Felix Salmon

When Tony Hsieh sold Zappos to Amazon, there were lots of glowing stories about his monster success. Only later did it emerge that he never wanted to sell at all, but felt forced to do so by his VC backers.

It now seems that a similar narrative is likely to emerge from Jimmy Choo president Tamara Mellon. The woman who famously said that “at the end of the day, the person who has the money has the control” is now changing her tune somewhat:

It’s always love and kisses when a private-equity company takes control of your firm: they promise investment, and growth, and riches beyond your wildest dreams. All of which came true for Mellon (who acquired her surname by marrying a man with 14 trust funds, but that’s another story). But then the clock strikes midnight, and your eager backers are forced — they have LPs to answer to, after all — to sell your company out from under you.

Mellon’s blaming the GPs here, and I don’t blame her — they’re the people who make all the promises and the decisions. But she’s a financial sophisticate who knows full well how private equity works: it always needs an exit. And when it exits, it will always sell to the highest bidder, rather than to some potential buyer who might be more likely to preserve value over the long term.

It’s going to be fascinating to hear what Mellon has to say about the way that private-equity professionals behave. Most of the time, the beef with such firms is that they do well by themselves and by senior management, but can fatally damage the company while doing so, and don’t care at all about rank-and-file employees. Mellon is rare in that she’s a member of senior management and she’s upset.

But once you have Mellon’s money, a few extra millions tend not to have the mollifying effect that they might have on a less affluent founder. Mellon made a fortune when she (or her backers) sold Jimmy Choo — but she had a fortune already, at that point. What she really valued, it seems, was her company, and her career. And it’s easy to see how her backers might have stripped her of both those things, in their big and profitable exit.

At about the same time that Michael Kinsley’s hilarious response to a blog post of mine hit the web, The Atlantic also uploaded to its website Kathleen McAuliffe’s excellent story about how parasites shape our behavior.

McAuliffe’s 5,873-word feature was written for the magazine, and went through multiple layers of commissioning, copy-editing, top-editing, fact-checking, and the like. It’s not, by any means, an easy read; it includes quite a few passages like this.

The neurotransmitter is known to be jacked up in people with schizophrenia—another one of those strange observations about the disease, like its tendency to erode gray matter, that have long puzzled medical researchers. Antipsychotic medicine designed to quell schizophrenic delusions apparently blocks the action of dopamine, which had suggested to Webster that what it might really be doing is thwarting the parasite.

And yet, within 36 hours of being uploaded to the Atlantic’s website, the story had already amassed half a million pageviews — and was “well on its way to becoming the most visited piece ever” in the history of the site, in the words of Alexis Madrigal.

Meanwhile, earlier in the week, Salon editor Kerry Lauerman had revealed some traffic stats of his own:

We ended 2011 on a remarkable high note, with over 7 million unique visitors for the first time, without any giant, viral hits that could be outliers. And now we’ve finished January in similar fashion, at 7.23 million.

There are concrete reasons for this… We’ve — completely against the trend — slowed down our process. We’ve tried to work longer on stories for greater impact, and publish fewer quick-takes that we know you can consume elsewhere. We’re actually publishing, on average, roughly one-third fewer posts on Salon than we were a year ago (from 848 to 572 in December; 943 to 602 in January). So: 33 percent fewer posts; 40 percent greater traffic.

All of which would seem to imply that Kinsley is right, and that there’s something amiss with my more-is-more thesis of online journalism. Have we really — finally — reached the point at which quality is asserting itself in the form of monster pageviews? Especially given the fact that the New York Observer, the subject of my original post, is getting fewer pageviews now than it was in its much more assiduously edited days at the end of 2007.

If we have reached that point — and I hope that we have — it’s a function of the way that the world of the web is moving from search to social. Companies like Demand Media were created to game search — to take what people are genuinely interested in, and then exploit those interests to get undeserved traffic and ad revenues. Gaming social media, by contrast, is much harder: people tend not to share things  they don’t genuinely like.

The one thing that Kinsley got undeniably wrong in his piece was his assertion that I find the “more is more” formula to be “a wonderful development”. I don’t. Yes, I said that the Observer threw out the old and did something brave and new; I also said that I preferred things the way they were before.

What I do find to be a wonderful development is the way in which social discovery engines like Summify and Percolate surface much more relevant and much higher-quality content than search ever did. (Although I do worry, a lot, about the way in which Twitter seems to have bought Summify just to shut it down.) The more that we share stories and use such tools, the better the chance that great content will get an audience commensurate with its quality — even if it doesn’t have a web-friendly headlines like “How Your Cat Is Making You Crazy”.

That said, the downside to publishing subpar content is certainly shrinking. Once upon a time, if you read a bad story in a certain publication, that would color your view of the whole enterprise. That’s no longer the case: in a world where websites are insatiable, there are precious few publications of consistent excellence. As Kinsley says, almost no one achieves good writing most of the time — but once upon a time, editors could and did simply spike material which wasn’t good enough. Nowadays, less-than-great copy tends to get published anyway, since websites have no space constraints and the old excuse about how “we ran out of pages” doesn’t hold water any more.

The real cost of publishing dull content is not that readers will be put off your brand. Instead, it’s an opportunity cost: rather than getting Norman to churn out ill-informed blog posts on ostrich farming and fracking, might it not be better to put him to work honing and editing the work of someone else, helping to create the next viral story about how your cat might be turning  you into a schizophrenic?

The economics, however, still don’t add up. For reasons I don’t fully understand, high-quality edited journalism is not a little but rather a lot more expensive than more-is-more blogging. McAuliffe probably got paid somewhere in the region of $1.50 a word for her piece, which works out at $8,800; by the time you add in the cost of salary and benefits for everybody who worked on it, plus the expenses involved in flying her to Prague to report it, you’re talking enough money to get a thousand blog posts out of Norman. Ex post, McAuliffe’s article is worth it. But it takes a bold cash-strapped publisher indeed (and all publishers are cash-strapped, these days) to choose a single heavily-reported feature over a thousand blog posts.

We still live in a world where the brand value of a venerable print publication has clout on the web. McAuliffe’s piece would never have garnered 500,000 pageviews in 36 hours had she published it on her personal website; instead, it both benefited from and helped to burnish the reputation of the Atlantic more generally. That’s a nice virtuous circle. On the other hand, a boring blog post which would never get attention on a random blog can get a decent four-figure number of pageviews just by dint of being published on the website of a print publication like the New York Times or the New York Observer. As a result, such publications are faced with a constant temptation to put up as much content as they can and monetize those pageviews, even if doing so slowly erodes their brand. Immediate cashflows, these days, tend to trump impossible-to-measure concepts like the degree to which brand value might be going up or down.

My expectation, then, is that we’re likely to see a lot of more-is-more journalism from established names like the Observer, even as the most successful online franchises, such as the Atlantic, increasingly invest in expensive, high-quality content. It’s the difference between managing decline and managing for growth. In an industry which is undoubtedly in secular decline, the former makes a lot of sense. And the latter, if it doesn’t work, can be incredibly expensive.

So while I’m extremely happy to see high-quality journalism reach a very large audience online, I’m far from convinced that we’re about to enter a golden age where publishers get rewarded for spending lots of effort and money on commissioning, editing, and publishing extraordinary content. The web is still a mass medium, and cats-make-you-crazy stories are hard to scale, while commodity content is much easier to replicate. If you want to get to half a million pageviews, you’re always much more likely to get there with a thousand blog posts than you are with a single swing for the fences.

This is why Mark Zuckerberg was smart to stay in complete control of Facebook and not listen to anybody telling him that a multi-billion-dollar company needed a seasoned, professional CEO in charge.

Jack and Suzy Welch are onto something when they diagnose a potential class problem at Facebook, post-IPO.

After its IPO, Facebook is going to have two classes of citizens. That’s just reality. Some of its 3,000 or so employees — several hundred in number by some counts — will have significant riches in the hand. Newer hires, though — well, they’ll mostly have options in the bush.

Where they go hilariously wrong is in their proposed solution to the problem. There’s a carrot, which as far as I can tell involves Silicon Valley manager-geeks suddenly transforming themselves into motivational speakers. And then there’s a stick:

With all this exultant “barking,” there also needs be bite — in the form of frequent, rigorous performance reviews. The facts are, if Facebook wants urgency, speed and intensity around its mission, those behaviors must be explicit values that, when demonstrated, result in bonus money and upward mobility — or not.

Any company, in the wake of an IPO, finds itself growing new and previously-unnecessary layers of management, especially in areas like the general counsel’s office, investor relations, and public relations. But for the Welches, that’s not enough: extra management also has to be marbled throughout the organization, to be found everywhere as “frequent, rigorous performance reviews”.

There is absolutely zero evidence that frequent, rigorous performance reviews ever do any good, and quite a lot of reason to believe that they actually do harm. And what’s true of business professionals in general is especially true of Silicon Valley engineers — a culture where pretty much everybody knows exactly who’s hot and who’s not, without any need for formal, frequent, or rigorous performance reviews.

What’s more, it’s far from clear that the best way to motivate a Silicon Valley engineer is to dangle an annual bonus in front of his face and tell him that if he works hard he could get an extra couple of months’ salary at the end of the year. Rather, the best way to get the most out of engineers is to surround them with other great engineers, in a collegial atmosphere where everybody works hard and everybody does really well building great products that everybody is proud of.

Performance reviews are horrible, divisive things which create a whole other set of class distinctions within a company, between the “high performers” who get money and promotions and the grunts who live in fear that their review will be used to punish or fire them. (And of course if bonus-greed isn’t a great motivator of computer engineers, fear is even worse, especially in the context of Silicon Valley, where there are multiple jobs permanently being dangled in front of just about anybody who can code.)

Managing a company like Facebook is all about creating a magnetic culture — a place where employees love to work, and where they’ll tell their friends that they’re having a great time and that they should come join them. Meanwhile, there has never been a company in the history of capitalism where managers really love the performance-review process and tell all their friends that they would hugely enjoy going through it themselves on a frequent and rigorous basis.

In other words, the mere existence of such things would probably be enough to put off many talented potential employees with a wide choice of possible employers. At a company like GE, a CEO like Jack Welch tends not to worry about such things. But at Facebook, the ability to continue to attract Silicon Valley’s best coders is very high up Mark Zuckerberg’s list of priorities and concerns.

Which is reason number 1,452 that all of Facebook’s shareholders should be very happy indeed that the company is being run by Mark Zuckerberg and not by Jack Welch.

In one of his biggest errors as economic advisor to the president, Larry Summers told Barack Obama that “It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus. We can if necessary take further steps.”

He was absolutely wrong, of course, as Obama himself realized as early as the summer of 2009. Noam Scheiber reports:

A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this. When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

This makes it seem as though the administration tried to get America to see the effects of the stimulus, and failed. But in fact, the opposite is true: a large part of the stimulus — the payroll-tax cut — was specifically designed to be invisible.

The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

All of which makes it seem as though Summers was almost sabotaging his own plan. It makes some amount of conceptual sense to do a smaller stimulus up front, with the option of enlarging it later on if necessary. But it makes no conceptual sense to do that if you’re then going to construct a stimulus which provides zero political momentum for a re-up.

There’s evidence that the Obama economic team wasn’t entirely unhappy with the lack of a second stimulus:

By January 2011, two months after Democrats suffered a rout in the congressional midterm elections, the West Wing again faced a critical choice… Should they tackle the trillion-dollar deficit, co-opting the anti-government zeal that Republicans had ridden to power? Or should they try to lower the stubbornly high unemployment rate, which had exceeded 9 percent for 20 straight months?

The president’s team quickly concluded that the deficit was the higher priority.

Scheiber is sympathetic. He says that the decision to concentrate on unemployment would constitute “playing partisan hardball”, and adds:

The decision to focus on the deficit in 2011 was defensible at the time. It wasn’t until much later that the economy’s weakness became clear.

This is simply bonkers: I was describing the stubbornly-high unemployment rate as “Obama’s Katrina” as early as June 2010, when unemployment stood at 9.6%. By January 2011, nothing much had changed: the unemployment rate was still 9.4%. It’s hard to see what’s happened since then which has made the economy’s weakness any clearer.

Scheiber saves his harshest words for the White House political tacticians who ignored the debt ceiling issue for too long and overestimated the tractability of the House Republicans. But the truth is that Obama’s economic strategy has been a victim of political miscalculations more or less since day one. Obama’s economic team has been consistently modest in what it considers politically possible. Summers, in his memo, for instance, noted that Ken Rogoff, who he described as a “widely respected macroeconomist, former chief economist of the IMF, former McCain adviser”, wanted a trillion-dollar stimulus. Summers also consistently said that the risks of doing too little were greater than the risks of doing too much. But even so, the stimulus came in much lower than that, shrunk by second-guessing what was politically possible.

It’s almost as though the Obama economic team — with the notable exception of Christy Romer — was consistently looking for excuses to do less rather than more. Much of the team first got to know each other in the Clinton administration, and Scheiber talks a lot about how they didn’t grok the way that the Republican party has changed since those years. But the same can be said of their attitude to the economy. Clinton’s economic success, especially when Summers was at Treasury, was achieved with a less-is-more approach: his fiscal policy was conservative, and he let the Fed take care of the gas pedal. That doesn’t work in a crisis, and it certainly doesn’t work in this crisis, where the Fed has long since run up against the zero bound for interest rates. The problem is that no one on Obama’s economic team, and especially not Peter Orszag, seems to have had much of an appetite for anything else.

Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.)

And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”.

It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit.

If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now. It would be a multi-billion-dollar gift to bondholders who expect much less than that, in a context where a few billion dollars could well make the difference between a successful deal and a failed one. If there’s effectively going to be an EU/IMF guarantee of the new Greek bonds, then the nominal haircut would surely be bigger than 50%, and I haven’t heard anything along those lines.

Basically, what’s going on here is that because the bondholders are already in the boat, no one needs to do them any favors. What’s needed is an agreement between Greece and the Troika — something acceptable to both sides, and which the Troika believes that Greece will hold to. Even as sensible people like Mohamed El-Erian can see clearly that that’s not going to happen. “I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best,” he writes. “Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.”

Or, to put it another way, that overloaded pirate ship is very precarious. And even if it manages to get everybody on board now — which is far from certain — it could still easily capsize a few months down the road.

In general, immigration is incredibly healthy for any economy. Immigrants tend to work hard, boost GDP, fill jobs which would otherwise be hard to fill, and also create jobs of their own. But whatever’s true of immigrants in general is much more true of legal immigrants. And whatever’s true of legal immigrants in general is much more true of smart, high-qualified legal immigrants.

The US has various visas specifically designed to encourage the kind of skilled, legal immigration which has driven its economy for nearly all of its history. The three main ones are the O visa, the H visa, and the L visa. The O visa is a small program for “aliens of extraordinary ability”, and the H visa all but suffocated under its own popularity in 2007 and 2008. But the L visa kept on allowing people in. It’s given to employees of foreign companies, who have spent at least a year working for that company abroad, and who are only allowed to work for that company when they’re in the US. And historically it’s been quite easy to get, with Customs Immigration rejecting fewer than one in ten applicants. Until:

This is bad, but it gets worse — the spike in denials seems to target specific countries over others. In 2008 the L-1B denial rate stood between 2% and 3% for India, Canada, Mexico, and the UK. In 2009, it rose: to 2.9% in Canada, and 4.1% in the UK. And 15.1% in Mexico. And 22.5% in India.

Meanwhile, in order to make things even harder, Customs Immigration didn’t just approve the applications that they didn’t deny. Instead, they increasingly sent them back with RFEs, or “requests for evidence” — a layer of bureaucracy which at best adds months to the visa-application process and makes it much harder for global companies to move employees to where they might be urgently needed. If you think the rise in denial rates is bad, just check this out:

It really does look as though Customs Immigration is in the middle of a massive crackdown on L-1B applications here. Now, why would they do that? Maybe because the number of applications was suddenly very high? No — it turns out that the drop in L-1B applications for Indians, the people who suffered the brunt of the crackdown, preceded the crackdown by a couple of years.

If you look at this last chart, what you’re seeing is just the number of L-1B visa applications from Indians. It’s falling sharply enough on its own — but then on top of that an increasing number of those petitions is being denied, and most of the rest are being sent back with an RFE.

All too often, the questions in the RFE, or the reasons for rejection, seem to imply rules which simply don’t exist:

Employers say that at times they believe applicants are rejected for L-1B status if a particular consular officer or an adjudicator believes a company could not possibly have more than three to five people with specialized knowledge in a particular area. Nothing in the statute or regulations indicates “specialized knowledge” need be restricted to a handful of people in a company. In fact, in companies employing thousands of people in highly specialized fields and product lines, it would not even be feasible to operate in most circumstances if specialized knowledge was restricted to three or four people at a time in a specific subject area, product or service.

Another type of denial, employers say, comes from USCIS adjudicators and consular officers requiring a standard of “extraordinary ability” be met to permit the transfer of employees into the United States with specialized knowledge. Requests for Evidence for L-1B have included asking whether the individual received a patent. And companies note that even patent holders have been denied L-1B petitions under the new, arbitrary standards.

Of course, Customs Immigration has discretion to reject anybody for any or no reason. No one has the right to immigrate to the US. But it does seem here that the US is rejecting far too many people — as though their job is to keep them out, rather than welcome them in.

Thanks to the National Foundation for American Policy for putting these charts together. As they note, everybody rejected has had a huge amount of money and effort put into their application. And so it does seem as though something bad is going on here.

Given the resources involved, employers are selective about who they sponsor. The high rate of denials (and Requests for Evidence) is from a pool of applicants selected by employers because they believe the foreign nationals meet the standard for approval, making the increase in denials difficult to defend. Denying employers the ability to transfer in key personnel or gain entry for a skilled professional or researcher harms innovation and job creation in the United States, encouraging employers to keep more resources outside the country to ensure predictability.

American cities won’t win the global competition for talent if federal officials keep on behaving like this. Canada can do this stuff well; why can’t the US?

The long-awaited mortgage settlement is here! And it looks like a good one. The biggest worry was that the attorneys general would give away the shop in return for big headlines. While in fact they seem to have been quite successful at limiting the immunity that the five banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) are going to receive:

In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.

The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.

Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.

Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.

If you’re a bank shareholder breathing a sigh of relief, then, don’t. The only thing you’re protected against, now, is lawsuits over robosigning. Were those likely to cost $25 billion if they had gone to court? It seems unlikely to me that they could have raised that much. Other big-money lawsuits over securitization can and almost certainly will still be brought — which means that the big banks all still have significant litigation risk hanging over their heads.

So why did they do this deal? Well, for one thing, it’s not nearly as expensive as it might look at first glance. It’s not like they’re paying out $25 billion and getting nothing but a bit of immunity in return. A huge chunk of the money will go towards principal reductions on underwater mortgages — which means that it’s not really a cash outlay at all.

Let’s say I lent you $350,000 to buy a house, and that house is now worth only $250,000. I’m holding that mortgage on my books at par, but if I sold it there’s no way I could get $350,000 for it, or even $250,000. I give you a principal reduction of $40,000, so that you now owe $310,000. That’s good for you — which is why the settlement is a welcome development. And it means that I have to take a $40,000 write-down on my balance sheet. But the mortgage is still being held on my books at $310,000, which is still more than I could have sold it for before the write-down.

In other words, what’s happening here is that the mortgage settlement is at heart largely just encouraging banks to bring their balance sheets closer to reality — which is something they’d have to do sooner or later in any case. Indeed, insofar as principal reductions can increase the value of a mortgage, this deal is actually making banks money, over the long term.

So think of this as that rarest of settlements, one which really is a win for all sides. The attorneys general get a big deal, homeowners who got foreclosed upon get $2,000 apiece, and the banks get to do the kind of principal reductions they probably have wanted to do for a while, but while getting significant immunity from prosecution at the same time.

Now, I guess, we just wait and see what happens with all the other possible prosecutions and lawsuits, especially in New York and California. And, of course, from the FHFA.

Sarah Thornton has an interesting theory on why art prices keep on spiraling upwards:

The burden for the stinking rich is what to do with their money. There is currently no interest to be earned on cash, so they can’t leave it in the bank. The property market is nearly paralyzed and, for these globetrotters, the drawback of real estate is that it is tied to specific currencies. A Mayfair flat sells in pounds, but the Francis Bacon painting that hangs on its wall could sell in Hong Kong dollars and take up residence on a yacht in the South Pacific. Like historic or extra-large diamonds, works by artists with international recognition are a hedge against volatile currency fluctuations.

Fifteen years ago financial advisers were not in the practice of recommending that rich people diversify their portfolios by buying art. Now it is the norm. While buying emergent art is high-risk, speculative investment, acquiring established masterpieces is perceived as the opposite – a back-up in hard times. If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.

This would be a lot more convincing if Thornton actually named or quoted any of the financial advisers who are reportedly “recommending” buying art as an investment. Because I’d love to talk to one. Art’s a dreadful investment: it’s got a negative carry, it’s highly unpredictable in terms of value, there’s no reason whatsoever why prices should go up rather than down, and, of course, you can put your elbow through it at any time.

In my experience, the only people who ever recommend that rich people diversify their portfolios by buying art are people who are going to make money, somehow, from the deal: people selling art investment or advisory services. Everybody else is generally pretty sensible, and sticks to saying the simple truth: Buy art because you love it, not because you think it’s going to rise in value.

More generally, the stinking rich are, as a rule, swamped with bright ideas from people guiding them on what to do with their money. They all have family offices, replete with highly-paid investment managers: The alternative here is not to simply leave the money in the bank, earning no interest. (More likely, they own the bank, take other people’s deposits, and lend them out at a healthy profit.)

And the idea of art as “a hedge against volatile currency fluctuations” is just bonkers; I’m not at all surprised that the line appears in a column for the Guardian, rather than in Thornton’s normal home of the Economist. If you have billions of dollars and you want to hedge against currency fluctuations, then — and I hope you’re sitting down for this — you hedge against currency fluctuations. Options and swaps and futures and forwards and the like are as commoditized as they come in the foreign-exchange markets, and much easier and cheaper to buy and sell than any major artwork.

Thornton’s wrong, too, about the intrinsic value of a 1964 Marilyn by Andy Warhol. If it was worth 10% of its current value a few years ago, it can be worth 10% of its current value in a few years’ time, too. Admittedly, 10% of its current value is still “something”. But that hardly makes the Warhol a remotely sensible investment. The whole point of art is that it has no intrinsic value: that its financial value is a magical number which is some highly variable function of how much various incredibly rich people love and covet the work.

But she’s right about this aspect of why the two big auction houses are doing so well these days:

Christie’s and Sotheby’s are superlative marketers who are getting better at funnelling demand for objects by a small group of well-tested artist brands.

The key word here is “brands”. CNBC’s Zac Bissonnette recently wrote to me saying that what he hates about contemporary art is the way in which “you can just put it there and all your friends will know what it is. People might as well hang a Nike swoosh over their couches.”

Zac’s exactly right about this: the one thing that pretty much all ultra-expensive art has in common is that it’s instantly recognizable as the work of a given artist. (And that goes for Cézanne as much as it does for Jeff Koons.) Fine art has become the billionaire’s-club equivalent of a Louis Vuitton bag, slathered in logos. It’s not connoisseurship which drives values, so much as recognizability. Which in turn helps to explain why the most prolific artists (Picasso, Warhol, Hirst) are also the most expensive: the more of their work there is, the more exposed to it people become, the more they’ll recognize it, and therefore the more desirable it is.

I do hold out some small hope that the Chinese art market will provide a correction to this syndrome — there, I’m told, the value of an art work is (at least sometimes) much less a function of its recognizability as the work of a certain artist, and much more a function of the way that it can fit itself into a long artistic tradition.

Once upon a time, the western art market worked that way too: there were genres, and artists worked within them, and then would be judged on how well they painted within the constraints of that genre. Those days, of course, are over now. But that doesn’t mean for a minute that the value of a Warhol is somehow forever. As with any other investment, what goes up can always go down.

Last year, I blogged a paper about the way in which wineries lie about the alcohol content of their wines. Now, the same authors have a new paper out, trying to get to the bottom of exactly why wine is getting hotter.

One thing I like about this paper is that it doesn’t look directly at wine-alcohol levels, but moves back a step to the sugar content of the grapes going into the wine. If you turn high-sugar grapes into wine, one of two things has to happen: either you get sweet wine, or you get high-alcohol wine. Since taste in wine is getting dryer rather than sweeter over time, higher-sugar grapes mean hotter wine. And those grapes are definitely getting sweeter, especially when it comes to white wine. Here are the charts for California:

Is there a global-warming thing going on here? After all, warmer temperatures mean sweeter fruit. But, no. Here are the temperatures of California’s wine-growing regions for the years since 1990 that sweetness has been rising quite dramatically:

But we kinda knew this already. The most interesting thing in the paper, is not that hotter wine is unrelated to global warming. Instead, it’s that hotter wine is quite strongly related to price:

Sugar content of grapes at harvest was relatively high for red varieties and premium varieties, and for grapes from ultra-premium and premium regions. The same categories tended to show evidence of faster growth rates in sugar content as well… In all of the models, the analysis shows a higher propensity for growth in sugar content for premium varieties, compared with non-premium varieties… This feature and the patterns of the level of sugar content among regions and varieties could be consistent with a “Parker effect” where higher sugar content is an unintended consequence of wineries responding to market demand and seeking riper flavored, more-intense wines through longer hang times…

We found that the region with the lowest price of wine grapes (under $500 per ton) had significantly lower average degrees Brix at crush compared with all other regions… It may be profitable, in producing lower-priced wines, to opt for a higher yield of wine per ton of grapes in exchange for lower Brix.

Simplifying, you can think of vineyards in one of two ways. Either they’re a source of grapes which get sold by the ton, in which case you want to maximize the yield. That, in turn, means lower sugar content. Alternatively, they can be a source of carefully-cultivated grapes which get turned into premium wine selling for $20 per bottle and up. In that case, the quality of the grapes starts trumping their quantity. And it’s pretty clear that what winemakers want, if they’re going to sell expensive wine, is grapes with a lot of sugar. That’s their expressed preference, anyway.

All of this is consistent with what I wrote last year — that wine drinkers say that they want lower-alcohol wines, and will even go so far as to prefer to buy wines with lower alcohol numbers on the label. But when they actually taste the stuff, in general the higher the alcohol the happier they are. Especially when the wine is expensive.

The Economist has a cute chart today, showing the net worth of the world’s richest men (and one woman), divided by their age. Warren Buffett has, on average, built just over $600 million of net worth per year of his life, putting him just behind Bernard Arnault and well behind Bill Gates and Carlos Slim, who right now constitute the billion-dollar-a-year club. (I’ll save you the math: that’s $2.7 million per day.)

There’s a good chance that when Facebook IPOs, Mark Zuckerberg will join that tiny group: he’s 27 years old, so the market cap we’re looking for here is $95 billion. If Facebook is worth more than that, Zuckerberg will have increased his wealth by $1 billion a year, on average, from the day he was born onwards.

Which helps to put Zuckerberg’s ten-figure tax bill in perspective. If you’ve been getting a billion dollars wealthier every year for 27 years, a one-off payment of $2 billion doesn’t seem particularly excessive, in tax terms — especially if all your other tax bills, before and since, are relatively minuscule.

What’s more, Zuckerberg’s $2 billion tax bill is only coming about because of a quirk in the way his Facebook equity has been structured: on top of his 414 million shares of Facebook, he also owns 120 million options. Zuckerberg’s shares are generating no tax bill at all; it’s only the fact that he’s exercising the options which is giving him $5 billion or so of taxable income, for this year only. (And even that income is offset by the fact that Facebook itself gets an equal and opposite corresponding deduction — and since Zuckerberg owns 28.4% of Facebook, what he’s losing personally he’s partially making up through his corporate shareholding.)

David Miller explains how founder-billionaires get off even more lightly than private-equity GPs when it comes to taxes:

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

Miller has a rather complicated way of getting America’s ultra-rich to pay taxes: if you earn more than $2.2 million per year, or own $5.7 million or more in publicly traded securities, then you have to mark your wealth to market every year and pay income tax on the amount that it has gone up. Conversely, if your wealth declines, then you can get a massive rebate.

Personally, I think it would be much better idea if we simply implemented a small wealth tax, on top of income tax, for the very wealthy: last year I proposed that any wealth over $5 million should be taxed, annually, at a 1% rate. For someone with $5.7 million in wealth — that’s the top 0.1% — such a tax would increase their tax bill by just $7,000 a year. But for Mark Zuckerberg, it would bite. Right now, he stands to pay essentially no taxes in 2013. But if there was a 1% wealth tax and he was worth $27 billion at the end of 2013, that would generate a $270 million tax bill.

When politicians talk about taxing the rich, a common rejoinder is that income is not the same as wealth, and it’s wealth, not income, which really makes you rich. Fair enough. So let’s tax wealth. It’s fair, and it could provide some very useful revenue for anybody looking to balance the national budget.

Stephen Fidler reports that the ECB is kindasorta going to tender its bonds into the Greek debt exchange, thereby helping the country achieve some €11 billion in extra savings.

The details are sketchy, but to a first approximation, it seems to work like this: the ECB has €50 billion of Greek bonds, which it bought for €39 billion. It will sell those bonds to the EFSF for €39 billion, which in turn will “return the bonds to Greece”, whatever that means. Greece, in turn, “will then agree to repay the EFSF” — which may or may not mean issuing new bonds to be held by the EFSF. Since Greece will now have €39 billion of debt rather than €50 billion, that’s an €11 billion savings.

The ECB, under this plan, ends up breaking even, without monetizing any debt. As Zero Hedge says,

The ECB could have taken the loss directly and just printed money for that loss. So this demonstrates an unwillingness to print money. The ECB could take the loss and get capital from the member states. By using the EFSF rather than new capital calls, it is a sign that countries are at the limit of what they will contribute. Hoping for new money is unrealistic – since this was the perfect opportunity to put up new money and tell the world that Europe is truly united and willing to contribute. This just uses up money that was already allocated.

I’m also a bit worried about Greece’s new €39 billion debt to the EFSF — how is that going to be structured? Right now, the €50 billion of ECB debt comprises exactly the same bonds that anybody else can buy, but a big new EFSF debt might well be some kind of senior, bilateral obligation which effectively subordinates the new bonds that Greece is going to issue in a bond exchange.

And more generally, the problem here is that the EFSF, which was created to lend new money to countries in distress, is instead being used to retire debt that Greece issued years ago. That, in turn, hurts the EFSF’s ability to fund Greece — and all the other countries in Europe, for that matter — going forwards.

So there’s not a lot to get excited about here in structural terms. In big-picture terms, however, this is clearly good news, since it’s a signal that Europe is actually finding ways to get everybody on board for a new debt deal between Greece, its bondholders, and the Troika. Will it be enough? No. But it’s a step in the right direction.

Prashant Gopal has an intriguing story today on the way in which banks are not only doing more short sales than they used to, but are even throwing in cash sweeteners to speed things along. Why would they be doing such a thing? The banks aren’t saying, but theories abound:

Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales…

Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case.

It certainly rings true that banks are more likely to take losses on a loan when they purchased that loan at a discount. We saw that with principal reductions, last year, and it’s no surprise that it might be moving into short sales too.

More generally, it makes sense that once a homeowner has been living in their home for a year or more without making any kind of rent or mortgage payments, they start getting quite comfortable with that lifestyle, and become rather difficult to dislodge. Cash incentives can work much better than lawsuits, especially when there are title problems.

Frankly, the banks brought this on themselves. It’s well known in mortgage-servicing circles that the faster you move, when a mortgage goes into default, the more money you can save. But too many banks have let far too many mortgages fester in default for far too long — which means that all too many of them are all but worthless at this point.

What the banks should have done, when these mortgages went into default, was work with the homeowners, giving them a menu of options. Would you like to do a short sale? Would you like a modification, with lower monthly payments? Would you like some kind of principal reduction? Would you even be interested in some kind of deal where you sell your house and then get to rent it back from the new owner?

Instead, the banks did nothing, rebuffed attempts from homeowners to contact them and work something out, and generally said no to innovative ideas. Leaving them much worse off, and forced to resort to actions like this:

JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.

As such deals continue, and the homes then get dumped onto the market at any price, they will only serve to further depress the US housing market more generally. What’s more, they’ll act as an incentive for homeowners to stop paying their mortgage and start holding out for a big check in return for leaving their homes quietly. The whole thing is an unholy and unnecessary mess. Although I’m shedding no tears at all for the banks, who are admittedly the biggest losers.

Banks need to be regulated. Depositors can’t be expected to do due diligence on their financials, so you need deposit insurance. And in turn, the government — which provides the deposit insurance — needs to make sure that the banks have certain minimum levels of capital. Otherwise, the insurance fund will go bust in no time.

All of this is wholly uncontroversial — until you get to the subject of money-market funds. At heart, as they exist today, MMFs are banks. They borrow money which is repayable on demand, and they lend it out for fixed terms, taking a certain amount of credit risk while doing so. If their borrowers fail to repay the money, or if their depositors all demand their money back at once, then they’ll be left needing to be bailed out.

Paul Volcker, in September, gave a speech laying out the problem with MMFs very clearly:

Started decades ago essentially as regulatory arbitrage, money market funds today have trillions of dollars heavily invested in short-term commercial paper, bank deposits, and notably recently, European banks.

Free of capital constraints, official reserve requirements, and deposit insurance charges, these MMMFs are truly hidden in the shadows of banking markets. The result is to divert what amounts to demand deposits from the regulated banking system. While generally conservatively managed, the funds are demonstrably vulnerable in troubled times to disturbing runs, highlighted in the wake of the Lehman bankruptcy after one large fund had to suspend payments. The sudden impact on the availability of business credit in the midst of the broader financial crisis compelled the Treasury and Federal Reserve to provide hundreds of billions of dollars by resorting to highly unorthodox emergency funds to maintain the functioning of markets.

Recently, in an effort to maintain some earnings, many of those funds invested heavily in European banks. Now, without the backstop official liquidity, they are actively withdrawing those funds adding to the strains on European banking stability.

The time has clearly come to harness money market funds in a manner that recognizes both their structural importance in diverting funds from regulated banks and their destabilizing potential. If indeed they wish to continue to provide on so large a scale a service that mimics commercial bank demand deposits, then strong capital requirements, official insurance protection, and stronger official surveillance of investment practices is called for. Simpler and more appropriately, they should be treated as an ordinary mutual funds, with redemption value reflecting day by day market price fluctuations.

Wonderfully, it seems that the SEC has been listening. The WSJ article is a bit hard to follow, but the SEC seems to have a three-pronged approach to regulating these beasts.

Firstly, they’ll be forced to raise capital. Secondly, depositors won’t be able to withdraw all of their money at once, just 95% of it. The last 5%, they’ll have to wait 30 days. And thirdly, the net asset value should be allowed to float, rather than being fixed at $1.

What are the chances of all of this happening? Zero. Reading between the lines, it seems that the SEC is making a big ask, and will probably be willing to compromise: even Volcker painted reform as a choice between more capital and a floating NAV, rather than a both-and approach.

But just forcing MMFs to raise capital will be a huge and important step forwards. Not that it’s going to be easy:

J. Christopher Donahue, president and chief executive of Pittsburgh-based Federated Investors Inc., which manages $255.9 billion of money-fund assets, said he plans to sue the SEC if the new regulation interferes with his firm’s ability to do business.

“We’re going to do everything in our power to attack it,” Mr. Donahue said of the possible regulations.

This is kinda hilarious, given the official Federated argument against Volcker:

With 30 million investors and $2.6 trillion in assets, MMFs are hardly unseen, hidden or surreptitious. Not only are they subject to significant control, examination and oversight by the Securities and Exchange Commission, with detailed prospectus requirements for the issuance of their shares, demanding reporting requirements, regular surveillance, and substantial requirements as to liquidity, asset quality and maturities, but they must publicly and frequently disclose the contents of their portfolios, on their websites and in regulatory filings – down to the individual security level.

In other words, the reason that MMFs need no further regulation is that they’re already regulated by the SEC. On the other hand, if the SEC itself wants to step up its regulation of MMFs, then they’ll sue it.

The reality is that MMFs are a monster source of systemic risk in the US, and the SEC is absolutely right to want to get some kind of a grip on them. They need to make a choice: are they mutual funds, where investors risk taking losses? Or are they banks, which need to be regulated by the government? Up until now, they’ve managed to have their cake and eat it — but those times must come to an end. Here’s hoping Mary Schapiro sticks to her guns on this one, in the face of what is sure to be extremely stark opposition.

Many thanks to Zac Bissonnette for fisking the latest Bloomberg gushery on art funds for me, so I don’t have to. This fund isn’t going to produce disappointing returns: it’s probably not even going to get off the ground to begin with. Does Bloomberg’s Scott Reyburn have a clue what “unconfirmed commitments” are? I suspect they’re the fund-world equivalent of vaporware.

But the fact is that the intersection of money and art is a busy place these days. You have what John Powers cleverly calls Spot Markets, for starters — the global Hirst-spot bazaar is in full flower right now. And then there’s that $250 million Cézanne — a figure confirmed by “multiple sources” of Alexandra Peers, and which, as Marion Maneker says, serves to validate other nine-figure prices paid for important works.

Interestingly, the Cézanne is particularly special in that it’s a 19th-Century work: everything else north of $100 million has been 20th Century. This could be the beginning of a relative-value trade, where older masterpieces finally converge in value on the silly prices being paid for modern and contemporary works. Or it could just be an outlier: there are precious few undisputed masterpieces of this sheer size in private hands. The Cézanne is 130 centimeters wide — that’s over 51 inches, which is huge by the artist’s standards. (Some of The Bathers are significantly bigger, but all of those are in museums.) If you want a trophy painting, it’s still the case that you’re going to want something big.

So when Peers quotes the venerable Gary Tinterow describing the Cézanne as “the darkest, the most stripped down and essential” of its series, that’s all well and good — but the real driver of the $250 million price was, I suspect, its square footage.

Alice Gregory has a great piece in the latest n+1 magazine about working at Sotheby’s during the run-up in prices following the 2009 crash. Here’s a taster:

After a few months on the job, I was assigned a new duty—writing the essays that are printed beneath and between the reproduced images in the sale catalogue…

I sprinkled about twenty adjectives (“fey,” “gestural,” “restrained”) amid a small repertory of active verbs (“explore,” “trace,” “question” ). I inserted the phrases “negative space,” “balanced composition,” and “challenges the viewer” every so often. X’s lyrical abstraction and visual vocabulary—which is marked by dogged muscularity and a singular preoccupation with the formal qualities of light—ushered in some of the most important art to hit the postwar market in decades… It was embarrassingly easy, and might have been the only truly dishonest part of the Sotheby’s enterprise. In most ways, the auction house is unshackled from intellectual pretense by its pure attention to the marketplace…

Sotheby’s felt detached from the posturing that happens in Chelsea galleries and the gnomic garbage that counts for art-world conversation. Auction house employees don’t invoke half-remembered poststructuralism or make inapt analogies. They don’t have to. The prices speak for themselves.

We’re in a world right now where distinctions between art and money and value are becoming increasingly blurred, in a way which plays straight into the hands of the nouveau riche and the hedge-fund managers who love to splash millions on big and shiny work. This is a fad, and it will pass, along with former M&A dealmakers who think that owning an expensive art collection gives them the ability to make money flipping paintings on a six-year time horizon. Sociologically, it’s fascinating. But when the crash comes, it’s going to be very, very painful for anybody in the art world who’s gotten used to today’s excesses.

This isn’t good; the Greece talks have now moved past their clear deadline and have reached the finger-pointing stage. The broad outline of the dynamics here is now very clear: you need three different parties to agree on a deal for the whole thing to have a chance of success. Private-sector bondholders need to agree to a very deep cut in the value of their bonds; the Greek government needs to agree to enormous spending cuts over and above the 1.5% of GDP that they’ve already offered; and the Troika of the EU, ECB, and IMF needs to agree to pony up extra bailout money to cover the larger-than-expected deficits that Greece is running.

Of the three, the bondholders are the least of anybody’s problems. In fact, almost everything they’ve done in recent months can be viewed as a way of showing that if and when everything goes pear-shaped, it’s not their fault. They will talk to anybody, agree to pretty much anything, and be perfectly reasonable all along; it’s the various governments, here, which are finding it impossible to come to terms.

And it’s easy to see why. The Greek economy is in a very severe recession, exacerbated by the spending cuts already imposed. Every extra euro cut will only serve to shrink the economy even further — and no country in the history of finance has ever achieved a sustainable debt level by reducing its GDP. It almost doesn’t matter whether government spending on things like unemployment benefits is too high on an absolute level: if you cut it now, you doom the Greek economy to perpetual recession, and Greek society to ever-greater levels of political unrest.

On the other hand, you can see why German taxpayers — or anybody else in the rest of Europe, for that matter — have no particular inclination to continue to pay for Greece’s high benefits, especially when the Greek government seems incapable of raising the taxes needed to pay for those benefits itself, and when, as Euro Group president Jean-Claude Juncker says, “there are elements of corruption at all levels of the public administration”.

The result is an impasse which, the longer it goes on, the harder it becomes to break; the Troika won’t even let the Greeks do a bilateral deal with bondholders unless and until there’s a much bigger agreement between Greece and Europe. Which means, in turn, that the bondholders are staring down a worst-case scenario — a default outside the context of any kind of negotiated exchange offer — through no fault of their own at all.

The Troika doesn’t want that — banks across Europe would suffer much-greater-than-necessary losses as a result, both on their Greek holdings and on their holdings of newly-endangered debt from Portugal and other countries on Europe’s periphery. But at this point, it’s probably easier for France and Germany to bail out their domestic banks directly for their sovereign-debt losses than it is for them to shovel any more cash in Greece’s direction.

If the Troika fails to save Greece, the past 66 years of ever-increasing European unity will come to a sudden and drastic halt, and all eyes will turn to Portugal, asking if it will be next. (The Europeans will say no, and indeed already the ECB seems to be pre-emptively shoring up Portuguese bond prices; the bond markets will say yes.) There will also be a second sovereign default, sooner rather than later, in Cyprus, and at that point the European and international communities will have essentially no credibility in terms of its ability to prevent dominoes from falling.

But I’ve never seen less appetite, at the European level, for a policy of continuing to kick the can down the road. Which means that there’s a very good chance that the long-awaited and long-feared crunch might soon be upon us. Greece and the Troika might not be able to agree on whether the latest deadline has been missed, but there’s one deadline no one can move: March 20, when Greece’s big €14 billion bond issue comes due. Either there’s an exchange offer in place by that point — or else the European project will have failed.