Felix Salmon

You might have noticed a WSJ story by Juliet Chung today, talking about a new report from Citigroup and leading with the eye-popping number that the amount of money managed by hedge funds could soar to $5 trillion over the next five years. Barry Ritholtz certainly saw it, and responded with derision: “I highly doubt the industry is doubling in size,” he writes, “or that assets will triple.”

My initial reaction, on reading the WSJ story, was exactly the same. But then I thought it might be worth reading the report itself. Finding the report (which you can download in PDF format here) wasn’t easy, since Chung evidently decided that everything we needed to know about the report was contained in her article, and that therefore there was no need to link to it. And if you go to the Citi Prime Finance website, the most recent report there is dated December 2010. But Citi’s crack PR team did send me their press release, which includes a link to the report. And it turns out that the $5 trillion number is taken straight from the headline of the press release; it doesn’t actually appear anywhere in the report at all.

In that sense, this is a replay of the Kauffman report on hedge funds a couple of weeks ago: it’s a very worthwhile report, undermined by a stupid press release desperately trying to sensationalize something quite subtle and interesting.

That said, Barry raises some valid points, many but not all of which are addressed by the report. Firstly, he says, withdrawals from hedge funds have been rising. And that’s true — at least when it comes to the high net worth individuals and family offices who have historically invested in these things. Here’s the chart:

As you can see, individuals and families are basically keeping the amount of money that they invest in hedge funds flat, even after returns, and despite the fact that they have gotten a lot wealthier over the past three years. As a percentage of their total assets, the amount of money these people are investing in hedge funds is definitely falling.

On the other hand, institutional investors are still increasing the amount of money they’re allocating to hedge funds. Not quite as quickly as during the go-go years of 2004-7, when institutions poured $1 trillion into the asset class. But Citi estimates that institutions transferred some $179 billion in total into hedge funds in 2010 and 2011, even as they were recovering from the financial crisis. And I’d agree with Citi here that at the margin institutional investors are more likely to accelerate those flows than they are to reverse them and start withdrawing money. Big institutional investors move slowly, and once they start on a course of action they tend to be committed to it for the long term.

Barry’s second point is that hedge funds have underperformed in recent years. And indeed that helps explain the way that individual investors have soured on the asset class. But institutional flows don’t tend to mirror previous-twelve-month performance in the way that individual investors are wont to do. Institutions tend to determine investment strategies and risk allocations, and then decide how best to position themselves; while hot funds might see inflows and weak funds might see outflows, the total amount of money that institutions allocate to hedge funds is actually very weakly correlated with hedge-fund performance. Here’s the Citi report:

Institutional investors entering the market were looking for risk-adjusted returns and an ability to reduce the volatility of their portfolios. This was a very different mandate from the one sought by high net worth and family office investors— namely, achieving outperformance and high returns on what they considered to be their risk capital.

Thirdly, Barry says that the hedge-fund industry is contracting — which is also true, and also entirely consistent with fewer and much bigger institutional mandates. Here’s one quote from the report:

We only take money from institutional investors and the minimum investment levels are high (passive $50 million, bespoke $500 million). This is due to only wanting “like-minded” investors to be part of the platform in order to reduce the risk of excessive withdrawals by less stable/less long-term investors in case of a market crisis of some sort.

This is the new world of hedge-fund management: setting minimum investment levels so as to deliberately exclude precisely the kind of investors that built up the asset class in the first place. The number of people who can do that, however, is by its nature much smaller than the number of people who have founded a hedge fund. So consolidation and contraction is inevitable. While the Citi report does forecast an increase in the amount of assets under management, it doesn’t for a minute forecast an increase in the number of hedge-fund managers.

“It is not a particularly great time to be a fund manager,” says Barry, and he’s right. But that doesn’t mean that Citi is wrong.

Fourthly, Barry points to the fact that the fund-of-funds industry is doing badly. On this point, the Citi report actually goes further than Barry: it basically says that fund-of-funds were a fad, and that they won’t last much longer. This chart, for one, is striking:

Here’s how the report puts it:

As many investment committees and boards became uncomfortable with the fees they were paying to fund of funds, many institutional investors began making direct allocations to hedge funds. Many of these investors began their direct investing program by again placing a singular allocation with a multi-strategy manager and relying on the CIO of that organization to direct capital across various approaches based on their assessment of market opportunities.

Essentially, as the hedge-fund world consolidates, the functions formerly performed by fund-of-funds managers can now be performed within huge hedge-fund groups. And they won’t charge you extra for the privilege.

Finally, Barry says that investors are getting fed up with high fees — and the question of 2-and-20 is one that is surprisingly ducked by Citi in this otherwise comprehensive 76-page report. While sophisticated risk-allocation strategies are all well and good, at some point one has to ask whether it’s worth paying 2-and-20 to get the level of risk you want, and whether you might not be better off over the long term with less risk optimization and also lower fees. If the hedge fund industry doesn’t grow as much as Citi says it will, the reason will surely be that institutional investors will finally have decided that 2-and-20 is too high a price to pay for what they’re getting.

So if you read the actual report, rather than the press release, it stands up quite well to Barry’s criticisms. But I’m still not completely convinced by it. For instance, the report has a whole section under the headline “Directional Hedge Funds Gain Traction for Their Ability to Dampen Equity Volatility”. It says:

Remember, most institutional investors are focused obsessively on capital protection, as they have limited pools of assets they are managing to meet obligations. For pension funds, these obligations relate to the institution’s need to meet liabilities owed to their members. E and Fs need to fund activities over a long-term period. Sovereign wealth funds need to diversify their account balances. In all these instances, there is an extreme aversion to losing money.

“E and Fs”, by the way, is investmentese for “endowments and foundations”. And this passage just doesn’t ring true to me. Bond investors focus obsessively on capital protection; long-term institutional investors looking to capture an illiquidity premium, on the other hand, actively want more volatility, if it means that their long-term returns will be higher. If the institutional investors that Citi talked to are focusing on capital protection, I find it hard to believe that they’re going to significantly increase their allocation to hedge funds. Partly because of those fees, and partly because no hedge fund is immune to blowing up. It’s true that hedge funds as a whole lost less money than the stock market did during the plunge of 2008-9. But they still lost money — if they were promising capital protection (something the stock market never promises), then they clearly failed at their job.

Another thing missing from the report is the move from defined-benefit pensions, which create massive pension funds, to defined-contribution 401(k)s and the like, which just create lots of much smaller investors. The sophisticated strategies outlined in this report are all well and good, but they’re out of reach to anybody with a 401(k). As the report notes, the US accounts for 58.5% of all pension fund assets. And if those assets move out of pension funds and into 401(k)s, then they’re significantly less likely to get invested in a hedge fund.

And while the report does foresee an increase in the amount of money that small investors allocate towards things which look a bit like hedge funds, that’s its weakest point. For one thing, there are significant regulatory obstacles in the way. And for another, hedge funds know that catering to small investors carries a lot of risk, even as they generally have to reduce their fees to get at that money. Here’s the chart:

What you’re seeing here is a real rise in the amount of money which belongs to retail investors and is being managed either by hedge funds or by conventional mutual funds offering total-return strategies. The increase of $369 billion over the past 5 years is significant. But it’s also dangerous, as the Citi report highlights:

Several respondents noted that these products were only suitable for strategies using highly liquid products.

There were also concerns that these products would not get the same attention and focus from hedge fund managers as their core funds, since the fee potential was not as great. Many worried that managers would just view these products as an opportunity for asset gathering and that their lack of performance could hurt the brand of the hedge fund industry overall.

So is there a bright future for hedge funds or not? My gut feeling is to split the difference between Barry and the report. Here’s the most interesting chart, for me:

Pension funds, here, are by far the largest pool of money; sovereign wealth funds are smaller, and endowments and foundations are smaller still. Basically, the larger the amount of money you’re managing, the smaller the percentage of that money that you’re investing in hedge funds.

Over time, I suspect that these three lines are likely to start converging — somewhere. And if the convergence point is anywhere north of about 4%, then the total amount of money in hedge funds will go up, just because pension funds are so big. In order for the hedge fund industry’s assets under management to fall, the blue lines in this chart are going to have to stop rising and start falling. And while that’s possible, I don’t think it’s going to happen. Not yet.

So will hedge funds find themselves managing $5 trillion by 2016? No. But will they be managing more money than they are today? Yes, I think they will. And the increase won’t just come from internal returns. It will come from substantial capital inflows, too.

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This weekend Spain requested the bailout it had previously denied it needed – here’s the official statement (PDF). The Spanish government has formed the Fund for Orderly Bank Restructuring (FROB), which will accept loans of up to $125 billion from the euro zone and inject needed capital into its banks. The final details of the aid, however, will not be set until the European Commission conducts its own assessment of Spanish banks’ financial health.

Markets shrugged at the news. “The hourglass … has been turned over, but each time it’s happened in Europe over the past few years there seems to be less and less sand in it,” as one analyst put it.

Tim Duy thinks the problem is that the “half-life of European bailouts is getting shorter and shorter” and the FROB was a “last-ditch gamble on the part of the Spanish government to avoid a general government bailout”. As Felix notes, Europe choose not to bail out Spain’s banks directly, hoping to avoid the headaches and precedent-setting involved in a direct intervention in a member states’ banks.

And if a bailout of the Spanish (or Italian) government is on the way, Joe Weisenthal thinks Merkel may be losing her leverage; text messages – “Spain is not Uganda” – from the Spanish prime minister indicate he feels the same way.

For doom and gloom, EU officials have discussed capital controls, including limiting the size of withdrawals from ATM machines, if Greece leaves the euro. On the wonkier side, FT Alphaville has an excellent and detailed series of posts. – Ben Walsh

On to today’s links:

New Normal
The median net worth of the American family fell by 40% between 2007 and 2010 – Federal Reserve

JPMorgan
Wall Street’s reaction to JPMorgan losing $27 billion in market cap: “I kind of shrug” – Bloomberg

Less Is More
The perfect tweet is perfectly boring, study says – The Atlantic

EU Mess
Lagarde: We have less than three months to save the euro – CNN

It’s Come to This
Romer: “The Fed is the only plausible source of immediate help for the American economy” – NYT

Compelling
Social media is a factory, and we are a vast, unpaid proletariat – New Inquiry

Wonks
The US recession is already here – John Hussman

Indicators
Citi’s Panic/Euphoria model says we’re panicking – Business Insider

Yikes
UK prime minister left his 8-year-old daughter in a pub – Reuters

China
John Hempton: “China is a kleptocracy of a scale never seen before in human history” – Bronte Capital
China’s industrial output, retail sales and inflation are all falling again – Reuters

Facebook
Now that everyone is on it, Facebook is no longer growing like crazy – WSJ
Nasdaq still not sure why its systems completely failed during Facebook’s IPO – WSJ

Charts
The geography of abortion – The Atlantic Cities

Matt Levine has an excellent post on the latest storm in a CDS teacup, which has been prompted by Europe’s bailout of Spanish banks. If you feel any need to follow this kind of thing at all, here’s basically what you need to know.

Firstly, this bailout is going to add a good €100 billion or so to Spain’s national debt, over and above its existing bonds. That in and of itself makes Spain less creditworthy: the more debt you have, the lower the chances are that you’re going to be able to pay it all back.

More worryingly, for holders of Spain’s national debt, this new bank-bailout debt (which is owed by the country of Spain, remember, since the money isn’t going directly to the banks) carries something known as preferred creditor status. That means that if push comes to shove, Spain will repay the bailout debt before repaying any of its bonds.

To take a simplified example: if Spain has €100 billion in bailout debt due and another €200 billion in bond payments due, and only has €150 billion on hand, then an equitable treatment would be to ask each of its creditors to take a 50% haircut. But with preferred creditor status, Europe will get its €100 billion back in full, and bondholders would have to take a 75% haircut. So holding Spanish bonds just became significantly riskier, this weekend.

Now here comes the CDS angle: if this subordination is written into European law, does that mean that the Europeans just subordinated Spain’s bondholders? Because if they did, then that might count as a credit event, and allow anybody holding Spanish CDS to trigger those CDS and ask to be paid out in full.

There’s lots of discussion here about the difference between the two different places that the money for the Spanish bank bailout might come from: the EFSF, on the one hand, and the ESM, on the other. The ESM’s preferred-creditor status is enshrined in law; the EFSF’s isn’t. In practice, as Joseph Cotterill points out, they behave the same way: European countries will treat the EFSF exactly the same way they treat the ESM, and the EFSF managed to get away haircut-free in the Greek restructuring. But as far as CDS documentation is concerned, what happens in practice doesn’t matter. What matters is the legal theory.

And when it comes to the legalese, it doesn’t get much more impenetrable than this:

“Subordination” means, with respect to an obligation (the “Subordinated Obligation”) and another obligation of the Reference Entity to which such obligation is being compared (the “Senior Obligation”), a contractual, trust or similar arrangement providing that (i) upon the liquidation, dissolution, reorganization or winding up of the Reference Entity, claims of the holders of the Senior Obligation will be satisfied prior to the claims of the holders of the Subordinated Obligation or (ii) the holders of the Subordinated Obligation will not be entitled to receive or retain payments in respect of their claims against the Reference Entity at any time that the Reference Entity is in payment arrears or is otherwise in default under the Senior Obligation. … For purposes of determining whether Subordination exists or whether an obligation is Subordinated with respect to another obligation to which it is being compared, the existence of preferred creditors arising by operation of law or of collateral, credit support or other credit enhancement arrangements shall not be taken into account, except that, notwithstanding the foregoing, priorities arising by operation of law shall be taken into account where the Reference Entity is a Sovereign.

Christopher Whittall has found some lawyers willing to stick their necks out and translate this into English. Basically, there are two ways that CDS can be triggered on the grounds of subordination. The first one is moot, since it applies to entities which can be liquidated, and therefore clearly doesn’t apply to sovereigns. The second one is a bit more complicated, but it basically comes down to the question of whether Spain would be allowed to pay its bondholders if it was in arrears to the ESM. And that’s a question of Spanish law, not European treaty. Unless and until the Spaniards pass a law to that effect, the CDS probably can’t be triggered — which isn’t to say that some enterprising hedge-fund manager somewhere isn’t going to give it the old college try.

Even if the CDS were triggered, however, that wouldn’t be the worst thing in the world. So long as Spain keeps on paying its bond payments on time, the CDS auction, were there to be such a thing, would happen at a pretty high price, and would be no big deal. Think of the auction for Fannie Mae and Freddie Mac: they both had a credit event, but the clearing price was basically par, so holders of CDS didn’t make any kind of profits.

And more generally, the fact that the European Union has been so blasé about these matters is definitely encouraging. Once upon a time, lots of Eurocrats seemed to think that they really had to worry about the CDS market, and whether there was a credit event in Greece. Now, in the wake of the Greek restructuring, they’ve grown up, and they understand that the credit derivatives market is not important enough to worry about or to build policy around. They’re going to do their thing, and the CDS market will react as it may. (Including, perhaps, by just giving up on the whole sovereign-CDS thing entirely.)

In other words, the subordination matters; whether or not the subordination constitutes a credit event under ISDA rules, not so much. As the EFSF and ESM continue to disburse money to the European periphery, that’s the thing to concentrate on most: how much money have they given out, and when do they need to be repaid? Because all of those payments are going to come first, before any payments to bondholders.

The WSJ has a good post-mortem on the Facebook fiasco today, pointing fingers very much at Nasdaq. And clearly Nasdaq was Ground Zero for the trading problems the day that Facebook went public. But this kind of thing smells fishy:

Some hedge-fund managers called Facebook’s chief operating officer, Sheryl Sandberg, because they hadn’t received any trade confirmations from Nasdaq, says a person familiar with the phone calls. Some hedge-fund managers apologized to Ms. Sandberg and said they needed to sell their entire positions because of the confusion, the person added.

This clearly comes from Sandberg’s office, if not Sandberg herself — and it sounds very much as though she’s blaming Nasdaq for a lot of investors dumping Facebook shares on the opening day. If I were in her position, I’d do the same thing: it’s a lot easier than finding fault with, say, Facebook’s CFO, or blaming herself.

I don’t doubt that Nasdaq glitches did take the wind out of the Facebook share price, if indeed it did open with a pop at $42. (The WSJ casts some doubt on that, quoting the head of electronic trading at Deutsche Bank as saying that it was “mathematically impossible” to come up with a $42 figure if the cross had been calculated with all of the orders put in.) But with hindsight, and given the degree to which Facebook shares have slumped in the last three weeks and not bounced back at all, any problems at Nasdaq simply hastened a fall in price that was surely inevitable.

None of which is to exonerate Nasdaq at all. The WSJ article ends with a perspicacious quote from Joseph Cohn, a retail investor in New York state:

“My experience on that day is that the markets aren’t built to handle failure,” he said. “With technology, you’re able to accomplish a lot more, but when it fails, it fails miserably.”

This I think is what the SEC’s Mary Schapiro is talking about when she says that the Facebook IPO was reminiscent of the May 2010 flash crash. The US stock market, when it works, works fine. But it’s not robust at all; it’s certainly not what Nassim Taleb would call “anti-fragile”. That’s why Nasdaq did so much testing of their systems before the IPO: they knew that if the systems failed, the outcome could be horrible. As, in fact, it was.

IPOs are a particularly hard task for stock exchanges, as we saw first with the BATS IPO and now with Facebook. Normally, any given trade happens at a price very close to the previous trade — but in an IPO, no one really has a clue what the price should be, and demand can appear and dissipate much more quickly than we see in the normal course of secondary-market trading. Momentum traders rule, and value investors know that the best thing they can do is wait patiently until things quiet down. As a result, once Facebook stock started falling and the supportive bid from the underwriters went away, there was basically no bid any more. Hence the fact that it’s now trading more than $10 below the IPO price.

On the other hand, the stock genuinely has stabilized in recent sessions, trading in a narrow band between $26 and $28 for more than a week now. That’s a pretty good sign that the market has worked out what Facebook is worth — and there’s no reason at all to believe that there were multiple equilibria here, and that if the IPO had gone better then we might have had a similar week-long stretch of trading between, say, $42 and $44 per share. Sandberg should probably call up her ex-boss Larry Summers if she really believes that. It might be a comforting unfalsifiable thought, but it’s still untrue.

Martin Wolf appeared on CNBC today, which is never a good idea. Between all the swishing noises and flashing graphics, it was pretty hard to understand what he was saying — and in any case, the questions from Andrew Ross Sorkin were generally of the form “tell me what’s going to happen in the future”, rather than “analyze what we know about the present”. At one point Sorkin literally asked Wolf to “handicap the outcome” of the Greek election. Wolf is a fascinating and erudite man, and I’ve never had a conversation with him where I didn’t learn a lot. But maybe if I asked him that kind of question, it could be possible for me to walk away none the wiser about anything.

Ryan McCarthy picked up on one point that Wolf made: he said — or seemed to say — that a eurozone deposit guarantee scheme would not protect deposits against the risk of devaluation. Sorkin really should have pushed him on this, since it seems to me at least that the whole point of a eurozone deposit guarantee scheme would be to keep depositors whole in euro terms, even if their country leaves the euro and devalues. Even without such a scheme, there’s a strong case to be made that if and when Greece leaves the euro, the EU should essentially write a large check to Greek depositors, making up for any losses due to the drachmaization of their deposits. Because if the EU doesn’t do that, capital flight from the European periphery will go from bad to catastrophic.

But CNBC is a place for heat rather than light, so instead of an interesting conversation between two smart journalists, we got shown the graphic above, twice. It purports to show a real-time quote for the Greek 2-year bond, which currently seems to be yielding 349.152%. (I love the idea that they know this number to three decimal places.) According to the chart, the yield on this instrument has been rising steadily until now: there’s no indication that there was even a dip after the bond restructuring in –

Hang on a sec. Check out that x-axis! You can’t be expected to grok this in the amount of time that the chart appears on CNBC — just a couple of seconds. But the chart stops in March, when the restructuring took place and the Greek 2-year bond ceased to exist. No wonder the yield is “unch”!

CNBC has more than its fair share of meaningless graphics, but this one is especially stupid: it’s a chart of an instrument which ceased to exist three months ago, showing what the yield on that instrument did in the run-up to its default.

Of course, CNBC’s viewers can’t be expected to understand that. The one thing they will understand is the yield, which is shown at 350%. CNBC is sending a clear message, here, that Greek debt is about to default, and it’s using a made-up measure to do so. There’s no such thing as the Greek 2-year bond yield, but Bloomberg has done its best to come up with an approximation of what such a thing might be trading at — and their best estimation puts the Greek two-year benchmark at 8.98%. Which means that CNBC is only off by a factor of, oh, 340 percentage points. Well done that channel! In any case, here’s the clip.

The FT has the best explanation of the way that Europe has this weekend agreed to bail out Spain’s banks. Impressively, the whole deal was done on Saturday, in good time to let all the Spanish negotiators spend Sunday preparing for and watching Spain’s big opening match against Italy in the European Cup. (Portugal lost today; Greece had a draw on Friday; and Ireland isn’t in the tournament plays Croatia tomorrow. According to the odds, Spain has the highest chance of winning both the PIIGS subset and the tournament as a whole.)

The big question, going into this weekend, was whether Europe would be willing to recapitalize Spain’s banks directly, or whether it would simply help Spain bail out its banks. And the answer seems to be somewhere in the middle. Europe is going to lend money to Frob, which is basically the Spanish Tarp; Frob, in turn, will use that money to recapitalize the banks.

So really there are two bailouts here. The Spanish government is getting debt finance from Europe, and the Spanish banks are getting equity finance from the Spanish government. Because the money is ultimately going to the banks, the Europeans and the Spaniards have an excuse for not imposing tough austerity conditions on Spain. And that’s good: Spain has never been fiscally profligate in the way that Greece was, and there’s no reason why it would ever benefit from some kind of Germanic nanny double-checking and second-guessing every check it writes.

On the other hand, all the money for bailing out Spain’s banks is immediately going to become Spanish sovereign debt. And that’s not good, for anyone worried about the Spanish fiscal situation. What’s more, it’s unclear how much of the money is going to come from the ESM rather than the EFSF. That might seem like a niggardly distinction, but it’s an important one: the ESM has preferred-creditor status, which means that it’s senior to anybody buying Spanish sovereign bonds. And as a result, at the margin, the more ESM debt that Spain has, the higher the spread on Spanish government bonds, since every euro of ESM debt effectively subordinates every euro owed by the Spanish government to bondholders.

The way to avoid all this would have been for Europe to recapitalize the Spanish banks directly, rather than doing so by lending money to Frob. The IMF couldn’t participate in such a plan, since it can only lend to governments, not to banks — but the IMF isn’t participating in this plan, either. And by taking equity in the Spanish banks, Europe would actually have a chance of turning a substantial profit on the whole operation, instead of just lending money to Spain at concessionary rates. As it is, if the equity that Spain takes in the Spanish banks ends up rising in value, all that rise in value will accrue to the government of Spain, rather than to the Europeans who provided the money.

But clearly Europe hasn’t yet reached the point at which it’s willing to directly help out the financial sectors of member countries, no matter how necessary or potentially profitable that might be. Taking equity stakes in Spanish banks — or any other private-sector institution, for that matter — is clearly something which Europe wants to leave to individual countries, and I can understand that, at least in theory. In practice, however, I suspect that Spain and the markets would have been much happier if the flow of money had been direct, rather than being intermediated by the Spanish government.

There’s a fine art to pricing any scarce resource. Ex ante, it’s impossible to do a precise calibration of supply and demand, but being able to do so is crucial to getting things right. If you’re in a business where you can make more of whatever you’re selling when demand rises, that’s one thing. But when you’re selling tickets, or Facebook shares, that’s not the case.

In a world where you have to set the price in advance, and then it can’t be changed, the calculus is simple. Set the price too high, and you end up with insufficient demand and a general feeling of failure; you don’t attract the number of people you were hoping for, and even those people are likely to end up feeling ripped off. On the other hand, set the price too low, and you create disappointment among people who wanted to give you their money and can’t, quite aside from the fact that you’re clearly leaving money on the table.

In the past couple of days, we’ve seen good examples of both. At Yankee Stadium, the price of tickets is way too high, as is evidenced by the huge number of empty seats, and by the fact that on the secondary market, two thirds of tickets are sold for less than face value. Lots of seats are being sold by people asking less than $5 a pop, and at the top of the ticket-price range, the average discount to face value is more than $90.

At the same time, sold-out $125 tickets for the Big Apple Barbecue Block Party are being hawked on Craigslist for significant premiums to face value, prompting Ryan Sutton to declare that they should be more expensive next year.

The Yankees are taking a shoot-the-messenger approach to their attendance problems, blaming the secondary market in tickets, rather than the fact that the tickets cost a fortune. That’s just silly, and it’s a no-brainer that the price of Yankees tickets should come down. Just like an IPO, you want to price season tickets so there’s a small implied “pop” in there — people with season tickets should be able to sell them on the secondary market for a little bit more than they paid. That helps keep demand for season tickets healthy, year in and year out.

What’s more, the Yankees have the same stupid pricing as the Metropolitan Opera: every game or opera costs the same amount, no matter how in-demand or run-of-the-mill the matchup. Pretty much every other baseball team has pricing variable enough that at least the big games cost more; the Yankees should take a leaf out of Broadway’s book and do the same. Broadway pretty much always sells out every show, these days, at whatever the clearing price is, and scalping is way down. That would make Yankees games much less desolate.

Pricing the barbecue tickets is trickier, but Sutton is right: when you’re raising money for charity, it’s a little heartbreaking to see tickets being flipped for profit. And the cost of setting the price too high is small: if the tickets look as though they’re not going to sell out, you just run some kind of special offer where people can buy them at a discount for a limited period of time. No harm, no foul.

And what about IPOs? With them, there’s no do-over, and the process tends to be driven very much by big investment banks with more than half an eye on their reputation in the equity capital markets. They care about making money on every deal, but they care much more about getting a healthy stream of fee income from future deals. While the barbecue can overprice its tickets without too much damage, investment banks don’t have the same luxury.

And that’s probably the real reason why there’s an IPO pop. Underpricing the IPO might mean that the issuing company is leaving money on the table — but overpricing the IPO is much worse, as Facebook and its underwriters are still discovering. So banks always err on the side of underpricing. Except, as in this case, when the issuer has too much power, and gets too greedy.

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The world’s most powerful monetary policymaker mentioned fiscal policy 23 times in his prepared testimony before Congress yesterday. The word cloud from Bernanke’s speech pretty much sums it up: Congress, Bernanke argued, has the power to boost the US economy and save us from the dreaded “fiscal cliff”.

If you haven’t been paying attention, Bernanke has spent much of the last few years very politely directing us to fiscal policy, arguing for deficit spending and, in pretty much the strongest language possible for a central banker, has begged for help propping up the economy. Tim Duy highlights something particularly pointed in Bernanke’s latest remarks: “Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain”.

All of which should make Paul Krugman nod approvingly. In his column and blog Krugman argued that “Reagan was a Keynsian” and noted that total government spending adjusted for inflation and population was actually higher under Reagan than Obama. (Donald Boudreaux calls Krugman’s numbers “highly questionable”.)

Fareed Zakaria takes the spending argument a bit further:

For those who think President Obama’s policies have done little to produce growth, keep in mind that the single largest piece of his policies – in dollar terms – has been tax cuts. They actually began before Obama, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008. Then came the stimulus bill, of which tax cuts were the largest chunk by far – one-third of the total. The Department of Transportation, by contrast, got 6 percent of the total to fix infrastructure.

To which President Obama basically replied today: “Blame Congress”. In a press conference, Obama once again called for Congress to pass the jobs bill he first proposed in September. – Ryan McCarthy

On to today’s links:

Mysteries Explained
Chaos versus order: A unified theory of Muppets – Dahlia Lithwick

Regulations
The Fed boldly demands that US banks comply with minimum international capital standards (by 2019) – WSJ

New Normal
Overdraft fees cost Americans an estimated $29.5 billion in 2011 – Pew Trusts

EU Mess
Spain expected to request bank bailout from EU on Saturday – Reuters
“Spain’s banks now own 67% of the country’s bonds”, the largest proportion in the euro zone – NYT
What the Soviet Union breakup can teach us about the euro zone crisis – Bloomberg
Member states went wrong by ceding the right to print money to the ECB – George Soros
Martin Wolf eviscerates the German finance ministry – FT

Charts
Why you should want interest rates to rise, in one chart – Bespoke Investment Group

Alternative Currencies
Bitcoin’s volatility has all but disappeared – Ars Technica

Knock Offs
The Chinese secretly copy a quaint, historic Austrian village – News 24

Memes
The Big Mac Index moves to academia – The Economist

Data Points
France, Italy and Germany each have more than $25 billion in net outstanding CDS – Sober Look

Rumors
Mashable is reportedly preparing for a sale to CNN – BI

CNBC has a breathless report from Maria Bartiromo today, under the headline “UBS May Have Facebook Trading Loss of $350 Million”:

UBS is sitting on losses that could be as high as $350 million stemming from its investment in the Facebook initial public offering, and is preparing legal action against Nasdaq as a result, people familiar with the matter told CNBC…

These people said UBS wanted 1 million shares, but when it did not receive confirmations, it repeated the order multiple times and was left with much more than it intended…

Apparently, UBS tried to unload the stock at $35 a share, but could not catch a bid and sold some of the positions under $30 a share.

The math here just doesn’t add up. Let’s say that UBS put in an order for 1 million shares, didn’t get a confirmation, so canceled the first order and put in a second order. And then didn’t get a confirmation for that, either. Let’s say it did this, oh, half a dozen times in all. And that each time, the order went through but the cancelation didn’t. Which would mean that UBS ended up with 6 million shares at the opening price of $42. And then sold them all at an average of $33. That’s a loss of $9 per share times 6 million shares — which works out at $54 million.

So, where does the other $300 million come from?

The fact is that if UBS ended up losing anywhere close to $350 million on Facebook stock, it has no business being in the equity capital markets at all. On the day of the IPO, it makes perfect sense that UBS put in orders to buy stock, since it was surely receiving orders from its clients. And I can also believe that due to Nasdaq glitches, UBS might have ended up buying more stock than it wanted.

But if UBS only had orders for 1 million shares from its clients, and it found itself with many more shares than that, it was incumbent on UBS to sell the excess stock — immediately. UBS has no business holding millions of shares of Facebook on its balance sheet for no good reason other than that Nasdaq made a mistake.

What’s more, it was abundantly clear on that first day of trading that Morgan Stanley would buy back as the market wanted to sell, at the IPO price of $38 per share. If UBS had more shares than it wanted, there was a willing buyer at that price.

So what happened? Kid Dynamite has got some screenshots from Twitter, which show that UBS was buying aggressively in the market, at 11:40am, at $40 per share. To the tune of some 86 million shares 860,000 shares. Anything from 11:40am onwards can’t be attributed to Nasdaq glitches, it’s a simple bet that Facebook was going up rather than down.* By Monday morning, UBS advertised more shares traded even than Morgan Stanley — over 100 million in total.

The most likely thing, here, is that UBS simply bollixed up its Facebook trading strategy in the worst possible way, going massively long at exactly the same point in time as everybody else was going massively short. It was a bold and enormous bet, and like many bold and enormous bets, it wound up going spectacularly wrong. But if that’s what happened, you can’t really blame the Nasdaq. After all, if the bet had worked out, and Facebook stock had soared, you can be sure that UBS — and its traders — would be taking full credit for their genius and prescience.

*Update: Apologies to UBS, the screenshot shows actual shares for sale, not lots of 100 shares as Kid Dynamite first assumed. And there were some Nasdaq glitches even after 11:30am. But the fault here still looks as though it lies at least as much with UBS as it does with the Nasdaq.

Last week, the Economist’s Ryan Avent sparked a storm in a Twitter teacup with this tweet:

Fun: when googling turns up an Economist piece BI ganked wholesale, without asking and with no link. bit.ly/KsTbQJ

— Ryan Avent (@ryanavent) May 30, 2012

It turned out, over the course of the ensuing conversation, that Business Insider’s material from the Economist — and from Reuters, for that matter — is legally syndicated to TBI through a deal with a company called NewsCred. There’s nothing illicit going on here; it’s just that as ever in big news organizations, the editorial side is generally the last to find out when deals like this are done.

I had a very interesting lunch with NewsCred CEO Shafqat Islam a couple of days ago and his company seems to be very good at signing up publishers. Just about every major publisher you can think of has a deal with NewsCred now; the NewsCred homepage features the Guardian, Project Syndicate, and many others, and Islam talked to me about everyone from the FT to the NYT coming on board as well.

There are two big trends that NewsCred is latching onto here. The first is that publishers are increasingly desperate for revenues, and if someone comes along and offers them essentially free money, they’re much more likely to say yes. And the second is the way in which brands are becoming publishers in their own right: rather than buying ads adjacent to published content, they find it easier and more effective to simply publish that content themselves. If you look at the list of NewsCred clients, yes, it includes Business Insider and Huffington Post. But it also includes Orange, and Pepsi, and Johnson & Johnson, and Zurich Re. None of these brands has any interest in selling ads against content, as Business Insider and HuffPo do. Instead, they want to create websites which are full of interesting, high-quality, relevant content. Producing that stuff is hard; syndicating it from NewsCred is easy.

For journalists, this new income source could hardly come at a more welcome time. Islam told me that if I wanted to syndicate my blog through his platform, I would probably get at least $500 per customer per month, and more if the customer was a big news site. He reckoned he could quite easily find 10 or 20 customers wanting to use my content — which raises the prospect of a $10,000-per-month income stream, just for my blog alone. There aren’t many bloggers, journalists, or publishers who are going to be comfortable turning down that kind of money. Even if Islam was blowing smoke a little as to how much money my blog might be able to get, the fact is that blogs have real value on the syndication market, now, and it’s silly for bloggers not to realize that value.

I’m a fan of syndication — I’ve been doing it for free for many years now. My posts can be found at Seeking Alpha, where I have 59,383 followers; at Wired; at CJR; even at Business Insider. Most of those BI articles are just excerpts and links to my Reuters blog, but occasionally someone at BI will ask if they can run a post in full, and I say yes. As I do to most other people who ask me nicely. And it works the other way too: in September I ran a post from Henry Blodget on this blog.

But all of those deals were done front-of-house, as it were, between me and the editorial staff at those other publications. The big difference with NewsCred is that the deals are done back-of-house, by biz-dev types, who are out to maximize revenues, and who often don’t even bother informing the editorial staff what they’re doing. Islam told me that he thinks he should start reaching out more to the editorial side; I think that’s a great idea. The more they’re on board with this kind of thing, the happier everybody will be.

Syndication of news stories in general and blog posts in particular does have its problems. Islam told me that he doesn’t run into a lot of SEO problems, but let’s take a sentence at random from the story Avent tweeted — “So a falling stock price demographic scenario presumes that younger generations are more risk-tolerant” — and google it. Here’s what I get:

The top article is from BI; the second is a crappy spammy blogspot site; the third is spammier still; and the link to the Economist, the fourth result in the list, ends up directing to a very odd domain, dr.economist.com, and doesn’t actually link to the original blog post at all. Obviously, the Economist needs to work on its SEO. But equally obviously, the more that your stuff gets syndicated, and the more it gets syndicated to high-profile sites, the less likely your own site is to be the top search result for your own content.

The second problem is that comments streams end up appearing all over the shop: Ryan’s the original post* has 19 comments, for instance, while the BI version has 32 — none of which Ryan its author is likely to ever see. There are tools like Disqus which allow the same post to appear in different places and still have one set of comments, but it’s not clear that NewsCred supports them, or can mandate their use, and in any case many original publishers don’t use those tools.

A third problem lies with updates. If Ryan comes back and updates or corrects his the post, it’s far from clear how or whether those changes would ever make their way through to BI and other sites which syndicated the original piece.

And then there are simple technical glitches. Ryan’s the original post, for instance, prominently features a chart comparing stock p/e ratios over time with something called the M/O ratio — the number of 40-somethings expressed as a percentage of the number of 60-somethings. That chart somehow failed to make its way into the BI version of the story.

More vaguely but also more importantly, there’s also the fact that blogs are a conversation, and that syndicating individual blog posts in this manner fragments that conversation. People will end up linking to the BI post rather than the original Economist version; and in general, people reading the BI post will see it in a context very different from that which was intended. I’ve long said that the unit of quality, for a blog, is not the blog post but rather the blog as a whole. If you regularly take post-sized chunks and syndicate them across the web, the blog loses its coherence. It’s a bit like the way in which pop music moved from being all about the album at the end of the 20th Century to being all about the single in the 21st: the way these things are consumed makes a huge difference.

NewsCred is in the same business as Percolate, in many ways — turning brands into publishers, even when that’s not a core competency — but it cuts against Percolate’s model in that Percolate is built on the idea that it can easily determine when lots of people are sharing the same piece of content on social networks. If that piece of content lives on dozens of different sites, it becomes much more difficult to work out when that’s happening.

Finally, the syndication model means that many decisions which I’m sure that the editorial side would love to make are in fact being made by biz-dev types. For instance, let’s say that a large global financial-services company like Goldman Sachs wanted to syndicate Reuters content, including my blog. The business side here would surely love to be able to do that — but then my blog posts could start appearing on Goldman’s website, creating the impression that I was in some way working for them.

None of these problems are insurmountable — and in many ways I like the idea that thousands of different publishers can spring up, putting together bespoke products for exactly the audience they want, with original bloggers and journalists around the world being paid hundreds of times per piece. It’s a very democratic and decentralized vision of what journalism can be, and it’s rather appealing — especially if it provides a healthy income stream to big publishers as well as small ones. I just wish that these decisions were being made and thought about higher up in the org chart, and especially on the editorial side, rather than invading from the lower reaches of the business side. Because if it’s done badly at the beginning, that could poison the whole model.

*Update: I missed this originally, but the Economist post in question was actually written by Allison Schrager, and not by Ryan Avent.

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America’s big banks are short a mere $500 billion in capital. That’s how much more of a cushion Nobel prize-winning economist Robert Engle thinks is needed for banks to survive another financial crisis. Even more disconcerting is that the shortfall is just $39 billion less than it was before the collapse of Lehman Brothers.

If that isn’t bad enough, Engle’s calculations actually rate European banks as more capital-deficient than their American counterparts – thanks to differing accounting treatment of derivatives. (Morgan Stanley is currently trying to decide what to do with $50 trillion of those.)

In the wake of JPMorgan’s multibillion-dollar botched hedge, there’s something of a bipartisan consensus for stronger bank capital requirements for America’s banks. Even Richard Shelby now thinks the Basel III requirements should be beefed up. Keep in mind that just last fall, Jamie Dimon was calling capital requirements “anti-American“.

It’s a battle Dimon and the banking industry appear to be losing. The Fed has released details of new capital requirements and in doing so has shown it rejected a number of bank requests for favorable accounting treatment. More importantly, of course, the new regulations will require banks to hold more equity. The FT reports that the Fed is also proposing new rules that will require mark-to-market accounting of banks’ securities portfolio. That, too, is likely to force them to raise more capital.

For the total bank nerds, here’s the link to the Fed’s new capital requirements proposal. Enjoy. – Ben Walsh

On to today’s links:

Must Read
The increasingly lucrative business of incarcerating immigrants in private prisons – HuffPost

Long Reads
How two brothers became America’s largest distributors of illegal pain meds – Businessweek

Facebook
Even investors who bought pre-IPO Facebook shares last year are now facing big losses – WSJ

New Normal
Sorry, but Americans don’t actually care about organized labor anymore – TNR
Can unions become relevant again? – Felix

The Fed
Yellen makes the strong case for doing something – Federal Reserve
Lockhart cites “halting and tenuous” recovery, hints at more Fed action – Federal Reserve Bank of Atlanta

Primary Sources
Ben Bernanke pretty much saying the same thing he said in April – Federal Reserve

EU Mess
Spain has a trump card for its inevitable bailout: It’s too big to fail – NYT
Merkel backs a two-tiered EU, with the UK at the margins – Bloomberg
Urban myths: Greek and Spanish depositors moving cash to Germany – Alea

Good Thinking
Remove the motivational quote and JPEG from your email signature immediately – Deadspin

Growth Industries
Twitter already makes more money from mobile ads than desktop ads – All Things D

Ouch
The new Fannie Mae CEO wasted no time in opposing principal reductions – WSJ

Bruce Western and Jake Rosenfeld* have an impassioned plea in Foreign Affairs for the return of unions as a political and economic force. There’s no doubt of a very strong connection between the decline of unions, on the one hand, and the rise of inequality, on the other — and as inequality slowly tears this country apart, the need for a force that could bring the majority of people together has never been greater.

According to their figures, more unionization might reduce GDP growth by a decimal point or two, but could increase compensation for unionized blue-collar workers by between 10% and 20%, while simultaneously improving wages for similar non-union jobs. That seems like a decent deal to me. After all, the lesson of the current recovery is that GDP growth has little value if it’s not accompanied by more and better jobs.

But as the results of the Wisconsin recall election show, Middle America doesn’t trust unions to represent its interests any more. When Western and Rosenfeld say that unions should “take on the challenge of improving productivity and profitability at the local level”, and embark on a “national campaign against inequality”, I think they’re biting off much more than unions can reasonably chew. There’s really no evidence that unions are good at increasing productivity, and neither is there much evidence that unions or anybody else will ever be able to construct a campaign against inequality which really strikes a chord with most Americans.

Joe Nocera, too, has recently rediscovered a nostalgia for the days of unionization, and is right to say that the country would be better off if more jobs were unionized. But in an age where political discourse on both sides of the aisle is dominated by the influence of capital rather than labor, this kind of wouldn’t-it-be-great-if thinking isn’t going to get anybody very far, especially in a world where the idea of a job for life has long since disappeared. I don’t know what a truly modern labor movement would look like, but I’m pretty sure it won’t take the form of a political campaign against something as abstract as inequality.

The fact is that in a globalized world, American workers need their big multinational employers more than the big multinational employers need American workers. One of the biggest secular forces in the decline of labor has surely been the glut of skilled and unskilled workers coming onto the international labor force in recent decades, particularly in China. As a result, I suspect that any truly important next-generation social movement will be profoundly international in nature, and will have to make big strides in China before it has any real effect in the US. Laborers in Chinese factories aren’t just competing with US workers for jobs: they’re also, in a weird way, the best hope those US workers have for real improvements in how they’re treated and paid.

*For people wanting to link to this article: do not copy-and-paste its URL; copy my link instead. And even that will only work until June 18. Foreign Affairs really needs to understand how people share articles, its current system is a nightmare.

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The Fed could do nothing, or it could try to repeat what it’s already done, while remaining vigilant, if things get worse. Reportedly.

Jon Hilsenrath, the WSJ‘s top Fed reporter — whose words have been known to launch the vaunted “Hilsenrally” – reports this morning that “disappointing U.S. economic data” and worries over Europe “have prompted a shift at the Federal Reserve.” As it happens, “the possibility of action” is now back on the table.

If this edition of the Fed’s latest strategic leaking – what Kate Mackenzie calls the “Fed(wire)” –  feels a bit underwhelming, it’s because the Fed has been quite busy over the last four years; its balance sheet has more than tripled since the financial crisis, while inflation has been kept under control and unemployment has remained persistently high.

So what specifically could the Fed do now? For one, Hilsenrath hints at an extension of Operation Twist. Morgan Stanley puts the odds at another round of quantitative easing at a strangely precise 56%. There is also some talk of coordinated global action, in which the Fed would further entice banks to swap their currencies for dollars.

It’s less clear if any of this will help. The WSJ‘s David Wessel evaluates whether the Fed’s post-crisis quantitative easing program has achieved its four main goals: signaling a long period of low rates (success); cutting interest rates for consumers and businesses (success); encouraging investors to buy higher-yielding securities (mixed results); and “pushing the dollar lower, giving exports a lift” (mixed results).

The problem, Wessel figures, is that “with rates already so low and so much else going on, the added benefits of another round of asset buying may be too small to make much difference.” And even if the divided Fed decides to act, Hilsenrath writes, “The Fed’s next meeting, June 19 and 20, could be too soon for conclusive decisions.” – Ryan McCarthy

On to today’s links:

Awesome
“Prospectus for Silicon Valley’s next hot tech IPO, where nothing could possibly go wrong” – McSweeney’s

Regulations
The JOBS Act is helping America by allowing “empty shells with almost no employees” to go public – WSJ

EU Mess
The ECB doesn’t change rates, tells Europe to fix itself and markets jump anyway – NYT
Greece, the cradle of Western thought and where citizens attack tax collectors with whips – NYT
The EU is on autopilot, just like pre-1914 Europe and Cold War weapons systems – Foreign Policy

Compelling
The microinsurance revolution – NYT
How microinsurance fights AIDS – Felix

Regulators
Team America, Risk Police: Ex-regulators form a group to do what current regulators should do – NYT

Takedowns
Can someone please buy David Brooks an intro economics textbook? – Center for Economic and Policy Research

Remuneration
AIG, Bank of America and GE each pay their auditors more than $100 million a year – Bloomberg Ticker

RIP
Ray Bradbury, author of Fahrenheit 451 and The Martian Chronicles has died – io9

Dickensian
Unemployed Brits were bused in for unpaid work during the Queen’s Jubilee – The Guardian

Oxpeckers
5,000 words on why David Simon is wrong about paywalls – CJR

Price Points
Tell HBO how much you’d pay for a stand-alone HBOGO subscription – Take My Money HBO

Yikes
Bill Clinton suggests the US is already in recession – CNBC

What’s one of the best ways to improve the life expectancy of HIV-positive South Africans? Pay them if they die!

Tina Rosenberg has a great piece today about microinsurance in general, and a South African firm called AllLife in particular, which is playing an important role in changing attitudes to HIV — turning it from a perceived death sentence to something much more manageable:

Ross Beerman, AllLife’s managing director, says that clients average a 15 percent improvement in their CD4 count — an immune system marker — six months after buying insurance, whether or not they are taking antiretrovirals (the majority of clients have not yet reached that stage). That improvement may partly be the psychology of seeing their disease in a different way: “If you think you have a terminal disease, you don’t care how you eat and exercise,” said Beerman.

There’s still a stigma attached to HIV in pretty much every country in the world, and South Africa is no exception. AllLife is a way of dragging people out of denial — which is medically disastrous — and giving them an incentive to get tested and really start looking after themselves.

It’s not cheap. In a country where antiretroviral drugs are free, a life-insurance policy paying out $62,500 at death costs $225 per month, which is $2,700 a year. Still, that pricing sends a clear message to the person being insured: we, the for-profit insurance company, don’t expect you to die any time soon. Because if you die any time in the next couple of decades, we risk losing money.

Being HIV-positive can be lonely, and it’s great to have your insurer checking in with you and following up, as AllLife does.

On the other hand, for a typical South African, paying $225 a month, month in and month out, is not easy. And if you have the discipline and resources to do that, maybe you have the discipline and resources to look after yourself on your own, without needing an insurance-company cheerleader. What I worry about, in this model, is the degree to which AllLife’s business model is predicated on the idea that many if not most of its customers will eventually give up paying their premiums, and will never see any payout when they die. Especially since the people who are less good at looking after themselves are precisely the people who are going to be less good at paying premiums, too.

Overall, however, I’m a fan of microinsurance in general and AllLife in particular. Rosenberg’s article ends on just the right note, I think:

One happy side effect of AllLife’s establishment is its impact on the stigma of AIDS. Nongovernment groups can explain over and over that H.I.V. is not a death sentence. But it’s a more persuasive message when a company bets its own money. “We’re saying you don’t have a terminal illness,” said Beerman. “You have a chronic, manageable disease. You’re going to live a long time. And we’ll help you.”

In order to be successful, AllLife needs to send that message not only to its insureds, but to a very broad swath of South Africans who might be persuaded to buy its product. Most of them won’t sign up — but all of them will get the message. And when for-profit companies have a strong incentive to propagate this kind of message, that has to be a good thing, whether the insurers end up succeeding or not.

If you want a three-sentence distillation of Adam Davidson’s latest column for the NYT Magazine, just ask Joe Schwenk, a/k/a @HamptonsBorn, what the biggest secret is about the Hamptons:

Many farm families can sell their land and rake in hundreds of millions. They don’t because they are more interested in maintaining their way of life than making cash. Farm-family-owned land provides the vistas that make this place so special. So when you see a tractor ramble by your backyard, dusting up your custom windows, be thankful — don’t throw a woman’s heel at the windshield.

Or, as Davidson puts it:

There are more than 27 million businesses in the United States. About a thousand are huge conglomerates seeking to increase profits. Another several thousand are small or medium-size companies seeking their big score. A vast majority, however, are what economists call lifestyle businesses. They are owned by people whose goal is to do what they like and to cover their nut. These surviving proprietors hadn’t merely been lucky. They loved their businesses so much that they found a way to hold on to them, even if it meant making bad business decisions. It’s a remarkable accomplishment in its own right.

The ironic thing about both the Hamptons and the West Village — the subject of Davidson’s column — is that they’re expensive and desirable precisely because they still have a significant quotient of these “lifestyle” denizens refusing to avail themselves of the seemingly-obvious property-price arbitrage. Which applies to rentals just as much as it does to farms: Davidson tells the story of Arleen Bowman, who signed a ten-year lease for the Arleen Bowman Boutique in 2002, and is going to lose her space next month. She could have sold that lease in 2007 to Marc Jacobs or some big brand, and made a lot of money by doing so — but she didn’t.

It’s people like Arleen Bowman and Joe Schwenk who make their neighborhoods highly desirable for the 0.1%: they lend charm and character to a place which without them would be just another soulless luxury enclave like Aspen or Palm Beach. John Paulson just spent $49 million for a 56,000 square foot house on 128 acres in Aspen — compare that to the $41.3 million he paid for a 15,000 square foot house on 10 acres in Southampton. Southampton’s more desirable, partly because it’s only a helicopter ride as opposed to a private-jet ride from NYC, but also because it has Mr Schwenk:

Hamptons Request of the Day: Dig out Mr.P’s Palm trees and return to greenhouse down island. Mr.P installs trees just for the season.

— Joe Schwenk (@HamptonsBorn) September 18, 2011

When the 0.1% — or, in Paulson’s case, the 0.001% — hire Schwenk to drive their poodle back to New York City because she won’t fit in the helicopter, what they’re really doing is lording their financial aggression over people who really just want to enjoy living in the place they call home. The ultra-rich believe in profit maximization just like America’s middle classes believe in God and apple pie. And so they phone the people who grew up on what are now multi-million-dollar farms, and order them to fix their ice machines.

America tends not to begrudge the ultra-rich their wealth — not until they see it in ugly, entitled close-up. Joe Schwenk and Arleen Bowman are the kind of people who built America, and who continue to make it the place the ultra-rich want to call home. What Davidson calls “bad business decisions”, I call keeping things in perspective — these are people who would be unlikely to be happier, and quite likely to be significantly unhappier, if they suddenly found themselves in possession of $35 million. And there is something a little depressing about the fact that it’s these middle-class strivers who pay the price for the gentrification they themselves are helping to turbo-charge.