Felix Salmon

Why would clients like El Paso ever hire Goldman Sachs if Goldman Sachs is always working in its own best interest rather than that of the clients? My hypothesis, yesterday, was some kind of mysterious Goldman magic. Which, admittedly, is not particularly falsifiable or compelling. So many thanks to a loyal reader, who doesn’t want to be named, for giving me some very good reasons why clients hire conflicted investment banks, especially in the M&A field. It turns out that there are good reasons why “the most conflicted bankers are often the most sought after by clients”. Take it away, loyal reader:

A few points from your post on Goldman today.

You and many other commentators seem to have some misconceptions about what exactly large, sophisticated clients such as El Paso’s board hire investment bankers to do.

Its always funny how, in the minds of pundits everywhere, those conniving and all-powerful one-percenters who sit on corporate boards become impotent and completely incapable of independent decision-making once an investment banker walks into the room.

El Paso’s directors were well aware that Goldman was conflicted and in fact displayed a healthy skepticism of Goldman’s impartiality by its decision to “exclude Goldman from tactical discussions about how to respond to Kinder Morgan from September 15, 2011 onwards”.

At the end of the day the board, not Goldman or any other advisor, made the decision of how to proceed at each major step in the process and while Goldman may have been consulted on some of these decisions (along with MS and probably 2 or more sophisticated law firms), the sophisticated directors of El Paso’s board knew full well that the decision was their’s to make and that Goldman’s advice should be taken with a grain (or block) of salt.

So contrary to your claims I would posit that Goldman’s clients do not in fact trust Goldman to provide “impartial advice in their own best interest” and that Goldman’s ability to “snow clients and get them to do whatever Goldman wants” is highly overrated (and likely non-existent).

So why do clients hire potentially conflicted investment bankers?

The tempting answer – and the one implied by your final paragraph – is that Goldman’s clients are all irrational idiots getting unwittingly screwed by a giant squid. However, it’s important to remember that pretty much every PE fund out there hires Goldman or one of its competitors to perform either buy-side (sometimes) or sell-side (nearly always) advisory work on all of their transactions. Surely, the masters of the universe running multi-billion dollar PE funds aren’t getting “snowed” by their comparatively poorer and less-well-regarded friends working on the sell-side.

When sophisticated clients (management teams, company boards, PE funds, etc) hire M&A bankers, they typically hire them for two main reasons (in addition to the legally required shams referred to as “fairness opinions”): Execution and Connections.

The execution part is obvious – M&A processes require a lot of (sometimes specialized) work that most companies are not well-staffed for since these events come around relatively rarely. While execution work represents the bulk of the person-hours devoted to a deal, the work is simple enough that if execution work were the primary value-add provided by bankers you would see much lower fees since the work itself is fairly commoditizable.

It’s the connections that bring in the big bucks for bankers. From making sure that the book lands on the desk of a potential buyer’s CEO rather than a lowly corp dev intern to massaging egos on both sides after a particularly harsh negotiation call, the value the banker provides is his/her ability to act as a conduit between the seller and potential buyers. This obviously means that the most sought-after bankers are those with the best connections to (and deepest relationships with) potential buyers. Since it’s basically impossible for a banker to develop strong relationships with a buyer without having some sort of conflict (say having formerly worked for potential buyer in a previous engagement), we shouldn’t be at all surprised that the most conflicted bankers are often the most sought after by clients.

A few personal examples:

• Back in my private equity days our firm was looking to sell a smaller company to one of a handful of larger potential strategic buyers. Our criteria for selecting a banker basically came down to two metrics: (a) how many times had that banker worked for any of the buyers and (b) how many times had the banker sold a company to one of the buyers. We weren’t looking for impartiality and “strategic advice”, we were looking for connections and relationships – “conflicts”, you might say. It’s the job of the principal (whether a PE fund or a company’s board) to make all of the hard decisions of when to sell and for how much. The advisor is simply paid labor to help throughout the process.
• Back in my days as an M&A banker, we had just wrapped up the sale of a mid-sized company (“Company A”) to a private equity firm when a larger firm (“Company B”) that owned a non-core subsidiary that was one of Company A’s direct competitors called us up because it wanted to sell the non-core subsidiary. The CEO of Company B hired us without the traditional “bake-off” process in part because the CEO of Company A (whom Company B’s CEO was friendly with after meeting at various industry events) had been impressed with our work. More importantly, though, CEO B knew that the PE fund that had recently purchased Company A was executing a roll-up strategy in the industry and was one of the most likely buyers of his subsidiary. At this point it’s worth mentioning that our firm’s relationship with the PE fund involved extended far beyond having recently sold Company A to them. The PE fund was one of our firm’s top relationships, and we regularly both sold companies to this PE firm and sold this PE firm’s portfolio companies to other buyers when they were ready to exit. Further, several of our firm’s MD’s, including the lead banker on the deals in question here, were LP’s in several of the PE firm’s funds, including the current fund that had bought Company A and would look to buy the subsidiary of Company B. Both CEO A and CEO B knew of our deep relationships with the PE firm before they hired us. Point being, if CEO B had tried to find a more conflicted banker to sell his subsidiary, he couldn’t have found one (and if he could have he would have hired them instead). He hired us on the spot because he knew all of our “conflicts” meant that we had the best relationships – and that’s exactly what he was buying.

It’s a well known principle of economics and game theory that “repeated game” negotiations lead to more efficient outcomes for both parties than one-off negotiations because of the reciprocity and trust built through repeated games. What clients are buying from bankers is access to this type of trust that can only be gained through repeated transactions between parties. Viewed in isolation, any one instance of “reciprocity” may look like an instance of conflicting interests – and in many cases, it might very well be. But the sophisticated clients of Goldman and other banks know that it’s exactly this reciprocity that they are buying – after all they could have easily hired the lower-priced and conflict-free banker who didn’t have any relevant tombstones in the back of his pitch deck.

Looked at from this view, it shouldn’t be at all surprising that sophisticated clients keep paying the a premium Goldman’s “strategic advisory services” when Goldman has a reputation for being the most conflicted bank on the street. These clients aren’t hiring Goldman despite its many conflicts of interest. They are hiring Goldman specifically because of these numerous conflicts and the numerous deep relationships they represent.

None of this is to excuse the Goldman MD for not revealing his holdings in Kinder or to say that Goldman is always above board with all of its clients. Nor is it to pretend that there aren’t often principal-agent issues between boards, management teams, advisors and shareholders, especially in large public companies.

But we should at least acknowledge that conflicts of interest are a core piece of an M&A banker’s value proposition to its clients and that almost all of these clients are extremely sophisticated individuals who know exactly what they’re paying for.

Update: Matt Levine has a great response.

After I wrote about Andrew Schiff on Monday, he called me up, and we talked about his statement that New York’s middle class is diminishing, and that it’s becoming increasingly difficult to afford a middle-class* lifestyle here. Pretty quickly, we managed to put our finger on an empirical question which, if it could be answered, would determine which of us is right and which is wrong.

First, take the top 5% of the New York population by income, then cream off the top 0.1%. So you’re going from the 99.9th percentile down to the 95th percentile. The question is, how has that group’s income compared to their cost of living over the past 25 years?

Schiff’s thesis is that 25 years ago, in 1987, the cost of living was lower, in income-adjusted terms, than it is now. Whereas my thesis is that income for that group has outpaced their cost of living, even after taking into account the fact that lots of things in New York have gotten more expensive.

I asked Ben Walsh to look into this, and sadly it isn’t very easy; it seems that we’re going to have to make a few kludgy adjustments to the original question. For one thing, getting detailed information for historical New York City income distribution is not easy. Here’s a CBO paper which says that nationally, income at the 96th percentile rose 42% in real terms from $96,583 in 1987 to $137,578 in 2007 — that’s in 2007 dollars. Which means that nominal incomes rose 160% from $52,916 to $137,578 over the course of 20 years.

And here’s a paper looking at New York State, showing real income for the top 5% of the population growing 70% from $154,567 between 1987 and 1989, to $262,679 between 2004 and 2006. That’s in 2005 dollars. In nominal terms, we’re talking a 180% rise in 25 years.

It’s certain that the income of the top 5% in New York City has been growing faster than the income of the top 5% in New York State or the country as a whole; a reasonable estimate is that it has doubled, in real terms, over the past 25 years. In nominal terms, that means someone earning $100,000 in 1987 would be earning $400,000 today. (Conveniently, nominal prices nationwide, according to the CPI Inflation Calculator, have almost exactly doubled over the past 25 years as well.)

So what has happened to the cost of living a middle-class lifestyle in New York City over that time? If prices have more than quadrupled in nominal terms, or more than doubled in real terms, then Schiff is right. If they haven’t, then I’m right.

This is harder to determine. Schiff talks a lot about the cost of health insurance, which has certainly been increasing in real terms; nationwide, healthcare costs have been increasing at 5.6% per year over the long term. That means they’ve trebled, in nominal terms, over the past 25 years — a very large increase, but not one which has outpaced income gains for the rich. The cost of private insurance might have gone up faster, but I don’t think that it’s going to make a huge difference.

What about house prices? They’re up too: the nominal median house price in the New York metropolitan area was $196,765 in 1987, and had risen to $387,429 by 2010. That means houses basically doubled in price, in nominal terms, over 23 years; in real terms, they went up by just 14%. Again, house prices for the top 5% might have gone up faster. But remember, first, that mortgage rates have come down a lot during this period, so the cost of buying has actually come down. More generally, at these levels, virtually everybody is buying rather than renting, and there’s a significant forced-savings component to mortgage payments. As Walsh notes, the cost of living, when you’re talking about a mortgage, blurs into savings, investment, and wealth creation.

As for private schools, there you see a much bigger increase. Again, reliable statistics are hard to find, but this NYT story from 1987 cites a cost of $4,500 to send a third-grader to private school, compared to the $32,000 that Andrew Schiff is paying for his ten-year-old’s tuition*. That means private-school fees have increased roughly sevenfold, in nominal terms, over the past 25 years — more than incomes have, even for the top 5%.

I’d very much welcome any empirical help here: if you have numbers on the cost of living in New York over the past 25 years, or better numbers for how much the income of New York City’s top 5% has increased over that time, do let me know and I’ll revisit. But my gut feeling is that insofar as things like house prices and private schools have increased in price, that’s a function of demand: the rich are getting so much richer that they’re increasingly able to compete to pay enormous sums for such things. In other words, any increase in the cost of living in New York is evidence — albeit circumstantial evidence — for the thesis that disposable incomes have been going up rather than down, and that the rich are richer now than they used to be. Even by New York City standards.

Update: First, apologies for using the term “middle-class” without snark quotes. Of course if you’re looking at the top 5% of the population, they’re not really in the middle of anything. I was simply adopting Schiff’s terms of debate, without (for these purposes) challenging them. But to be clear: as far as I’m concerned, anybody in the top 5% is rich.

And thanks to commenter TFF, who discovered that the school charging $4,500 a year in 1987 is charging $18,000 a year now. Conveniently, that’s exactly a 4X multiplier, which is also what I think has happened to nominal incomes — for the rich — during that time.

Update 2: Yves Smith has a smart take on how useful the comparison is that Schiff is making.

Stephen Morse doesn’t Matter. In fact, he calls the journalism startup — whose Kickstarter campaign broke past the $100,000 level in just nine days — “Snake Oil Salesmen 2.0″ and “a scam”. And after getting a smart explanation of exactly how Matter’s business model is, he doubled down on his position and said he would keep it even if they manage to raise $500,000. So I invited him up to Reuters for a little debate.

We disagreed about a few different things. The first is Morse’s idea that there’s so much great content out there for less than 99 cents that no one’s going to pay that whopping sum to read Matter’s stories. I, obviously, disagree. I think that the success of the Kickstarter campaign is proof that there’s huge untapped demand for this kind of material — demand which is not being met by the competitors Morse cites, like Scientific American or Popular Mechanics. I think that the success of books for the Kindle — for that matter, the success of decades of magazines and centuries of paper books — demonstrates that there’s real demand for quality content, even from people who don’t necessarily have the time to read it all. I think that mobile devices like phones and tablets have revolutionized where and how we consume a huge range of written content. And, most importantly, I think that trail blazers like the iTunes Store and the New York Times are changing the willingness of millions of people to pay for digital material.

“If I were a content consumer,” says Morse, lapsing into a rather odd conditional, “I wouldn’t pay 99 cents for one article” when magazine subscriptions amortize out at a lower per-article cost, and besides there’s lots of great content out there which is absolutely free. Such things, he says, are “a much better value” than Matter. But here I think Morse misses the great hope of the 99-cent price: it’s low enough that substantially everybody in Matter’s target audience can afford to pay it without any real effect on their wealth or cashflow whatsoever. It’s less than the amount you tip a cab driver, or a bartender; in fact, it’s less than the cost of just about anything you might buy in the physical world. 99 cents is low enough that, for hundreds of thousands of people, worries about value disappear. They pay that on text messages all the time, which have much lower value. Why not pay it for something great, if doing so allows that thing to exist in the first place?

Put it this way: if Matter found a way for people to pay them after they read a story, rather than before, on a purely voluntary basis, I’d still be optimistic about their ability to make money doing this. Think of a world where you got the New Yorker delivered for free every week, and then clicked a button paying them 99 cents every time you really liked one of the articles. I think they could get a lot of revenue that way, and I think the success of the porous New York Times paywall is strong evidence of that. Yes, there will always be people who don’t want to pay, and there will always be others who somehow find free samizdat versions of Matter’s stories. But those people aren’t important. What’s important is the number of honest people who are more than happy to pay when they find something good to read. And that number is extremely large, and growing.

Matter’s Kickstarter campaign proves that people want to give them their money. The task facing Matter is to create material that’s so unique, so great, that readers around the country and the world will be eager to buy subscriptions, or individual issues, in the knowledge that their money is going straight to the creators of that content. It’s an exercise in doing something which has historically been extremely rare, in the world of journalism: selling stories to readers, as opposed to selling readers to advertisers. But the internet makes it so easy to reach millions of potential readers that a small and enthusiastic subgroup can be big enough to sustain this kind of publication. Nanopublishing didn’t work when Nick Denton tried it on an ad-supported basis. But Matter is effectively running a publication at a CPM of $1,000 — and a lot of math starts working when the numbers get that big.

In our debate, Morse snarked that no one down below us, in Times Square, had heard of Jim Giles or Bobbie Johnson, the co-founders of Matter. And in saying that he revealed his broader mindset: that of a would-be internet entrepreneur who raises venture funding by using the words “platform” and “scale” a lot while promising things like “explosive growth”. It’s no great secret that Giles and Johnson have talked to VCs, many of whom have been very supportive. But what they’re building doesn’t lend itself to the VC business model, where you either have monster, multi-million-dollar success, or else you die trying.

Morse uses the fact that Matter doesn’t have VC funding as a count against them, when in fact it’s a great count in their favor. VCs provide two things: money and advice. And Matter’s getting the advice; it’s just doing so without having to sell its soul to people wanting a monster return on their investment. All it needs to do, at least in the first instance, is pay for itself. And at the end of our debate, Morse finally came up with a number: if Matter can get 20,000 paying customers each week, he said, then he sees a sustainable model there.

Morse also said that “even if every science nerd out there pays a dollar, this is not going to be something that will get the critical audience needed to be a financial success”. Which I think is plainly wrong: there are a lot more than 20,000 science nerds out there. Scientific American has a circulation of 475,000. Popular Mechanics and Popular Science both have a circulation of over 1.2 million. Smithsonian has a circulation of more than 2 million. And National Geographic has a circulation of over 4 million. Can Matter reach 20,000 paying customers? Of course it can. Here’s Johnson:

We don’t think it’s going to be a mainstream smash; we don’t think it’s going to change the world; we don’t think we’re going to out New Yorker the New Yorker; we don’t think we’re going to be billionaires. But we do think, done right, we can offer something valuable and remain sustainable in the medium term.

There’s nothing pie-in-the-sky about that idea; to the contrary, it’s eminently achievable. I think so, and 1,806 of Matter’s Kickstarter backers think so too. With 17 more days to go.

This, I think, is a major change of tune from Greece.

When Greece first launched its exchange offer, on February 24, the language about when and whether it would active its collective action clauses was long and complex. I’ve uploaded the original press release here; the relevant language is at the bottom of page 2 and the top of page 3, and has caused a lot of confusion. (Simone Foxman, for instance, reported yesterday that if Greece gets 90% participation, the CACs would not be activated. That’s the exact opposite of what Greece said in the press release, where it declared its intention “to declare the proposed amendments effective” in that event.)

Today’s press release, by contrast, is a lot simpler. Never mind the old distinctions about what happened if the take-up was less than 66%, or between 66% and 75%, or between 75% and 90%, or above 90%. Instead, we just get one, simple rule:

The Republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds.

In other words, there are collective action clauses, and if Greece can trigger them, it will. End of story.

Greece has also now explicitly talking about default; as far as I can tell this is the first time it has done that.

The Republic’s representative noted that Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI.

This isn’t quite as drastic as it seems at first blush. Remember that Greece has now said that if it can trigger the CACs, it will. So if more than 66% of bondholders tender into the exchange, then everybody will end up with new bonds, whether they tendered into the exchange or not.

But note that this only applies to the Greek-law bonds. The English-law bonds need a 75% take-up, on a bond-by-bond basis. So it’s possible that the Greek-law bonds will be successfully exchanged, while some or all of the English-law bonds end up in default.

The English-law bonds are ultimately something of a sideshow, except for purposes of Greece’s CDS, where they might well end up being the instruments tendered into the bond exchange. But this new stance from Greece now makes the outcome of the Greek CDS auction very uncertain indeed: if one English-law bond fails to get 75% participation and gets defaulted on, then that bond will certainly become the cheapest bond to deliver into the exchange, and the CDS payout will be much higher than current market prices are anticipating.

My feeling is that this press release is an attempt to maximize the participation of holders of English-law bonds. If they hold out, Greece is saying, then the exchange is very likely to go ahead without them, and they’ll be left behind with nothing to show for it except the prospect of a long and painful court fight. Under the terms of the original press release, Greece kept open the possibility that it might pay hold-out creditors in full. Now it seems to have closed down that possibility. Which makes the upside of holding out much smaller.

Andrew Ross Sorkin weighs in today on Goldman’s conflicts in the takeover of El Paso Corporation by Kinder Morgan, as laid bare in a blistering opinion by Delaware Chancellor Leo Strine. Steven Davidoff has described the decision as demonstrating that “Chancellor Strine is a bold judge, one who is brilliant and willing to make waves” — and so it’s worth extracting some of the more Rakoffian bits of Strine prose.

While Sorkin leads his column with the script that Goldman CEO Lloyd Blankfein was given when he called El Paso CEO Doug Foshee, for instance, he omits the gloss that Strine provides on that script:

Certain Chancery staff have experienced a troubling side effect to reading this evidence: Lionel Richie’s 1980’s treacle, “Hello,” came to mind and is stuck in their heads. See LIONEL RICHIE, Hello, on CAN’T SLOW DOWN (Motown Records 1983) (“Hello!/Is it me you’re looking for?/I can see it in your eyes/I can see it in your smile/You’re all I’ve ever wanted/And my arms are open wide …./And I want to tell you so much I love you ….”).

Similarly, while Foshee officially says that he has “acted at all times in a manner consistent with our values of stewardship and integrity, and always conducted myself in the best interests of El Paso, its employees, and its shareholders”, that has to be read in the context of the way in which Strine utterly skewered him:

At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested in pursuing an MBO of the E&P business. The defendants defend this by calling Foshee’s actions and motivations immaterial and frivolous.

It may turn out after trial that Foshee is the type of person who entertains and then dismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day.

It could be.

Strine saves his most acid commentary for Goldman.

The defendants begrudgingly concede that El Paso’s long- standing financial advisor, Goldman, had a “potential conflict” because: (1) it owned approximately 19%, or $4 billion worth, of Kinder Morgan stock; (2) it controlled two of Kinder Morgan’s board seats; (3) it had placed two senior Goldman principals on the Kinder Morgan board who thus owed Kinder Morgan fiduciary duties; and (4) the lead Goldman banker working for El Paso, Steve Daniel, personally owned approximately $340,000 of Kinder Morgan stock.

The phrase “potential conflict” is footnoted; Strine notes drily that “Goldman’s answering brief used the phrase ‘potential conflict’ to describe its position fifteen times.” In fact, as Strine says, this wasn’t a potential conflict at all: instead, the conflict was “actual and potent”.

Goldman’s position — beautifully demolished by Strine — is that it had Chinese walls in place, and that its M&A team was blissfully ignorant of the enormous stake that Goldman had in Kinder Morgan getting El Paso on the cheap. (Never mind the fact that Goldman’s M&A team was led by someone who personally had a $340,000 stake in Kinder. As Foshee himself put it, that’s a conflict “between one person’s brain”.)

But here’s the thing: as Francesco Guerrera points out, if Goldman’s only interest here was getting a nice check for its M&A team, there was an easy and non-conflicted way for them to do that.

This unruly mess wouldn’t have happened had Goldman resigned from El Paso right after the Kinder Morgan approach. Goldman would have probably been hired by Kinder Morgan, earned similar fees and avoided uncomfortable questions about divided loyalties.

Which definitely makes it seem as though the only reason for Goldman to stay on as an El Paso adviser was to ensure that El Paso and Forshee sold themselves for a modest sum to Goldman and its fellow owners of Kinder.

Guerrera adds that “what Goldman did isn’t illegal, just inappropriate in an age in which Wall Street’s morals and behavior are under the public microscope”. But Strine actually goes further than that — he says quite clearly that “the plaintiffs have a reasonable probability of success on a claim that the Merger is tainted by breaches of fiduciary duty”. And Davidoff notes that “Goldman Sachs’s engagement letter with El Paso probably limits its liabilities to no more than $20 million”. It’s entirely possible that Goldman’s actions in this case were both inappropriate and actionable; what’s more, Goldman will probably end up settling the case at some point, for a multi-million-dollar sum.

All of this comes as Nick Dunbar of Bloomberg reports on the numbers involved in Goldman’s shenanigans in Greece.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

The question at this point is surely why any client would ever trust Goldman on anything. Goldman seems to have a habit, here: it recommends a certain course of action, involving a deal which the client is barred from testing in the market. (El Paso wasn’t allowed to shop itself to anybody other than Kinder; Greece wasn’t allowed to check the market price of the swaps which Goldman was selling it, because Goldman said that if Greece did that, the whole deal would be off.)

This is surely the most magical and mysterious aspect of Goldman Sachs: that despite mountains of evidence that its actions are always orchestrated to result in the best possible outcome for Goldman Sachs, its clients still seem to trust it to give excellent and impartial advice in their own best interest. Maybe that’s the key skill that Goldman investment bankers are hired for. Not analytical or strategic expertise, but rather the ability to snow clients and get them to do whatever Goldman wants.

My wonky post last week on how Greece’s default could kill the sovereign CDS market turns out to have been surprisingly popular, especially among policymakers who are worried about whether there’s a serious flaw in the CDS architecture. So today I had a fascinating chat with David Geen, ISDA’s general counsel, to double-check whether there was something I was missing. And it turns out that I was wrong: I wasn’t pessimistic enough. The problem I identified with Greece’s default isn’t just a problem for sovereign CDS: it’s a problem for all CDS.

At heart, the problem is what happens when an issuer swaps out all of its bonds for some new bonds. There’s no reason at all why the new bonds should trade at a massive discount to par — indeed, issuers often like it when their new bonds trade at or near 100 cents on the dollar. But if the CDS auction happens after the bond exchange, and if all of the old bonds are exchanged, then holders of the new bonds are forced to tender new bonds into the exchange, even if they’re trading at 100 cents on the dollar. Which means that holders of old bonds could suffer a huge haircut in the value of their bonds, but still get no payout from their CDS.

This has been an issue in the past. When Anglo Irish Bank restructured its bonds, it amended the old bonds to include a call option which allowed the bank to buy back every €1,000 of bonds for €0.01. That was an effective way of wiping out the value of the old bonds — but it also risked serious damage to the CDS market, since in a CDS auction, the value of a bond is calculated as the price of the bond considered as a percentage of the outstanding principal — and the outstanding principal is considered to be not the face value of the bond but rather the amount of the call option. If Anglo Irish had done the exchange quickly, before a CDS auction was possible, then bondholders would have had to tender bonds with a call option at €0.01 — which would mean that they couldn’t claim any payout on their CDS at all.

In the end, Anglo Irish took pity on the CDS holders, and staggered its restructuring so that there was enough time for ISDA to conduct an auction before the bonds got changed out of all recognition. But hoping that the issuer will act in a friendly manner is not exactly an optimum strategy — especially since, by definition, the issuer will be in the process of going bust.

This is a known issue. In a primer on sovereign state restructurings and credit default swaps dated October 2011, ISDA’s own counsel, Allen & Overy, said as much on page 20.

If an issuer has inserted a right to call at 20%, the outstanding principal would be considered to be 20% of the face value: if it were likely that the call would be exercised, the current value of a bond with a face value of USD100 would be approximately USD20, ie close to 100% of the outstanding principal. If an auction final price was based on this bond, a buyer of protection would receive only a marginal payment in settlement of its credit default swap, rather than a payment reflecting the full diminution in value caused by the restructuring.

The buyer of protection would also lose out in the more straightforward case where all deliverable obligations are redeemed prior to settlement.

This seems unsatisfactory at first blush, particularly as it is effectively the very thing for which protection is bought (the restructuring event) which thwarts the buyer.

This doesn’t just seem unsatisfactory at first blush; it is unsatisfactory. And there is no second blush. Essentially, CDS holders are reduced to hoping that the issuer will be nice, and structure the exchange in such a way as to let them get paid out. But there’s no particular reason why the issuer should do that, especially seeing as how the CDS holders were the people who were effectively shorting the issuer as it tumbled into bankruptcy.

Nearly all issuers in Europe have collective action clauses in their bonds: any of them could ask their bondholders to agree to change the payment terms on all bonds so that call options were introduced or principal amounts reduced. If a supermajority of bondholders did that, then the issuer could change the payment terms immediately, before a CDS auction could be held, and buyers of protection could find that CDS protection to be worthless.

In the past, ISDA has found a slightly kludgy way to deal with this. If you look at the documentation for the CIT auction in 2009, you’ll find this piece of crystalline prose:

If, after the date that is two Business Days after the Notice of Physical Settlement Date, but prior to Delivery, a Deliverable Obligation specified in the Notice of Physical Settlement (or NOPS Amendment Notice, as the case may be) is redeemed and/or cancelled in whole or in part (either in accordance with the terms of the relevant Deliverable Obligation, or otherwise) and, in connection with such redemption and/or cancellation, holders of the Deliverable Obligation receive cash, securities, rights and/or other assets (whether tangible or otherwise) (in each case, whether of the relevant Reference Entity or of a third party) (together, the “Assets”) (such event, an “Asset Exchange”) then, notwithstanding Section 3.4, Buyer’s right to Deliver each relevant Deliverable Obligation shall, to the extent it is the subject of an Asset Exchange, be replaced by a right to Deliver an amount of Relevant Assets equal to, or greater than, but not less than, the Asset Entitlement Amount (together with any part of the Deliverable Obligation that has not been the subject of such Asset Exchange).

I’ll translate that into English for you: the auction might happen after your bonds have been exchanged into something else, which we’ll call Relevant Assets. If that happens, then you’re allowed to consider whatever Relevant Assets you got to be deliverables as far as the auction is concerned. Even if the Relevant Assets are equity rather than debt.

But there’s no indication that this kind of language is going to appear with respect to the Greek restructuring. And there’s no reason for CDS holders to believe that it will appear when bond exchanges happen. And there’s certainly nothing in the existing CDS boilerplate indicating that any such language should ever appear.

If you own protection on a credit, then, you’re very much in a world of caveat emptor. You can trade in and out of CDS and make a good living; these things are, first and foremost, trading vehicles. That’s why they’re more liquid than bonds. But if you have a strategy which involves actually getting paid out on your CDS in the event of default, then you should definitely worry that the payout might not happen, even if the event of default is clear and declared. What’s more, there’s really no good way to hedge that risk.

So far, the CDS market has managed to muddle through, when it comes to restructurings and bond exchanges. But it’s sure to blow up sooner or later. And I’m far from convinced that ISDA and Allen & Overy are capable of reworking the standard documentation to make it more robust to these risks.

Bill Easterly has a wonderful riff at Foreign Policy today, entitled “How I Would Not Lead the World Bank”. He urges us all not to pick him as the next World Bank president, and concludes that he wouldn’t even hire himself. And he gives lots of reasons why he’d be rather bad at the job, all of which, in a kind of indirect way, actually help to bolster my idea that Indra Nooyi would be perfect for it.

I would not lead the World Bank by assembling an expert task force of my fellow social scientists, natural scientists, and random unemployed politicians. I would not ask such a well-qualified expert task force to answer the question “What must we do to end world poverty?” — especially if we forget to answer the question “Who put us in charge?”

I would not lead the World Bank to ever use the words “civil society.” I would not emulate my deservedly respected non-predecessor as World Bank president by giving a speech on the Arab Spring without using the word “democracy,” even in a purely descriptive sense. I could not possibly attain a remarkable record of five years of speeches without ever using the word d_m_cr_cy at all.

I would not appoint U.S.-educated elites vetted by their autocratic home governments to represent the underrepresented peoples of the world. I would not negotiate the contents of World Bank reports with governments in either the West or the Rest, except possibly for correcting typos.

I would not lead the World Bank by perpetuating the technocratic illusion that development is something “we” do to “them.” I would not ignore the rights of “them.” If the New York Times should happen to report on the front page that a World Bank-financed project torched the homes and crops of Ugandan farmers, I would not stonewall the investigation for the next 165 days, 4 hours, 37 minutes, and 20 seconds up to now.

The point here is that the president of the World Bank is hamstrung in all manner of ways, both obvious and non-. There’s a reason why Bob Zoellick has never used the word “democracy” in a speech — and that reason is Article IV, Section 10 of the Bank’s Articles of Agreement. “The Bank and its officers shall not interfere in the political affairs of any member,” it says; “nor shall they be influenced in their decisions by the political character of the member or members concerned.”

The political structure of the bank is similarly responsible for the fact that substantially everything the president says, even more than the president’s subordinates, is vetted by the political appointees on the Bank’s board. The World Bank is owned and run by sovereign governments, who will talk until they’re blue in the face about how they’re working for the world’s poorest, but who ultimately are not going to sign on to anything which they don’t perceive as being in their own best interest.

As a result, what’s needed at the World Bank is someone who knows development, but who isn’t deeply invested in their own normative ideas of what must be done. Running the Bank involves a delicate dance with extremely important and powerful shareholders who can effectively shut you down at any time. As Moisés Naím says, “In this case you have to know how to get a large, culturally heterogeneous, technically sophisticated and, at times, recalcitrant bureaucracy to move in the direction you set.”

Naím does a very good job of laying out who the US should not nominate, but is weaker when it comes to who it should be:

Mr Obama should look for a professional who already knows this field, its ideas, players and traps, who has a vision for the World Bank rooted in practical experience with development and who has already run successfully a global organisation.

He does say that picking the CEO of a large multinational corporation is not necessarily a good idea, on the grounds that “the skills needed to survive and thrive” in the Bank “are closer to those found in a well-run public sector than in the private sector”. But the fact is that if you’re looking for an American who has successfully run a global organisation in the public sector, you’re going to end up with a very short list of possible candidates. Americans don’t run big multilateral organizations: the World Bank is the exception to that rule. And maybe Unicef.

Pepsico is big enough — with more than 285,000 employees spread across pretty much every country of the world — that it resembles to some degree the sprawling bureaucracy of the World Bank. At the same time, Nooyi is blandly corporate enough that she’d be able to build a strategy around the art of the possible, rather than around her preconceived notions of how development can and must work. She has demonstrated that she knows development; she’s well versed in the art of diplomacy; and she’s clearly capable of running a large global organization. She’s not the only possible candidate; I for one would love to see Nancy Birdsall nominated. But Easterly’s piece shows how nominating any kind of ideologue is almost certain to end in tears.

On his media tour doing damage control for the quotes he gave to Bloomberg’s Max Abelson, Andrew Schiff rocked up at Tech Ticker last week, to talk to a sympathetic Aaron Task. “The salary you’re making now, you can’t live a middle-class lifestyle in New York City,” said Task. That salary, of course, is $350,000 per year — enough for Schiff to, among other things, pay $32,000 a year to send his 10-year-old daughter to Poly Prep Country Day School.

If you’re a connoisseur of rich people’s whines, you’ll be intimately familiar with the idea that they don’t have much money left after paying for expensive things in general and private school in particular. But sending your kids to private school is the epitome of upper-class snobbishness and elitism, and nobody who does it should ever be allowed to kvetch about their straitened circumstances. After all, they’ve already paid, with their taxes, to send their kids to public school. But their local public school isn’t good enough for little Muffy — in large part because all the rich parents in the neighborhood send their kids to private school instead, and therefore the local public schools aren’t getting the benefits of a significant cohort of affluent, educated, and engaged parents.

What’s more, if you send your kid to public school and augment her education with anything near $32,000 worth per year of books and travel and experiences and even private tutoring, she’ll end up extremely well educated. After all, when you look at studies which adjust for socio-economic status, there’s very little evidence at all that private schools provide a better education than public schools. Indeed, the evidence shows the opposite: that middle-class kids who grow up with two well-educated parents and lots of books around the house will generally do very well in school no matter where they go. Which means that the only real reason to send Muffy to private school is to ensure that she only hangs out with rich kids.

But let’s put aside for one minute Schiff’s complaints that once he’s spent $200,000 per year, not including health insurance, and saved a whole bunch more in his 401(k) plan, he doesn’t have any money left. His main point is that “living in New York is extremely expensive”. And that actually isn’t true. If you’re a financial professional, New York is arguably the cheapest of the world’s financial centers. And most major non-financial cities are more expensive than New York, too.

According to Mercer’s annual cost of living survey, New York lies somewhere between Brisbane and Brasilia, and is significantly cheaper than the likes of Milan, Tel Aviv, Melbourne, Seoul, and, of course, London. And it doesn’t even come close to Sydney, Rio, Hong Kong, Singapore, Geneva, Moscow, or Tokyo. Complaining about the cost of living in New York is the ultimate in parochialism: New York might be expensive by US standards, but it’s definitely cheap by global-city standards. Which is why it’s rather ironic to hear this plaint from Schiff, who’s the marketing director for a company which calls itself Euro Pacific Capital.

Most worryingly for Schiff’s clients, however, is the weakness of his logical reasoning. Worrying about his kids, Schiff tells Task that “I want them to grow up the way I grew up as a kid. I’m certainly of middle-class New York City origins. And that is becoming increasingly expensive. And that’s a function of the diminishing middle class and upper-middle class in the United States.”

Actually, Andrew, if a middle-class lifestyle is becoming increasingly expensive, that’s a function of the growing middle class and upper-middle class in the United States. Or Brooklyn, anyway. Why does the brownstone next door cost $1.5 million? Because there’s demand for housing at those prices from a large number of upper-middle-class families who want to live there. If you’re having difficulty raising a family on $350,000 a year, and you’re surrounded by people living the kind of lifestyle you can’t afford, that’s a sign that New York in general, and Cobble Hill in particular, is full of families making enormous sums of money.

The problem in brownstone Brooklyn isn’t that the middle class is diminishing. In fact, the whole reason why Andrew Schiff can’t move into the house he wants is that Brooklyn’s middle class is growing, to the point at which demand from middle-class families for comfortable housing significantly exceeds supply. The natural result is stratospheric prices. Wall Street bonuses might be down this year. But there’s still an enormous amount of money in New York — so much money, in fact, that Andrew Schiff feels unable to buy exactly the house he wants. I don’t think anybody is going to feel sorry for him — but the very fact that he’s in that position is proof that the rich are doing very well for themselves these days.

And in the mean time, if Andrew’s feeling stuck in his current digs, I have a suggestion for him. Buy a dishwasher. Trust me, you can afford it. And it’ll make your current life significantly easier.

Jonathan Binstock is the head of Citibank’s art advisory and finance operation — the shop which was famously founded by Jeffrey Deitch. Recently, he put out a four-page research report on Gerhard Richter. According to Binstock’s report, Richter “has recently emerged powerfully as the next great market force among the tradition of 20th century painters including Pablo Picasso, Willem de Kooning and Andy Warhol”. What’s more, “it is clear that he is in the process of being catapulted to a rare and illustrious realm of authority”. And he turns out to have been a great investment, as this chart from the report purports to demonstrate:

Binstock was kind enough to agree to come in to Reuters to talk about this report, which I’m not really a fan of. For one thing, I don’t think there’s much in the way of meaningful information in Binstock’s chart, and I think it’s incredibly dangerous to make it seem as though artists are investable assets which can be compared in some way to the S&P 500. Binstock says that he’s “trying to bring a level of financial professionalism to the project”, but I’m pretty sure that most of my readers would be able to come up with two or three ways off the top of their heads in which the above chart is unprofessional.

In any case, Binstock is very much part of the way in which the art world is turning individual artists, like Gerhard Richter, into asset classes. When I asked if his phrase about Richter “being catapulted” was a classic momentum-trade analysis, Binstock replied that “yes, he’s being catapulted, and I think that’s an imprimatur that comes now from the market”. In other words, Binstock is now lumping Richter in with Picasso, de Kooning, and Warhol just because Richter paintings are selling for large and ever-increasing sums at auction.

But here’s the thing: Picasso, de Kooning, and Warhol aren’t just good artists, they’re important artists — among the most important of the 20th Century. They permanently changed the way we look at and think about art: what it is, what it can do, what it should look like. Richter’s no slouch on that front, but he’s not in their league, and never will be. What’s more, there’s a very clear distinction between Richter’s important art, on the one hand — think fuzzy black-and-white paintings interrogating Germany’s attitudes to its own history — and his expensive art, on the other. Here’s how Binstock describes the expensive art:

A particularly desirable series of abstract paintings from the late 1980s and early 1990s provides an excellent case in point. The artist made a stunning array of these in a convenient easel size of roughly 48 x 40 in (122 x 102 cm) — domestically scaled objects with overwhelming wall power. Their beautiful rubbed surfaces are among the most delectable of all Richter’s abstract conceits. A red and blue example, sold at the same Sotheby’s sale mentioned earlier, brought $6.3 million, an extraordinary price for a painting that might have been $2 million in late 2007. Indeed, another painting from the series, primarily white and especially creamy, made $1.8 million in October of that year.

Check out the adjectives: “convenient”. “Domestically scaled”. “Wall power”. “Delectable”. “Especially creamy”. This isn’t art, it’s interior design for the private-jet crowd. Binstock is talking here about what he calls “the mid-market”, which he defines as paintings in the $1 million to $5 million range. (Yes, $5 million is now officially the new middle market.) The middle market is where you find apartment-sized, instantly-recognizable paintings which look nice above the fireplace.

Picasso, de Kooning, and Warhol all faced art-world opposition to what they were doing: they were breaking rules, creating something challenging and new. It took a long time for the art world to embrace them, and to this day their work still carries a frisson of transgression. Richter’s expensive art, by contrast — the colorful squeegee paintings, or the beautiful candles — is perfectly calibrated to middlebrow taste, and has never been remotely controversial.

Remember that when we’re looking at extremely expensive art, we’re looking, pretty much by definition, at the art which is most coveted by incredibly rich men. (That’s why paintings of women have always sold for much higher sums than paintings of men.) And while your typical incredibly rich man might well have a lot of sophistication when it comes to arbitraging the capital structure of potential takeover targets, his taste in art is most likely to run very much in line with Matisse’s famous quote about how a painting should be like a comfortable armchair. Richter’s “beautiful rubbed surfaces” sell at a premium for exactly the same reason that the apartments at 15 Central Park West sell at a premium: they’re modern yet timeless, incredibly easy to live in, and utterly inoffensive.

This didn’t make it into the video, but Binstock and I talked a bit about Richter’s mirror paintings, and he told me about a blood-red piece which sold at Sotheby’s in London a couple of weeks ago for about $750,000. He loves that work; I, too, am very partial to the Richter mirror paintings, especially the room devoted to them at Dia: Beacon. But the mirror paintings are very much at the highbrow end of the Richter spectrum, which means that they barely even count as “middle market” as far as the Richter money-scale is concerned.

I therefore had to ask Binstock about the famous declaration by Tobias Meyer of Sotheby’s that “the best art is the most expensive art because the market is so smart”. Binstock said that “in some cases”, Meyer is correct, but he then reversed himself, noting that “you can buy a Velásquez for a lot less than a Richter”. How does that make any sense? “It’s a question of supply and demand,” said Binstock. There might be a much greater supply of Richters than of Velásquezes, but, he said, “there’s much more demand”.

It’s worth quantifying this for a minute. I went on to Artnet to see how many works by Velásquez had sold for more than $100,000 in the history of its database: the answer is three. There’s the portrait which sold at Bonham’s in December for $4.6 million, and then there’s one other portrait, of Saint Rufina, which has sold twice: at Christie’s in New York in 1999 for $8.9 million, and then again at Sotheby’s in London in 2007 for $17 million.

Richter, by contrast, has no fewer than 545 works in the Artnet database which have sold at auction for more than $100,000. If you want a Richter, and you have the money, it’s trivially easy to buy one: you can get one directly from any number of art dealers, or you can just wait until the next round of art auctions, where I’m sure a lot will be available for sale. Even so, there have been 15 different Richters which have sold for more than $10 million since 2007; two of them beat the $17 million Velásquez figure in 2011 alone. There are so many Richters for sale these days that the tenth-most-expensive Richter to sell at auction in 2011 still managed to bring in $5.7 million; in total 108 Richters sold at auction in 2011, at an average sale price of $1.85 million apiece.

Is it really possible that demand for Richters is so much greater than demand for Velásquezes that Richters can flood the market and still sell for more than $20 million, while Velásquezes, which come along once a decade or so, fetch only $4.6 million? That’s what the market is telling us. But I don’t think that the laws of supply and demand are particularly useful here. In many ways, the high prices we’re seeing for Richter represent a liquidity premium, and also the way in which rich people are happier dropping enormous sums of money on art if those sums have already been ratified by dozens of other transactions at similar valuations.

If you look down Wikipedia’s list of the world’s most expensive paintings, there’s certainly a fair few pieces by artists who come up for sale only rarely — Klimt, van Gogh, Titian, Pontormo. But they’re very much outnumbered by Picassos and Warhols with quasi-commodity status. And if you want to be charitable to Binstock, that’s really all he’s saying in his research note: that Richter is becoming a commodity just like Picasso and Warhol, and that the commodification of an artist is generally accompanied by a significant increase in that artist’s valuations.

I would never encourage speculating on the art market: it’s a rigged game, which you’re almost certain to lose. But if you really want to do it, here’s a tip: buy work which (a) is instantly recognizable as coming from the artist in question; (b) looks great when hung on the wall of an expensive apartment, and (c) comes from a fecund artist with a massive output. Oh, and if you can, get a painting with lots of red in it. And remember, you’re not buying great art, or art you particularly love. You’re second-guessing, buying the kind of art you hope that billionaires are going to covet in the future. It’s a pretty soul-destroying exercise, with a low probability of success. But if you’re the kind of person who marks your art collection to market, you probably don’t have much of a soul to begin with.

Farhad Manjoo has an interesting profile of Cheryl Malone’s Article One Partners, a company which crowdsources the discovery of prior art for use in patent suits. These “amateur sleuths are stamping out patent trolls,” according to the title of the page; the headline is “How To Kill Patent Trolls.”

Which is why it’s surprising that there’s no indication in the article whatsoever that patent trolls are even being harmed, let alone killed, by the actions of Article One. Instead, the whole piece is based on a rather rocky syllogism. If you can find prior art, goes the argument, you can kill a patent troll. Article One finds prior art. Therefore, Article One kills patent trolls. Here’s Manjoo:

Patent trolls should be easy to defeat. Say a company tries to enforce some ridiculous claim, as in the recent case over a 1994 patent covering the entire “interactive Web.” It doesn’t seem hard to invalidate a patent that broad. All you need to do is find descriptions of that invention that date back to before the patent was filed.

The problem is that searching for old inventions is really difficult.

Does Manjoo really believe that “all you need to do” is find prior art, and the court case automagically disappears in a puff of smoke? It would be wonderful were that the case. But the real world, sadly, behaves differently.

Probably the most famous patent-troll case in recent years was the one where a troll named NTP managed to extract $612.5 million from Research in Motion. That case covered five different patents: of the five, the U.S. Patent Office had given “non-final” rejections to all of them, and had issued a final rejection to one, when the case was settled.

RIM had discovered prior art for all of the patents that NTP was suing over — but that didn’t really help them at all. The problem was that the patents had already been awarded to NTP, which meant that NTP was within its rights to sue RIM for as long as it held those patents. Once RIM found out what NTP was up to, it could and did challenge the patents at the U.S. Patent Office, which has a procedure for such things. But the U.S. Patent Office is an entirely separate entity from the U.S. District Court, where judge James Spencer made it very clear that his job was to rule only on whether RIM was violating NTP’s patents, and not on whether NTP’s patents were properly granted. Had RIM not settled the case, the court could and probably would have shut down the entire BlackBerry service.

RIM, of course, offered to post a substantially greater settlement if it could get the money back were NTP’s patents deemed invalid; NTP, naturally, rejected that offer. And challenging patents at the U.S. Patent Office takes time; if you’ve already been sued by a patent troll in U.S. District Court or just about anywhere else, it’s almost certainly too late at that point to look for prior art, take it to the USPTO, get the patent invalidated, and win the case that way. Meanwhile, it’s pretty much impossible to keep tabs on every patent awarded to a possible troll, and try to challenge those patents at the USPTO on the off chance that if you don’t, those patents might be used against you.

So while Article One is surely doing God’s work out there, I think it’s massively overoptimistic to believe that they will make so much as a dent in the patent-troll industry. What they’re doing might well be necessary to kill patent trolls. But it’s very, very far from sufficient.

Update: As commenter rootless_e points out, the jury in the NTP vs RIM case did find against RIM’s claims of prior art. Largely because RIM’s courtroom strategy was unbelievably boneheaded. But the fact remains that RIM was forced to settle the claim before the USPTO could invalidate NTP’s patents.

When it comes to the World Bank presidency, pretty much everybody agrees on two things: (1) it shouldn’t be an American; (2) it will be an American. We can and probably should get hung up on (1), but given political realities, it makes sense to ask: if it’s going to be an American, then who should it be? It shouldn’t be Larry Summers, that’s for sure, and it shouldn’t be Jeff Sachs, either. But there’s another name floating around which is a much better idea than either of those two men: Indra Nooyi.

Nooyi, the chairman and CEO of Pepsico, has a lot of things going for her. Firstly, she’s a woman — and it’s generally understood that the Obama administration would love to nominate a woman to the job if it possibly can. Here’s Alan Beattie:

Bank policymakers say that the US proposing a female candidate – who would be the first woman to lead the institution – could help neutralise the charge that the appointment process was “business as usual”. Although administration officials have been cagey about likely contenders, candidates that have been discussed include Susan Rice, US ambassador to the UN, Lael Brainard, top international economics official at the Treasury, and Indra Nooyi, chief executive of PepsiCo. Laura d’Andrea Tyson, who was White House chief economic adviser to former president Bill Clinton, is also a possible contender.

Nooyi definitely stands out in that crowd. Rice, Brainard, and even Tyson are smart and capable technocrats — but they’re not leaders in the way that Nooyi is. One of the problems with US nominees to the Bank presidency is that they tend to be the kind of people who have risen to positions of importance (but never quite the very top) within their own organizations, without having ever had much visibility or power in the world more broadly.

The list of potential nominees from non-US countries is full of heavy hitters with serious global reputations, including quite a lot of former heads of state. The US nominee should be of that general caliber, if only to make it clear that the US takes the Bank seriously and isn’t steamrolling a number of extremely high-profile foreign candidates, only to install in their rightful place the Under Secretary of the Treasury for International Affairs. That’s an important job, to be sure, but it’s also a technocratic job where you always do what you’re told. It’s more fixer than leader.

Nooyi, by contrast, has led one of the world’s biggest multinational companies for five years, and has been in Pepsico’s C-suite for over a decade. During that time she has made a real and credible commitment to sustainability; she even managed to funnel $6 million to Sachs’s Earth Institute.

On top of that, she’s Indian. Born in Chennai, she didn’t arrive in the US until 1978, when she was 23. Nooyi’s an American now, and she’s certainly American enough to lead the World Bank, given the precedent of Jim Wolfensohn. But she wouldn’t only be the first woman to lead the Bank; she’d also be the first non-white person to lead the Bank. And that, of course, is something which is long overdue.

Nooyi is very comfortable among the upper reaches of global VVIPs, and, like Wolfensohn, she also has the significant advantage, for a World Bank president, of being rich enough to afford her own private jet. What’s more, the Bank job would allow her to turn even the criticisms of her tenure at Pepsico to her advantage. Consider this:

“It’s a very enticing vision to be more focused on health and wellness, to be focused on global hunger and all of those things,” says Ali Dibadj, an analyst with Sanford C. Bernstein & Co. “The problem is, you have to remember where three quarters of the company comes from: sugary, salty, fatty” foods.

Nooyi has at this point made more money than she could possibly ever spend; she’s clearly committed to making a difference in the world. And she’d be more able to do that at the helm of the World Bank than she would be staying on at Pepsico with restive shareholders pressuring her to sell more soda. Nooyi and the Bank need each other; her nomination makes perfect sense.

In 2002, Jeff Sachs took the top job at one of the most ambitious university departments in the world: the Earth Institute at Columbia University. And he’s done that job very well, judging by the main metric that universities care about. When he re-upped his contract last April, the press release gushed about all the multi-million-dollar donations that the Earth Institute has received, including $20 million from the Gates Foundation and $28 million from the Lenfest Foundation to endow climate change research.

Now, however, Sachs wants to leave: he’s got his eye on a job where the sums of money involved make those numbers seem positively puny.

My quest to help end poverty has taken me to more than 125 countries, from mega-city capitals to mountaintop villages, from rain forest settlements to nomadic desert camps. Now I hope it will take me to 18th and Pennsylvania, to the presidency of the World Bank. I am eager for this challenge.

To a certain extent, Sachs’s job application reads almost like self-parody: “the president of the World Bank spends a lot of time travelling in first class to poor countries. I have been doing that for years, so I’m obviously highly qualified for the job.”

And of course Sachs has one crucial thing going for him: he’s American. The next World Bank president will, sadly, be an American, a fact which takes a lot of highly-qualified potential candidates, including many former heads of state, out of the running.

But even if the next president of the World Bank is an American, we can still do better than Sachs. The reason that Sachs shouldn’t get the job is basically the same as the reason why Larry Summers shouldn’t get the job: he’s an arrogant economist who nearly always thinks he’s the smartest guy in the room. The presidency of the World Bank is a diplomatic position: if you want to do it effectively, you need to be able to wrangle not only the vast staff working for you, but also the various executive directors who are your superiors and who have a tendency to want to micromanage your decisions. Insofar as Jim Wolfensohn, say, was a successful World Bank president, he was successful because he was a smooth-talking investment banker who was expert at schmoozing important people.

Sachs, by contrast, is angry; he’s one of life’s natural campaigners. That’s great when you’re hanging out with Bono, or even Bill Gates. But it’s less likely to get you very far when you’re trying to persuade the Nigerian president to revolutionize his domestic policy.

Which is one reason why Hillary Clinton would be much better than Sachs for the job: she knows the international diplomatic back-channels, while also knowing how to tactically assert power when necessary.

Besides, Sachs has two big strikes against him. One is the “shock therapy” he administered to Eastern European countries, especially Russia, in the wake of the fall of the Berlin Wall. It was a complete disaster, and Sachs has never accepted his share of the blame for it. He still thinks, as far as I know, that his ideas were good ones, and were just poorly implemented. But they weren’t good ideas, not least because the political institutions in the countries he was dealing with were obviously not up to the task of effectively and honestly implementing his drastic prescriptions.

More recently, Sachs has been investing an enormous amount of personal and financial capital in his Millennium Villages project — a well-intentioned project which attempts to demonstrate the power of investment to turn around poor villages, but which virtually nobody outside the project thinks is capable of demonstrating any such thing. Before even thinking about nominating Sachs to the World Bank, Obama should take a straw poll of Bank employees. Most of them have pretty strong opinions about the Millennium Villages, and it would be very useful to know if he would be entering an institution whose employees in large part consider him to be much better at public relations than at wrestling with messy empirical truths.

Sachs’s worldview, boiled down, is that development is easy, we know how to do it, and that given enough money, it’s relatively trivial to spend that money in an effective way to reduce poverty around the world. When World Bank presidents come in with that attitude, the results can be wasteful at best and downright counterproductive at worst. I’m not, in general, a fan of politicians. But in this case, we’d be better off with a smart politician in charge of the Bank — someone able to build consensus and approach tough problems with modesty — than we would with an arrogant economist.

Harry Wilson today outs Allen & Overy’s David Benton as the legal mastermind behind the mess that is sovereign CDS documentation. Benton’s certainly coming under a lot of criticism these days, and not just on the ultra-wonky end of the spectrum from people like me. Even Pimco’s Bill Gross seems to have a beef with these rules — and Pimco’s on the Determinations Committee!

“If I were a buyer of protection on Greece and have seen the result this morning in terms of no protection, then I would be upset,” Gross, manager of the world’s largest bond fund, said on CNBC television of the ISDA’s decision.

So when Wilson says that ISDA’s decision not yet to declare default was “controversial”, he’s not wrong. Here, for instance, is Barry Ritholtz:

Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives?

The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable.

And Peter Eavis is back with more CDS criticism, too:

One of the decisions of the swaps association on Thursday underscored how swaps can be disconnected from actions that harm investors’ economic interests. As part of the Greek debt deal, the European Central Bank will be shielded against losses on the Greek bonds it holds, a move that relegates, or subordinates, the claims of private creditors who hold the same bonds.

But the swaps association said the plans to subordinate private creditors do not meet the definition of subordination in the swaps contracts, so they do not have to pay out.

All of which says to me that ISDA and Greece have done an incredibly bad communications job here. Because ISDA’s decision was, clearly, the correct one.

The point here, which is easy to miss, is that credit default swaps only get triggered when there’s a real-world event of default. Yes, the deal with the ECB is indeed going to subordinate private-sector bondholders. And yes, Greece is indeed going to fail to make good on its obligations come March 20. There will be an event of default in Greece. But swaps don’t pay out on future events. They pay out on past events. And Greece hasn’t actually defaulted yet: every payment it has promised to make has, to date, been made in full and on time.

Now there are exceptions to this rule. If a government explicitly repudiates its outstanding debt, then that can count as an event of default even before a payment is missed. But Greece hasn’t actually done that. And most of the time, default swaps only pay out when there’s a default. Which is as it should be.

Is that reason for bondholders to be upset, pace Gross? Absolutely not. If you own a credit default swap on Greece, you own a piece of paper worth about 75 cents on the dollar. If you want to realize that 75 cents right now, you can: you can just sell your CDS. If and when the CDS is officially triggered, there will be an auction, and the CDS will be found to be worth roughly 75 cents on the dollar. In that case, you will wind up with 75 cents whether you like it or not.

In other words, when Greece finally defaults, owners of credit protection will be forced to get a payout. Whereas those owners right now have the option: they can take the payout if they want it, or they can hold on to their CDS position if they would rather do that. I don’t see why having that option would make anybody upset.

This is why the CDS market has been so successful: it’s a liquid, market instrument, which prices in expectations of future default. Ritholtz is right that Greece has refused to make good on its future obligations. And as a result, default protection on Greece is extremely valuable. When that future date comes and goes without a bond payment, the CDS will get triggered, and holders of protection will get a lot of money. There’s nothing broken there.

The subordination question is a bit messier, but it’s fundamentally the same idea. Greece has now created two classes of bonds: the ones held by the ECB, and the ones held by private bondholders. There’s nothing in the documentation of those bonds which might indicate the ECB’s bonds are senior to the private sector’s bonds. Right now, they’re all, legally, pari passu.

Again, in future, that’s not going to be the case. Greece is going to privilege the principal and coupon payments to the ECB, while imposing a massive haircut on the payments due private bondholders. That’s both subordination and an event of default. And when it happens, the CDS will get triggered. And that trigger is priced in to the CDS market.

In many ways it’s the genius of the CDS market — at least in theory — that there’s no rush to trigger CDS, because if you know that the instrument is going to get triggered very soon anyway, it’s going to be worth pretty much the same today as it will be when it’s triggered.

That’s my problem with the way ISDA rules cover bonds covered by CACs. Because of technical issues surrounding the availability of deliverables, it’s possible that if you wait for the default to happen, you’ll be too late to get what by rights should be your payout on the bonds. But this is a separate issue from what Gross and Ritholtz and Eavis are worrying about. They seem to think one of two things: either that Greece has already defaulted, and that therefore the CDS should have been triggered by now, or else that a Greek default is so certain at this point that the CDS should have been triggered by now. The first isn’t true. And the second is silly.

Eavis has another point, which is that default swaps are used for a purpose, and that purpose is to hedge against falling bond valuations. (That’s what he means by “investors’ economic interests”.) He is worried that the payout on the bonds might not be entirely in line with the loss of value on the bonds. And that’s a reasonable worry. But it’s also, right now, a pretty theoretical worry. Because in practice, the value of Greek CDS has tracked the value of Greek bonds extremely closely. In other words, even if there are possible problems with them in theory, they seem to have worked OK in practice.

I’ve got a few questions for ISDA about the way that CDS documentation works in the sovereign context in particular, and I’ll be wonking out about this issue further going forward. Because I think that the combination of CACs and CDSs is potentially extremely dangerous. But what I’m emphatically not worried about is ISDA’s decision not to trigger the CDS just yet. That decision was exactly correct. Even Pimco voted for it.

In August 2004, Gothamist publisher Jake Dobkin applied for working-press credentials from the NYPD. An avid and ubiquitous news photographer, he clearly qualified for the credentials on any common-sense grounds. But the NYPD denied his request on the grounds that Gothamist was a website, and the NYPD didn’t consider anybody working for a website to be a journalist. (Seriously.) Thus did the saga of Gothamist’s press pass begin.

Eventually, in 2009, the NYPD was forced, thanks to a lawsuit, to start issuing credentials to bloggers. But it still clearly didn’t want to. And Gothamist still had zero press passes.

The story from then on in is a long one: Gothamist editor Chris Robbins’s post from last December on the subject runs to more than 2,700 words. But basically there are a few things you officially need a press pass for, including getting the NYPD’s “press wire” emails. And there are even more things that you unofficially need a press pass for, including being considered a journalist by the Mayor’s press secretary.

I’m with Dobkin on this one: the whole system of the NYPD making highly-secretive determinations as to who is and who isn’t press is broken, and the best outcome here would be to simply abolish the things altogether. But given that they do exist, Gothamist should clearly qualify for them: as Dobkin says, they’re a legitimate media organization with over 25 employees and more than 2.5 million unique readers in New York City. This isn’t some guy in his pajamas. “Next time someone accuses a blog of aggregating,” Dobkin tweeted the last time he was rejected, “ask yourself, how can they avoid aggregating without all the tools required to produce original posts?”

This story has a happy ending, of sorts. On February 28 — some 90 months after his initial application — Dobkin was told that his latest application had been approved. The pass arrived today.

Still, Dobkin’s fight is a timely reminder, as we remember one of the most influential online-media innovators of all time, that the real world can move astonishingly slowly by internet standards. Print still has a cachet that most online publications struggle to achieve, and uncontroversial news outlets like Gothamist get lumped in with provocateurs like Andrew Breitbart in the mind of information officers and PR people in New York and across the country. Breitbart and Dobkin both, in their own ways, made significant advances in terms of expanding the possibilities of online news. But Breitbart made a much bigger splash. And, in doing so, didn’t help Dobkin’s cause in the slightest.

First, apologies for how Greece-heavy this blog is these days. There are other things going on out there, I’m sure. But we’re going through the largest sovereign default in the history of the world, and surprisingly few people — including senior European policymakers and journalists who are covering it professionally — really seem to understand what’s going on.

At the WSJ, for instance, the news story on today’s official ISDA determination (“Greek Deal Won’t Trigger CDS Payouts, Panel Says”) is bad; the blog post about it by Charles Forelle (“ISDA’s Greek Ruling Not the Last Word”) is very good.

And in Europe, the range of sophistication within policymaking circles is even greater. At the lowest, most basic level, one finds a feeling that it’s a Bad Thing if a European sovereign nation were ever to default, and so therefore it would be a good thing if the bond exchange was organized so that there was no official market determination of default. (Never mind that Greece is already in selective default on its bonds, according to S&P.)

At a slightly higher level of sophistication one finds the short-sellers-are-bad crowd, who don’t like CDS because they allow hedge funds to easily bet against countries. If the messy Greek CDS situation helps to reduce the amount of trust that the markets have in sovereign CDS generally, then so much the better, on this view.

And then, finally, there’s Peter Eavis’s conspiracy theory: if the Greek bond exchange goes really smoothly, and the sun rises in the morning and Italian bond yields stay below 5%, then maybe that’s the most worrying outcome of all. Because at that point Greece will have managed to wipe out, at a stroke, debt amounting to some 54% of GDP. You can see how Portugal and Ireland might be a little jealous. You don’t want to make sovereign default too easy — not least because it would do extremely nasty things to European banks’ balance sheets.

That said, Greece has now broken the sovereign-default taboo; many countries both inside and outside Europe have way too much debt; and now that debt relief is an option for politicians to seriously consider, it’s pretty much certain that at some point another European government will end up choosing that option.

So it’s extremely important for European politicians and voters generally to really understand what’s going on here, rather than just a relative handful of financial-market sophisticates. Greece’s default was a drastic move, and Europe has semi-officially said that it was a mistake: once we’re done with Greece, they’ve said, we’re not going to ask any other European country to similarly write down its private debt.

But the cat’s out of the bag now. Greece had no choice but to default. Portugal and Ireland do now have the choice. And while the cost of default is large, so is the cost of carrying a whopping great debt load. It’s up to the leaders and voters of those countries to determine which is the least bad option.