Felix Salmon

Stiglitz argues that now is “no time for a trade war with China” — Project Syndicate

EU banks could need up to $266 billion — CNBC

How the EuroTARP could play out — FT Alphaville

Welcome to the end of the Fake Recovery — Credit Writedowns

Michael Lewis says that Wall Street’s fingerprints are all over the EU crisis (Video) — Reuters

Ben Bernanke “can’t blame” the Occupy Wall Street protesters — ThinkProgress

Morgan Stanley is fighting “anonymous blogs and market whispers” — DealBook

Facebook is now as big as the entire internet was in 2004 — Royal Pingdom

Microsoft may actually buy Yahoo this time — Reuters

“Bill Gross feels fat” — Dealbreaker

Three years ago, NPR’s Madeleine Brand introduced a segment with Henry Blodget with these words:

Let’s go now to someone who knows a little something about financial bubbles bursting: Henry Blodget. He had a front-row seat during the dot-com boom: he was a tech stock analyst at Merrill Lynch from 1999 to 2001. Well, now Merrill is gone, sold off to Bank of America over the weekend, and Henry Blodget is gone too, banned from Wall Street after being charged with fraud.

Well, if Henry Blodget was gone in 2008, he’s definitely back in 2011. And while he’s still banned from the securities industry, he’s not banned from Wall Street: in fact, he’s positively welcomed there. He rang the opening bell at the NYSE this morning, which, judging by the huge grin on his face, made him feel even better than getting a $7 million check a couple of weeks ago to expand Business Insider.

How did Blodget manage this turnaround? Well, he started a blog, Internet Outsider, which wonderfully still exists, although it hasn’t been updated in almost four years. Kevin Ryan, impressed with the blog, turned it into a fully-fledged business, called Silicon Alley Insider. And the rest, well, is history.

The move from an outsider-branded blog to an insider-branded for-profit site marked the point at which Blodget started to focus intently on creating a website which would be as addictive as possible for readers, and cause them to come back as often as possible, generating as much revenue for himself as he could muster. Giving your media business a name like Inside.com or Business Insider is one way of justifying high ad rates: the idea is to sell advertisers on the idea that your site is being written by and for high-value professionals. These names may or may not mean much to readers, but to advertisers, Business Insider is always going to be a more attractive buy than Internet Outsider.

Similarly, for all that Blodget reacted rather defensively to my post on his over-aggregation, I was mainly trying to be descriptive rather than prescriptive. Putting up a vast amount of content on a daily basis is pretty much a necessary precondition for being a successful website. As is making that content as sensational as possible, with screaming all-caps headlines, striking photographs of pretty girls, or anything else which makes people click. I work in Times Square: I see for myself every day how people flock to an overstimulative environment. And creating such an environment online is the secret not only of TBI’s success, but also that of HuffPo.

For that matter, it’s the secret of CNBC, too: lots of whizzing graphics and manufactured cacophony. Both TBI and CNBC feature a huge quantity of market reports with negative added value: they’re giving a running commentary on a volatile market, making their viewers nervous and giving them an ersatz need to know what’s going on now. And the fact is that traders love this stuff — I defy you to find a trading floor which doesn’t have a TV tuned to CNBC. And truth be told, at any given point in time, some computer on that floor is going to have a TBI tab open too.

TBI is also a breath of fresh air for anybody who wants to cut through the clutter of stodgy reporting and get to the heart of the matter quickly:

“On Wall Street, I’d consistently submit a report that would say, ‘This is going to be roadkill,’ and it would come back rewritten as ‘We see some weakness,’” Blodget says. “Now I can say, ‘It’s going to be roadkill.’ That’s very satisfying.”

TBI stories are short, they’re punchy, they say what they mean, and they have a distinctive, provocative, voice. They’re not always true — but traders don’t care so much about what’s true, they care only about what people are saying and thinking right now. Media stodginess is a luxury of monopolists: the minute that media outlets start to seriously compete with each other, they always become increasingly sensationalistic. And TBI is competing not only with dozens of other news websites, but also with all the other addictive content online, including Zynga and Facebook. Henry doesn’t have the luxury of writing carefully-considered pieces and letting them stand on their own merit. His role has two parts to it, and unless he can make his carnival-barker job work, he’s going to get fired from his business-analyst gig.

Blodget’s VIP status on the floor of the NYSE today shows how far he’s come from the dot-bust days of his disgrace. Wall Street doesn’t much care about that any more — and neither does it object to TBI’s sensationalistic tendencies. Wall Street has always been a place of short memories and short attention spans. And Blodget knows just how to appeal to that audience.

You work hard, have a long and storied career, rise to the top of your profession, and become a multi-millionaire by doing so. How many people, in that situation, will say that the amount of money they’re being paid is “absurd”, “impossible to understand”, and “daft”? Well, Gerhard Richter, for one:

“It’s just as absurd as the banking crisis,” said the 79-year-old German, speaking to reporters on Tuesday at the press launch of a major retrospective of his work opening at London’s Tate Modern.

“It’s impossible to understand and it’s daft,” he added, speaking through an interpreter.

Asked how he thought the art market had changed in the last few years, he replied in English: “It became worse.”

Are there any bankers out there who feel this way? There must be, surely, somewhere — people pulling down seven- or eight-figure salaries, who think that it’s simply ridiculous to imagine that they’re really “earning” that kind of money, or adding that kind of value to the world. At least Gerhard Richter can point to his luminous paintings as an obvious example of how he’s making the world a better place. It’s hard to do anything similar when you’re structuring CDO-squareds.

One thing that bankers and painters have in common is that their services are Veblen-like: the more expensive they become, the more demand there is for what they do. Someone like Adam Lindemann who would evince no interest in an artwork priced at $500 can suddenly become very eager when it’s $500,000. And the phrase “reassuringly expensive” might have been designed to reflect the pricing strategies of banks looking to provide M&A advice to CEOs.

And in art, just like in banking, a healthy ego is often necessary if you want to become wealthy and successful. But occasionally, someone like Gerhard Richter is at least willing to come along and say that the whole market has gotten ridiculously out of hand. According to Artnet, 151 works by Gerhard Richter have sold at auction for more than $1 million, and ten have sold for over $10 million. In 2011 to date he’s already reached $92,412,177 in auction sales, and we haven’t even had the fall auctions yet.

Those sums didn’t go directly to Richter, of course — but they certainly helped to drive up the prices of his new works, which aren’t reflected in the Artnet database. And it is a bit silly: he puts the same amount of effort into creating a new work now as he did decades ago, but now is paid millions for each one. Couldn’t that money be put to better use buying less expensive art?

Matt Yglesias’s post on Denmark this morning got me all misty-eyed for European tax-and-spend liberalism:

The Nordic countries have become the world leaders in combining high levels of public services with strong economic growth precisely by being pretty relentless at seeking out economically efficient ways to raise tax revenue.

To put this into a US context, two of the biggest and most daunting long-term problems facing the US economy are (1) the fact that Americans aren’t as well educated as their counterparts elsewhere in the world; and (2) the fast-growing obesity epidemic.

Both of these problems are caused, in large part, by America’s very high levels of child poverty.

So if you fix the child-poverty problem, you’ve made a serious dent in both the education problem and the obesity problem.

What’s more, the child-poverty problem really is one of those problems which can be fixed quite easily just by throwing money at it. Give enough money to children in poverty, and they’re not poor any more. Problem solved — at least to a first approximation.

Of course, doing that is expensive, and needs to be paid for. Lower poverty will cause higher growth in the long term, but funding a permanent poverty-reduction program with deficit spending is still not something I’d recommend. So a responsible government adjusts its income so that it can pay for such a thing. The great thing about governments, after all — unlike households — is that they have a lot of control over how much money they’re bringing in. If a government wants more money, it just needs to raise existing tax rates, or implement new taxes.

So you bring in a new tax. On fatty foods — which would also, at the margin, help on the obesity front. Or on financial transactions. Or on carbon. Ideally, something you wouldn’t mind seeing less of. You take the revenues from the new tax, and you use them to make the country a better place. And if the tax is well designed, it will have no visible effect on economic growth.

But in the US, this kind of thinking is anathema not only to the right but also to the left. If fiscal conservatives want to reduce the deficit, they always look first to spending cuts rather than to new taxes — despite the fact that taxes in the US have almost never been lower than they are now.

As a result, the biggest and most daunting long-term problems facing America — things like the fact that the number of uneducated fat people is growing alarmingly — remain unaddressed, and largely ignored.

Is there a conservative way of addressing such issues? I don’t think there is — I think that conservatives will simply say that questions of education and nutrition are a matter of individual choice, and that the government should not concern itself with such things. But if we continue down that road, I fear that the unemployable underclass will only continue to grow. And that anger at the powers that be — whether it comes from the Tea Party or from Occupy Wall Street — will only continue to grow along with it.

Joshua Brown is feeling extremely bearish, and he’s making some sense — The Reformed Broker

The EU hints that investors will take bigger losses in a second Greek rescue – Bloomberg

Wolfgang Schauble is talking real European fiscal integration — Crooked Timber

France and Belgium are bailing out Dexia. Again. — Reuters

Kenneth Rogoff argues against Europe’s proposed financial transactions tax — Project Syndicate

“Investors do not really have a clear idea of how healthy any of these banks truly are.” — The Big Picture

Citi’s having trouble unloading $300 million billion in assets — WSJ

House Majority Leader Eric Cantor says Obama’s jobs bill is basically dead — WSJ Washington Wire

And pension costs alone are reason enough for American Airlines to declare bankruptcy — Fortune

Pace the president, does Bank of America’s $5 debit-card fee really show the need for the Consumer Financial Protection Bureau? Not really: the CFPB does not exist to prevent banks from charging stupid fees as part of a self-defeating protest against the Durbin amendment. If BofA wants to charge $5, or $50, or even $500 to people using its debit cards, then so long as it gives them fair warning, does so transparently, and is happy to see them close their accounts, it should be allowed to do so.

The fact that the fee was a mistake can be seen easily by the fact that it caused a huge uproar, while much bigger increases to Citibank’s monthly checking-account fee went largely unremarked-upon. At Citibank, the basic free-checking account now carries a $10 fee, waived if you use direct deposit or have a $1,500 average balance. And Citi’s more fully-featured checking account, which used to have a $12 monthly fee, has seen that increased to $20; in order to avoid that fee, the average balance has also been raised, from $6,000 to $10,000.

The era of big-bank free checking is over. But that has nothing to do with Durbin, and everything to do with the regulation of overdraft fees. (And, of course, low interest rates.) If banks need to charge a monthly fee in order to make money on their checking accounts, then so be it. But I do think that the current level of checking-account fees is excessive, and that charging for debit transactions is downright idiotic.

All four of the big banks have a standard checking account with a monthly fee which is waived once you keep a monthly balance of more than $1,500. At Wells Fargo, that fee is $5. At Citi, it’s $10. At Chase, it’s $12. And at BofA, it’s also $12, rising to $17 if you use your debit card.

Then there’s the next tier up, where fees only get waived once you have a significant amount of money on deposit. Again, Wells Fargo has the best deal: the minimum is $5,000, and if you drop below it, the charge is $15 per month. At Citi, it’s $15,000 or $20/month. At Chase, it’s $15,000 or $25/month. And at BofA, it’s $10,000 or $25/month — plus that $5/month fee for debit-card usage, even for people keeping a five-figure sum on deposit. That fee only gets waived once you reach $20,000 on deposit.

What expensive services are the banks providing which require fees of hundreds of dollars a year? Branches, mainly, and tellers, and paper statements. And, of course, the enormous overhead associated with being a huge global bank. It’s certainly not debit-card payments — which are pretty much the cheapest way that any customer can transact, from the bank’s perspective. It costs vastly more for a bank to process a paper check than it does for them to process a debit-card payment — so why would they charge an extra monthly fee for the latter and not for the former?

I’m all in favor of banks charging a reasonable fee for expensive services, rather than trying to hide the cost of those services in painful and unexpected charges. But my idea of “reasonable” is more or less what we charge at Lower East Side People’s: $3 a month, for people carrying a balance of less than $75 — essentially, a way to discourage people from keeping bank accounts open and unused with no money on deposit.

As for the proper role of the CFPB, one thing I’m desperately looking forward to is a simple public database of all the banks offering federally-insured checking accounts, with a very easy way of comparing the features and fees of each. It would be particularly great if the CFPB could bestow some kind of gold star on the best and cheapest products, and could thereby help steer Americans away from bad accounts at megabanks, and towards much better accounts at smaller banks and credit unions.

Although, if BofA continues to carry on like this, I reckon it’ll lose a lot of customers anyway, sooner or later.

ProPublica’s Paul Kiel has a fantastic story today about the way in which the government has proved utterly toothless with regard to auditing its mortgage-modification programs, never mind publicizing or enforcing whatever violations it did manage to find. HAMP, it turns out, is a perfect example of what happens when the government mandates change without enforcing it: huge amounts of money get spent, to little or no lasting effect. Neil Barofsky provides the nut quote:

“If you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he said. “It’s why the program has been a colossal failure.”

Kiel’s story is based on the government audits of just one mortgage servicer — GMAC — since Treasury refuses to release the audits of anybody else. (It only released GMAC’s after GMAC itself, to its credit, consented to the release.) Treasury has paid servicers some $471 million in cash incentives — but taxpayers aren’t allowed to audit where that cash has gone, or whether it has been effective. It’s a fiasco.

HAMP was envisioned as a huge, $50 billion program; in the event, it never really took off, and only $1.6 billion has been spent so far, including $116 million paid to Freddie Mac for its ineffective auditing services:

It took several months for the unit to even get off the ground. In August of 2009, Treasury rejected Freddie Mac’s first reviews of servicers as inadequate, because they were “inconsistent and incomplete” and its staff was “unqualified,” according to a report by the TARP’s special inspector general. Freddie Mac promised to improve. That process took several more months.

As a result, for the program’s crucial first eight months there effectively was no watchdog. Nationwide, servicers filed to pursue foreclosure on about two million loans during that time.

When there was an audit, the auditors seem to have been just as incompetent as the servicers:

The December 2009 review says that 35 of the 247 loans auditors reviewed were denied because the homeowner was “less than 60 days delinquent.” In the report, auditors said that was the right decision in all but one case. But being less than 60 days delinquent is never on its own a legitimate reason for a servicer to deny a modification, according to the program rules. Homeowners are eligible for a modification even if they’re current on their loans, as long as they can show they’re in imminent danger of defaulting.

Another example: Auditors agreed that GMAC had correctly denied a homeowner because of a failure to sign a trial modification offer by Dec. 31, 2012, HAMP’s end date. That makes no sense, because the review took place in 2009. Treasury’s spokeswoman said this was a typo and that the homeowner was denied for a completely different reason.

There are several other examples in later reports of auditors signing off on denial reasons that have no apparent basis in the program’s rules. For instance, auditors cited “grandfathered foreclosure” as a legitimate reason for some denials. The spokeswoman said such loans had been in the foreclosure process before GMAC signed up for the program, but the program rules explicitly stated at the time that such loans were eligible.

I believe GMAC, here, that it’s the auditors who are at fault, rather than GMAC — that in many of these cases, the auditors’ stated reasons were generated by the auditors themselves, and often bore no relation to GMAC’s reasons. The fact is that ProPublica’s Kiel seems to be much better versed on HAMP than anybody tasked with enforcing the program:

Treasury defended the questionable denials, and in so doing raised even more questions. For instance, the spokeswoman said HAMP “does not specifically require servicers to evaluate loans that are less than 60 days delinquent.” But Treasury’s official guidance to servicers said such borrowers “must be screened.”

“It makes you wonder if the Treasury even knows the rules for their own program,” said National Consumer Law Center’s Thompson.

Well done to ProPublica, and Kiel, for getting this information and for making it public in a fully transparent and interactive way. There’s nothing in this story to make it seem that Treasury is anything other than fully captured by the big banks. Its reaction to ProPublica’s FOIA requests, in particular, seems unjustifiable. There’s nothing commercially sensitive in these documents: Treasury is just trying to protect the banks from fully-deserved bad press.

And while the state attorneys general — at least in states like New York and California — might have a more aggressive stance towards the big banks than Treasury does, the fact is that they, too, are simply not set up to implement real enforcement. Which is the main reason why the banks have de facto impunity in this country. Even when the government tells them to do something, they face no real negative consequences from failing to do it.

Ezra Klein has a great post on Occupy Wall Street and the 99%:

These are not rants against the system. They’re not anarchist manifestos. They’re not calls for a revolution. They’re small stories of people who played by the rules, did what they were told, and now have nothing to show for it. Or, worse, they have tens of thousands in debt to show for it…

This is why I’m taking Occupy Wall Street — or, perhaps more specifically, the ‘We Are The 99 Percent’ movement — seriously. There are a lot of people who are getting an unusually raw deal right now. There is a small group of people who are getting an unusually good deal right now. That doesn’t sound to me like a stable equilibrium…

What gives their movement the potential for power and potency is the masses who just want the system to work the way they were promised it would work. It’s not that 99 percent of Americans are really struggling. It’s not that 99 percent of Americans want a revolution. It’s that 99 percent of Americans sense that the fundamental bargain of our economy — work hard, play by the rules, get ahead — has been broken, and they want to see it restored.

Ezra makes the perfectly reasonable point that the stories here aren’t of people in the 85th percentile, say — the point at which you start earning more than $100,000 a year. But even if the 99% are more like the 60%, or the 50%, or even the 40%, their name is apt, if only because the upper-middle classes have little to fear from this movement. The target of Occupy Wall Street is not middle-class journalists on six-figure salaries like Ezra Klein: it’s the plutocrats running institutions like Goldman Sachs or JP Morgan Chase.

“Look around,” says Ezra, “and the reality is not everyone is suffering”:

Wall Street caused this mess, and the government paid off their debts and helped them rake in record profits in recent years. The top 1 percent account for 24 percent of the nation’s income and 40 percent of its wealth. There are a lot of people who don’t seem to be doing everything they’re supposed to do, and it seems to be working out just fine for them.

This does handily explain the anger you see at Occupy Wall Street. And if you look at the Declaration of the Occupation of New York City, it’s targeted at “they” — and “they” is very much the 1%, not the larger group of people who aren’t suffering.

Ezra asks whether reducing the political power of the 1% would bring wages up for the rest of us, but this isn’t some kind of organized-labor march, demanding more money or higher salaries. It’s just a large group of concerned and responsible citizens who feel that the social compact has been broken, and who want to see it restored. They can see who has benefitted the most from the breakage, and they’ve gathered at those people’s symbolic home.

It seems to be working, too. The press has started to take them seriously, and at least one bank CEO is “clearly concerned” about the movement. Good. People without money have seen their political influence decline dramatically in recent decades. It’s time that trend is reversed.

The S&P 500 declining for five consecutive months does not augur well for its near future –The Big Picture

The September ISM report says that the manufacturing sector is up slightly –ISM

Rick Perry used millions in taxpayer money to bring subprime lenders to Texas — AP

Koch Industries reportedly bribed international officials, did business with Iran — Bloomberg

Shell is accused of funding militant violence in Nigeria — Guardian

Sprint is about to “bet the company” on the iPhone, buying 30.5 million units — WSJ

Analysts expect Goldman Sachs to show  “compensation discipline” after a bad quarter — FT Alphaville

American Airlines shares are way down; here are its 25 largest investors — ZeroHedge

Citi CFO: Our gross derivative exposure to Europe is irrelevant — WSJ

Mike Konczal points out several reasons why some of America’s youth have taken to the streets — NewDeal2.0

ABC News and Yahoo will be sharing web content — NYT Media Decoder

Michael Lewis made $10 a word at Portfolio, probably about that much at Vanity Fair — New York

Memoirs of a markets reporter — CJR

And here is the strangest question ever asked on a workplace ethics quiz — Happy Place

Michael Lewis’s new book, Boomerang, is listed at $25.95, although you can get it for $15.04 at Amazon, or just $10.39 for the Kindle version. (It’s $12.99 on iBooks.)

These are entirely reasonable prices to pay for a new book by Michael Lewis. But here’s the thing: the entire book, with the exception of a very short introduction, is available for free on the web. In its entirety, the book comprises Lewis’s Vanity Fair pieces on Iceland; Greece; Ireland; Germany; and California. That’s it. Follow those links, print them out or Instapaper them, and you have Boomerang right there. The hardback doesn’t even come with an index.

Still, that hasn’t stopped the Kindle edition of Boomerang from reaching #1 on the Amazon nonfiction bestseller list, with the hardback at #2.

All of which is further proof, if proof be needed, that giving your stuff away for free can be the best way of selling it for significant sums of money. David Pogue has worked this out; Adam Mansbach turned a children’s book into a money machine the same way.

Which leaves only one question: What exactly does Boomerang, the title, mean? I asked Norton; they said they’d get back to me.

David Harvey’s Marxian take on the global financial crisis, The Enigma of Capital, just came out in paperback. It’s timely, coinciding as it does with the Occupy Wall Street movement. And it also has the best index of any crisis book I’ve read.

Here’s just a snippet; the whole thing can be read as part of Amazon’s Look Inside function if you’re so inclined. But how is it possible to resist a book with an index entry for “state-finance nexus, failure of”?

Joe Hagan’s NYMag cover story on Twitter dredges up one of the most misunderstood factoids about the service:

To surface the content, and keep the audience happy, you have to make sure that the content keeps flowing in, and this, too, is far from a sure thing. A study conducted by sociologists working for Yahoo concluded that 50 percent of all the tweets come from just 20,000 users. “It’s really dominated by this media-celebrity-blogger elite,” says Duncan Watts, one of the researchers. “It’s a small number of users who are hyperconnected, and then there’s everybody else just paying attention to those people.”

Joe doesn’t link to the study, which is here; in any case, it’s not the easiest document to understand. The paper’s language is different to Joe’s:

It remains the case that 20K elite users, comprising less than 0.05% of the user population, attract almost 50% of all attention within Twitter.

I asked Watts to explain exactly what this means, and he replied:

What we actually found is the following: if you take a random Twitter user and look at their feed, roughly 50% of the tweets that you see will come from one of 20,000 users. What we did NOT find is that 50% of all tweets originate from one of 20K users. That is NOT true, and actually is impossible given rate limits on posting tweets.

Joe’s point is absolutely right: if you look at how Twitter is used in practice, a lot of people do a lot more reading than writing, while a very small group of people are responsible for a huge proportion of what is read.

But at the same time, Twitter has actually been astonishingly good at getting people to write anything at all. Back in June, Twitter reached the point at which it was publishing 200 million tweets per day:

For perspective, every day, the world writes the equivalent of a 10 million-page book in Tweets or 8,163 copies of Leo Tolstoy’s War and Peace.

It’s true that a lot of those tweets are read by a relatively small number of people, and that a tiny minority of those tweets get broadcast to millions, either directly or by being retweeted. But Twitter — along with Facebook — is at the forefront of what Arianna Huffington astutely identified as an incredibly important and powerful new trend: “self-expression has become the new entertainment”.

Think about it this way: what would happen if Twitter was reduced to just those 20,000 accounts broadcasting to the Twitter user base, with nobody else writing anything at all? The service, obviously, would die in a matter of days. The 20,000 most-read Twitter accounts are the bread in the typical user’s sandwich; the flavor comes from everything else — their friends, their unique interests, and, crucially, their own contributions to the stream.

Contra Hagan, then, this particular statistic says nothing in particular about the quantity of content flowing in and around the twittersphere. For that, you’re better off looking at the total number of tweets per day — something which is still rising at an impressive rate. When you have millions of users contributing hundreds of millions of tweets to the ecosystem on a daily basis, some are going to have much more reach than others. But the real power and longevity of the platform will come from its breadth. Not from the broadcasting-like attributes of a handful of power users.

Deleveraging is painful. It’s so painful, indeed, that it can actually be lethal:

Foreclosure is not just a metaphorical epidemic, but a bona fide public health crisis…

The N.B.E.R. study found significantly more suicide attempts in high-foreclosure neighborhoods. For every 100 foreclosures, it found a 12 percent increase in anxiety-related emergency-room visits and hospitalizations by adults under 50. Losing a home disrupts social ties to neighbors, schools, jobs and health care providers — ties that under better circumstances promote good health. Neighborhoods suffer, not just homeowners.

This is a problem that’s going to get worse before it gets better. No matter how many refinancings and principal writedowns we get, the number of foreclosures is bound to rise sooner or later. There are 11 million homeowners underwater; those people have to deleverage somehow, and foreclosure is, sadly, top of the list of ways for them to do so. The only other way of getting a principal writedown, these days, is a short sale — but given how long it’s taking banks to foreclose, it makes sense to just sit in your house and wait for the bank to kick you out, rather than going to all the effort of trying to find a buyer just so that you can be forced to live elsewhere that much sooner.

I worry too about Ireland, in particular, where foreclosures haven’t even started yet, mainly because underwater homeowners there have been surprisingly diligent about making their mortgage payments. That’s partly a cultural thing, and partly a function of the fact that Irish mortgages are all recourse: if you default on your mortgage, the bank will seize essentially everything you own. But develeraging is even more necessary in Ireland than it is in the US, and again it’s hard to see how it’s going to happen without defaults and foreclosures.

The “great haircut” idea where everybody sees their debts written off simply isn’t going to happen: there’s not enough capital in the banking system, for starters. And for as long as Ireland remains in the euro, it’s hard to see how the country can deleverage through inflation. But that’s more of an option in the US — the more we inflate our way out of our excessive debt burden, the healthier we’ll all be. Literally.

Michael Lewis says something very odd in his big piece on California and the phenomenon of overconsumption:

The succession of financial bubbles, and the amassing of personal and public debt, Whybrow views as simply an expression of the lizard-brained way of life. A color-coded map of American personal indebtedness could be laid on top of the Centers for Disease Control’s color-coded map that illustrates the fantastic rise in rates of obesity across the United States since 1985 without disturbing the general pattern.

Here is the map in question; if you go to the site and see it animated over time, it is indeed quite scary. But it doesn’t look remotely like a map of American personal indebtedness.

Indeed, if you download the Fed’s list of total debt balance per capita, by state, it looks nothing like this map at all. The Fed only lists the ten biggest states, and the overall average, which is is a per capita indebtedness of $47,260.

At the bottom of the personal-indebtedness league table are Texas ($34,640 of debt, 31% obesity) and Ohio ($34,090 of debt, 29.2% obesity).

Meanwhile, the states at the top of the personal-indebtedness league table are California ($73,300 of debt, 24% obesity), New Jersey ($60,560 of debt, 23.8% obesity), and Nevada ($60,190 of debt, 22.4% obesity).

In fact, indebtedness and obesity have a strong negative correlation. If I plug the obesity rates for the ten largest states into an online correlation calculator, I get an amazing -0.843 correlation between obesity rates and personal indebtedness. What Lewis wrote is so false that the opposite of it is actually true.

Now there are strong connections between debt and obesity. For one thing, both have been increasing steadily over time. And a German study last year showed that over-indebted Germans were more than twice as likely to be obese as their financially-successful counterparts. But here in the US, Texas, with its responsible lenders and no housing bubble, is much fatter than places like California and Nevada, which went on bubble-fueled binges of borrowing and irresponsible lending.

Investor Chamath Palihapitiya wrote a strongly-worded letter to Airbnb CEO Brian Chesky yesterday, which promptly got leaked to Kara Swisher.

Palihapitiya was given the opportunity to invest in Airbnb’s latest round, but declined, partly because of the way it’s structured. Airbnb’s executives are taking $31 million in cash as part of the deal, and Palihapitiya was actually OK with that. But his problem was that $22.5 million of that is coming in the form of a dividend — which makes it look pretty evil, in an early-stage company where many employees only have options.

“If you want liquidity, that’s fine, but you should make it available to everyone,” wrote Palihapitiya, adding that “dividends are an approach used by cash rich operations to distribute excess earnings”.

In case Palihapitiya’s point isn’t clear, let me explain with a much simpler company, with just two founders and one new shareholder.

Adam and Bill set up a company — let’s call it Bubbl. The way the structure is set up, Adam has 1 million shares in Bubbl, while Bill has 1 million options to buy Bubbl stock at $1 per share. Bubbl is successful enough that potential investors start circling, and eventually a deal is done whereby Charles will pay $1 million to buy 200,000 shares at $5 per share.

Historically, such a deal would be pretty simple. Bubbl issues 200,000 new shares, which are sold to Charles for $5 each. And so after the investment, Adam still has his 1 million shares, Bill has his 1 million options, and Bubbl has $1 million of cash in the bank. Working on the assumption that at some point Bill will exercise all of his options, Adam’s stake in the company has gone down from 50% to 45.45%, since the total number of fully-diluted shares outstanding has risen from 2 million to 2.2 million.

Adam’s now worth $5 million on paper: he owns 1 million shares which are worth $5 apiece. And he owns 45% of a company with $1 million in the bank, so in a sense he has $450,000 in cash. But he can’t spend that cash — it belongs to Bubbl, not to Adam. The problem is, Adam wants to buy a nice house. And Bill, too, likes the idea of making some fast cash. So instead of doing this kind of old-fashioned deal, Adam and Bill decide that they’re going to do a cash-out deal instead.

Charles still buys 200,000 shares at $5 each, but Bubbl doesn’t issue any new shares this time. Instead, Adam simply sells Charles 100,000 of his 1 million shares. And Bill exercises 100,000 of his 1 million options, buying 100,000 shares at $1 each and immediately selling them to Charles for $5 each.

At the end of all this, there are still only 2 million fully-diluted shares outstanding. Adam owns 900,000 of them, which gives him the same 45% stake. But he also has $500,000 in cash. Bill has 900,000 options, and $400,000 in cash. And Bubbl has $100,000 in cash, which it got paid by Bill when Bill exercised his options.

Now, let’s take our first step into the world of evil, and suppose that Adam doesn’t feel any particular need to look out for Bill’s interests. Bill isn’t a shareholder yet: he just has options. So instead of letting Bill exercise some of his options, Adam decides to sell the full stake to Charles himself. His shareholding drops to 800,000 shares, he gets $1 million from Charles, and he ends up with a 40% fully-diluted stake in the company, compared to the 50% stake that Bill will have when he exercises his options.

Adam’s choices here are pretty clear. He can make sure that Charles’s $1 million stays in the company, take no cash for himself, and end up with a 45.45% stake. He can put just $100,000 of Charles’s money in the company, take $500,000 of it for himself, and still end up with a very similar 45% stake. Or, he can take all of Charles’s $1 million in cash for himself, and end up with just 40% of Bubbl.

Or, Adam could get really evil. This time, Bubbl issues 200,000 shares to Charles in return for $1.2 million. Bubbl then has $1.2 million in the bank, and distributes all of that money to its shareholders, as a dividend. Now remember that Bill only has options: he doesn’t have any shares. The only shareholders, right now, are Adam, with 1 million, and Charles, with 200,000. So Adam gets $1 million of the dividend, while Charles gets $200,000 of his own money back.

The net result for Charles is the same: he’s spent $1 million in total, and received 200,000 shares. But Adam is sitting pretty: he has 45.45% of the company, plus $1 million in cash.

This is a much better option, for Adam, than the other three: he manages to maximize his fully-diluted shareholding in the company, and get $1 million in cash. Adam has cashed out, here, but has also kept all of his shares: a classic case of having his cake and eating it. And Bill, of course, gets nothing: no cash, and no cash in Bubbl’s bank account, either. In fact, he’s been diluted. If Adam just sold some of his shares to Charles, then Bill would retain his 50% stake in the company after he exercised his options. But this way, Bill gets diluted down to a 45.45% stake.

Essentially, Adam is taking money from Charles, and he’s taking equity from Bill. At least Charles is getting something in return: Bill isn’t.

Which explains what Palihapitiya was thinking when he wrote this:

I would implore you to not take the easy way out. Treat your employees the same as you’d treat yourself. Do things that you will be proud of and can defend to anyone including your Board, employees, prospective hires etc. In such a competitive hiring market, you are competing with not just your obvious competitors, but also any successful tech company who is also looking for great talent. A principle that treats your employees as well as you’d treat yourself is a huge strategy for differentiation, retention and long term happiness of the exact types of people you will need to be successful. In contrast, if you are viewed as self-dealing and shady, it will only hurt your long term prospects.

It was only two months ago that Chesky was forced to grovel to the public, admitting that he had “really screwed things up” when a woman’s apartment was ransacked by Airbnb guests. He’d learned, he said, that “you should always uphold your values and trust your instincts”. One’s forced to wonder, given the structure of this latest round, just how long that lesson lasted.

Update: Palihapitiya has now written a follow-up letter to Kara Swisher, “prepared in discussion with Chesky and Airbnb’s board”, in which he says that he will participate in the round after all, in return for promises from Chesky to allow employees to cash out in future. In contrast to the original letter, it’s full of jargon (“strategic intent to balance employee and founder liquidity which will align long term interests”) and seems to represent the triumph of greed over principle.