundled service but one you ask for and pay for. This way, Netflix lowers their perceived WI subscriber count, keeps their content deals without renegotiations, and generally carries on.

This is all incredibly similar to the debate over cable-TV pricing, where the status quo is that you pay a flat fee for a bundle of channels, and there’s a vocal constituency — in which I include myself — saying that we should move to an a-la-carte pay-only-for-what-you-watch approach.

Netflix has always been about convenience, and a flat monthly fee, buried on your credit card statement somewhere, is certainly more convenient than paying for movies one at a time, as you have to do on say iTunes. But just because Netflix charges consumers on a flat-monthly-fee basis doesn’t mean that’s the best way for it to make deals with movie studios.

Up until now, it seems, Netflix has paid the studios a flat monthly fee, linked to the number of subscribers it has with access to their content. And when that got too expensive, it wound up cutting off streaming from its DVD subscribers to save on its own library-subscription costs.

Netflix paying a flat monthly fee for a bundle of movies is a bit like a cable-TV subscriber paying a flat monthly fee for a bundle of channels. The idea is that you pay the same amount each month whether you actually watch any movies or not; people who only use the DVD service and who never use the thrown-in streaming service are still very expensive for Netflix. (This is a big departure from the old business model, where people who barely used the DVD service were Netflix’s most profitable customers.)

It makes sense, under this model, for Netflix to unburden itself of DVD customers who barely stream any movies but who still cost Netflix itself lots of money in subscription fees. But that just means that everybody would be better off under a different model — for instance, one in which studios got paid every time one of their movies was streamed. (That kind of system would also be wonderful for independent filmmakers, who could upload their movies to Netflix at no charge and then get a stream of payments as and when Netflix’s subscribers started watching their film.)

Such a system would probably be better for the movie studios, too, since it would align their incentives with those of Netflix: they would get more money when people watched more movies and used Netflix more. As the studios and Netflix teamed up to persuade people to stream their movies, everybody would win.

So why isn’t this happening? Because the media business is calcified, and has to be dragged kicking and screaming into any kind of new business model. The studios have a reliable revenue stream from Netflix right now, and they have no real incentive to swap that for something less reliable, even if that would make them more money. It’s short-sighted, but Netflix certainly doesn’t have the power to make them change their minds. And so we end up with Netflix removing the streaming option from a large proportion of its subscribers — something I’m sure it absolutely hates to do. People are blaming Netflix here, but it’s surely more likely that the real villains of the story are the studios.