Felix Salmon

More or less the entire market now believes Greece will default. — Bloomberg

It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9.

One of Buffett’s successors is a guy who paid over $5.2 million to have lunch with him. –Fortune

[Weschler's] three biggest positions were W.R. Grace (GRA) ($412 million), DaVita (DVA) ($368 million), and DirectTV (DTV) ($328 million). DaVita runs kidney dialysis centers. W.R. Grace is in bankruptcy, but its stock trades actively in the market.

The United States has the lowest share of small businesses of any OECD country. — Washington Post

in France, when a company grows to 50 employees, it has to set up a Works Council that coordinates with employees on workplace conditions. And so “many small French companies limit themselves to… 49 employees.”

The US Department of Defense is the world’s largest employer, by far, with 40% more employees than the Chinese People’s Liberation Army . — The Economist

Student loans for for-profit universities are about as safe as sub-prime. — @rortybomb

Groupon Needs to Get Its Growth On — WSJ

The story isn’t all bad. Groupon gained market share in North America in August compared with top rival LivingSocial, Yipit Data reports. Meanwhile Facebook, a potentially worrisome competitor, recently shut down its daily-deals product.

86% of Americans now approve of interracial marriages. — Gallup

More Americans disapproved than approved until 1983, and approval did not exceed the majority level until 1997.

Spiegel has an excellent, long, and detailed article about the tension at the heart of the euro crisis — the one between Greece and Germany. Europe has thrown $150 billion at Greece to date and has nothing to show for it except for a temporarily averted sovereign default. If that kind of money continues to rain down on Greece, the outcome will be similar — immediate crisis averted, but no real change in terms of the Greek sovereign finances. Austerity, it turns out, is working exactly the way it always does: it’s slowing down the country and making any recovery pretty much impossible.

Up until now, the EU’s attitude to Greece was a bit like Tim Geithner’s attitude to the debt ceiling: Greece will implement the reforms it has promised, it will recover economically, we will give them the liquidity they need from the EFSF, there is no alternative. But now, starkly, two alternatives have emerged blinking into the harsh light of the market. Either Greece defaults and remains in the euro; or it defaults and leaves the euro. This is not an orderly London Club bail-in default with a modest 21% haircut and an exit yield of 9%: rather, it’s a proper we-can’t-pay-our-debts default with significant losses for all banks holding Greek debt — including the ECB.

Meanwhile, with the exit of Jürgen Stark, the ECB itself has clearly reached the limit with respect to how much it can help the eurozone stay intact. Stark’s replacement — almost certainly another German Bundesbank type — may or may not be as hardline as Stark was. But Friday’s news underlines that the ECB is emphatically not going to behave during this crisis as the Fed did during the last one — by subordinating itself to broader necessities, and making its first priority that it do everything in its power to ensure that a coherent and coordinated crisis-response plan is adhered to. To put it another way: Bernanke, ultimately, did what Paulson wanted him to do. It’s not at all clear that Mario Draghi will be able to behave the same way.

So the latest swoon in European and global markets makes sense: we’re at an inflection point, in Europe, and all the signs are pointing to more chaos and uncertainty. The last crisis brought Europe and the world together, at least briefly. This one is tearing Europe apart. The unity that we saw at the G20 summit in London in 2009 is nowhere to be seen, and there’s no indication that it’s going to emerge again, at least not before it’s too late. Most of the time, market reports of “worries over Europe” are code for “global stock markets fell, and we don’t know why.” This time, I think they’re legit.

It’s beyond ironic — closer to moronic, really — that Jamie Dimon would give an interview to London’s very own Financial Times, complaining that international bank-regulation standards are “anti-American,” on the very day that the Vickers Report — Robert Peston calls it “the most radical reform of British banks in a generation, and possibly ever” — is released.

It’s literally unthinkable that the US Treasury would ever dream of doing to JP Morgan what the UK Treasury, here, seems to want to do to the likes of Barclays and RBS. This is a Volcker Rule on steroids — all retail banking will be ring-fenced and forced to operate with enormous amounts of capital, much more than Dimon is complaining about. It’s essentially a break-up, in all but name, of the big banks with both retail arms and investment-banking operations. And it’s designed, quite explicitly, to strengthen the UK’s banking system by reducing the amount of risk and bolstering financial stability.

But Dimon doesn’t care about what’s going on in the UK. He’s just looking at Basel, which — incredibly — he wants the US to withdraw from.

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

I have no idea what Dimon thinks is anti-American about the Basel standards, which are certainly in the interests of the United States. In fact, by all accounts it was the US which was pushing for stricter rules, and had to compromise with the laxer Europeans, whose banks are much less well capitalized right now.

US banks, including JP Morgan with its “fortress balance sheet”, are very well placed to navigate through the Basel rules and come out strong and dominant on the other side. European banks, by contrast, will have to raise a lot of very expensive equity. And UK banks, if the Vickers proposals are adopted, will be much less formidable in the international arena than they are right now, with most of their assets ring-fenced and unavailable for merchant-banking misadventures.

And in any case, as we learned during the financial crisis, the world is so interconnected that whatever is good for the global banking system is good for the US banking system. Which point seems to be lost on Dimon:

“I think any American president, secretary of Treasury, regulator or other leader would want strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country,” said Mr Dimon.

This makes no sense. The more capital America’s banks have, the stronger and healthier they are, surely. Why would enhanced capital-adequacy standards mean giving up a position of having healthy banks? It would mean quite the opposite, it seems to me.

But I suspect that what Dimon is talking about here isn’t healthy banks, but rather healthy bank shareholders. He wants to go back to the casino model, with himself sitting in the role of the house which always wins. (Except when it loses, and is bailed out by the government.) The American president, secretary of Treasury, regulator or other leaders have no particular interest in seeing bank shareholders and employees make lots of money — that’s not what healthy banking is about. The best banks, indeed, are the invisible middlemen who make very little money.

Vickers understands that, as do the regulators at the Federal Reserve who helped to negotiate the Basel agreement. And in his heart of heart, Dimon probably does too. Not that he’d ever admit it.

Carol Bartz is off the Yahoo! Board, and $10 million richer. — All Things D

The Pittsburgh metropolitan area is one of the country’s least diverse. — Pittsburgh Post-Gazette

Southwestern Pennsylvania is whiter even than the Amish country around Lancaster, the Mormon population center of Salt Lake City, Midwest agrarian capitals such as Des Moines, Iowa, and far more isolated places like Boise, Idaho.

Michael Pettis argues that having the dollar as reserve currency is a bad thing for the U.S. economy. — Foreign Policy

Consuming beyond your means, in other words, is considered a curse for other countries even as they insist that it is a privilege for the United States.

Raghuram Rajan considers whether inflation is the solution to our debt troubles. — Project Syndicate

The central bank needs rapid, sizeable inflation to bring down real debt values quickly – a slow increase in inflation (especially if well signaled by the central bank) would have limited effect, because maturing debt would demand not only higher nominal rates, but also an inflation-risk premium to roll over claims.

The Georgia jobs program touted by Obama is nearly bankrupt, its director says. — Reuters

Only 12 unemployed people signed up in August and 92 have done so since February, according to state Department of Labor statistics.

Dexter Filkins goes long on the murder of Pakistani journalist Syed Shahzad, presumably by his own country’s military. — New Yorker

Muhammad told me that his most memorable job came in December, 2001, when he was part of a large I.S.I. operation intended to help jihadi fighters escape from Tora Bora—the mountainous region where bin Laden was trapped for several weeks, until he mysteriously slipped away.

An incredible graphic taken from voicemails left for United 93 passenger Mark Bingham. — San Jose Mercury News via Charles Apple

Nico Muhly has a fantastic rant about the way in which professional orchestras make it effectively impossible for composers to actually listen to their own pieces, after they’ve been played; the most pungent comment on his post comes from fellow composer Jeff Harrington, who says that he’s never heard a piece that he wrote for two great musicians who have played it 30 times.

The problem here is not that the pieces aren’t recorded — they are. Rather, it’s that the recordings are digital. Because they’re digital, they can be copied perfectly, and distributed widely, with great ease — and that’s something that orchestras are very scared of. They make good money from their digital recordings, and they don’t want to risk unlicensed recordings being found in the wild.

This is a pretty short-sighted view. Nico Muhly isn’t asking orchestras to let him put their recordings online; he just wants to be able to listen, privately, to what his piece sounded like when it was actually played by humans in a concert hall. But in fact it wouldn’t do any harm to anybody if that recording turned up embedded on his website. People who listen to it there would be much more likely to buy the official recording if and when it appeared. Either way, Muhly’s main point stands: composers will write significantly better music for orchestra if they can hear what it sounds like after they’ve done so. And not just composers, either: the same is true for soloists, as well.

In general, it’s depressing and unsurprising to discover that orchestral unions are even more hidebound and reflexively negative, when it comes to the digital world, than record labels. They look at the world of digital music as something to be scared of, and to say “no” to as loudly as possible, unless and until someone comes along with a big bag of money and pays them to say yes. It’s the same zero-sum mindset behind the Authors Guild’s opposition to Google’s attempts to make their work much easier to search for and find.

Google Books was only ever going to encourage more people to buy more books, yet the Authors Guild insisted on hobbling it and extracting as much money as they could from Google before allowing it to go ahead. And making it easy for people to listen to new music online is the best possible way for orchestras and composers to build a new fan base and long-term audience — but instead the orchestras are fighting that which is in their own best interest.

Orchestras suffer no losses if people listen to their sounds outside the concert hall where those sounds were originally performed. In fact, they benefit: anybody who listens to those sounds online is someone who might become a fan and subscriber. But the unions don’t think that way: they just know that they’re paid for performing in the concert hall, and they’re not being paid any extra if and when that performance appears online. And so they’ll oppose any attempt to get it there.

I’m not sure what the best way around this problem might be, but I fear that it’s part of the reason why the extremely vibrant new-music scene has relatively few pieces for full-scale orchestra. They’re hard to write, expensive to perform, and then impossible to distribute in recorded form.

If the artform does survive, I suspect it will be thanks the one group of composers who regularly do hear their music recorded — soundtrack composers for film and TV. So, Nico, is Hollywood calling? That might be one solution to your problem.

(Via the Browser)

Remember to check out Counterparties.com, which has all the following stories, plus many more.

Why we should treat Bank of America mortgages like asbestos –  Reuters

This is not the first time that some have talked about a litigation trust as a mechanism to deal with some of Wall Street’s liability arising from the collapse of the U.S. housing market. In the early days of the financial crisis, regulators discussed the merits of using an asbestos-style trust to resolve potential litigation claims against the biggest U.S. banks. But regulators ultimately rejected the trust concept along with other novel ideas that were deemed either unworkable or politically untenable.

Here’s the intel report for this weekend’s terror threat — The Daily

According to recently obtained information, al-Qa’ida may be planning attacks inside the United States, targeting either New York City or Washington, DC around the time of the 9/11 anniversary… While this specific threat reporting indicates al-Qa’ida may be considering an attack using vehicle-borne improvised explosive devices (VBIEDs) — likely similar to the tactic used by Faisal Shahzad in his attempted attack on Times Square 1 May 2010 — we assess that al-Qa’ida and its affiliates have also considered attacks with small-arms, homemade explosive devices, and poisons, and probably provide their operatives with enough autonomy to select the particular target and method of attack.

Justin Wolfers thinks Obama’s jobs plan is reasonable eight times over — Freakonomics

It’s reasonably front-loaded. Goldman Sachs says it will raise 2012 GDP by about 1.5%–before any multiplier effects. Moody’s chief economist Mark Zandi thinks the effect on 2012 GDP will be about 2%. Expect more estimates in the 1-3% range for 2012; smaller for 2013.

Maybe this is just a trial balloon AOL is floating to try to get Yahoo to buy it. Possibly. One could probably come up with some other explanation.  — Bloomberg

Armstrong is discussing options for a combination aimed at strengthening the two Internet companies, said the people, who wouldn’t be identified because the talks aren’t public. He has talked with private equity firms and investment bankers from Allen & Co. working with Yahoo, one person said.

Fannie, Freddie may be near a settlement with the SEC over subprime disclosure. — Dealbook

The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.

Turns out the first scrambled F-16s on 9/11 were unarmed, and planning to ram United 93 in order to stop it. — Washington Post

“Lucky, you’re coming with me,” barked Col. Marc Sasseville.

They were gearing up in the pre-flight life-support area when Sasseville, struggling into his flight suit, met her eye.

“I’m going to go for the cockpit,” Sasseville said.

She replied without hesitating.

“I’ll take the tail.”

It was a plan. And a pact.

Bernanke: Consumers are depressed beyond reason or expectation. — NYT

Economic models based on historic patterns of unemployment, wages, debt and housing prices suggest that people should be spending more money. Instead, just as corporations are sitting on their money, households are holding back, too.

Why? Well, one possibility is that Americans collectively are suffering from what amounts to an economic version of post-traumatic stress disorder.

And Google is reported to have paid $125 million for Zagat. Ouch. — WSJ

Edward Robinson has a fabulous profile of Anthony Scaramucci today. Scaramucci is a master of self-promotion; in the secretive world of hedge funds, he stands out as the guy who will spend whatever it takes to get noticed.

Scaramucci uses his SALT conference — and its A-list lineup of speakers — to burnish the SkyBridge brand. At the 2011 event, Scaramucci threw a private dinner for Bush, who pocketed $175,000 for his off-the-record talk earlier in the evening…

Scaramucci promotes SkyBridge in the media too. He makes regular appearances as a stock picker on CNBC, and spent more than $100,000 to place the SkyBridge logo in a scene in Stone’s second Wall Street drama featuring Gordon Gekko, the insider- trading felon played by Michael Douglas…

When the recession struck in 2008, SkyBridge rapidly lost a fifth of its value and Scaramucci criss-crossed the country trying to persuade clients not to withdraw from his fund…

At the time, financial firms were canceling conferences in Las Vegas out of concern it would look bad to party in Sin City as taxpayers bailed out Wall Street.

Scaramucci had no such qualms. He decided to host his first hedge-fund extravaganza at Encore at Wynn, one of the priciest hotels on the Strip. “I wanted to let people know we were still alive,” he says.

What Robinson nails is the way that this is what Scaramucci does — it’s his job. Scaramucci is a fund-of-funds manager, posting returns even he admits are lackluster: he more or less tracks the S&P 500, while making big, risky bets (a third of his assets are in MBS), investing in leveraged hedge funds, and reserving the right not to redeem his clients’ money upon request. Which means that he only has two ways to make money: either find stupid people to give him their money, or else shower himself with so many conspicuous indicia of success that people just want to buy into his perceived success.

OK, make that one way to make money.

It’s far from clear that Scaramucci actually is successful, in financial terms, by Wall Street standards. He certainly spends a lot — millions of dollars — on various forms of conspicuous consumption and self-promotion. But he’s not making a lot: since he’s a fund-of-funds manager, he’s making 1.5-and-zero, rather than 2-and-20. And under the terms of his deal with Citigroup, a substantial chunk of that 1.5 goes straight to them. He has to run Skybridge, of course, with all the employee compensation, compliance costs, and the like that entails. He’s regularly writing seven-figure checks to pay for things like the Davos Tasting of ludicrously expensive wine. And of course he has to pony up charitable donations, too, so as to be able to get up in front of a well-heeled crowd to receive the Hedge Funds Care Award for Caring. (I’m not making this up.)

Scaramucci’s fake-it-till-you-make-it approach might end up working: his fund is still growing, and Robinson says that he “has become the Wall Street player he aspired to be when he first landed at Goldman some 22 years ago.” He’s living proof of what Windward Capital’s Robert Nichols is quoted saying at the end of the article: “Performance isn’t what beats a path to your door. It’s sales and marketing.”

But he’s not a stock-picker, or even, really, a hedge-fund manager: he just plays one on TV.

And he’s also dangerous:

SkyBridge, which manages $2.8 billion in assets, is aiming its funds of funds at so-called mass affluent investors. They are households with a net worth of $100,000 to $1 million not counting their primary residence…

“I want to be the Peter Lynch of the hedge-fund industry,” Scaramucci says, referring to the Fidelity Investments money manager and TV spokesman who helped popularize mutual-fund investing in the 1980s and 1990s. “I want to make hedge-fund investing approachable to the average American investor.”…

The fund of funds has a minimum threshold investment of only $25,000, and SkyBridge sells it through Morgan Stanley Smith Barney, Bank of America Corp.’s Merrill Lynch unit and other retail brokerages.

This is a really, really bad idea. Households with less than $1 million in net worth should not be investing in hedge funds; they should certainly not be paying Scaramucci 1.5% a year for the privilege of doing so. (Plus front-end “placement fees” of as much as 3%.) The problem here is that most hedge funds are not good investments, and there’s absolutely no indication whatsoever that the funds Scaramucci invests in are any exception. Would you invest your money with the kind of person who pays real money to sponsor a fictional ball in the movie Wall Street 2?

Some people would: Scaramucci does seem to be a consummate salesman.

A youthful man with wavy brown hair and matinee idol looks, Scaramucci does have a salesman’s smooth touch. He peppers his conversation with offers to perform favors — “What do you need?” — and is fond of slipping his arm around your shoulder and giving it a squeeze to make a point…

“I would make him the trustee for my estate not because he’s a brilliant investor but because he would do the right thing for my family,” says Robert Matza, a former president of Neuberger Berman and now president of GoldenTree Asset Management LP, a New York hedge fund. “I trust him.”

I’ve seen another side to Scaramucci: my post about his wine tasting was followed by a series of irate phone calls and emails from him, not only to me but also to any and every senior Thomson Reuters executive he could think of. It’s the steely competitor underneath the glad-handing exterior. “Always invest with an Italian,” he says. It’s a joke — but it can also be read as a threat. If anybody is going to become the Peter Lynch of the hedge-fund industry, let’s hope it isn’t this popinjay. He’s the very worst of Wall Street, made flesh.

Update: I was happy to strike through the gratuitous Italian reference when Scaramucci told me he had taken offence.

I’m not a fan of the kind of political rhetoric that Barack Obama employed for much of his speech last night. “Pass this jobs bill” is not exactly “tear down this wall.” And at the risk of getting nitpicky, it’s difficult to say that “America can be number one again” and “America will be number one again” towards the end of the speech, only to finish with the assertion that “America remains the greatest nation on Earth”: my reaction was “wow, that was quick.”

But, as Paul Krugman says, there’s a lot to like in the nitty-gritty of the proposals, even if most of it was hard to discern in the speech itself. This, in particular, comes close to something I’ve been advocating for a while:

The President’s plan will completely eliminate payroll taxes for firms that increase their payroll by adding new workers or increasing the wages of their current worker (the benefit is capped at the first $50 million in payroll increases).

There are two things I’m less than ecstatic about here. First is the $50 million cap; second is the elimination of payroll taxes just for handing out pay rises, rather than for actually hiring people. But maybe there are logistical reasons why it’s hard to measure the number of employees, rather than just the total payroll in dollars.

But the idea of this bill, I think, is to attack the jobs crisis on multiple fronts, rather than placing a lot of faith in any one tax cut or similar. There’s the tax credit for hiring unemployed veterans, which is a great idea, along with another tax credit for hiring anybody who’s been unemployed for more than six months. There’s infrastructure investment, concentrated on schools, along with the return of our old friend the National Infrastructure Bank. That was a great idea when Obama first proposed it during the presidential election campaign, and it will remain a great idea when it’s proposed again every few years or so.

And! The wholesale mortgage refinance proposal managed to make it into the bill as well. That’s a great little stimulus program, which will cost the government little or nothing. It probably won’t create much in the way of jobs, but we need growth as well as jobs, and it will help, at the margin, on the growth front.

My least favorite part of the bill is probably the conceit that, as Obama put it, “everything in this bill will be paid for. Everything.” This is a particularly obvious symptom of the virulent disease which has long reached pandemic proportions in Washington — taking a headline from George Magnus, I call it Deficit Attention Disorder.

This is a stimulus bill; stimulus bills, by their nature, can’t be revenue-neutral or fully paid-for. And this one isn’t. Instead, it seems like Obama is going to tot up the cost of the bill — $447 billion is the number doing the rounds — and add it to the $1.5 trillion that the deficit supercommittee is being charged with cutting from the budget over a decade-long period. That’s not paying for a bill, it’s passing the buck to someone else.

And it’s pretty sad commentary on the state of American politics — and the way that the horrible personal-finance metaphor seems to have become embedded in the national psyche — that Obama considers this both necessary and a good idea.

The bottom line here, I fear, is that the best we can hope for is that this second stimulus will manage to keep the economy slightly above stall speed, and thereby help us avoid the job losses associated with a nasty double-dip recession. Avoided job losses are very good things, but they’re not new jobs. And they don’t get you re-elected.

Obama’s address to Congress — Whitehouse.gov

Americans still prefer to have male bosses — Gallup

92% of Afghan men ages 15 to 30 have never heard of 9/11 — WSJ

Economists call Romney’s economic growth projections “a stretch” — NYT

BofA’s CEO has a t-shirt in his office that reads: “Grind Together, Shine Together” — Businessweek

Bernanke warns of the consequences of a “substantial fiscal consolidation” — Federal Reserve

Why “we had to save banks in order to sue them” — Bloomberg

Why is Britain’s debt still AAA? — Alphaville

The Fed is considering three unconventional moves (not including QE3) — WSJ

Michael Arrington out at AOL — Fortune

HuffPost publishes its first e-book — Poynter

Gothamist publishes its first e-book — Gothamist

Vikram Pandit’s “globality” strategy for Citi may be in trouble — Bloomberg

Martin Wolf: The market is telling us to borrow and spend – and we’re not listening — FT

David Wessel and Shahien Nasiripour have similar reactions to the CBO paper on the costs and benefits of a wholesale mortgage refinance. Both of them say the effect of such a scheme would be pretty small, especially when you take into account the fact that the government would lose $4.5 billion, and private investors another $13-15 billion, in prepayment losses. Here’s Shahien:

Some 2.9m mortgages worth $428bn would be refinanced, saving borrowers $7.4bn from lower payments and averting 111,000 defaults at a cost of about $600m to the US government, the CBO said.

But investors in mortgage-backed securities guaranteed by the US would lose about $13bn to $15bn from prepayments on securities yielding above-market rates, the economists say.

This is all true — but I think it overstates the costs and understates the benefits of this idea.

For one thing, the benefits side can easily be increased just by tweaking a few numbers. The CBO paper just says that the new, refinanced mortgages would be issued at the “prevailing market rate”, without saying what that rate is; I think they’re using a rate around 4.5% on a 30-year fixed mortgage. But agency paper is trading at much lower yields than that. If you refinance existing mortgage holders at a rate of say 3.5%, then you’ll get many more people participating, and everybody participating will save a lot more money.

What’s more, the benefits side of the CBO calculation includes the mortgage-interest savings only for the first year — as are the savings to the GSEs of having to pay out less money in guarantee obligations. But the idea here is to refinance into 30-year bonds, so the total savings are much bigger, over the course of ten or 30 years, than the numbers in the CBO paper.

Meanwhile, the big prepayment “losses” are wholly a one-off expense which will never be repeated; it’s a bit disingenuous to take one year’s annual savings, as the CBO does, and then subtract a big one-off cost in order to get a net cost to the federal government of $600 million. Why not take two years’ savings, or three, or ten?

But what are these prepayment losses, anyway? They’re calculated by taking the market value of the mortgage-backed securities backed by the mortgages which will be refinanced, and then assuming that those securities will be paid off at 100 cents on the dollar. Since the securities are trading well above par right now, around 106 cents on the dollar, anybody who marks to market would suffer a loss of about 6% on their holding.

Let me translate that into English for you: the CBO is saying that if we paid off current bondholders at 100 cents on the dollar, they would lose as much as $15 billion. Doing so is entirely legal and proper: all of these mortgages can be prepaid. And anybody buying a mortgage bond cares first and foremost about prepayment risk — this would hardly come out of the blue.

But what’s happening right now is that mortgage bonds are trading well above par just because investors are well aware that refis are hard to come by for many homeowners. They’re basically taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates. If the value of their bonds came down towards the face value of the bonds, that would be a good thing. It’s not good when mortgage bonds trade well below par, but it’s not good when they trade well above par, either — it’s a sign of market failure. Remember, there would be no default involved here. So bondholders really couldn’t complain much.

One of the ways that capital takes advantage of labor in this country is the way in which homeowners who can prepay their mortgage for free often don’t take advantage of that option even when it’s available to them and doing so would save them tens of thousands of dollars. I think there are psychological reasons for this, but any plan which reduces the ranks of those homeowners is a good idea in my book.

Besides, it’s about time that homeowners who have diligently been paying off their mortgage, in full, throughout the financial crisis and all the way to the present day, should get some kind of reward from the government. This idea is a much better way of doing that than is the dreadful and hugely expensive institution of mortgage-interest tax relief. What we need, right now, is for the US as a whole to take advantage of the incredibly low interest-rate environment. Wholesale mortgage refinance is a great way of achieving exactly that goal.

Why is Google buying Zagat, a company which has failed miserably online, rather than, say, Yelp or Tripadvisor? I suspect a lot of the reason has to do with its pseudoscientific ratings, on a 30-point scale: Google loves being able to quantify stuff. But those ratings are silly: they’re not at all comparable between markets (try a sushi joint in Long Island and then compare it to one in New York City with an identical food rating), and they suffer from enormous inflation.

On top of that, the one concrete datapoint that Zagat does provide — the cost estimate — is simply dreadful. Steve Cuozzo exposed this five years ago, and nothing has improved since then — you will basically never get out of a restaurant for the ridiculously low price that Zagat purports to think that a meal costs.

Zagat is mainly useful as a source of phone numbers and opening hours — information Google Places already has. Yes, it has a trusted reputation — but Google has that, too. And it has a massive global print-publishing business; I can’t for the life of me imagine why that’s something that Google wants to get into.

Most puzzlingly of all, Google’s Marissa Mayer refers twice in her short official announcement to Zagat’s “insight” — it’s “impressive” at first mention, and “tremendous” at second. Does anybody have a clue what she’s talking about? Zagat doesn’t do insight — that’s simply not the business it’s in.

So color me very confused at this weird entry into what looks very much like Old Media — something which was very useful before the mobile internet came along, but which has already been comprehensively disrupted by Google itself. Google is the future of information; Zagat is the messy and conflicted past.

Ethical questions about the Zagat guide abound — about the way that restaurants game their ratings, the things that diners will do for a free guide, and the way that Tim and Nina Zagat themselves are extremely chummy with the restaurateurs they’re judging in a supposedly objective manner. I hope Mayer and Google know what they’re doing, here. But it makes no sense to me.

Eric Burroughs has a fabulous scoop today: the Swiss National Bank isn’t just buying euros at a rate of 1.20 Swiss francs to the euro. (If that was all it was doing, in fact, it would yet to have spent any money at all: the exchange rate hasn’t hit that level since the announcement.) Instead, or as well, the SNB is intervening aggressively in the FX options market. And not the plain-vanilla exchange-traded options market, either: the SNB seems to have been a huge seller of forward volatility agreements — essentially taking a massive short position in the volatility of the euro/Swissie exchange rate.

But a picture, here, tells a thousand words. If you recall my post from immediately after the SNB announcement, you’ll remember these charts:

The left-hand chart is the euro/Swissie volatility surface on August 22; the right-hand chart is the same surface on September 6, after the announcement. It’s even more skewed: people are still bearish on the euro and bullish on the Swiss franc, and expecting lots of volatility ahead.

Now check out what the same surface looks like today:

Now that’s what I call a dramatic one-day move. And remember, this move came after the market reacted to the SNB announcement — no one was expecting this, not even after the SNB said what it was going to do.

This is a bold move by the SNB, even if it might prove expensive should things not go according to plan:

Selling volatility also means that the SNB has forced the euro/Swiss franc options market to turn suddenly long gamma, so that the hedging of option dealers would help dampen the daily moves in the currency pair. The opposite happens when the options market is short gamma, exacerbating sharp market swings.

“Long gamma”, here, means that if you hold an option, it will make a lot of money even on a relatively small move in the currency pair. By contrast, before this intervention, implied volatilities were so high that the Swiss franc needed to move as much as 4% in one week in order to make options trades profitable. (Which, of course, it did.)

Essentially, the SNB is trying to calm down the options market, and thereby calm down volatility in the swap price: the two feed off each other very closely. But the problem with doing things like buying double-no-touch options is that it gives the market every incentive to try and make the exchange rate hit the strike price — it’s almost an “I dare you”. So far, the market hasn’t really tested the SNB’s steadfastness on this issue. But the two are sure to butt heads at some point. And the SNB here, is maximizing the amount it has to lose if the market wins.

One of the problems with mortgage modifications, the way the big banks do them, is that they tend not to work very well. Borrowers who were underwater stay underwater; often their total amount outstanding goes up rather than down. The amount of time and effort expended by both borrower and lender is enormous, much of it duplicated due to bad document management by the banks, and policies requiring borrowers to get at least two modifications — one for a “trial period” and then a second, permanent one. Redefault rates are very high.

In that context, it’s easy to see why banks would shy away from expanding such programs even further: they’re clearly broken, after all, and even if they help borrowers (which isn’t clear), they certainly don’t seem to be helping the banks.

Which is why it’s encouraging to have seen a couple of pieces in recent days showing that well-designed programs for delinquent borrowers really can work, and work well.

First came James Orr and Joseph Tracy at the NY Fed, talking about government programs to lend money to laid-off workers so that they could meet their mortgage payments while unemployed. One program, in Philadelphia, has seen fully 80% of participants remain in their homes and pay off their loans in full. Here’s the key:

An important aspect of HEMAP’s screening process is evaluating the homeowner with respect to the reemployment prospect. In Pennsylvania, this is done on an individualized basis.

As any community banker will tell you, loans perform much better when you have an individual, human relationship with the borrower — something big national banks find hard to do, but which smaller banks can be quite good at. Ruth Simon today has the story of Webster Bank:

Webster is doing a good job at servicing its loans,” says Connecticut Attorney General George Jepsen…

At Webster, “you can actually reach a person,” says Martha Ross, a housing counselor with Neighborhood Housing Services of Waterbury, Conn…

Just 1.84% of the mortgages serviced by Webster were at least 30 days past due but not in foreclosure as of June 30. The U.S. average is 8.15%…

When it restructures a loan, Webster usually waives late fees, penalties and unpaid interest instead of adding them to the loan balance—and putting homeowners deeper in the hole. Borrowers don’t have to make months of trial payments before the modification is made permanent…

Employee bonuses are tied partly to the number of modifications…

“We try to figure out what can a customer afford [in order] to stay in the home—and are willing to make it happen,” says Webster Chief Executive James C. Smith, whose father started the bank in 1935.

The lesson here is pretty clear: individualized attention from staffers empowered to make individually-customized decisions pays enormous dividends. I can see how the risk-management types wouldn’t like it, or the Type A personalities wanting to run the bank and be in full control of everything. And that kind of system also doesn’t scale well: if you’re growing your mortgage-servicing department at the rate at which banks like BofA are growing theirs, an organization like this would be putting enormous responsibility onto brand-new and untested employees.

But the right thing to do here is known, and is, in theory, implementable. I just fear that the big banks are constitutionally incapable of adopting it.

Michael Cembalest’s note explaining the EU Mess with lego seems to have touched a nerve, and while a part of that is due to the lego, I like to think that some of it is due to the fact that actually the diagram does very well what few other explanations have done — which is explain just how messy and multipolar the euro crisis really is.

Cembalest’s diagram includes a dozen different stakeholders, each trying to fob off the burden of the euro crisis onto someone else. (The single noble exception here are the opposition parties — the Social Democrats and the Greens — in Germany.) It’s all too easy, looking at Europe from across the pond, to divide the entire continent into two halves: a profligate south, spending beyond its means, piggybacking on the rich north, which doesn’t want to bail them out.

But of course it’s a lot more complicated than that. For starters, there’s the fight between the ECB, which wants a fiscal solution to the crisis, and pretty much everybody else, who wants the ECB to grow up, stop worrying about nonexistent inflation, and help save the euro zone by printing euros. There’s the question of whether and how much shareholders in banks should help pay for the bailout; a separate question about banks’ bondholders; and yet another question about sovereign bondholders. Within the northern countries, Finland has staked out a particularly extreme stance, saying that it won’t lend any money to anyone unless it’s collateralized. And then there’s the Bundesbank, which is particularly keen on imposing a painful regimen of austerity and structural reforms on countries which desperately need growth.

Or, to put it another way: European economic union has failed because European political union doesn’t exist. There’s no political body empowered to make decisions on behalf of the whole, and nor is there an executive able to issue debt on behalf of the whole. Hence the EFSF — a special purpose vehicle partially guaranteed by 16 different states including both Malta and Cyprus, incorporated under Luxembourgish law, and funded by the German Finanzagentur, in a structure which makes CDOs look downright simple. I’m sure it seemed like a good idea at the time, but you can hardly blame Europeans for being suspicious of such a creature.

As a result of all this politics, one thing is certain: we won’t get the best solution, as dreamed up by technocrats. Mark Dow, for instance, a former Treasury and IMF technocrat turned hedge-fund manager, has a solution to the problem that I like a lot: it’s far from painless, but it addresses the issue rather than doing any of the proverbial can-kicking, and it’s aimed at jumpstarting growth rather than trying to rely on austerity measures to do anything but make the situation worse.

Dow’s solution involves cutting loose Greece and Portugal, and probably Ireland too. The first two, certainly, need a devaluation if they’re going to regain economic growth — and so they should be allowed to devalue and default. Depositors in domestic banks would of course need to be kept whole; this might be reasonably expensive. And other European banks would lose a lot of money on the default, upon being forced to accept a hefty haircut on their holdings. So concurrently with cutting loose Greece and Portugal, there would need to be a massive recapitalization of the entire European banking sector — probably something on the order of a trillion euros or more. That would hurt bank shareholders, but keep the bondholders pretty much intact. “Shock and awe, writes Dow, “tired though this cliché has become, needs to be the overarching inspiration.”

As for Spain and Italy, they’re big industrial countries and can regain growth while remaining part of the euro — just so long as they can borrow relatively cheaply. Enter the ECB, committing to lend unlimited amounts of money to them, so long as they implement structural reforms, at a low rate of about 5%. Inflation risk, right now, is the least of our worries; if even the Swiss are happy to print unlimited amounts of money, then the ECB, in a much bigger crisis, should be too.

Now this isn’t the only possible solution; others exist. But something has to be done, and urgently. “Europe has to leapfrog the phase of thinking the unthinkable,” writes Dow, “and start doing the unthinkable”:

Orderly beats disorderly. Plan beats no plan. Proactive beats reactive. The time for the quantum leap in mindset is now.

And this is where Dow, or anybody else with a clever plan, runs straight into political reality. Any plan is going to be unacceptable to some European entity or government with veto power over the whole thing. And while Christine Lagarde, leading from the front, is surely trying to corral Europe’s elected politicians into something approaching a unified stance, her chances of success are slim.

Just look at where we are in the US, a single country with a single central bank and a strong federal executive. Look at the House Republicans during the debt ceiling debate; look at what all the Republican presidential candidates are saying about Ben Bernanke (a Republican originally nominated by a Republican candidate); look at the way that they increasingly don’t even bother to try to find economists willing to defend their stated positions. This is one of the reasons I pretty much want to pull a Rip van Winkle and wake up on November 7, 2012: by the conventions of journalism, there are going to be endless debates about whether or not certain economic-policy proposals make sense or are a good idea, as judged by economists and technocrats and pundits. And all those debates are going to make no difference whatsoever to the outcome of the election.

The principle of e pluribus unum, then, is looking pretty tattered even in its natural home of the US; it never stood a chance in Europe. Ideally, the population would elect a government; the government, duly elected, and with the backing of the people, would put together and enact a plan; and the plan would carry us through the crisis and out the other side. But that kind of thing is looking improbable even in the US; it’s impossible in Europe, not least because there is no European government. (And central bank independence, in this context, doesn’t help much either.)

Instead, we’re likely to end up doing as close to nothing as is economically possible. The slump in growth will accelerate, and probably result in another recession; the opportunity cost, in terms of wealth that might have been, will rapidly run into the trillions and won’t stop growing for a decade or more. Unemployment will savage the European welfare state and the US economy, and the entire global economy will stall. I don’t know or even particularly care what will happen to asset markets; they’re almost the least important part of the whole equation. It’s the real economy which matters, and as it remains stagnant, politics around the world will get ever more poisonous and unhelpful.

It’s a vicious circle, this situation that we entered with the advent of the global financial crisis, and neither the EU nor the US has the political will or ability to get us out of it. This is a test not only of capitalism but also of federalism and democracy. And right now neither of them are scoring very well.

In the world of regional newspapers, Journal Register Company and MediaNews Group are very big fish; they’re now merging, and the merged entity to be called Digital First Media, will be run by John Paton. Who writes that already he’s reaching an important milestone:

If our dailies continue on the trend they are on right now, by the end of the year they will have brought in more digital revenue than the costs of running their newsrooms.

Digital revenues can pay for newspaper newsrooms.

It seems to me that Digital First is much more likely to solve the problem of building strong — and profitable — web-based local media than is AOL’s Patch.

The first and most important reason is that local newspapers are, and always have been, the first best source of local ad-sales talent. They know their towns, they know their advertisers, they know their readers. Local advertising relationships are valuable and expensive things to build, and AOL doesn’t have any.

On the other side of the editorial divide, local newspapers are also the first best source of local news, and are generally much more respected and trusted in local communities than any cookie-cutter Patch site is likely to become. On an individual, case-by-case basis, it’s possible to find hyperlocal websites which are better than the local print rag. And of course it’s trivially true that wherever there isn’t a local print newspaper, any Patch site would be an improvement on nothing. But if you’re looking for a national-scale business with trust and local content in the community, Digital First is an obvious place to start. More than Patch, and indeed more than Groupon, too.

Finally there’s the opportunity for economies of scale. In theory, this is common to both Digital First and Patch: they both share hosting, design, development and other expenses across a large network of sites. But even here I think that Digital First has the edge: they’re far more advanced in terms of being able to share content, too. Local newspapers aren’t all local news, after all. Things like features, reviews, columns, comic strips — anything which can be syndicated, basically — can be shared.

Because Patch is web-native, syndicated content feels weirder there: this is an area where the old-fashioned aura of newsprint can help a website do things that a brand-new website would find much harder to get away with. But print ads should be easily capable of covering the marginal cost of printing and distributing a local paper, which means that print editions are not going to go away any time soon. So Digital First will, for the foreseeable future, be able to continue to have that hard-to-replicate feel of an old-fashioned newspaper, even as it embraces reader-generated content, new-media workflows, and the rest. The simple existence of a print product, found on the front shelf of the local grocery store, makes a very big difference.

None of which is to say that Paton’s job is an easy one. It’s not — in fact, it’s very hard. But I’d much rather be in Paton’s shoes right now than whomever has been put in charge of running Patch this week.