Felix Salmon

This is why I love FT Alphaville in general and Tracy Alloway in particular: she’ll dutifully read 14 pages into something entitled “The Basel Committee on Banking Supervision Joint Forum Report on Asset Securitisation Incentives” before coming across this chart and immediately realizing just how important it is.

I’ve put a bigger version here for people who want to pass it around in all its horrifying glory, but it’s also worth spelling things out, because it might not be immediately obvious.

The big-picture thing to remember when looking at this chart is something which I’ve said many times before — that it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds. On a micro level, triple-A securities are safer than any other securities. But on a macro level, they’re much more dangerous, precisely because they’re considered risk-free. They breed complacency and regulatory arbitrage, and they are a key ingredient in the cause of all big crises, which is leverage.

At the left-hand side of the chart we see that global issuance of triple-A bonds was more or less nonexistent back in the early 90s. All those Treasury bonds, all those agency securities from Fannie and Freddie, all that Japanese debt — add it all up, and it still comes to essentially zero by the standards of what seems normal today. Check out the left-hand y-axis: it goes up in $1 trillion increments. And we’re not talking stock, here, we’re talking flows: this chart is issuance per year.

(It’s pretty easy to see, looking at this chart, how a company like Pimco can find itself with over $1 trillion in assets under management: that’s now just a small fraction of the bonds issued each year.)

Now zoom back, and look at the chart as a whole: it’s going up and to the right, which says two things. Firstly, the amount of debt in the world is soaring. That’s a bad thing, because debt is much more systemically dangerous than equity. And secondly, the amount of triple-A debt in the world is soaring as well. Which is a worse thing, because triple-A debt is much more systemically dangerous than most other debt.

Then look at the green line. Triple-A debt wasn’t a huge part of the bond market back in the early 90s, but for the past decade it has invariably accounted for somewhere between 50% and 60% of total global fixed income issuance. That’s possibly the most horrifying bit of all: it simply defies credulity for anybody to be asked to believe that more than half the bonds issued in any given year are essentially free of any credit risk.

Finally, look at the way that the maroon bars — structured products, basically — have given way to a scarily large purple bar at the far right of the chart. That’s sovereign debt, and it tells you all you need to know about where the next crisis is likely to come from.

In a nutshell, triple-A debt is dangerous; there’s far too much of it; its growth seems out of control; and the triple-A problem has now become a sovereign-debt problem, in a world where sovereign-debt crises are the most damaging crises of all.

All that said, there are two things worth bearing in mind which make the chart slightly less horrific. The first is that for reasons I don’t understand, the chart ends in 2009, a crisis year when sovereigns pulled out all the stops in their attempt to prevent a global Depression. We’re more than halfway into 2011 at this point, there’s no good reason why the chart couldn’t include 2010 as well. And that might show 2009 as being a bit of an aberration. Does anybody have the numbers for total triple-A bond issuance in 2010, and how much of that was sovereign?

And secondly, any kind of debt-issuance chart is likely to go up and to the right to some extent, just because borrowing needs never go away, and old debt needs to get rolled over. The total stock of triple-A debt isn’t increasing by this many trillions of dollars per year, and it would be great to see a second chart of how much that is increasing, and how much of it is sovereign.

Still, flows matter. If sovereigns start being downgraded from triple-A status, debt is going to get a lot more expensive, and those rollovers — which cost very little in the current interest-rate environment — will really start to bite. And the invidious thing about debt is that it doesn’t go away. Deleveraging is painful, and is often accompanied by inflation or default. And the more debt you have to start with, the more painful deleveraging is going to be. Prepare yourselves.

Is there a company in the world which isn’t trying to “harness and leverage the power of social media to amplify our brand” or somesuch? I’m a pretty small fish in the Twitter pond, and I get asked on a very regular basis to talk to various marketing types about how they should be using Twitter. A smart organization with a big Twitter presence, then, will naturally start trying to leverage its ability to leverage Twitter by putting together sophisticated presentations full of “insights to help marketers align their content-sharing strategies” and the like. Which is exactly what the New York Times has just done.

The slideshow can be found here, and it’s worth downloading just to see how many photos the NYT art department could find of good-looking young people looking happy in minimalist houses. But it actually includes some interesting insights, too, which were spelled out at a conference yesterday by Brian Brett of the NYT Customer Research Group.

The survey claims to be the first of its kind on why people share content, which is a very good question. A large part of how people enjoy themselves online these days is by creating and sharing content, which is both exciting and a little bit scary for anybody in a media organization. And the NYT methodology was fun, too: aside from the standard surveys and interviews, they asked a bunch of people who don’t normally share much to spend a week sharing a lot; and they also asked a lot of heavy sharers to spend a week sharing nothing. (“It was like quitting smoking,” said one, “only harder”.)

The first striking insight is about the degree to which the act of sharing deepens understanding. It’s not at all surprising to learn that 85% of people say that they use other people’s responses to help them understand and process information — in fact 100% of people do that, and they’ve been doing it for centuries. We always react to news and information in large part by looking at how other people react to it.

But more interesting is the fact that 73% of people say that the simple act of sharing a piece of information with others makes them likely to process that information more deeply and thoughtfully. It’s like writing things down to remember them: the more you engage with something, the more important and salient it becomes to you.

This has interesting implications for anybody including sharing functionality on their website. Something like the Huffington Post Twitter module, when it works, makes such sharing unbelievably easy: it comes pre-loaded with a comment and a link, all you need to do is press the button and the content is shared. If you click on a share button and then click the “tweet this” button, that’s two clicks — a bit harder. If you edit the content of the tweet, that’s more engagement still. If you select a passage to share on Tumblr, that’s even more; if you write a long blog entry about the piece, then you’re really engaged. The easier you make sharing, the more sharing there will be — but you’ll be paying a cost in terms of the strength of the relationship you have with the people who do share your stuff.

Another implication here is that people who share content in laborious ways are more engaged than power users. If you copy a URL, paste it into TinyURL to shorten it, copy the shortened URL, go to the twitter.com website, paste it into the box, add a comment — that’s a lot of work going into sharing, compared to someone who has all that kind of thing automated in a toolbar button. And the greater the amount of effort involved, the stronger the relationship between site and sharer, as a rule.

Up until now, most of the emphasis, when it comes to sharing, has been on sharing as a distribution mechanism — if I tweet a link, thousands of people might see it and maybe even follow that link, so publishers love it when I tweet their stories. It’s still very early days, however, in terms of sharing as a relationship-building mechanism — the way in which when I tweet a link, I strengthen my relationship with whatever or whoever I’m sharing. One thing very few sites do, but which should be much more common, is to automatically include the twitter handle of the author of a story in the auto-tweeted text, along with or even instead of the twitter handle of the site the story comes from. After all, social media is about person-to-person relationships, and that kind of thing can do wonders for a writer’s relationship with the people tweeting their stories.

Brett mentioned at the end of his presentation that email was still the most common form of content sharing — not in terms of the number of people reached, but in terms of the number of people reaching out to others. That’s important too, and has been underemphasized up until now. It’s great to reach new people who see your stuff only after it’s shared with them. But it’s equally great to have such fantastic content that people want to share it, even if it’s just by email. Anybody sharing your content is an especially precious user, who loves your stuff and who should be thanked and cultivated as much as possible. (It should go without saying, of course, that it’s downright idiotic to antagonize those people and accuse them of breaking the law.)

The main theme running through the NYT report is the decidedly unsurprising conclusion that social media is social — people use it to define themselves to others, to stay connected to others, to influence others. Human relationships are vastly more important than brands, which is why it’s hard to build a corporate brand on Twitter, and the companies which manage to do so generally do so in a highly labor-intensive manner, one @-reply at a time.

Which is why it’s fascinating to me that this report is aimed at, and was commissioned in service of, the companies which use the NYT for their brand advertising. Brand advertising is important and powerful, but it’s not particularly social; not all brands can or should be fighting to become the rare Old Spice or Volkswagen with a viral ad campaign. And if you do have a viral ad campaign, you don’t really need or want it on nytimes.com. The press release, however, makes it clear that the findings are aimed very much at advertisers, as opposed to the editorial-technology people who would probably find it much more useful:

“The New York Times has invested heavily in social media across our organization, both in our own business and to create industry-leading integrated opportunities for our valued advertisers. As online sharing continues to grow as a tool for marketers, we saw an opportunity to add value to the conversation, by studying why people share online,” said Denise Warren, senior vice president and chief advertising officer, The New York Times Media Group, and general manager, NYTimes.com. “These findings are part of our ongoing commitment to help advertisers effectively reach and communicate with consumers through engaging, successful and creative campaigns.”

It seems to me that the NYT, here, is going along with the fiction that high-profile brand advertising in the NYT can and should be social. If that’s what the advertisers think they want, that’s what we’ll give them. But the smart advertisers will ignore all this — just as they ignored other useless distractions like click-through rates. We know that only idiots click on ads; what makes us think that people who not only click on ads but actively share them will be any smarter?

Viral videos — the rather fabulous K-Swiss one being just the latest example — are all well and good. But high-end websites like nytimes.com are no place for viral videos, or for sharing tools embedded in ads. Those are a bit like the QR codes you see on posters: a sign of fad-following desperation and a good sign that the advertiser doesn’t have faith in the creatives they’ve hired. Brand advertising isn’t and shouldn’t be transactional. And I’m a bit worried that the NYT is enabling those who think it can be.

The News Corp hacking virus is proving both virulent and highly contagious. Rupert Murdoch tried to treat it with amputation, by closing down the News of the World, but the surgery came too late, and he couldn’t prevent the virus from spreading to the Sun and the Sunday Times. At that point, the virus was unstoppable: its next victim was Murdoch’s $12 billion bid to take control of BSkyB. Now, with the UK police investigation barely having started, the virus has managed to jump over the Atlantic: the FBI is getting involved, looking into allegations that Murdoch’s papers tried to hack the phones of 9/11 victims.

This isn’t the investigation under the Foreign Corrupt Practices Act that Eliot Spitzer was calling for, although that might well come next. Both of them would normally seem like a bit of a stretch — it’s far from clear that anybody at News ever successfully hacked into voicemails on US phones, and it’s hard to use the FCPA when there’s no clear financial benefit for the company doing the bribing. But these, of course, are not normal times, and the more the virus spreads the more harmful and powerful it becomes. On this side of the pond, Les Hinton in particular is looking vulnerable; he’s currently running the Wall Street Journal, and if he ends up falling victim to the virus, there’s a chance the WSJ could get infected by association.

This is not an existential crisis for News Corp, a $42 billion behemoth which will continue to exist in one form or another whatever happens. But it’s much more damaging to Rupert Murdoch personally, and to his son James. Both of them are now going testify in parliament on Tuesday, and there’s no way that the experience is going to be a pleasant experience for either of them. They can’t lie — the truth is going to come out sooner or later, and neither will want to risk a criminal perjury trial. But at the same time it will defy credulity if Murdoch claims to have had no knowledge of his newspapers’ techniques, or if James claims that he genuinely thought the illegal activities were confined to one royal reporter at the News of the World.

Amid all the talk, over the years, about who will succeed Rupert as head of News Corp, no one seriously considered the possibility that Rupert might be forced to step down and hand over control to a non-relation. But there’s no doubt that Rupert Murdoch is now a serious liability to News Corp, and that liability wouldn’t go away if he were replaced by James.

Murdoch has always been more interested in power than money, and so the fact that resigning would make his net worth soar means very little to him. (It’s not like he’ll ever spend his billions in any case.) But Tuesday’s grilling will only be the first of many very difficult situations: the UK and US investigations are going to go on for the foreseeable future, and the headlines will continue to come out in a damaging drip for a long time yet.

Rupert Murdoch turned his father’s small media company into a global empire; it has always been his dream to keep News Corp in the Murdoch family for generations to come. But that dream has never looked less likely than it does right now; the virus is closing in on the Murdochs, and their immunity to the virus, which was weak to begin with, is rapidly disappearing. It’s a story fit for the movies: even after huge triumphs like acquiring the WSJ and releasing Avatar, Murdoch could be doomed by his first love — the love of aggressive tabloid journalism. He’s tough: he’ll try to hold out for as long as he can. But he’s human, too. I wouldn’t be at all surprised if someone within News Corp weren’t working right now on a face-saving exit for one of the most successful media moguls of any era.

Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington.

Megan McCardle thinks this shows a “giant disconnect” between Wall Street and Washington — things which Wall Street thinks are easy turn out in reality to be extremely hard, and things which any Wall Streeter would just do as a matter of course can be de facto impossible when political posturing starts getting in the way.

I’m not sure the disconnect is all that huge, for a couple of reasons. For one thing, US default risk is impossible to hedge. US default is an end-of-the-world event, and markets by their nature can’t price such things. Conceptually, there’s no point in buying something which pays off if the world ends, since the world will have ended at that point, and in any case your counterparty won’t be able to make good on the contract.

On top of that, remember that we already hit the debt ceiling on May 16 — two months ago. Since then, the amount of outstanding Treasury securities — a number which normally rises steadily — has been stuck at $14.3 trillion. The fact that supply of Treasuries has been artificially constrained by the debt ceiling has surely, at the margin, helped to support prices.

And more generally there are still a lot of individuals and institutions who want to buy Treasury bonds. That number might have been falling in recent weeks, but it’s still large. The U.S. is not facing the kind of emergency we’re seeing in the eurozone, where countries want to borrow money but no one’s willing to lend to them. If Treasury asks to borrow money from the markets, the markets will always lend it money; the only question is how much interest they will charge.

This is where McArdle goes awry, incidentally: she’s worried that any new debt issued after August 2 won’t be able to find buyers if Congress doesn’t raise the debt ceiling. But there will always be buyers, and there will always be buyers at yields very, very close to the secondary-market price for Treasury bonds. Treasury bonds are fungible, and to underscore that fact Treasury could easily just reopen old bond issuances instead of creating new ones. That would ensure that there was no way of telling the difference between bonds issued “legally” and bonds issued after the debt ceiling was breached.

Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

This is one reason why I worry a lot about clever ideas like Mitch McConnell’s plan to get the debt limit raised through a novel use of the Presidential veto — or, for that matter, Matt Yglesias’s even cleverer plan for Democrats to game the McConnell scheme. McConnell is one of Congress’ foremost tacticians, but cunning tactics on either side of the aisle are the last thing that anybody needs right now.

When Bob Rubin did a nifty sidestep around Congress and magicked Mexico’s bailout billions from some dusty account no one knew about, he was playing a dangerous game. When Hank Paulson and Ben Bernanke stretched the limits of their powers almost beyond the legal breaking point during the financial crisis, their actions were understandable but also set yet another precedent. And so now, when there’s no immediate emergency at all, people are looking to the executive branch to find a way to do the right thing, and thereby giving Congress implicit permission to play out and generally behave with all the maturity of a group of rampaging destructive adolescents.

The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.

Last week, Scott Bell wrote a wonderful and heartfelt post about what it’s like being a financial advisor.

I’ll tell you to sell something because a trend is broken or a target is reached, or you need money and I picked that one… the one that went up still. And I’ll hear about it whenever something else is down.

We’re supposed to have read that great article on page 5 of the business section in the LA Times about GE. And when I say I didn’t, I can actually feel the shock and disgust oozing through the phone. The disappointment…

We’re supposed to know about every single product being advertised and whether the new one is better than the one we have. We’re supposed to be compared to every portfolio at your friends’ next cocktail party…

I don’t have a magic bullet or crystal ball, but somehow I’m still supposed to know. Even though you know I don’t know, you still have it in your head that I do (or else why are you paying me). And this irrational double talk in your head only shows its face when your greed or fear kick into overdrive. You know, the time you are least logical for us to talk about your money.

It really is a gruesome job, being a broker — the kind of people who hire you tend to have ridiculous expectations when it comes to what you can do with their money. (Anything less than 10% annualized is a disappointment, as a rule.) They all want to outperform the market, they all want high return with low risk and they are quite happy contradicting themselves on a regular basis.

And on the other side of things, it’s not much easier being a client. A reader sent me a note today that they got from their broker. It advises a big restructuring of their portfolio: a bunch of funds should be sold and a bunch of similar funds should be bought. The asset allocation ends up pretty much the same, but the vehicles change. And in the course of an eight-page letter, the reason for doing this mass purge is dealt with swiftly indeed:

The funds we are recommending that you sell have in the most part demonstrated performance that has not been in line with our expectations and we feel you would benefit from switching into more prosperous and more diversified holdings…

The property sector has experienced a turbulent time since the financial crisis and in most part has not fully recovered and we feel there are better opportunities in this sector for you to benefit from.

On the basis of this advice, the broker is recommending a six-figure decision representing an enormous proportion of his client’s net worth — and the advice, boiled down, comes down to a pretty tautological “we’re recommending this course of action because we think you will benefit from it”.

The deeper thing going on here is what might charitably be called a momentum trade, or what might less charitably be called a sell-low strategy. First you pick your sector, then you pick funds in that sector. If the funds do well, that’s great; if they do badly, then you sell those funds and instead you buy funds which did do well over the time period in question. Then, next year, presumably, you rinse and repeat.

If you’re a remotely normal person, you’re not qualified to pick stocks and neither do you have the self-confidence to even try. So instead you outsource your stock-picking and buy mutual funds. But this just shunts the problem down the road: if you’re not qualified to pick stocks, what qualifies you to pick mutual funds? After all, there are just as many funds to choose from as there are stocks. So you punt again and outsource your fund-picking to a financial advisor. And all the while you know you’re still not much better off: however many stocks and mutual funds there are, the number of financial advisors is greater still. If you can’t pick a stock or pick a mutual fund, what makes you think you can pick a financial advisor?

The relationship between you and your advisor, then, is a bit rocky from the beginning: you’re paying the advisor to pay mutual fund managers to invest your money in stocks which might well underperform. There’s a lot of fear and greed in there, neither of which make for particularly clear-headed conversations or decisions. And then to make matters worse, your advisor is likely to treat you like he treats most of his other clients. That means that he’ll recommend you do something or other on a regular basis, since most clients think a broker who doesn’t do anything is wasting their money. (In fact, a broker who does do something is probably wasting their money; a broker who doesn’t do anything is saving them money. But most clients don’t think that way.)

All of which is why my standard advice to everyone is to simply buy index funds and rebalance every so often, if and when you get around to it. Because it’s silly having an advisor if you don’t take their advice — but at the same time there’s no particular reason to believe that your broker’s advice is particularly good, or that something like a “sell the funds which have underperformed of late” strategy is actually a sensible one, or is liable to work well over the long term.

And it’s hard to have that kind of meta-conversation with your broker, too, because brokers don’t get paid nearly as much as they used to and are often not particularly smart or sophisticated. (I hasten to add that smart and sophisticated brokers aren’t necessarily better at being brokers; they just might be a bit better at giving a good answer to questions like “does it make sense to sell funds which have gone down in value, and if so, when should you do so”.)

If you look at the 14-figure sums being managed by financial advisors, it’s easy to see how incompetence and rampant emotion and waste and fraud and messiness can easily result in billions of dollars flowing from dumb investors to the smart Wall Street crowd every year. And it’s equally easy to blame Wall Street generally, and brokers in particular, for that waste. But irrational and emotional individual investors deserve their own fair share of the blame. Financial advisors are dealt a nasty hand, much of the time. So before we blame them for things which seem wrong, we should probably ask ourselves what exactly we’re hiring them to do in the first place and whether our expectations are remotely reasonable.

Felix Salmon and Henry Farrell on Bloggingheads, talking Murdoch, eurocatastrophe, and even Google+ — BhTV

Wired.com publishes the full chat logs between Lamo and Manning — Wired

UK Passport Delays at British Embassy in USA: there’s no excuse for this at all — UK Passport Delays

Piers Morgan was an expert in phone hacking in Jan 2001 — Guido Fawkes

Steve Waldman has a fantastic reaction to my post about principal reductions, saying that “accounting is destiny”:

If a bank has a loan on its books valued at par, and it offers a principal reduction, it must write down the value of the loan. It takes a hit against its capital position, and experiences an event of nonperformance that even the most sympathetic regulators will have no choice but to tabulate. If a bank has purchased a loan at a discount, however, the loan is on the books at historical cost. The bank can offer a principal reduction down to the discounted value without experiencing any loss of book equity.

Of course this is a matter of mere accounting. Whether or not a bank takes a capital hit has no bearing on whether a principal reduction will increase the realizable cash-flow value of the loan.

But accounting is destiny. The economic value of a bank franchise, both to shareholders and managers, is intimately wound up with its accounting position. A bank whose books are healthy may distribute cash to shareholders and managers, while a bank whose capital position has deteriorated will find itself constrained. A well-capitalized bank is free to take on lucrative, speculative new business, while a troubled bank must remain boringly and unprofitably vanilla.

This is, basically, the muddle-through approach to troubled assets. If you keep them on your book at par, then you can claim to be well capitalized, and use all that capital to pay yourself well and expand into new businesses. Eventually, with luck, those businesses will be successful enough that they make enough money to cover the losses on the assets when they’re finally realized.

But the real world doesn’t always work like that. See David Reilly’s very good piece on Bank of America today:

BofA maintains it has ample capital and can grow into new, more stringent capital requirements by 2019. The trouble is investors might not be so patient…

BofA is juggling mortgage problems as the economy and housing again look shaky. Markets already have shown what they think: BofA’s shares trade at about 50% of book value and about 85% of stated tangible book value. This means investors think either its assets are overstated or liabilities understated.

BofA needs to put questions about its mortgage risks firmly to bed. Or it needs a thicker equity cushion.

In other words, there are two different ways of looking at bank equity. One is Waldman’s way, where you take the bank’s stated assets, subtract its liabilities, and are left with its equity. And then there’s the more common and salient way of doing things, which is just to look at the share price. While it’s true that regulators do worry about accounting equity, they pay attention to share prices too. (That’s one reason that they weren’t worried about banks during the subprime bubble: the shares showed very little risk there.) And when it comes to paying employees and opening new business lines, a healthy share price is in much more useful than any accounting fiction.

Investors know how much subprime junk is buried on the balance sheets of America’s biggest banks, and they take that into account when they value those banks’ shares. If the banks, through principal reductions, can increase the real value of that junk, Wall Street will likely reward them rather than punish them. Even if that means taking a write-down on assets which everybody knows are worth significantly less than 100 cents on the dollar.

I’ve received some very interesting reactions to yesterday’s post on Netflix, including David Leonhardt reminding me about his profile of the company five years ago.

There are three parts of that article which are particularly interesting today. The first is the thesis that Netflix’s success is based in large part on a long-tail model.

Every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer. “Americans’ tastes are really broad,” says Reed Hastings, Netflix’s chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want.

The second is the idea that the economics of Netflix were far from obvious:

The stock trades for about $27, down about $12 from its 2004 high. One fifth of its shares are on loan to short sellers betting it will fall further.

You can understand the doubts, too. At a time when cable and phone companies are running fat data pipes into homes, Netflix can seem a lot like the Sears catalog of the early 21st century.

And the third is the look forward to Netflix’s own streaming offering:

The company has been hiring engineers to build its own download site, which, with a familiar brand name and all that information about what people like to watch, may be formidable.

But it could be years — 5? 20? — before downloading approaches the size of the DVD business.

Netflix’s stock, of course, has turned out to be a veritable wonder over the past five years: it’s currently at $291 per share, more than ten times its level when Leonhardt was worried about its prospects. It turns out that while people were worried about Netflix at $27 per share when it was based on a long-tail model, they’re much more excited about Netflix at $270 per share when it’s based on a live-streaming model.

The people who still think of Netflix as a queue-and-DVDs site, I think, are a bit like the people who think of Amazon as a bookstore, or of Apple as a computer maker. The whole reason that Netflix is at $270 a share rather than $27 a share is streaming, and if you have a subscription-only account at Netflix, the famous queue, which I loved, disappears entirely.

The queue was a great way of putting together a list of movies you really wanted to see, and then going through them slowly, at your own pace. Sometimes certain movies weren’t available, but that was OK — there were always other movies that were available, and you knew that sooner or later the ones that weren’t available would show up.

With a streaming-only account, however, all of that goes away. Let’s say you’re having a dinner conversation about arthouse thrillers featuring an A-list actor and a much less well-known but very beautiful female co-star, where nothing much happens amidst lingering shots of beautiful scenery. With the old Netflix, you could put The Passenger and The American into your queue next to each other, and probably watch them back-to-back, if you had four hours to spare. With streaming-only Netflix, you wind up being faced with something unhelpful like this:

There’s no option to add either movie to your queue; instead, your only choices are to sign up for the DVD option at $8 per month, or to watch something completely unrelated. If and when Netflix does manage to get either of these movies into its streaming library, you’ll never know.

Which is one reason why Netflix is going to serve up many fewer highbrow films on instant streaming — that’s what happens when you kill the queue. The long-tail business model turned out not to be the salvation of Netflix after all; rather, all that matters is convenience. The Passenger‘s not available? Never mind, let’s watch Frankenstein Must Be Destroyed instead.

What does this means for the future of Netflix? Probably a small minority of arthouse types will defect to GreenCine, but they won’t be numerous enough that anybody at Netflix will care. There’s always a tension between quality and and convenience — Kevin Maney wrote a whole book about it — and there’s no doubt which one wins in the marketplace: convenience, every time.

Netflix got its toehold in the market by being more convenient than Blockbuster; it’s now doing to its DVD business what it initially did to DVD-rental shops. The wonderful long-tail qualities turn out to have been an incidental benefit more than a core value proposition. The streaming service will be the main part of Netflix; the DVD service will be kept on by the arthouse long-tail lovers who don’t go to GreenCine.

The big questions is what will happen to the people wanting to see blockbuster recent releases. Will they sign up for Netflix DVDs? Will they move to Redbox? Or will they just make do with whatever happens to be available on streaming? Any ideas?

Simon Dumenco’s open letter to Peter Goodman on HuffPo’s aggregation — AdAge, see also

Rupert Murdoch facing BSkyB defeat as parties unite in call to drop takeover — Guardian

More than 75% of bike-car collisions are caused by errant motorist behavior — Buzzdata

Jim Impoco on Anthony DeRosa: “This is a fellow who had no editorial authority whatsoever!” — Beet

Robert Whitaker on The New York Times’ Defense of Antidepressants — Psychology Today

Newsweek.com Will Cease to Exist on July 19 — NYMag

Back in 2009, Chris Anderson posted this chart, showing how Netflix’s consumers were embracing the long tail of its offerings. As the number of movies in Netflix’s library grew from 4,500 to 18,000, the top 500 movies in the library went from constituting more than 70% of demand to less than 50% of demand.

This is the wonderful thing about online retailers: they can offer vastly more inventory than their local-store counterparts. And this is the wonderful thing, too, about Netflix streaming, at least as it existed until today. The big problem with Netflix, for many of us, before streaming came along, was always that we would stock up on highbrow ambitious fare which we knew we really ought to see, and then not be in the mood for something highbrow and ambitious when finally we had some spare time to watch a movie. With streaming, you could get the best of both worlds: a selection of fabulous rare DVDs, and instant access to something popular and brainless should you be so inclined.

Those days, however, are now over. You can buy the DVDs-by-mail service, or you can buy the online-streaming service, but to get them both you have to buy them separately: Netflix won’t give you even a single penny discount for getting both together rather than one or the other. In unscientific polls, more than a third of subscribers say they’re going to cancel; I doubt that anywhere near that many will follow through on that threat, but the fact is that Netflix offers much worse value going forward than it has done up until now. Streaming is great, but the selection is still extremely limited, and sometimes it doesn’t work at all for people with spotty internet connections. Having a few DVDs in familiar red envelopes was quite lovely, just in case there were problems with the internet, or you were about to go on a long journey with a laptop, or you needed to watch something only available at the end of Netflix’s long tail.

In shoving people out of their DVDs-by-mail schemes and into the streaming-only option, Netflix is reversing the trend seen in Anderson’s chart: the proportion of demand accounted for by its top 500 titles is almost certainly going to reach new all-time highs. At the margin, this move might well help encourage movie studios to allow their long-tail films to be available for streaming, but that process is going to take a long time and we might never have as much inventory available for streaming as we currently do in the DVD store.

Theoretically, of course, the long-tail model works even better with streaming than it does with physical DVDs, since all the physical problems associated with finding and managing the inventory of pieces of plastic go away, and filmmakers can upload their films for streaming even if they don’t have a DVD distribution model. But it’s going to take many years to get there, and in the mean time I think it would make sense for Netflix to allow its streaming customers to take out on physical DVDs any titles which aren’t available for streaming. That might give Netflix a bit less of a bully pulpit when it comes to negotiations with studios. But it would be much more consumer-friendly.

(Incidentally, is there a reliable number out there for the number of movies available on Netflix streaming? I’ve looked but can’t find one.)

Check out page 44 of the Joint Committee on Taxation report on the way that household debt is treated for tax purposes. I’ve put the table into chart form, to make it easier to see what’s going on. Apologies for the rather weird y-axis on the chart: it’s serving a double purpose, counting total returns for the left-hand column and dollars for the right hand column. I would have done a dual axis, but I was having difficulty making that work in Excel.

In any event, the big picture here is clear. Households earning more than $200,000 a year account for less than 10% of the returns, but get 30% of all the benefits. And households earning more than $100,000 a year get 69% of all the benefit. The mortgage-interest deduction might be a middle-class tax break, but realistically it’s an upper-middle-class tax break.

The JCT is also very clear on the two separate ways in which it’s fundamentally unfair, benefiting owners at the expense of renters:

The deduction for home mortgage interest reduces the after-tax cost of financing and maintaining a home. Because the Federal income tax allows taxpayers to deduct mortgage interest from their taxable income, but does not allow them to deduct rental payments, there is a financial incentive to buy rather than rent a home. Taxpayers are also allowed to exclude gains from the sale of their principal residences of up to $500,000 from gross income. There is no such exclusion for other types of investments, further reinforcing the financial incentive to buy rather than rent a home.

Homeowners also receive preferential treatment under U.S. tax law because the imputed rental income on owner-occupied housing (that is, the cost of rent which the taxpayer avoids by owning and occupying a home) is not taxed. Consider two taxpayers: one rents a home at a $1,000 monthly rate, and the other owns a home which carries a $1,000 monthly mortgage. All else equal, a renter pays taxes on a measure of income that includes the $1,000 used to pay rent and the homeowner pays taxes on a measure of income that does not include that same $1,000. If imputed rental income were included in income, it would be appropriate to allow a deduction for mortgage interest, property taxes, and depreciation as costs of earning that income. Because tax law allows taxpayers to deduct mortgage interest and property taxes to determine their taxable income but does not tax imputed rental income or allow them to deduct rental payment, it creates the incentive to buy rather than rent a home and to finance the acquisition with debt.

The mortgage-interest deduction should be abolished, of course — it’s a dreadful piece of public policy. Homeownership, especially during times of high unemployment, does more harm than good, and there’s not even any real evidence that the deduction actually increases homeownership, rather than just artificially making houses more expensive to buy.

But if we’re not going to abolish the mortgage-interest deduction, I like the idea that homeowners should be taxed on their imputed rental income. Think about it this way: I can give you a house, or I can give you the money to buy that house, or I can give you an income stream to pay the rent on that house. The tax consequences of the three are very different, and the last one is the worst: you have to pay income tax on the income stream, leaving you with less money for rent. But if you own a house, and get lots of valuable benefit from it every month, you don’t need to pay any tax on that benefit at all.

More realistically, however, we should just look at the $80 billion a year we’re spending on the mortgage-interest deduction and ask ourselves (a) whether we can afford it, and (b) whether it’s really the best possible way in which we could be spending $80 billion a year. The answer to both questions is clearly no. Especially since that money is going overwhelmingly to the richest households in America.

Last month, in a post headlined “how the mortgage industry lies with statistics,” I bemoaned the fact that I couldn’t find good real data to compare to the massaged data which went into this chart.

What this chart purports to show is that if you’re writing qualified mortgages, the default rate is low whatever the downpayment; it’s the non-qualified mortgages which see enormous default rates above 15%.

But now Glenn Costello of the Kroll Bond Rating Agency has taken the same data from CoreLogic and crunched it for me in exactly the way I requested of Anthony Guarino, the man who put the above chart together. And if you look at the data in a non-massaged way, it looks very different indeed:

The first thing to note is that all of the bars on this chart apply to qualified mortgages: the unqualified ones aren’t even included. And yet the y axis goes much higher than the official mortgage industry’s chart — one of the bars reaches a whopping 40%, about which more in a minute.

The greenish bars, on this chart, are all the mortgages with downpayments of 20% or more, broken down into three groups: downpayments of 20-25%; 25-30%; and more than 30%. (The chart actually shows LTV, or loan-to-value, which is the opposite of a downpayment: to get the downpayment, you subtract the LTV from 100.)

The worst performance for this group happened in 2006, for mortgages with a 20-25% downpayment: they ended up with a delinquency rate of 10.3%. That’s very high, and that single datapoint alone would suffice to show that the 20% downpayment level isn’t a guarantee of safety when it comes to mortgages.

But just look what happens when you compare the mortgages with a 20-25% downpayment to the mortgages with a 15-20% downpayment. Now we’re looking at the bluish bars — they range from 15-20% downpayments all the way to 3-5% downpayments. But for the time being, just look at the lightest blue bar and compare it to the darkest green bar. That’s where the 20% downpayment dividing line happens, and the difference is stark.

In 2002, 6.6% of mortgages with a 15-20% downpayment ended up in delinquency, compared to just 1.5% of mortgages with a 20-25% downpayment. That’s an increase of 340%. In 2003, the numbers are 5.7% and 1.8%; in 2004 they’re 8.0% and 3.5%; in 2005 they’re 13.3% and 8.3%; in 2006 they’re 21.2% and 10.3%; and in 2007 they’re 15.7% and 6.4%. In every case, the gap is huge; in 2006, it’s in double digits.

Remember, we’re talking about qualified mortgages here — the ones the mortgage industry claims are so safe that banks should be allowed to sell all of them off without keeping any skin in the game. All of these mortgages came with mortgage insurance, for instance. And now check out that tall bar from 2007: if you took out a qualified mortgage, that year, with a downpayment of between 3% and 5%, then you had a 40% chance of ending up in delinquency. There was clearly nothing safe about those mortgages at all; even the mortgages with no money down at all did better. (The final maroon bar shows mortgages with 0-3% down.)

The contrast with the official chart could hardly be starker. Let’s look at 2007. According to the mortgage industry, the worst performance seen in the qualified-mortgage universe was a delinquency rate of 6.3%, for loans with 5% or more in downpayment. The truth is that loans with 5-10% down in 2007 saw a delinquency rate of 25%. And you have to get up to a downpayment of 25-30% before you see a delinquency rate of less than 6.3%.

So let’s all remember this chart, the next time anybody claims that you can have a safe mortgage with a low downpayment. Because the fact is that you can’t.

Univision is a massive television network in the United States, which has had a lot of success providing popular programming in Spanish. It’s had a news operation for a while, but nothing investigative — and up until now it has made a point of telling only upbeat and positive stories about the hispanic population in the US.

And that’s only the beginning of why this story is so interesting. Univision has done a great job of providing it in a range of formats: there’s Spanish-language video, of course. But there’s also a detailed Spanish-language web story, complete with supporting documents, as well as an English-language version of the video and a clearly-written story, in English, posted on Univision’s excellent Tumblr.

The news here is that Senator Marco Rubio of Florida has a brother-in-law with a rather embarrassing past:

Cicilia was convicted and sentenced to 25 years in prison for conspiracy to distribute cocaine and marijuana belonging to a crime ring implicated in the death and dismemberment of a federal informant, as well as the bribing of several Miami police officers.

And there’s a meta-story, too, about the way in which Rubio’s office refused to respond to Univision’s enquiries, instead trying to quash the story entirely by going above the head of the news department and complaining directly to Univision’s CEO.

“Quite simply, the pursuit of this story and the targeting of the Senator’s relatives, who are private citizens, is outrageous,” said Alex Burgos in a letter to Univision CEO Randy Falco seeking to kill the story. “They do not hold public office and are unrelated in every way to his service in the United States Senate… This is not news. This is tabloid journalism.”

The lesson here is that as the number of investigative reporters on local newspapers continues to shrink, this kind of news will increasingly come from brand-new outlets, which include not only blog networks like Gawker but also hybrid creatures like Univision Investiga. This increasingly-diverse news ecosystem raises interesting questions for the likes of Rubio spokesman Alex Burgos, who refused to deal with Univision Investiga in the same way that he would deal with an English-language national news network, or for that matter the Miami Herald, where the author of the story, Gerardo Reyes, won a Pulitzer. Instead, Burgos decided that the best response was an aggressively adversarial one, where the full power of the Senator’s office would be used to try to ensure that the story never got out at all.

I don’t think that tactic was wise. Very few of the newer media outlets are subsidiaries of companies which are open to political coercion in this manner — and of course Burgos’s attempts here didn’t work very well either. Rubio and Burgos may not be happy about the increasing diversity of news outlets covering them, making it harder for them to control the flow of news. But outfits like Univision Investiga are entirely legitimate, and have to be treated that way.

Shahien Nasiripour has an update on the talks between the big banks and the state attorneys general, with some rather worrying news: under the proposed settlement, the AGs are going to give the banks broad immunity from prosecution, despite the fact that they don’t really have a clue what the banks might have done wrong.

Some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness.

“I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

According to sources familiar with the ongoing state and federal probes, state and federal officials have wasted months not digging into the details of the foreclosure crisis, yielding little of value in court and undercutting the lenders’ incentive to strike a settlement of greater benefit to homeowners and taxpayers.

The investigators have yet to gather many documents, conduct depositions or assemble tallies of aggrieved homeowners. They don’t yet have a good handle on the number of wrongful foreclosures, the amount of fraudulent documents filed in local courts or the volume of legal instruments processed by so-called “robo-signers,” the agents that lenders employed to process foreclosure filings en masse without examining the underlying paperwork.

“The evidence a prosecutor would use is not in the possession of the prosecution,” said one person familiar with the ongoing settlement talks.

This doesn’t really surprise me. A coalition of 50 AGs, not to mention a large number of disparate federal agencies, is never going to be particularly good at taking a focused look at wrongdoing in the banking industry during the financial crisis. The best they can hope for is to get a flavor of what the likely crimes were, and then try and extract as much as they can from the banks.

But the dangers here are obvious, especially to those of us who remember the story of Steve Rattner. Andrew Cuomo, if you recall, granted Rattner immunity from criminal prosecution in return for his testimony — and then regretted that deal later, when he found out much more about Rattner’s actions. It’s clearly in the banks’ interest to do a deal now, before a lot of detail comes out about what they did wrong; after all, this is a world where a single bad mistake can result in fine of hundreds of millions of dollars. Multiply that by thousands of mistakes and it’s easy to see why the banks would much rather pay a few billion dollars up front and put all that prosecution risk behind them.

If a deal isn’t done, aggressive AGs in New York and maybe a couple of other states could decide to start prosecuting cases individually — but the AGs don’t really have the resources to do that in all cases and against all banks, and most AGs don’t have the resources or even the inclination to do it at all. Which is why it’s important that they have all the information they can lay their hands on now, in the run-up to a global settlement. I’m already pessimistic that the settlement will actually achieve much of anything. And if it results in hugely valuable immunity for the banks, it might well be Wall Street which ends up the ultimate winner. Again.

The holy grail of mortgage modification is principal reduction — the only thing which gets homeowners out of negative equity hell. And one of the big questions is why it’s not more common: it seems to make sense for all concerned, given that a sensibly modified mortgage is likely to be much more profitable for a bank than forcing a homeowner into a short sale or foreclosure and trying to sell off the home in the current market.

Last week the NYT, in a front-page story, found that Chase is actually doing principal reductions — quietly, on some of the most toxic mortgages written during the subprime bubble. But the mechanism was very mysterious — for one thing, the principal reductions were being done on many mortgages which were actually current and in good standing, rather than on mortgages which were careening towards foreclosure.

Philip van Doorn followed up, and my reading of his article — he doesn’t make this explicit — is that there’s actually method to the madness here. In order for banks to offer principal reductions, two criteria need to have been met: (a) they came into the mortgages via acquisition, rather than writing them themselves; and (b) they bought the mortgages at a discount.

Wells Fargo said that even though most of the Pick-a-Pay modifications had resulted “in material payment reduction to the customer,” Wells Fargo had not been forced to make larger provisions for loan loss reserves — which would have hurt earnings results — because of the aggressive write-downs taken when the loans were acquired…

JPMorgan had $24.8 billion in option-ARMS as of March 31 within in its $70.8 billion purchased credit impaired portfolio, acquired as part of the company’s purchase of the failed Washington Mutual from the Federal Deposit Insurance Corp.in September 2008. The PCI loans were written-down to fair value when they were acquired, and as of March 31, JPMorgan said that although it had set aside $4.9 billion in loan loss reserves for all of its PCI loans, “to date, no charge-offs have been recorded on PCI loans.”

It seems that Wells and JP Morgan are happy to do principal reductions only on the mortgages they bought at a discount from Wells Fargo and WaMu respectively; Bank of America, meanwhile, which inherited a bunch of these loans when it acquired Countrywide, is not doing principal reductions, and I don’t think it’s a coincidence that the Countrywide loans were bought at very close to par.

The behavioral psychology here is very easy to understand. No bank wants to admit that it wrote idiotic loans, and write down its own assets from par. Meanwhile, it’s much easier to write up an acquired asset, if the amount you reduce the loan is less than the discount you bought the loan for in the first place.

Economically speaking, however, what the banks are doing here does not make sense. Either writing down option-ARM loans makes sense, from a P&L perspective, or it doesn’t. If it does, then the banks should do so on all their toxic loans, not just the ones they bought at a discount. And if it doesn’t, then they shouldn’t be doing so at all.

The truth is, of course, that banks should be doing principal reductions, and they should be doing them on lots of their loans, rather than just the ones they bought cheap. And the fact that they’re already doing this, entirely voluntarily, on some of their loans is the best possible indication that it makes perfect economic sense to do so on all of their loans. Even if doing so might involve admitting that the subprime crisis still isn’t fully over.