Felix Salmon

Kickstarter of the day, Flint-and-Tinder edition

Felix Salmon
Apr 26, 2012 20:33 UTC

If you want an example of Kickstarter-as-QVC which is extremely likely to fail, look no further than Flint and Tinder. The brainchild of one Jake Bronstein, the idea is to create a new company making boxer shorts in the USA. “It’s about more than underwear,” he says in the video. “It’s about redefining what it means to be Made in America.”

rockhard.tiffMy favorite bit of the pitch is when Mr Bronstein shows us a photograph of his rock-hard abs. (Sadly, those abs are spoken for: that’s a wedding ring you’re looking at.) My least favorite part of the pitch, meanwhile, comes in an update:

The last round of prototypes came from the factory on Friday and while they’re good, there’s still lots of work to be done…

It might sound obsessive, but the way I see it is this: So far, 300+ of you ponied-up for underwear that is made in America. What I’d like to send you instead, is the greatest pair of underwear you’ve ever worn… that just happens to be made in America. It’s the only way this thing is going to work.

Finally, I’ve put together a top-notch team to help realize this goal, but there are still several key roles to fill. Feel free to point me towards anyone you think I should be talking to.

This is a significant backtrack from the original post, where Bronstein said he had already got the designs and needed just $30,000 “to get it going”. As a result, at least one donor ponied up $3,600 and has been promised 365 pairs of premium men’s underwear.

It’s possible, of course, that Bronstein will end up with a genuine retail product at the end of all this. Possible, but unlikely. It’s also possible (and equally unlikely) that the people who have given him $45,882 to date are really just wanting to support an American entrepreneur, and don’t particularly care all that much about when or whether they’ll ever actually receive their briefs.

This project encapsulates my issues with Kickstarter. I’m not saying that Bronstein is a fraud, but I am saying that he seems to have little if any manufacturing or retailing experience*, and is going to face an enormous number of unforeseen obstacles before he ever starts selling this product online. What he wants to do is start a company; Kickstarter quite explicitly says that it does not exist to help people start companies, but that seems to be what it has become anyway.

The fact is that starting companies is hard, and that there’s a very high failure rate in such things. Bronstein has almost certainly underestimated his chances of failure; all entrepreneurs do. Meanwhile, Bronstein’s funders have similarly overestimated the chances that they’re actually going to receive underwear if they fund this project. It’s a deal based on delusion, and it has a high probability of ending in tears and frustration all round. I just wish that Kickstarter were much more honest about that.

*Update: Jake Bronstein replies in the comments, saying that he does too have manufacturing and retailing experience, as the founder of Buckyballs. (He also says that I could easily have discovered this fact by looking at his profile on Kickstarter; it’s true I missed that link.) His mention of Buckyballs, however, did remind me of this video, where Bronstein left an extremely aggressive and intimidating nastygram message for Zen Magnets, a smaller competitor.

The Kickstarter project seems to be gathering a lot of momentum, and at the margin the more money it raises the more likely it is to be able to deliver a product. Still, my broader point is less about Bronstein and more about Kickstarter. Sooner or later, a bunch of these product-related Kickstarter projects are going to fail. And at that point a lot of funders are likely to be extremely unhappy.


I happened to find this posting when I was looking online for some commentary on the Flint and Tinder product I just bought (and happen to think is fantastic). What I love most about this post is not how “better than thou” it was towards the kickstarter campaign memeber, but how WRONG it was! This Kickstarter campaign, which was deemed an “example of Kickstarter-as-QVC which is extremely likely to fail,” turned out to be one of the most successful campaigns Kickstarter has seen to date. Not just successful, but a RECORD BREAKER. As techcrunch noted on October 21st, this Kickstarter Record Breaker received 850K in seed funding. Way to know the trends.

I applaud Felix’s desire to take a position, but …. seems he needs a better pulse on what the public really wants if he is going to be so adamant. Guess this was a post that was more extremely likely to fail than the product it was criticizing.

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Can national statistics be self-fulfilling?

Felix Salmon
Apr 26, 2012 18:43 UTC

John Kemp has a timely reminder, in the wake of the news that the UK is now back in recession after posting a -0.2% GDP figure:

Modern societies have made a fetish of official statistics, particularly the national income and production accounting (NIPA) system developed by Nobel Laureates Simon Kuznets and Richard Stone during the 1930s and 1940s.

NIPAs, especially the top-line figure for gross domestic product (GDP), as well as monthly employment data such as U.S. nonfarm payrolls, have become the arbiters of economic policy and the success and failure of politicians.

In a strange way, Britain’s ONS, and similar agencies like the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) in the United States, hold the fate of politicians in their hands because they help write the political narrative.

It is only a slight exaggeration to say BEA is one of the most powerful agencies in the U.S. government. It may not have as many tanks as the Pentagon, but by measuring the success and failure of economic policies, it can make and break presidencies, as President George H W Bush could confirm and Barack Obama fears.

As Kemp points out, it’s silly to imagine that the UK’s Office for National Statistics can measure the entire economic output of the United Kingdom between January and March, hone it to within a single decimal point, and release an accurate figure before April’s even out.

But I do wonder about all those studies tying election results to various economic statistics like GDP growth or the unemployment rate. To what degree are voters responding to economic activity and joblessness, and to what degree are they responding to statistics? On an individual level, of course, no one has the kind of direct sensitivity to national economic growth which would make vote one way if it was low and another way if it was high. That’s why we need statistical offices. Still, in aggregate, it’s plausible to believe that the population as a whole will be happier, and more well-disposed towards incumbents, when the economy is growing and unemployment is low.

Certainly there’s a very strong way in which national statistics — rather than the underlying economy — drive the national conversation, especially in an election year: Jim Surowiecki’s column in this week’s New Yorker is a prime example. And the strongest word of all is “recession”: it’s incredibly hard for a politician to win an election so long as her opponent can correctly say that she has driven the economy into a recession.

That’s the real reason why there was so much anger when the ONS released its first-quater GDP statistic in the UK: the fact that everybody now knows (or thinks that they know) that the economy is back in recession is itself going to slow down the pace of economic activity in the second quarter.

None of which is to say that national statistical agencies are a bad thing, or that they shouldn’t release their data as efficiently and quickly as they can. It’s just to say that, in good Heisenbergian fashion, they affect the economy just by observing it. It’s even possible that all those lies told by the Argentine statistics office were more than just spin, and actually helped the real economy, somehow. Not that I’d ever recommend such a course of action.


You say this as if it is something new, but the UK (and most of the rest of the world) has historically generally estimated the GDP pessimistically and subsequently adjusted it up, while the US has generally estimated optimistically and then adjusted it down.

Are people not spending because of statistics? Of course not. They are not spending because they have less money in their pockets. Only this month, with the public sector pension changes, the government has taken about £100 million per month out of the economy.

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The problem with Marc Andreessen

Felix Salmon
Apr 26, 2012 15:47 UTC

2005-new.jpg It’s easy to see why Marc Andreessen is grinning on the front cover of Wired magazine this month. Inside, there’s an interview where he’s introduced as a “tenacious pioneer”, one of “our biggest heroes”, and someone who was so far ahead of the curve on his “five big ideas” that he had them “before everyone else”.

It’s easy to admire Andreessen, a man whose disarming and engaging blog was a must-read during the financial crisis, when he would provide some very smart perspective from the point of view of a wealthy man, thousands of miles away from the epicenters of the crisis, who had some very sharp insights into what was going on. He then launched Andreessen Horowitz, and the blog became more of a public seminar in how to be senior management, which is great if you like that sort of thing. And it’s true that the five big ideas in the interview are all pretty revolutionary things, although I don’t think he actually had them all first.

But Andreessen has never really been a public intellectual. His single greatest achievement — the creation of the world’s first web browser, Mosaic — took place under the auspices of the National Center for Supercomputing Applications at the University of Illinois. But ever since then he’s been a red-blooded capitalist, founding and funding a long series of for-profit companies, and becoming one of the wealthiest and most powerful men in Silicon Valley in the process.

And when you look at Marc the capitalist, rather than at Marc the ideas guy, the hero-worship becomes a bit more difficult. I certainly like the way that he’s dragging Silicon Valley into the world of philanthropy, where it’s historically been very weak. But a lot of my own Wired story, last month, can be read as a push back against the IPO culture which Andreessen, almost more than anybody else, has managed to create.

“Silicon Valley is full of venture capitalists who have become dynastically wealthy off the backs of companies that no longer exist,” I wrote in that piece, and Andreessen is Exhibit A if you want to look for such a person. His first company, Netscape, lost the Browser Wars and ended up getting sold to AOL. His second company, Loudcloud, was (to be charitable) too far ahead of its time, so it “pivoted” into something called Opsware; eventually Andreessen managed to sell it off to HP. His third company, Ning, was even less successful, and ended up buried somewhere in Glam Media. None of them exist today in any recognizable form; none of them ever made much money; and none of them even really made it as far as building anything approaching a permanent income stream.

The Netscape IPO, in 1994 1995, was in its own way revolutionary. It broke the rules by going public without ever having made any money, and it also had that eye-popping first-day rise, from the issue price of $28 to as high as $75 in the first day’s trading. For the first time, people in Silicon Valley understood that you could make enormous sums of money just by timing the markets — buying in at a low valuation and selling at a high valuation — even if the underlying company never made any money at all.

Andreessen’s current company, Andreessen Horowitz, is devoted to doing exactly that. Andreessen Horowitz does provide a bit of expert advice and name recognition, but at heart it doesn’t make anything at all; its sole predictable income stream is the management fee it skims off while investing other people’s money. Those investors, in turn, are not particularly interested in creating long-lasting standalone companies which have large profits and create jobs. Instead, they’re primarily interested in buying into any company, no matter how flash-in-the-pan, where Andreessen Horowitz can exit its investment for a large multiple of whatever it bought in at.

After all, that’s how Andreessen made his money. I’ve never met anybody who thought that Netscape was a good acquisition for AOL, or that HP gained much from buying Opsware beyond getting Andreessen to sit on its famously-dysfunctional board. (He became the semi-official spokesman for the board in 2010, which did almost nothing to improve the board’s reputation, but did quite a lot to hurt Andreessen’s.) In many ways, Andreessen’s entire fortune has been built on the greater-fool theory: if you build something trendy enough, there’s probably going to be a huge lumbering company out there somewhere willing to overpay for it. Hence the buzziness of the Wired interview — clouds! social! SAAS!

Andreessen’s also very shilly, when it comes to his own businesses: when Ning finally died, for instance, he put up a blog post all about how the team there had “brilliantly executed a dramatic transformation of the company”. The fact is, as a close reading of the Wired interview will attest, that while Andreessen does have a lot of good ideas, brilliant execution is not at the top of his list of abilities. His own social-media company went nowhere, and his consolation prize — a seat on the Facebook board — is so important that Mark Zuckerberg didn’t even bother to consult him before dropping $1 billion on Instagram. His main job there is to ensure that Mark can do whatever he wants, to provide a layer of insulation between Zuckerberg and shareholders. Meanwhile, the Twitter guys didn’t let Andreessen Horowitz invest in their company, forcing AH to buy its stake in the shadowy secondary market instead.

While Andreessen is very good at making money, then, he’s much less good at creating lasting value for the long-term shareholders of his companies. In his world, buy-and-hold public shareholders are the patsies, the people left holding the bag when the fast money has long since departed. He’s smart; the rest of us are chumps. I guess it makes perfect sense that he’s recruited Larry Summers as a Special Advisor.

Update: I should have mentioned (I was going to, and forgot) that Mosaic 0.9b is, to this day, my favorite-ever web browser. It was a beautiful thing, which worked wonderfully. And yes, in large part it was responsible for The Internet As We Know It today. Andreessen’s influence is felt far beyond the companies he started. But there’s another thing that Netscape started, which is the monster funding round which is so big that no one (except a true giant like Microsoft) will dare compete. A correspondent writes:

Firms such as his have been leading truly insane rounds lately, sometimes in excess of $100 million. This is a different kind of investment than traditional venture capital. Under the old model, a hundred companies raised a million dollars each. Market competition then (theoretically) selected the best. Under this new model, kings are made, and there is no competition. Who would compete with a company that just raised $100 million in a day? Who would invest in a company that would dare to compete with such a sudden colossus?

This kingmaker strategy (also at work in the payments world, see Square) is the opposite of portfolio diversification. It encourages the formation of massive bubbles. And it locks out true innovation to the extent that the kingmakers choose incorrectly–which they often do.

Update 2: Chris O’Brien, writing in 2009 when Andreessen Horowitz was launched, made much the same points in a more rigorous and quantitative way. It’s a really good post, you should read it.



Thanks for the linkback. My post came when Andreessen was just jumping into the VC game. He and I both agreed that the VC industry was in steep decline and the result would be that a handful of big firms would end up with the lion’s share of investors and deals. He was absolutely confident that his new firm could be among the 5 to 10 big firms left standing, though I was a bit more dubious. The game’s not over, certainly, but their track record so far has given them a lot of momentum. Given the way entrepreneurs revere him and the firm, it seems like he’s got a shot.

Now, whether this ultimates is a good thing or a bad thing for the larger tech economy, well, we’ll see.

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When is a scoop non-public information?

Felix Salmon
Apr 25, 2012 21:36 UTC

Many thanks to everybody who responded to my provocation yesterday, where I suggested that the NYT could sell advance access to its stories. John Gapper summed it up well, in a tweet: “If scoops don’t matter to most readers, as the digerati claim,” he said, it’s logical to sell them to those who do value them. Which, in this case, would be hedge-funds capable of front-running the news and making a profit when the news moves markets.

In a sense, there’s something very economically inefficient about scoops like this one. The NYT story came out in the middle of the weekend, when markets were closed; when they opened on Monday morning, both Walmart and Walmex had billions of dollars shaved off their market capitalizations, but no one was given the opportunity to short those stocks at their prior level. After many months of diligent and valuable work on this story, one would think that a genuinely capitalist economy wouldn’t just leave money on the table like that. After all, buy-side institutions pay millions of dollars to analysts who research companies like Walmart in depth; isn’t that exactly what the NYT was doing?

For years, short-sellers have briefed journalists when they find out something damning about a company: think of Jim Chanos, for instance, putting Bethany McLean on to Enron and other companies. More recently, a group of people ranging from Mark Cuban to John Hempton to Muddy Waters to Anonymous Analytics has merged the shorting and the reporting functions, putting on short positions before releasing their own research on a company in the hope of seeing that company’s shares fall as a result.

But while the world doesn’t seem to have blinked very much at shorts helping reporters, there’s a much more visceral opposition to the idea that reporters might ever help shorts. If the NYT were to give any hedge fund an advance peek at its reporting, goes the argument, well, that would be bad.

The journalism-ethics angle to this hasn’t really been fleshed out, though. Mathew Ingram, for instance, says that if news is being put out in the public service, then it shouldn’t be “just another commodity”; if the NYT were to go down this road, then “that would make it a very different type of entity than it is now”. It’s all very vague and hand-wavey.

The Epicurean Dealmaker, in the comments to my post, is a bit more on point:

Why in God’s name would you want to give the reporters and editors of the New York Times even more of an incentive to break market-moving news. Surely you know there are many sides to any story; emphasis is critical. Why would news consumers trust editors and journalists who could directly profit by making a complicated story just a little more controversial, by shading facts and presentation to put a company in a worse light, by selectively releasing (or suppressing) information? Newspapers like the Times have always relied on a not quite accurate but nevertheless crucial image of impartiality for their authority. This would disappear if they were seen to be tools of Steve Cohen or Ken Griffin.

The fact is that the reporters and editors of the NYT already have an incentive to break market-moving news. Talk to pretty much any business reporter, and they’ll tell you the same thing: the story everybody wants to get is the scoop which moves markets. If you develop a reputation as someone who can get those scoops with any regularity, you’ll rise far and fast. It’s not uncommon for business news services to even put out charts of a stock price, showing when a story came out and what happened to the price after it did. Those charts can mean real money in terms of new subscriptions, and also in terms of pay rises for the journalists in question.

So journalists already indirectly profit from moving markets, and my suggestion was that the relationship should remain indirect: the NYT would sell advance access to its feature stories as a package, ex ante, just like other high-end news services. If a hedge fund wanted to pay a very large amount of money for that package, then it could then do with the information as it wished. But in any case if the hedge fund wanted information to flow the other way, and wanted to influence the NYT’s journalists at all, then it would have to do that the old-fashioned way, just like Chanos did with McLean.

But the real problem with my idea, it turns out, has nothing to do with journalistic ethics at all. Instead, it’s the insider-trading rules of markets around the world.

I wrote about insider-trading rules back in 2008, and came to the conclusion that while I wouldn’t necessarily implement such laws if they didn’t exist, I’m not a huge fan of abolishing them, either. Certainly there are well-formed arguments why insider-trading laws should be abolished, but let’s ignore the philosophical arguments for the time being: they haven’t been abolished, they’ve been in force since the 1960s, and everybody has to abide by them.

And the effect of substantially all insider-trading laws is to, in effect, ban precisely the kind of thing I’m suggesting, where a small group of people can take advantage of information asymmetries to make money. The way that most (but not all) stock markets are set up, the ideal is a level playing field, where all players get exactly the same information at exactly the same time, and then act accordingly; attempts to act on information before it’s public are criminalized.

One thing that both the ethical and the legal approaches have in common, however, is the concept of “public information”: both of them object to my idea because the NYT is in the business of putting out public information, and giving hedge funds advance access to that information — before the rest of the public gets a look — would in some way be fundamentally unfair.

The concept of “public information” is not a well defined one, and probably can’t be well defined. Certainly it’s not a function of price: once a piece of information hits the Bloomberg wire, it’s public, even if you need to pay Bloomberg $20,000 a year to see it. Josh Benton raises the example of Footnoted Pro, which costs $10,000 a year — but that service is explicitly based on the analysis of public information which is released to and by the SEC. Michele Leder’s product simply provides a smarter way of finding the needles in the haystack of EDGAR filings.

Is a tweet public information? Yes. Is a Facebook status update? I don’t know, but I suspect it probably isn’t. But here’s something which definitely isn’t public information: hours of interviews with a former Walmex executive detailing exactly when and where the company paid bribes.

In the comments to my post, Daniel Davies makes an impassioned argument that what I’m suggesting would almost certainly be illegal in many markets, even if it might be allowed, in some circumstances, in the US. He also says that hedge funds would never pay $1 million a year for this service. These two things are related. The value of advance notice of NYT stories, to a hedge fund, is inversely proportional to the number of other hedge funds who are also getting that advance access. And here I think is one of the key ways to distinguish between public and non-public information.

Let’s say the NYT prices the service at $100,000 per year, and you’re a hedge fund wondering whether the service is worth paying for. It’s way more than you normally pay for public information, so you’re inclined to say no. On the other hand, if everybody else makes the same calculation and you end up being the only fund to subscribe, then at that point the $100,000 might well be worth it: you could make many times that on one trade. The problem is that if you’re the only fund to subscribe, then the information can’t be considered public any more. And if it’s non-public information, then you risk putting yourself in legal jeopardy by acting on it.

In other words, if the information is public then it’s worth very little, and if it’s non-public then it might be illegal to trade on.

This also explains why it’s so common for executives to complain that what short-sellers are doing is illegal. Jim Chanos had information about Enron which was damning, and he acted on it before it was made public by Bethany McLean. That looks like material non-public information to me. What he did was legal, if he didn’t have any insider sources within the company. But McLean certainly talked to a lot of people within Enron, and she was also talking to Chanos all the while. Which raises some legal grey-area issues.

My feeling is that it would be astonishing, in practice, to see an insider-trading prosecution based on information which the New York Times Company had sold on a subscription basis. It’s the NYT’s business to sell information; doing so can’t sensibly be considered illegal. And similarly, once someone has legitimately bought that information from the NYT, it’s a bit crazy to say that they can’t act on it.

Similarly, I’d be equally astonished to see Sharesleuth, Mark Cuban’s operation, ever prosecuted for insider trading, even if they quite explicitly had sources inside the company they were reporting on. Sharesleuth’s model is not intrinsically unethical; the problem with it is rather that the model just doesn’t seem to work. Still, I’m sure that if and when it does work, the company being targeted would try extremely hard to get Cuban investigated for insider trading. And that’s almost certainly a risk that potential subscribers to any advance-news NYT product have no interest in taking.


“The reason that brokers cannot front run their clients is it breaches their fiduciary duties to their clients. It was illegal by common law long before it became prohibited by regulation.”

Not true. Front running of client orders has always been illegal as a breach of fiduciary duty. Front running of research notes (or non-simultaneous distribution) wasn’t even illegal until the 2000 Global Research Settlement.

“And, no one bans trading simply on the basis of its being based on NMPI.”

Yes they do. David Einhorn, for example, recently fell badly foul of the assumption that everywhere is like the USA. An analyst’s opinions (as long as they are only based on public information) can never be MNPI, because they are analysis, not information. But a newspaper’s intention to publish a story certainly looks to me like it is information, not analysis.

” Is it illegal for the NYT to put a paywall on its website because web subscribers would then receive potentially market-moving news before print subscribers?”

No; this is obvious from the existence of subscription news services like Reuters and Bloomberg. The test is simply one of whether the practice is likely to damage confidence in the market.

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Counterparties: SIGTARP vs. Treasury

Apr 25, 2012 20:58 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Two government agencies. Two completely different narratives of the bailouts.

Roughly a week after the Treasury Department extolled the virtues of America’s crisis-era bailout measures, a government watchdog has a very different story to tell. SIGTARP, the office created to oversee the Troubled Asset Relief Program and headed by Christy Romero, has released its latest quarterly report to Congress [PDF].

If you’re struggling to understand the financial crisis and its aftermath, don’t read them back-to-back. One is a story about an against-all-odds victory; the other is about the one that got away.

Last week Treasury estimated that TARP investments, excluding its housing programs, would yield “an overall positive return for taxpayers.” SIGTARP, clearly pushing back against Treasury, says: “It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion.”

In statements to Politico’s Ben White and HuffPost’s Mark Gongloff, Treasury sticks by its story that the bailouts may turn a profit, telling Gongloff “most of the remaining projected cost [of TARP] ($46 billion) is related to foreclosure prevention aid, which was not intended to be recovered.”

It’s worth looking, then, at how foreclosure prevention money is actually being spent. In January, Treasury announced plans to significantly expand its widely maligned HAMP program for struggling homeowners.

SIGTARP’s recommendations for this HAMP expansion are pretty simple – they’re things like setting clear goals and making borrowers prove that they’re actually renting second homes rather than vacationing in them. But Romero complains that Treasury has largely refused to implement these recommendations. “Taxpayers and lawmakers, the office writes, “have an absolute right to know what the Government’s expectations and goals are for using billions of TARP dollars they’ll never get back.”

Regardless of which bailout narrative you believe, we can do better than spending billions without specific goals or accountability. That sounds a bit too much like the first round of bailouts.

And on to today’s links:

EU Mess
The UK is back in recession – Guardian

Billionaire Whimsy
Buffett pushed for higher taxes on the rich; Berkshire lobbied for cuts in private jet fees – WSJ

New Normal
Debt collectors are now “embedded” as employees in emergency rooms – NYT

A breakdown of Apple’s latest amazing quarter – Asymco

Wal-Mart lobbied aggressively to water down anti-bribery law – WashPost
Wal-Mart appoints global anti-bribery watchdog – Reuters

Reuters Opinion
The triumph of the social animal – Chrystia Freeland
When credit cards go social – Felix
When Europe goes to extremes – John Lloyd
Wal-Mart’s bribery is sadly unsurprising – Robert Boxwell
The IMF’s Euro conditions are not what they seem – Hugo Dixon

Unintended Consequences
The basic flaw in our massive disability program that discourages people from working – NYT

“Hedge Funds Perform Better And Cost Less Than Previously Thought, Say Hedge Funds” – Dealbreaker

Sad But Probably True
Netflix is both beloved and likely doomed – Felix
Netflix’s stream of bad news – NYT

Credit Suisse’s net profit falls 96% – and that’s a “sharp turnaround” – WSJ

How the SEC blew the cover of a Wall Street whistleblower – WSJ

Try Again
The new face of private equity, obligatory hard hats included – NYT

“The best fight I’ve ever seen”: Brawl breaks out at elite NYC club – NYT

Esther Dyson: The JOBS Act is just “magical thinking” – Project Syndicate

Tracked Changes
Parsing the Fed: How much the statement changes from March to April – WSJ



MrRFox, if you were a little less full of yourself you would be easier to talk to. Reasonable people would not interpret “100% tax rates will result in a variety of evasion techniques rather than 100% tax collection” as “plutocrats do not deserve to be taxed”. They may both be reasons to object to your suggestion, but they are by no means equivalent.

I agree that your proposal would cause most/all of the big money to flee the country. If that was your intention, then why didn’t you say so from the start instead of repeatedly talking about the need for revenue that your proposal wouldn’t generate?

Here’s a deal for you — I’ll say what I mean (thus you can trust that I don’t have a soft spot in my heart for plutocrats). You say what you mean (and don’t change horses midstream). Will make for a much more civilized conversation, ESPECIALLY if you can put aside the name calling.

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Why Cooper Union can’t be trusted

Felix Salmon
Apr 25, 2012 16:23 UTC

Remember the murky finances of Cooper Union, which went from healthy to disastrous in no time at all? There’s a lot of controversy about what went wrong, where exactly the problems lie, and what’s the best way to fix them. But one thing’s abundantly clear: the management and trustees of Cooper Union have been unhelpfully opaque about the college’s finances for years, and the college’s students and alumni are fed up with the “trust us, we’ve worked it out this time” approach.

The first thing that’s needed, before any big decisions about things like tuition fees, is transparency about Cooper Union’s finances, and generally much more openness and clarity from management. After all, this is the place where contractor Jonathan Rose got a $2 million contract to oversee the new flagship academic building, while before* his mother Sandra Priest Rose sat on Cooper’s board of trustees — all without any kind of disclosure as to how he was selected. Was Sandra Priest Rose’s pledge of $5 million towards the building contingent on her son getting that contract? No one knows.

But transparency, it turns out, is exactly the opposite of what we’ve ended up getting. Yesterday, Cooper Union’s president, Jamshed Barucha, posted a “framework for action” on the college’s website. In it, we’re told that something called the Revenue Task Force has released an “interim report” which has “recommended” that Cooper “explore” charging fees for “academic programs that build on our unique strengths”, which “may include master’s and other professional programs”.

All of which sounds rather tentative, but in principle the timing here is propitious. Tomorrow sees the Second Community Summit at Cooper Union where the Task Force’s report could be discussed and debated.

Except, discussion and debate isn’t really what Cooper is looking for here. Barucha has not released the Task Force report, and shows no sign of doing so. And for all the qualifiers in his note, it’s quite clear that the decision has already been made. “Cooper Union to Charge“, says the WSJ; “Cooper Union Will Charge Tuition for Graduate Students“, says the NYT.

The WSJ is a good guide to the official Cooper Union line:

The school’s economic troubles date to the early 1990s, when rent it received from the land it owns under the Chrysler Building decreased from $13 million to $11 million while school expenses increased.

It’s far from clear that this is even true: Barry Drogin, for one, who has looked into this issue very deeply, says quite unambiguously that “the Chrysler Building rent and payments in lieu of taxes (PILOT) have risen steadily every year, with large increases scheduled every ten years starting in 2018.” In any case, the Chrysler-building-rent problem is long solved. Revenue from the building will be $32.5 million in 2018, $41 million in 2028, and $55 million in 2031. Cooper’s fiscal problems have nothing to do with insufficient income from the Chrysler Building, and the fact that Cooper still seems wedded to that storyline is worrying.

And then there’s this:

Mr. Bharucha said he has received backing for the plan in recent discussions with faculty and alumni nationwide. “There is very strong, if silent, majority who are highly supportive of a plan that energizes the institution,” he said.

I love the idea of a “very strong” majority which is “highly supportive” of this plan — and yet, for all their incredible support, are somehow completely silent. Bharucha might as well have said that pigs fly when you’re not watching them: his statement might be unfalsifiable, but at the same time it’s also completely implausible. Cooper’s stakeholders are incredibly mistrustful of Bharucha and the trustees, and it’s hard to see how even a silent majority could be supporting a plan which exists only in the vaguest possible form.

After all, we’ve been here before. In 2006, Cooper Union filed something called a cy pres petition, in a successful attempt to get New York to allow it to borrow money against the Chrysler Building. That petition only came to light years later: the whole process, at the time, was shrouded in secrecy. And you can see why that might be: even as Cooper was loudly proclaiming its health in public, the petition was saying that “The Cooper Union currently faces the possibility that it will become unable to carry out its statutory mission in the not-too-distant future”; that it “currently faces a grave fiscal crisis”; and that even faced a real risk of losing its academic accreditation.

As part of that petition, Cooper committed to implementing something called a Master Plan, which involved cutting spending, raising $250 million, increasing the amount that alumni donate to the school, and other things, none of which really happened. As the board of trustees reported in 2011, “three key components of the Master Plan were not achieved as anticipated” — all of which were vastly more germane to the current fiscal crisis than any change in Chrysler Building rents in the early 1990s.

In other words, there’s really no reason why anybody should trust Bharucha or the trustees — to have any faith that they’re being fully truthful with the rest of the school, or that they’re in any position to successfully execute on their promises.

And what of the huge new $160 million (ish) academic building? The trustees still say that it has nothing to do with the fiscal crisis, despite the fact that it’s responsible for some $10 million a year in interest payments:

It is also important to state that 41 Cooper Square was not the cause of the current financial dilemma. Its construction relieved Cooper Union of the costs that would have had to be incurred to renovate the old engineering building and the Hewitt Building to make them acceptable sites for a 21st century education and meet accreditation standards.

This just doesn’t pass the smell test. There’s some small possibility that it’s true, but unless and until the trustees show how they arrived at this conclusion, I have no reason to believe them. The engineering faculty actually voted against the construction of the new academic building, saying that they were more than capable of staying where they were at significantly lower cost. (This fact was, of course, not included in the cy pres petition.)

More to the point, there’s never been a coherent account of how exactly Cooper Union ever intended to pay off the massive $175 million loan it took out to construct the new building. It needed its income from the Chrysler Building to pay its annual costs; and of course it doesn’t have any tuition revenue, since it doesn’t charge tuition.

This is the main thing that has never been adequately explained — by constructing the new building, Cooper Union added on a permanent $10 million annual expense, without any stated means of being able to cover that expense. The new academic building is a sunk cost at this point, of course. But until the trustees explain their logic surrounding its construction, it’s going to be extremely difficult to trust them to do the right thing going forwards.

*Update: Finally, some clarity on the Jonathan Rose/Sandra Priest Rose question. Tellingly, it comes from Roxanne Donovan, a representative of Jonathan Rose Companies, rather than from Cooper Union. She says that Jonathan Rose was hired more than a year before his mother was invited to join Cooper’s board; she also says that there was a formal RFP process for the selection of Jonathan Rose Companies.

Why Cooper Union wasn’t able to be transparent about this itself simply baffles me, and really makes my point. Just because you’re being secretive doesn’t mean you have something to hide.


My son is a serious artist who chose to go to Cooper Union because he wanted a rigorous environment that valued art as highly as engineering, architecture and outside of the this school as high as our society values medicine, business and/or finance.His first year of 2011 was fantastic and then the politics began. The art department seemed to lead the protests sacrificing the value of its mission which was to guide young serious artists into serious careers. My son was first very active in the protests because of his love for Cooper Union, but later he began to see what really was happening. The Cooper administration/educators did not seem to value art education and allowed the art students to destroy their own program. My son said how his critiques changed. If you were not involved with the politics your art was irrelevant. Exhibitions were no longer that important. He watched the tragic demise of a once strong art department all in the disgusting name of politics. No one seems to realize the true tragedy of Cooper Union. It is what all this has done to the current students who chose this school above others because they believed in its intense process and pure values. My son refused many scholarship offers to other schools to accept the promise of Cooper Union. I am sure he is not alone in his frustration and disillusionment.

Posted by jlj212 | Report as abusive

from Ben Walsh:

The Arab Spring: Tragic event, or unfortunate setback?

Ben Walsh
Apr 25, 2012 16:21 UTC

Re-reading can lead you to real gems. Going back over JPMorgan's annual letter to shareholders, I couldn't believe that the first time around I missed this quote in the third paragraph of the first page:

In addition to the ongoing global economic uncertainty, other traumatic events — such as the earthquake and tsunami in Japan, the debt ceiling fiasco in the United States, revolutions in the Middle East and the European debt crisis — have impeded recovery. In the face of these tragic events and unfortunate setbacks, the frustration with — and hostility toward — our industry continues. [emphasis added]

There are a lot of ways to describe the Arab Spring. Most do not imply that it was either a tragic event or an unfortunate setback, but Jamie Dimon does. Or, at least, what his ghostwriters did. As a human being, that's a pretty callous way to describe a series of popular uprisings against autocratic governments. But let's think like Jamie Dimon. As the Chairman and CEO of  a global financial institution, does it make sense?

In a very limited sense, yes. The Arab Spring probably played a role in spiking oil prices. Here's a chart of Brent crude prices from 2009 to April 2012, from EIA stats:

Oil prices clearly rise starting in the winter of 2010/11, when the Arab Spring began in Tunisia. And they have stayed at more or less elevated levels since. That makes sense given that the overthrows of autocratic governments come with uncertainty and economic disruption. Still, there's a strong case that overthrowing repressive regimes with calcified economies would be a good thing for markets.

And then there's the even stronger case that, irrespective of market impact, the Arab Spring is good. But Jamie Dimon will leave those ideas to whatever small portion of his thoughts are not filed under shareholder value.


What case is there that the “Arab Spring” was good?

Posted by Danny_Black | Report as abusive

When credit cards go social

Felix Salmon
Apr 24, 2012 22:18 UTC

There’s a new credit card out there, called Barclaycard Ring, which manages the rare feat of being a good, solid financial product even as it’s also incredibly gimmicky. It’s being branded as “the first ever crowdsourced credit card” — a financial product “built on a community” which, by the looks of the stock photography on the website, is full of incredibly happy, healthy, outdoorsy types who live only in bright sunshine. You don’t just apply for this thing, you “join the conversation”.

Which is not to say you shouldn’t apply. This card has an 8% APR, and no penalty APR. You miss a payment? You default on some other credit card debt? Your APR stays at 8%. For “revolvers” — people carrying a balance — this has got to be one of the cheapest credit cards out there, and certainly one of the least dangerous. The fee schedule is the one place where you don’t find gimmicks: no 0% APR balance transfers (with 3% up-front fee hidden in the small print), no hugely complicated reward program you’re never going to use, no annual membership fee which you have to mentally amortize against the perceived value of all those hypothetical rewards.

I hope and trust that the idea of a card without a penalty APR will catch on. Under new regulations, credit-card companies aren’t allowed to apply a new penalty APR to the entire balance being revolved any more; they have to apply it just to new purchases — and they have to pay that high-rate balance down first. As a result, penalty APRs aren’t nearly as profitable as they used to be. And when you do introduce a card with no penalty APR, it becomes incredibly easy to make apples-to-apples comparisons between cards: you should just go for the one with the lower rate.

Barclaycard is also promising to publish its own P&L statement for the card, showing how much money it’s making from interest payments, from late fees, and from interchange fees. That’s going to be interesting, when it starts being published in the next few months. It says that any profit over and above its own reasonable hurdle-rate expectations will then be rebated back into the “community” somehow, although the exact mechanism here is unclear. The general idea seems to be that if the cardmembers want something like onshore card servicing, then they’ll be given the choice to essentially pay for it, out of the excess profits that the card is rebating back to them.

At the same time, watching a big bank try to be all cool and down with the social kids can be rather like watching your father try to rap. The Twitter feed is embarrassing enough, but the sponsored posts are much worse. For instance: companies who “get” social media are “are the ones that are leading the fold and have good futures ahead of them”, says BrainFoggles, who seems to have been paid to write that by something called Dweeb Media, which specializes in “creating conversational blog post campaigns”.

And when I spoke to Barclaycard’s Paul Wilmore, I was far from convinced when he tried to sell me on the idea that if people with a Barclaycard Ring feel as though they’re part of a community, they’re going to be less likely to default on that card. That might be true with credit-union credit cards, where people really are part of a pre-existing community. But I doubt that the group of people with this Mastercard rather than that one will ever cohere into something real enough to change collective behavior by 200-300bp, as Wilmore is hoping.

For the representative of an exercise in radical transparency, Wilmore was also surprisingly reticent on some pretty basic issues. For instance, what’s Barclaycard’s profit margin going to be on this card? That number is going to be public, but he wouldn’t even give me a hint. Or, why do you need to become a cardmember before being able to read either the official cardmember agreement or the shorter summary agreement? Why aren’t those documents freely available on the card’s website, for people to read before they apply for the card?

Wilmore did tell me, quite proudly, that Barclaycard has filed no fewer than 14 patents around this card, which scared me a little: I’m not a fan of the idea that financial innovations can or should be patented. Insofar as there are good ideas here, I want to see them broadly adopted, but if anything these patents seem designed to discourage anybody else from trying out interesting products in this space.

In a sense, then, I wish that Barclaycard had just released a simple no-annual-fee, no-rewards, no-penalty-APR card and left it at that. I fear that the gimmicky social side of Barclaycard Ring is going to overshadow the fact that underneath its trendy exterior it’s actually a perfectly good product. Even if, as someone in financial media, I will admit to looking forward to those P&L statements.


thanks for credit card information and this is very good information on credit card.

Posted by kevinyong1882 | Report as abusive

Counterparties: Suddenly no one likes austerity

Apr 24, 2012 21:02 UTC

If you believe today’s host of reports, there’s been a sudden transformation in Europe. More than two years into a sweeping austerity project, European leaders are reportedly rethinking the idea that budget cutbacks can magically fix the continent’s dreary economy.

The commentary today borders on the breathless. “From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too,” the NYT declares. Henry Blodget, for his part, has settled decades of scholarly debate: “IT’S OFFICIAL: Keynes Was Right”. At Zero Hedge, Peter Tchir, calls it “The Day Austerity Died.”

How’d we get here? In France, Socialist presidential challenger François Hollande has indicated he’ll challenge austerity; the Dutch government yesterday collapsed over economic reform; and tomorrow, we may learn that the UK is back in a recession. The latest Eurostat numbers, meanwhile, are troubling. Greece, Portugal and Spain significantly reduced their respective budget deficits in the last two years, without anything resembling strong economic growth. In a back-of-the-envelope calculation of the same figures, Paul Krugman estimates that “1 euro of austerity yields only about 0.4 euros of reduced deficit.”

Angela Merkel, austerity’s great champion, is already pushing back against the austerity backlash, arguing that the “credibility” of the eurozone is at risk without continuing cutbacks. But as Matt O’Brien wrote last week, the market isn’t just worried about budget credibility, it’s worried about Europe’s credibility as an engine of economic growth. Credibility, after all, comes after results.

EU Mess
Europe begins to revolt against Germany-prescribed austerity – NYT
Spain reaches target in short-term debt sale, but its rates soar – Reuters
The “pain in Spain” could hit the world economy – WashPost
The tale of banking in the land of Italia – FT Alphaville
“The above statement shows why austerity is simply one of the dumbest policies on the planet” – Bonddad Blog
Five things you can say in French elections but not in American ones – Wonkblog

Shiller: We could all be dead before we see a housing rebound – Reuters

Justice Department investigating criminal charges against Wal-Mart – Bloomberg

Ahead of IPO, Facebook sees a drop in both profit and revenue – WSJ

MF Doom
MF Global trustee says executives will not receive bonuses – Bloomberg

The Fed
Krugman: The economy needs Chairman Bernanke to act like Professor Bernanke – NYT

Too Big to Outperform
As mutual funds have grown, performance has declined – Smart Money

Diamond and Saez: Higher tax rates on the 1% wouldn’t slow growth – WSJ

For the first time in over 70 years, more Mexicans are leaving the U.S. than entering – WashPost

Recap: James Murdoch’s latest appearance before the Leveson inquiry – The Guardian

Jeremy Hunt emails: The timeline of the BSkyB takeover that wasn’t – The Guardian

Popular Myths
Let’s stop blaming homeowners for the housing bubble – FDL

So Hot Right Now
Banks are pushing junk bonds as Europe’s crisis continues – Bloomberg


My dear Fi,
It is hard for these countries to look themselves in the face and find the one to blame. If their economy was truly undone by some greedy SOB – point him out. But aren’t we are told that the government will fix it when it was their incompetence and lack of financial acuity that got them in the trouble in the first place. So – do we double down on incompetence, government benefits, a social state and demand our fair share. In the end – life as usual cannot go on. This is the tough lessen families learn – countries learn. Watch as the lending dries up and the benefits fall short – and this whole thing unravels. I think what a lot of people with sense are saying – simply take care of your debts and get to the hard work of building your economy. The frustration shown here is they trusted their politicians and government and now they are shooting any messenger of austerity. However there is nowhere to pass this buck….Euro I mean…

Posted by xit007 | Report as abusive