Felix Salmon

Lucas Graves has by far the best and most sophisticated response to NYT ombudsman Arthur Brisbane’s silly question about “truth vigilantes”.

Graves makes the important point that Brisbane’s “objective and fair” formulation is itself problematic: as one of Brisbane’s commenters wrote, if a certain politician is objectively less truthful, less forthcoming, and less believable than others, then objectivity demands that reporting on what that politician’s saying be truthful — even if that comes across as unfair.

And this just about sums up the entire debate:

Pointing to a column in which Paul Krugman debunked Mitt Romney’s claim that the President travels the globe “apologizing for America,” Brisbane explains that,

As an Op-Ed columnist, Mr Krugman clearly has the freedom to call out what he thinks is a lie. My question for readers is: should news reporters do the same?

To anyone not steeped in the codes and practices of professional journalism, this sounds pretty odd: Testing facts is the province of opinion writers? What happens in the rest of the paper?

Graves’s main insight here, however, is to frame this debate in the context of what AJR has called the “fact-checking explosion” in American journalism — a movement which is roughly as old as the blogosphere, interestingly enough.

And like the blogosphere, the rise of fact-checking raises the obvious question:

It’s easy to declare, as Brook Gladstone did in a 2008 interview with Bill Moyers, that reporters should “Fact check incessantly. Whenever a false assertion is asserted, it has to be corrected in the same paragraph, not in a box of analysis on the side.” (I agree.) But why, exactly, don’t they do that today? Why has fact-checking evolved into a specialized form of journalism relegated to a sidebar or a separate site? Are there any good reasons for it to stay that way?

As I look around the blogosphere today, I see something which is clearly dying — it’s not as healthy or as vibrant as it used to be. But this is in some ways a good thing, since it’s a symptom of bloggish sensibilities making their way into the main news report. As we find more voice and attitude and context and external linking in news stories, the need for blogs decreases. (One reason why the blogosphere never took off in the UK to the same degree that it did in the US is that the UK press was always much bloggier, in this sense, than the US press was.)

With any luck, what’s happening to blogs will also happen to fact-checking. As fact-check columns proliferate and become impossible to ignore, reporters will start incorporating their conclusions in their reporting, and will eventually reach the (shocking!) point at which they habitually start comparing what politicians say with what the truth of the matter actually is. In other words, the greatest triumph of the fact-checking movement will come when it puts itself out of work, because journalists are doing its job for it as a matter of course.

That’s not going to happen any time soon, for reasons of what Graves calls “political risk aversion”. Fact-checking, says Graves, “is a deeply polarizing activity”, and mainstream media organizations have a reflective aversion to being polarizing. It’s certainly very difficult to be polarizing and fair at the same time. But a more honest and more polarizing press would be an improvement on what we’ve got now. And just as external links are slowly making their way out of the blog ghetto and into many news reports, let’s hope that facts make their way out of the fact-check ghetto too. It would certainly make a lot of political journalism much more interesting to read.

The big deadline in Greece is March 20 — that’s when the country has a €14.4 billion bond maturing that it can’t afford to repay. So Greece and its creditors are playing chicken with each other right now. Both want to do a deal, which would involve a cash payment of about 15 cents on the euro being paid out by a rescue committee comprising the EU, the IMF, and the ECB. Existing bondholders would get shepherded into new debt which would be worth less than the old debt but at least would remain current, while Greece would avoid the parade of horribles associated with a “hard default”, with its banks retaining access to funding from the international community in general and the ECB in particular.

The logical outcome, then, is that a deal gets done — probably along the lines that Marathon Asset Management CEO Bruce Richards sketched out to Peter Coy today. Richards’s math is a bit hard to follow:

The new bonds will probably pay annual interest of 4 percent to 5 percent and have a maturity of 20 years to 30 years, Richards said. They may trade for about half of their face value, he predicted. Altogether, the net present value of the deal for the bondholders will be about 32 cents on the euro, he estimated.

This doesn’t add up: if face value is 50 cents on the euro, then half that would be 25 cents; add in 15 cents of cash, and you get a total of 40 cents on the euro, not 32.

Update: OK, I understand how the math works now. The headline 50% haircut includes the 15 cents in cash: it’s 35 cents in bonds plus 15 cents in cash for a total of 50 cents. If you value the 35 cents in bonds at 50 cents on the dollar, then the bonds are worth 17 cents; add that to 15 cents in cash, and you get a total of 32 cents. Note that Greece, in this scenario, is getting a 65% face-value haircut, rather than a 50% haircut, and is getting coupon relief as well — all in all, Greece is swapping bonds it issued at par for new instruments worth 17 cents on the dollar. Which is an 83% NPV haircut. You can see why the market might object to a haircut that big.

But either way, the market is saying that a deal along those lines isn’t going to fly. The March 20 bonds are currently bid at 42, offered at 44, and no one is going to accept a deal worth 32 cents or even 40 cents if you can just sell those bonds outright for 42 cents. And similarly, no one buying the bonds right now at 42 is going to accept any deal at 32.

And it’s much harder to reach a deal now than it was a few months ago, because many of Europe’s biggest banks have quietly sold their holdings of Greek debt to aggressive hedge funds.

Even if a deal is done, remember that the people sitting on the other side of the table are the IIF, the hapless and toothless trade body representing the big banks without really being able to commit them to anything. And if the IIF can’t deliver the banks, it certainly can’t deliver the hedge funds, which are much less susceptible to arm twisting moral suasion.

As a result, we’re not going to see all $14.4 billion of bonds tendered in to any exchange — and there’s an extremely high chance that there will be enough holdouts to trigger Greek CDS contracts. That’s not the end of the world, although many people seem to think it would be; Greece is defaulting, so it stands to reason that default swaps would be triggered.

My expectation is that there will be an exchange; that it won’t be particularly successful; that it will trigger CDS; but that all the same it will be good enough for the EU, which will stump up its €30 billion and keep the can going on its bumpy path down the road. A bunch of hedge funds will be left with a large amount of defaulted Greek debt, and will start all manner of litigation, which will go nowhere for the foreseeable future. And no, there’s no way that Greece will pay those hedge funds just so that it can avoid the CDS being triggered.

Richards will be fine: he’ll tender into the exchange, get the cash and the bonds he’s expecting, and probably sell them at a small profit. Banks who lent to Greece at par will have to take very large losses. And the holdouts will start complaining loudly about the sanctity of contracts to anybody willing to listen, which will be a very small group of people indeed.

Frankly, it’s taken much longer than I thought for the actual default to arrive — seeing as how it was clearly signalled by Greece as long ago as July. That default would have been positively painless compared to this one. But at least we have a date, now. Greece will officially default on March 20. The only question is whether the EU will continue to fund the country after that date. For the sake of the euro zone, we had better all hope the answer is yes.

I had a memorable conversation on Monday with Suze Orman and Kim Bishop, the face and president respectively of the new Approved Card prepaid debit card. I had quite a few questions for them, and they did answer them, even if at times I did feel as though we were speaking at cross purposes.

I started off by asking Orman about an exchange she had last week with Marketplace Money’s Tess Vigeland.

Vigeland: CardHub.com did an analysis of your card versus the Green Dot card as well as the Amex card. And the one knock it did have is that there are so many different fees on your card — 20 versus eight for the Green Dot and only one fee for the Amex card.

Orman: Oh please, girl friend. Don’t tell me that you are that naive. There is no way Amex has just one fee. There is no way Green Dot has just four or five fees. The person that did that article doesn’t even know how to evaluate cards, let alone be good enough to give a determination on it. The reason that they were able to see all the fees that we could potentially charge, if you don’t use the card the way that we tell you, is because by law, you have to have them. And the only difference is we’re showing everybody the fees, we’re being transparent! All those other cards, you do your homework. You try to find their fees, you try to find out how much it’s really gonna cost you, you’re not gonna be able to, because they are hidden deep deep into the site. Are you kidding me? He was an idiot!

It’s worth listening to that answer, rather than just reading it: she spits it out. There is. No. Way. Amex. Has. Just. One. Fee.

Except, there is a way that Amex has just one fee. See for yourself. It’s a reasonably big fee: $2 per ATM withdrawal, with no free ATMs. But it really is the only fee that Amex has — you can delve as deep into the terms and conditions as you like, and you’re not going to find another one.

(There’s one other possible cost associated with the Amex card: if you have cash that you want to put onto your card, and for some reason you can’t deposit the cash into your bank account and transfer it over that way, then you’ll need to buy a MoneyPak, which costs $4.95. That’s the same as the Approved Card charges if you reload at Western Union, and it’s a bit more than the cost of reloading the Approved Card at MoneyGram. But Orman is very keen that you should never reload the card that way, and I don’t think Amex expects many people to reload with MoneyPaks, either.)

Now Orman did make a good point, which is that many of the fees on the Approved Card are for services which Amex doesn’t even offer. The Approved Card is designed to be a credible replacement for a checking account, and so for instance there are fees for things like re-issuing a check when you’re trying to pay a bill for the second time. You can’t do that with the Amex card, which doesn’t offer bill pay at all.

If you’re considering the Approved Card as a checking-account alternative, then, you should be comparing its fees to checking-account fees, rather than to the Amex card’s fees. But, if you already have a checking account and you want to get a prepaid debit card for some reason (maybe you want to use one for your kids’ allowance, for example, so that you can track where they’re spending their money), then it does make sense to compare the Approved Card to the Amex card.

Orman gave an Approved Card to her elderly mother; every time her mother uses it, Orman gets a text message saying where it was used and how much was spent. It’s a useful service — but the fact is that the Amex card also has email alerts, and doesn’t have a monthly charge.

So is the Amex card better than the Approved Card? I’m not sure about that. For one thing, it’s only accepted where American Express cards are accepted, which is a smaller universe of places than the Approved Card, which is a MasterCard. And you’re almost certainly better off with an Approved Card if you’re going to want to get cash out on it. On the other hand, the Approved Card does charge for a bunch of things that you get for free with the Amex card. There’s the fee for being declined at an ATM, for instance, or the fee for talking to a human being on the phone more than once a month. And the Amex card’s freebies (purchase protection, roadside assist, global assist emergency medical help, access to concert presales) are better than the offers on the Approved Card.

The Amex card even has its own, slightly more useful, version of the credit reporting which Orman’s so keen on with the Approved Card. With Orman’s card, your spending activity gets reported to TransUnion, which then will look at two years’ worth of aggregate data, and start thinking about whether there are useful correlations it can find between that data, on the one hand, and your demonstrated creditworthiness, on the other. No one’s promising anything, and nothing’s going to happen in any case until 2014 at the earliest.

With the Amex card, by contrast, the Make Your Move program will graduate you from a prepaid debit card to a fully-fledged charge card in as little as six months. Again, there aren’t any promises. But if you want a credit card and don’t currently qualify for one, the Amex prepaid card is likely to be more helpful to you than the Approved Card.

All of which is a very long way of saying that Orman’s animus towards the Amex card is decidedly misplaced. If you’re in the market for what the Amex card is offering, then it’s a competitive, attractively-priced offering. Orman’s card is not bad, and its fees are not a rip-off. But she has a dog in this fight now, and that means she’s no longer a reliable guide to the maze of personal-finance products out there. It used to be that when Suze Orman was rude about a product, that was because the product in question was a bad one. Now, when Suze Orman is rude about a product, it could just be because that product competes with her product.

And that’s, at heart, my beef with the way that Orman is now talking about checking accounts. She treats them all with extreme prejudice — and I hardly blame her for doing so. Much of the time, they really are evil things, filled with hidden pitfalls for the unaware. But now they’re competitors, too. Both Orman and Bishop were quite open about saying that they would be perfectly happy if someone fed up with checking-account fees closed down that account entirely and moved their life onto the Approved Card.

Orman, for instance, promised that the fees on her card would only ever go down, not up, while saying that thanks to the ever-deteriorating housing market, checking-account fees are going to rise. “The banks are going to be in big trouble,” she told me. “If they get into big trouble, which I know they’re already in, you’re going to see fees on these accounts and you’re never going to know what hit you.”

Orman even tried to persuade me that if you used a checking account to pay your bills, and you paid those bills by writing seven or eight paper checks per month and mailing them in with a first-class stamp, then the cost of postage would be higher than the monthly fee on the Approved Card. That seemed silly to me: if you can set up electronic bill pay on the Approved Card, then you can set it up with your checking account’s online banking, too. But Orman was adamant: you could do that if you wanted, but she wouldn’t advise it. Because even if there aren’t any fees for online bill pay now, your bank will surely start charging those kind of fees sooner or later. “You are going to see fees on every one of these checking accounts that are currently free,” said Orman — which, of course, if true, is a reason to just move over to using an Approved Card instead.

Just like with the Amex card, however, Orman isn’t credible here any more. I’m not saying she’s wrong, but she’s undoubtedly conflicted. And that means she’s no longer a reliable guide to things like the pros and cons of maintaining a checking account — one of the most basic financial decisions that everybody has to make, and one where up until now I would absolutely trust her advice.

Of course, I have my own opinions on financial matters as well. And some things are just completely laughable. Like, for instance, the idea that anybody, ever, should spend $63 per year for an investment newsletter with buy and sell portfolio recommendations which are designed to beat the market. But, that’s exactly what Orman is selling. And, she told me, “that newsletter is fabulous”, adding that it “has been beating the market by a lot”, and that it was “rated number one” by someone or other, and — I have to admit this is where she rendered me utterly speechless — “we issued a buy for an ETF for gold, we are up 5% in that ETF in a week and a half. So you have to look at the returns and judge it on the returns.”

Remember, this is a newsletter giving investment advice for people’s retirement accounts. And here’s Suze, bragging about the 10-day return on a gold ETF? “If you want to dispense information that you just buy and hold,” Orman told me, “I wouldn’t want to see your track record.”

Well, I’ll happily ignore Orman’s advice on this front, as well as the advice in her Money Navigator newsletter, and I’m going to stick to my buy-and-hold strategy instead, even though Orman’s telling me that “index funds are no longer going to be the way to do things, you need to buy ETFs with high dividend yields”.

All of which is sad — because the Approved Card, as I said originally, really is as good as prepaid debit cards get, and has a bunch of features that I can only dream will be replicated elsewhere.

There’s free access to your credit report, along with a free credit monitoring service, just for starters. I’m not convinced that these things are worth paying for, but if you get them for free, you can’t really complain. There’s a huge nationwide network of free ATMs, with an easy-to-use tool for finding them. There are discounts from various merchants. There’s a return tracker: when you return an item to the store and they say it’ll take a certain number of days for the money to be credited to your account, you can enter that into the system and it will tell you when the refund arrives, or warn you if it hasn’t arrived after two weeks. And there’s a wonderful service which texts or emails you your balance at 8am every morning, so that you can start the day knowing exactly how much money you have on your card, without even needing to check.

Most importantly, there’s a user-friendly interface which is designed to help you save, rather than spend, and to avoid fees, rather than incur them. Orman is absolutely genuine in her desire that everybody with this card pay no more than the $3 monthly fee — the phone system and the alerts system and everything else are set up to actively discourage the kind of behavior which would incur any extra fees on top of that.

But the point is that I need to make my own determination, here, about the virtues of the Approved Card. On close examination, and after spending an hour on the phone with Orman and Bishop, I’ve come to the conclusion that it’s a very good product. (I also have to take Orman’s word for some of this, since things like the Approved Discounts and the return tracker haven’t made it onto the Approved Card website yet.)

But what I can’t do is simply say “you can trust Suze Orman”. You can’t trust Orman on the subject of her competitors — which, now, includes every checking account in the country. You can’t trust Orman on investment advice. And I don’t trust Orman either on the value of credit scores and credit monitoring — a service she sells through MiFico for $50 per year.

Orman’s heart is in the right place: none of her products are really bad. If you sign up for a one-month free trial of her newsletter, you don’t need to provide a credit card number: all you get is the newsletter for one month. If you then want to subscribe, you need to subscribe. That’s a sign of an honest merchant: Orman isn’t looking to rip anybody off.

But if you want an impartial judge of whether to have a checking account or a prepaid debit card, Orman is certainly not the person to ask: she’s a full-fledged financial-services provider, now. Who will watch the watchdog? I think we need a new guru.

When Mitt Romney started plugging his friend’s for-profit university as a solution to the problem of rising higher-education costs, he was surely doing well by a major campaign donor, while giving pretty bad advice to potential students: no one should enroll in an $81,000 21-month program in “video game art” if it has — as this one does — a graduation rate of just 38%.

But Romney’s staking out an important philosophical stance here, too, when he praises the for-profit education industry in general as an affordable alternative to traditional colleges.

How can a company which exists to maximize the profits for its shareholders, and therefore to extract as much money as it possibly can from its students, possibly cost less than a traditional college which is run on a not-for-profit basis and which might well have a substantial endowment subsidizing tuition fees? Most traditional colleges charge some students nothing at all, while at the extreme, Cooper Union has a flat tuition rate of zero. For-profit colleges can’t possibly compete with that.

For-profit colleges have a fiduciary obligation to, basically, take the money and run: once they’ve been paid their tuition fee, they’ve made their money, whether the student continues to show up for class or not. But still, there are two main ways in which they could, at least in theory, compete on price with traditional colleges.

The first is to take advantage of their high drop-out rates, and use the drop-outs’ tuition fees to effectively cross-subsidize the minority of students who actually finish the course. After all, if half your students have stopped showing up for class, they’re not going to cost you much money. The average student will still suffer, of course, but at least those who finish the course might benefit.

The other way that for-profit colleges can end up cheaper than their traditional competitors is by concentrating on costs: rather than paying enormous sums for prestigious professors and research institutes, they concentrate with a laser focus on their core business of teaching undergrads. After all, their concentration on profits means that they’re likely to be more efficient than flabby old traditional not-for-profits. Think of it this way: groceries are cheaper at Walmart than they are at the Park Slope Food Coop.

But does that hold more generally? If you have a for-profit and a not-for-profit in the same space, is the for-profit likely to be cheaper and more efficient? I’ve been wondering about that question myself of late, ever since I had breakfast with Betterment CEO Jon Stein a couple of weeks ago. I’d just written something less-than-flattering about the fees that he charges, comparing them unflatteringly to those charged by Vanguard, and he told me that it’s incredibly hard to even think about competing on fees with Vanguard when you’re a for-profit company and Vanguard is mutualized.

That rang true to me — but it’s also something I wanted to check out for myself. There’s no doubt that Vanguard funds have historically been much cheaper than other funds, but to what extent is that just a function of the fact that they’re index funds, and index funds by their nature are cheaper things than actively-managed mutual funds? Certainly if you look at Vanguard’s ETFs, there’s not much evidence that they’re any cheaper than their direct for-profit competitors.

And what happens in other areas where not-for-profit organizations compete directly with for-profits? Hospitals, of course, are one — are non-profit hospitals measurably more efficient than their for-profit brethren? Credit unions are another; the banking lobby isn’t shy about keeping their operations restricted on the more or less explicit grounds that it’s not fair for for-profit banks to have to compete with mutualized credit unions. And in fact consumer-facing credit unions are, nearly always, much better value for depositors and borrowers than the big banks are.

One useful distinction here, I think, comes from Larry Summers, who talks about how a huge part of the US economy is now accounted for by non-traded goods, where the normal rules of competition become harder to discern. “In many of these areas the traditional case for market capitalism is weaker”, he writes, adding that “it is surely not an accident that in almost every society the production of health care and education is much more involved with the public sector than the production of manufactured goods.”

Summers concludes that “it is not so much the most capitalist parts of the contemporary economy but the least—those concerned with health, education and social protection–that are in most need of reinvention.” Unhelpfully, he gives no hint as to what kind of reinvention he has in mind, or whether he thinks that for-profit companies can do these things better or more efficiently than not-for-profit institutions.

But I do think that it behooves Obamacrats like Summers to engage directly with the facile certainties of Mitt Romney when it comes to things like this. For-profit colleges are not a better and cheaper alternative to traditional colleges; in fact, their shareholder focus by definition means that they don’t have their students’ best interests at heart.

Instead of pushing back, however, the Obama Administration technocrats love to talk about what they can learn from the private sector, and talk about public-private partnerships (where “private” always means “for profit”), and generally give the impression that even if they disapprove of individual for-profit colleges or healthcare companies, in principle they think such things are a swell idea.

Ideally what I’d like to see is some empirical data here: where do for-profits compete effectively with not-for-profits? Where don’t they? And if that particular distinction turns out not to be very useful in some of these areas, then what are the kinds of things we should be looking for instead?

I know full well that a lot of not-for-profit organizations are run in a dreadful fashion; I’m just not convinced that introducing a profit motive is always or even often the best way to fix that problem. Sometimes it might be: I’m thinking for instance about the way that American Homeowner Preservation, in Chicago, spun off a for-profit hedge fund in order to raise the kind of money which could buy up whole portfolios of distressed mortgages at a stroke. But I very much doubt that for-profit education is ever a good idea. I just don’t see how the incentives there could possibly be aligned.

Paul Volcker likes to say that the only worthwhile financial innovation of the past 20 years has been the ATM. So I suppose it was only a matter of time before that, too, was rendered evil.

Here, courtesy of Peter Eavis, is how the ATM at the Holiday Inn in Orlando now works — it doesn’t just charge $3 per withdrawal, but rather the higher of $3 or 3%.

I’ve never heard of anything like this before, although a bit of Googling turns up one page, aimed at ATM owners, saying that “Adult Entertainment clubs” frequently charge a percentage at their ATMs, and that although anybody going down this path “risks losing some transactions”, on the other hand it’s superior to simply capping the maximum withdrawal amount at some low level.

On the web, innovations are frequently found first on porn sites, and then work their way slowly into the mainstream; it seems the same thing is happening here, with strip-club innovations turning up at the Holiday Inn.

ATM operators were forced to display this screen by Sec 205.16 of Gramm-Leach-Bliley, the act which dismantled Glass-Steagal. There’s nothing in the act which caps fees at all, and neither is there anything which prevents ATM operators from charging their surcharge as a percentage rather than a fixed amount. Is this something the Consumer Financial Protection Bureau can look at, now that it has power over non-banks as well as banks? If not, I fear we’ll be seeing more and more of these ever-increasing ATM fees.

I tend to find fictionalizations of high finance disappointing. I wasn’t a huge fan of Margin Call: it seemed to me oversimplistic and often quite silly in its portrayal of a how a bank like Lehman Brothers operates. And Adam Haslett’s hugely ambitious novel Union Atlantic was worse. In both cases, a series of senior bankers behaved in ways that senior bankers simply wouldn’t ever behave in reality.

Robert Harris’s The Fear Index, however, is very different. For one thing, it’s not boring: it doesn’t allow financial exegesis to slow it down, and it’s as addictive as any thriller written. PIck this up on an airplane, and you won’t want to land. On top of that, it’s well written, to boot. I wouldn’t go so far as to call it literary, necessarily, but when our antihero, Alex Hoffmann, reaches up to touch “the hard puckered smile of his wound”, or when a key subplot is artfully introduced, early in the book, with the single word “again”, and then left to simmer for 150 pages before being properly picked up, you know you’re dealing with an author who relishes the craft of writing. Oh, and did I mention there’s even an autistic fund-of-funds manager named Ezra Klein?

For me, however, the greatest pleasure of this book is that it gets finance right. It’s set in the world of algorithmic hedge funds, and the whole thing takes place on May 6, 2010 — the day of the flash crash (and the UK general election). The details are specific, and correct — everything from the way that hedge fund managers sell their funds to investors, to the PhD snobbism at algo shops, to the income-tax rates on Switzerland-based hedgies, to the mechanics of the NBBO system and algorithmic e-mini orders during the flash crash. The thing that freaks out the managers at Hoffmann’s hedge fund is not that they’re losing money, but rather that they seem to be losing their delta hedge.

This is a thriller, of course, so there’s a quantum of what Harris calls “Gothic flights of fancy” in there as well. (“Briefly the knife trembled close to his face. ‘Es ist, was Sie sich wünschen,’ whispered Karp soothingly. It is what you desire.”) And the dystopian fear at the heart of the book is not new — it’s been a science-fiction staple for decades. But as Harris explains, reality itself has already become outlandish and scary in largely-invisible ways.

Harris throws an enormous number of torments at Hoffmann, his billionaire hedge fund manager, but the one that really sends him and his wife over the edge is when her gallerist manages to sell out her entire art show on its opening night, for the sum of $200,000. Now that’s what I call a rich-people problem: there’s some very dark satire, here, just beneath the fast-paced surface. I hope that Paul Greengrass manages to retain it, in the upcoming movie.

S&P brought its hammer down on Europe today, with nine — count ‘em — downgrades of euro zone countries. The removal of France’s triple-A has been getting most of the headlines, but for me the bigger news is the fact that Portugal has now been downgraded to junk status.

Both of those moves, however, are pretty standard for ratings agencies in general and for S&P in particular: a slightly belated recognition of what has long been obvious to the rest of us. If anybody really thought that French sovereign debt was risk-free, or that Portugal, with its ten-year bond yielding somewhere north of 1,000bp north of Bunds, was investment grade, then they have surely been living under a rock for the past couple of years.

There’s one area, however, where S&P’s actions are going to have a significant and far from positive effect — and that’s the European Financial Stability Facility, or EFSF. The way that the EFSF is structured, its credit rating is particularly reliant on the ratings of the euro zone’s biggest sovereigns. Here’s how S&P put it back on December 6:

Based on EFSF’s current structure, were we to lower one or more of the current ’AAA’ ratings on EFSF’s guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated ‘AAA’.

What this means is that Europe now faces a choice. On the one hand, it can restructure the EFSF so that it retains its triple-A credit rating. That would almost certainly involve shrinking the EFSF in size. Or, it can be sanguine about the EFSF downgrade and just let it happen. But that’s not a pleasant outcome either, given that everybody’s bright idea, when it comes to Europe’s sovereign bailouts, is to leverage the EFSF to some multiple of its present size. Leveraging a triple-A EFSF is hard enough; leveraging a double-A EFSF is pretty much impossible.

My guess is that the EFSF is going to get downgraded very soon — quite possibly on Monday. There’s actually not much point in Europe restructuring it so that it retains its triple-A: the political cost would be huge, and the benefit would be entirely hypothetical. (In theory, the financial markets are happy to lever up triple-A-rated assets. In practice, if those assets are European sovereign debt, not so much.)

Some small part of me thinks it’s a jolly good thing that the world is losing its store of triple-A assets. They’re dangerous things, precisely because we’re given to understand that they’re risk-free. But in this particular context, there are very few ways that today’s news can help Europe, and there are many, many ways that it can hurt. Not least when it comes to the amount of capital that Europe’s banks need to squirrel away against their stocks of sovereign debt.

Europe’s a risky continent; S&P is simply making that fact a little more obvious. In an ideal world, S&P’s opinions wouldn’t carry any more weight or importance than anybody else’s. But this isn’t an ideal world, and they do. And countries like France, which don’t control their own money supply, aren’t as immune to ratings-agency actions as the US turns out to have been.

The immediate ramifications of this announcement, in terms of global stock market reactions, aren’t important. And it’s even possible that if it accelerates the move away from the EFSF and towards the ESM, we could find a little bit of silver lining here. But the fact is that Europe is more fragile, now — more susceptible to changes in sentiment or genuine exogenous shocks — than it was yesterday. And that cannot be a good thing.

As my posts have been getting longer of late, I’ve ended up with a vast number of items that I meant to write but, well, haven’t. Since I’m not going to get to all of them, I’ll do some quick hits here.

¶ Dave Crisanti, a high-frequency trader himself, makes a good case that at some point, “trading volumes begin to have zero marginal value”. All too often we treat stock-market liquidity as an obviously good thing, when in fact that isn’t the case at all. As a result, he’s in favor of a 0.25% financial-transactions tax, despite the fact that such a thing “would drive me out of business”.

¶ Jessica Silver-Greenberg has the story of people who are being told that they qualify for a new credit card — but only if they use a large chunk of their new credit to start paying down written-off debt. Once a debt is more than seven years old, you’re no longer legally responsible to pay it, and in most cases the debt is past the statute of limitations. But, nastily, if you start paying one of those old debts again, then it becomes “re-aged”, and you are, again, legally responsible for it. So these credit cards are invidious things.

I asked FICO about this, too, to see whether paying off an expired debt might at least help your credit score a bit. The answer? No. “Assuming the expired debt is no longer appearing on someone’s credit report,” said FICO spokesman Anthony Sprauve, “it is not impacting their FICO credit score”. If you want to get a new credit card, make sure you’re only paying new debt when you do so, not old and expired debt as well.

¶ Landon Thomas says that the French and German banks which held a lot of Greek debt have now sold it to “hedge funds and other independent investors” who aren’t as amenable to arm-twisting. Which means that the Greek restructuring is looking more and more likely to be coercive and non-voluntary, even if that means triggering credit default swaps. Thomas says that triggering CDS is “a move that Europe and Greece are desperately seeking to avoid”, but he doesn’t explain why.

In a related story, IFR reports that hedge funds have been trying to buy up “blocking stakes” in certain bonds, which would allow them to veto any “voluntary” restructuring. As Anna Gelpern says, the most likely outcome is that nobody wins.

¶ Josh Brown has let the cat out of the bag: Druce Vertes’s Street Eye is a fantastic one-stop shop if you want to see what finance’s top tweeps are linking to. It’s a bit like an automated Counterparties, and I’m a huge fan. Because it’s automated, it can’t range too wide: it’s heavy on the mainstream-media stories. But it’s none the worse for that.

¶ Cathy O’Neil has a great post on one of the central problems of quantitative finance: because the models being used aren’t public (indeed, they’re jealously guarded and highly secret), the results being thrown out by those models are almost certainly false. The problem applies to science more generally, too — scientists don’t like sharing their models, and science suffers as a result. The fight over public access to taxpayer-funded research is an important story, but published science nearly always omits a lot of important information which would allow the results to be replicated. We’ve got to fix this somehow.

¶ Is hunger becoming a middle-class problem? According to a new report, 32% of New York households earning between $50,000 and $75,000 a year are having difficulty affording food. For households earning more than $75,000 per year, the percentage has rose from 4% to 24% between 2003 and 2008; it has since fallen back a little bit to 16%. Similarly, 30% of New Yorkers with a college degree, and 21% of New Yorkers with a graduate degree, have difficulty affording food.

¶ At the same time, if food is getting more expensive, that’s not necessarily a bad thing. As Mark Bittman reports, America’s meat consumption has been falling quite dramatically, which is probably good for the nation’s health. And a large part of that is a function of it getting more expensive.

¶ And Matthew Wald has an intriguing story: motor fuel companies in the US will have to pay about $6.8 million in fines for not adding cellulosic biofuel to their product in 2011. Which isn’t really their fault: it simply doesn’t exist, outside a few labs. Wald seems to think this is very silly. But I don’t. These fines will help speed development of a commercially-viable cellulosic biofuel product. Science evolves in response to incentives: look at the way we abolished CFCs only after the government forced the matter.

¶ Finally, here’s a chart of Goldman Sachs’s popularity over the past two years. It seems to be pretty steady, around the -20 range — that’s very negative. It means that if you take the percentage of people who heard something good about the company lately, and subtract the percentage of people who have heard something bad, you’ll end up far underwater. But the good news, for Goldman, is that it has recovered from its all-time lows circa Abacus.

I suspect we’re still only in its early days, but there’s no doubt that we’re in a massive Chinese-art bubble right now. And for proof, all you need to do is look at the league table of the highest-grossing artists of 2011.

If you look at the artists who made the most money at auction in any given year, it’s normally pretty predictable, with Picasso at the top of the list and Warhol increasingly dominating. But here, courtesy of ArtPrice and Bloomberg’s write-up of ArtPrice’s results, is the top of the 2011 league table:

1. Zhang Daqian, $506.7 million

2. Qi Bashi, $445.1 million

3. Andy Warhol, $324.8 million

4. Pablo Picasso, $311.6 million

5. Xu Beihong, $212.9 million

This is in many ways the tip of the art-market iceberg, where most deals — especially in the white-hot contemporary-art scene — are still done privately, rather than at auction. The reason no living artist is on this list is mainly that living artists have gallery representation, and galleries don’t like buying and selling at auction.

But still, the rise of Chinese artists on this league table is nothing short of astonishing. The most expensive artwork sold at auction in 2011 was Qi’s Eagle Standing on Pine Tree; Four-Character Couplet in Seal Script, which sold for $65.5 million in Beijing in May; it beat a major Clyfford Still into second place. (And remember too that this is using a value for the yuan which in many ways is artificially low.)

And the sheer levels here! Picasso has never grossed more than $362.7 million in one year; both Zhang and Qi handily beat that figure in 2011, without anything approaching Picasso’s place in the canon. And the way that these artists came out of nowhere makes Groupon’s growth seem positively sluggish. Here are the Artnet reports for Zhang and Qi:

And lest you think that the growth from 2010 to 2011 isn’t all that impressive, note the little footnote. The 2011 numbers are for the first half of the year only.

Precisely because these artists have almost nothing in the way of a long-term auction history, they’re not going to be showing up in the Mei-Moses art index for a while. That requires paintings to have been sold twice. But when that happens, we’re going to have some very crazy results. Either the index will soar, due to the bubble, or else the first datapoints will come when the paintings being bought today are eventually sold. And that might well be for prices much lower than we’re seeing right now.

Update: Marion Maneker doesn’t believe these numbers. “The tables mysteriously omit Gerhard Richter—a very important living artist—whose auction sales in 2011 were massive,” he writes. “So Artprice may have excluded living artists or have a faulty method for assembling the rankings.”

But the fact is that the tables don’t mysteriously omit Gerhard Richter. According to Artnet — which agrees with Artprice here — Richter sales at auction in 2011 came to a total of $199,897,823 — not enough to crack the top five. that’s a record for the artist, but you can see how it’s much more in line with previous totals than we’re seeing with the Chinese artists. This graph, of Richter’s auction sales, includes all of 2011:

Update 2: Thanks to commenter TWAndrews/Alex Tabarrok/Daniel Lippman for pointing to another possibility here:

There are rigged auction houses all over China and they become the most suitable places for elegant corruption. The briber, first of all, gets a fake painting either from a gallery or a fake painting factory. Then, s/he provides relevant document proof of scholars and experts to take care of the problem of authenticity. These scholars and experts are paid to confirm the authenticity of this fake painting. They falsify every historical detail, evidence of painting style and scientific verification of the materials used. The forged painting is then given to the official as a gift and is auctioned at a very high price. Eventually, there is always someone coming from nowhere who wins the bid. Again, the bidder is a trusted person of the briber. These auction houses get hush money before the whole corruption process is completed.

Geithner to Greenspan in ’06: “I’d like the record to show that I think you’re pretty terrific, too” — Alphaville

Amazon is rife with fake authors selling plagiarized erotica — Fast Company

The fallacy of “inefficient” markets — WSJ

Dominique Strauss-Kahn did not know he was sleeping with prostitutes ‘because they were all naked’ — Telegraph

Dan Freed has an amazing story today about credit-card interchange fees — the ones that weren’t touched at all by the Durbin amendment in the Dodd-Frank bill. But it turns out that the courts might yet prove even tougher than Congress: various suits working their way through the legal system could end up costing the banks hundreds of billions of dollars in settlement costs — plus a reduction of interchange fees to something approaching international norms.

The threat here is very real: Visa has already put more than $4 billion in a litigation escrow account, and the card companies’ potential liabilities are much smaller than those of the big banks. Deutsche Bank analyst Bryan Keane says that total damages “could total a couple of hundred billion dollars”, and that’s backed up by some back-of-the-envelope math:

JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.”

Those numbers cited by JPMorgan would appear to point the way to a very large settlement, since the case covers eight years and counting — from 2004 through the present. Eight times $40 billion is $320 billion, and an influential 2005 report on price-fixing by Purdue University economics professor John Connor that looked at 700 cartels going back to the 1600s found a median overcharge rate of 25.5%. But even if one assumes an overcharge of just 10% — the figure used by the Justice Department in its antitrust cases — that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion. If Bank of America had to pay roughly 10% of that, as per its 10-K, the bank would have to cough up $9.6 billion.

Freed includes this helpful chart, showing just how high US credit-card interchange fees are when compared to the rest of the world.

Note that the smallest bar, over to the right, is for the EU as a whole. If Germany is at 1.5, Spain is at 1.1%, and the UK is at 0.8%, then there have to be a lot of countries at or very close to zero in order to bring the overall average down to 0.3%.

Now that Congress has decided quite clearly that it’s not going to regulate credit-card interchange fees, it stands to reason that merchants are going to take their case to the courts. This one will run and run, I’m sure: there won’t be any checks written for a very long time yet. But it’s a huge contingent liability for the banking sector, just as negotiations over a mortgage settlement come to a head. If I were a bank shareholder, I certainly wouldn’t count on credit-card interchange fee remaining at its current inflated levels indefinitely.

As Mitt Romney cruises to his inevitable coronation as the Republican presidential candidate, increasing amounts of attention are being focused on his history at Bain Capital, where he made his fortune. Did he create 100,000 jobs, as he claims? Or is he a vulture and asset stripper?

Glenn Kessler has the definitive take on the job-creation claim, which he says is “untenable”; as he says, Romney’s method of counting jobs created when he wasn’t at Bain or when Bain wasn’t managing the companies in question doesn’t even pass the laugh test. Meanwhile, as Mark Maremont documents, Bain-run companies — even the successful ones — have an alarming tendency to end up in bankruptcy. And I think it’s fair to say that bankruptcy never creates jobs, except perhaps among bankruptcy lawyers.

The reality is that Romney would have been in violation of his fiduciary duty to his investors had he concentrated on creating jobs, rather than extracting as much money as he possibly could from the companies he bought. For instance, Worldwide Grinding Systems was a win for Bain, where it made $12 million on its initial $8 million investment, plus another $4.5 million in consulting fees. But the firm ended up in bankruptcy, 750 people lost their jobs, and the US government had to bail out the company’s pension plan to the tune of $44 million. There’s no sense in which that is just.

Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.

Private equity companies need growth, because they’re built on the idea of buying, restructuring, and then selling. They’re never in any business for the long haul: instead, they want to make as much money as they can as quickly as possible, sell out, and keep all the profits for themselves and their investors. When you sell, you want to maximize the price you can ask — and the way to do that is to show healthy growth. No one will pay top dollar for a company which isn’t growing.

Private equity is by no means unique in this respect: it happens at pretty much every public company, too. John Gapper, today, has a column about the way it destroys values at struggling technology companies:

Most public companies are run by people who hate folding ’em, and instead keep returning to the shareholders and bondholders for more chips…

Few senior executives, when debating options for a technology company in decline, admit defeat and run it modestly. Instead, they cast around for businesses to buy, or try to hurdle the chasm with what they have got. Sometimes they succeed but often they don’t, wasting a lot of money along the way.

It goes against their instincts to concede that the odds are so stacked against them that it is not worth the gamble. Mr Perez would have faced a hostile audience if he’d admitted it to the citizens of Rochester, Kodak’s company town in New York, but its investors would have benefited.

At many companies, then, both public and private, the optimal course of action is a modest one — run the business so that it makes a reasonable profit, and can continue to operate indefinitely. If you chase after growth, you often end up in bankruptcy: that’s one reason why the oldest companies in the world are all family-run. Families, unlike public companies or private-equity shops, don’t need growth: they’re more interested in looking after their business over the very, very long run.

There’s no limit at all to the amount of growth that the public companies will demand: in 2007, for instance, after a year when Citigroup made an astonishing $21.5 billion in net income, Fortune was complaining about its “less-than-stellar earnings”, and saying — quite accurately — that if they didn’t improve, the CEO would soon be out of a job. We now know, of course, that most if not all of those earnings were illusory, a product of the housing bubble which was shortly to burst and bring the bank to the brink of insolvency. But even bubblicious illusory earnings aren’t good enough for the stock market.

If you want to be fair to Mitt Romney, you could make the point that many of the companies he bought were highly risky, and would probably have gone bust anyway; in that sense he can’t be blamed if they eventually did just that. If a company is going to fail, you might as well squeeze the maximum amount of money out of it before it does. But doing that, at the margin, means more job losses, quicker job losses, and — as we saw at that steel company — a willingness to underfund staff pension plans and stiff the government with the bill. Mitt Romney turns out to have a personality which is highly suited to that kind of ruthlessly callous behavior; that’s how he became so incredibly wealthy. It’s an ugly part of capitalism; it might even be a necessary part of capitalism. But the one thing you can’t do is spin it as a great way of creating jobs.

Many thanks to Yoree Koh (and @Dutch_Book) for bringing Ben Stein’s lawsuit against Kyocera to my attention. You can download the whole thing here, but it’s worth spelling out some of the more hilarious parts.

The whole suit is ludicrous, of course: Stein is claiming breach of a nonexistent contract. (The closest thing the suit comes to saying that there was any contract at all is the part when it says that Stein’s agent ,Marcia Hurwitz, “considered the deal done”. Which, obviously, she was wrong about.

The basic story is simple. Kyocera wanted to hire Stein to do some TV commercials, but the company is very environmentally conscious, and it decided not to use him after learning of his anti-science views on global warming.

Stein somehow manages to turn this into a question of religious freedom, claiming that Kyocera’s refusal to let him pitch their products constitutes “wrongful discharge in violation of fundamental public policy”:

Ben Stein said he was by no means certain that global warming was man-made, a position held by many scientists and political conservatives. He also told Hurwitz to inform defendants that as a matter of religious belief, he believed that God, and not man, controlled the weather…

A host of federal laws protects Americans from being discriminated against on the basis of religious belief. Neither employees nor independent contractors already hired may be dismissed on the basis of their religious views.

Ben Stein’s questioning of whether man makes the weather or God makes the weather is a matter of his religious belief. For him to be fired because of his religious belief is a clear case of discrimination against him for religious belief in violation of state and federal law.

A word to the wise, Ben: you weren’t fired for your religious beliefs. Indeed, in a world where it’s hard to get a large group of rabbis to agree on the day of the week, the Jewish religion’s views on the subject of global warming are very clear. Consider this letter, for instance, signed by more than 600 rabbis:

We have established Interfaith Climate and Energy campaigns in 21 states that are educating congregations on the link between energy conservation and renewable energy sources that benefit climate change reduction…

We have longstanding distress about other health and environmental effects of energy policy, including global climate change…

The same energy policies that will help achieve peace for humankind by reducing our dependence on oil will create greater harmony within creation by protecting the environment.

Here’s much more detail on the question of Jewish attitudes to global warming, summed up by saying that

we must take responsibility for maintaining and preserving G-d’s Creation not only for the here and now, but also for the benefit of posterity. This is something that must be taken very seriously, and we are required to follow the guidance of the experts in taking practical measures of conservation and preservation to save the world from irresponsible and destructive consumption.

Needless to say, the idea that the weather is controlled by God, and that therefore it is unaffected by human behavior, appears nowhere in any Jewish teachings I can find. And Stein is quite explicit about being a Jew, having decided to play that card in his execrable documentary about Darwinism.

Stein’s also upset that Kyocera took issue with “statements widely attributed to him that appear on the web”. He replies, in the complaint, that this “means anonymous, unsupported gossip about a famous person”. Which it almost certainly doesn’t. I’m something of an expert on statements widely attributed to Ben Stein: none of that gossip is anonymous, and nearly all of it is very carefully supported. With, for example, video, of Stein himself saying, very clearly, that a big speech by Barack Obama’s was “scarily authoritarian” and “something the Führer would have done”.

But my favorite bit of the complaint is where he complains that the ad which did end up running, featuring Peter Morici, is “an explicit misappropriation of Ben Stein’s likeness and persona, which is an explicit violation of Ben Stein’s rights of privacy and of publicity, barred by California law”.

In other words, this ad, while it might look to all the world as though it features a real economist who’s much more qualified on such matters than Ben Stein, is in fact an illegal violation of Ben Stein’s privacy, which uses the likeness of Ben Stein. Maybe Stein thinks that Morici should wear a long blonde wig, or something, to make him look less Stein-esque?

The irony here is that this man — someone who’s so worried about his privacy that he appears on TV every opportunity he gets — has to give the address of his four-bedroom, 3,821 square-foot Beverly Hills mansion on the final page of his legal complaint. Maybe the main effect of this suit is that he’ll get added, now, to one of those Los Angeles bus tours of the residences of the rich and clueless.

The number of illegal immigrants in the US is going down, not up — NYT

Peter Eavis makes his debut on DealBook — NYT

Hennesy Youngman on Damien Hirst — YouTube

How Often Should I Charge My Gadget’s Battery to Prolong Its Lifespan? — Lifehacker

2 of the 4 heads of Goldman Sachs trading are leaving — Bloomberg

Carlyle’s 3 founders kept over half of the firm’s performance fees for themselves — WSJ

And if you check out Counterparties.com, you’ll find a cool new widget from The Browser, we love them!

I’m not sure what’s more offensive, the SWAG acronym (it stands for Silver, Wine, Art, Gold), or Patrick Mathurin’s lede in Monday’s FT:

The art market defied the economic gloom to return 11 per cent to investors in 2011, outpacing stock market returns for a second consecutive year.

No, Patrick, it didn’t. Art doesn’t have returns, it just sits there, being expensively insured. It pays no dividends, and it can’t be marked to market, since the only way to find out the market price for an artwork is to sell it. Even the auction houses have no real idea what any given artwork is worth: look how many pieces fail to sell at auction, or sell for multiples of their estimate. For instance, Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! sold at Christie’s in 1988 for $2.09 million, double its estimate of $800,000 to $1.2 million.

Besides, who are these “investors” who purportedly saw an 11% return in the art asset class in 2011? It’s not people who own art generally: a lot of people own art, but it’s not generally worth anything — we couldn’t sell it, for cash, if we needed to. A tiny sliver of the art world deals in works which really do have resale value, but it’s not true to say that even they went up in value by 11% in 2011, not with all the survivorship-bias and other problems in the Mei-Moses index Mathurin is citing.

Besides, Mathurin seems to be very bad at calculating returns even when he knows the sale price. That Lichtenstein, for instance, was sold again in 2011:

There were record auctions for paintings such Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! which sold at Christie’s in November, making gains in excess of $40m for its seller, who bought it for $2m in 1988.

Again, no, Patrick, it didn’t. For one thing, the hammer price on the painting was $38.5 million, and it’s really hard to make a gain of more than $40 million when your gross income is no higher than $38.5 million. And then there’s the fact that Christie’s slapped a guarantee on the painting, almost certainly at $35 million. What that means is the seller only got 70% of the excess over that amount.

So the total amount going to the seller — assuming zero seller’s premium — would be $35 million plus 70% of $3.5 million, which comes to a total of $37.45 million. Subtract the $2.09 million purchase price, and you get a total capital gain of $35.36 million. Which is, admittedly, a lot of money, but it’s a good $5 million short of Mathurin’s $40 million.

And incidentally, if $2.09 million becomes $37.45 million over the course of 23 years, that works out at an annualized return of just over 13%. Again, that’s very good, if not spectacular. But that’s your winner. Set it off against your losers — and you’re always going to have more losers than winners — and your total art return is going to be substantially lower. If you bought $2.09 million of Apple stock in 1988, it would be worth more than $80 million today. But you didn’t just buy Apple, you bought lots of other stocks as well (even assuming you were buying stocks at all in 1988), and overall they didn’t do nearly as well. Single datapoints, as a rule, mean very little.

But if Mathurin can wheel out his Lichtenstein, I’ll wheel out my 2008 Lafite:

The greatest loser was Chateau Lafite 2008, which peaked in January 2011 at £14,043 a case and whose last average trade price, this month, was £8,108, a fall of some 45%.

I’m all in favor of buying art and wine, but they’re not investments. There’s never any shortage of wine shills and art shills who will talk about them as asset classes when they go up in value. All those people should be ignored. And there should be an absolute ban on talk of how the art market “returned 11 percent to investors” and the like. We should be getting smarter about this stuff — and, in fact, the art and wine press is quite good on such matters. It’s just the financial press which perennially falls down.