Felix Salmon

Walter Hamilton of the LAT has a big trend story today; since I’m in California last week, I can tell you that it even made the front page of the paper. Here’s the thesis:

Americans worried about running out of money in their golden years are trying a new investment strategy: day trading their retirement funds.

Hamilton’s certainly found a few of these people. The most striking is Vlad Tokarev, a biomedical software engineer from Minneapolis with three different retirement accounts. “He is careful not to take excessive risks,” he says, since “he trades only one-third of his retirement savings.” Tokarev is also known as Vlad T on Amazon, where he asked some detailed questions of Richard Schmitt, who’s published a whole book, entitled “401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day”. Eventually, Vlad left a glowing review of the book, and seems to be following its prescriptions very closely.

But Hamilton gives very little evidence that this is a real trend at all. He mentions the guy with the book, of course, and also the guy with the website. (The book is $50; the website charges $200.) Other than that, there’s the guy who reviewed the book on Amazon, and then there’s one other person.

Joe Hansman, 29, who handles customer complaints at Wells Fargo, shifts money among two conservative mutual funds in his 401(k) and the banking company’s own stock. He trades 10 to 15 times a month, steering money into Wells Fargo’s stock when he expects it to rally for a few days.

This of course confirms everything you suspected about the kind of people who answer the customer-complaints line at Wells Fargo. Hansman really is day-trading Wells Fargo stock, buying before he thinks it’s going to rise, and then selling before he thinks it’s going to fall. The chances of this working out for him are pretty much exactly zero, despite (or perhaps because of) the fact that Hansman thinks he has some kind of inside track on what’s going on at Wells Fargo from answering the phones in its call center.

In reality, the last stock you should ever own in a 401(k) plan is your employer’s stock — you’re far too exposed to that employer already, and the whole point of having control of your own funds is to allow yourself to diversify. But this obvious fact, underscored by the Enron debacle, seems to be curiously lost on the good employees of Morgan Stanley:

Current and former Morgan Stanley employees, who receive company shares to match their 401(k) contributions, held 24 percent of retirement assets in the firm’s stock before last year’s decline, the highest percentage of any of the banks. They lost $570 million in 2011 as the shares plunged 44 percent…

The bank gives employees $1 of its stock for every $1 put into a 401(k) plan, with a limit of $9,800 a year. Once they receive the shares, employees are free to move the funds into investments other than the stock.

This actually gives me grounds for hope. Morgan Stanley employees, who can be assumed to be reasonably sophisticated about matters financial, turn out to be just as path-dependent as anybody else. Put them into something, and they’ll just stay there, no matter how obvious it is that they should move into something more sensible.

As a result, I suspect that day-trading retirement funds is extremely unlikely to actually become a Thing. People just don’t have the time or the self-discipline to do something like that — especially once you find out what’s involved. Because most 401(k) plans deliberately make it very difficult to do this kind of thing, these plans can only really be put into effect if you have two or even three accounts to trade. And if this kind of activity catches on, chances are the fund administrators will put an end to even the existing loopholes. These accounts are designed for buy-and-hold retirement funds, not for trading.

Lauren Young, in a peculiarly gushing video, says that we shouldn’t think of this as day trading, “but as a smart way to rebalance your portfolio”. That just doesn’t make sense to me. Opinions differ on what the optimal frequency is, when it comes to rebalancing: should you do it every six months? Every year? Only when you’re more than 5% or 10% out of whack? One thing I know for sure is that nobody advocates rebalancing on a daily basis.

And there’s a good reason for that. The strategy being advocated by Schmitt basically only works in highly volatile sideways markets, when up days are followed by down days and vice-versa. But the fact is that everybody who’s made real money in the stock market has done so by buying stocks and just holding onto them over the long term, as they steadily rise in value. Sometimes, stocks don’t do that; sometimes they move sideways for years at a stretch. But the point about retirement funds is that they’re designed for the long term — for patient investors who can afford to wait until the market rises. Whereas, with this strategy, the first thing you do when the market starts to rise is that you start selling.

Which brings me to the most profound problem with all these strategies. Because you can’t short stocks in a retirement account, all of these strategies involve moving back and forth, as frequently as once a day, between broad stock funds, on the one hand, and money-market or cash funds, on the other. As a result, over time, you’re going to find your retirement account much more invested in cash than it should be. A retirement account is no place for cash.

The phrase “day trading” brings to mind large losses on high-risk strategies. And it’s actually not that easy to engineer big losses if all you do is switch back and forth between a stock fund and cash: you have to try quite hard to buy high and sell low. What you will be doing, however, is ensuring that you’re less than fully invested in the kind of securities you ideally want to own over the long term. And the opportunity cost of that underweight allocation, when compounded over a decade or more, can add up to be something enormous.

The psychology behind day-trading 401(k) funds is not hard to understand. People want a decent amount of money when they retire, they don’t have that much money now, and they’re quite right to suspect that if they just keep their money invested in the S&P 500, then they’re very unlikely to end up where they want to be. So they decide that they’re going to try to take matters into their own hands. David Denby wrote a whole book about this kind of thinking; he called it American Sucker.

But the good news is that we learned, collectively, from the dot-com crash and from the 2008 crisis. Many fewer people, today, believe that they can turn the stock market into some kind of get-rich-quick scheme. And given the enormous obstacles involved in trying to day-trade retirement funds, I’m reasonably confident that 99% of their participants — including Lauren Young — will never even attempt it.

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

Five days after Bob Diamond testified before members of Parliament on the LIBOR scandal, Bank of England deputy governor Paul Tucker had his turn today. He took aim at Barclay’s less-than-subtle insinuation that in 2008 he all but asked the bank to submit artificially low rates. Tucker told the House of Commons that he was only warning Barclays not to spook the market by indicating it would borrow at elevated rates: “I was plainly talking about their money market activity”.

That conversation, Tucker said, came the day after Barclays refused to accept fresh capital from the UK government and he wanted to understand what the bank’s plan to instill confidence was, exactly. Tucker went on to say that he had similar conversations with non-LIBOR submitting financial firms. “Absolutely not” was Tucker’s immediate reply when asked if he or any other government official ever pressured banks to lower their LIBOR submissions. (Tucker’s full testimony is available here.)

As Felix noted earlier, what Tucker “meant … is that Barclays should do whatever it took to improve its reputation with other banks, so that they would lend to Barclays at lower rates. And yet the corrupt Barclays operation, including Jerry del Missier, reckoned that it would be easier to just go back to their old sordid ways, and nobble the Libor fixings instead”. That culture of deception has caught the eye of EU regulators, who are now readying their response to the scandal:

Michel Barnier, the EU commissioner overseeing financial services, will amend reforms to EU market abuse rules so that potential “loopholes” are closed and criminal sanctions specifically cover tampering with indices such as Libor and Euribor. Mr Barnier called the falsification of such benchmark rates a “betrayal” with potentially “systemic consequences”.

Holman Jenkins thinks the parsing of emails and secondhand misinterpretations of phone calls is just the latest evidence of the too-big-to-fail problem: No central banker or regulator has wanted to pull back the curtain and expose the continuing failures of large financial systems. That’s as big a problem as bankers behaving badly. – Ben Walsh

On to today’s links:

Problems
Patents: a multibillion-dollar business that’s less and less about invention – WSJ
“10% of Medicare beneficiaries who received hospital care accounted for 64% of the program’s hospital spending” – WSJ

Wonks
After a crisis, we feel the need to “maintain the illusion that the world is understandable” – Guardian

EU Mess
Things look even bleaker after another pointless EU summit – Forbes
Greeks underreported €28 billion in income in 2009, enough to cut the deficit by a third – WSJ

New Normal
Credit scores as de facto segregation – WaPo

Tax Arcana
Obama to propose a one-year extension of Bush tax cuts for Americans earning under $250k – NYT
Investors are really not worried about the fiscal cliff at all – Business Insider

Moving Your Money
Racehorses: an attractive investment opportunity (for drug cartels laundering cash) – WSJ

Long Reads
Amazon, the vampire squid of ecommerce: “People complain about conflicts of interest. But you still have to do business with them” – FT

Ugh
Day trading is the hot new way (again) to boost retirement funds – LAT
“An adjunct professor at a third-tier school hawking an overpriced get-rich-quick scheme with clever slogans? Don’t miss this” – Gawker

Must Read
Albrecht Muth and Viola Drath: odd couple and D.C.’s latest social Ponzi schemers – NYT

Old Normal
NYC before AC, where wearing shorts instilled fear of arrest for indecent exposure – New Yorker

Primary Sources
The Bob Diamond-Paul Tucker emails – John Mann MP

Politicking
Romney donor: “I don’t think the common person is getting it … the baby sitters, the nails ladies” – LAT

Oxpeckers
“The newspaper industry looks a lot like, well, steel, autos and textiles” – NYT

Sad
Gabriel García Márquez’s writing career ended by dementia – Guardian

Back on June 21, I looked at the plan from Mortgage Resolution Partners to use eminent domain to buy up underwater mortgages. I wasn’t very impressed, and now that the dust has settled a bit, it increasingly looks as though the scheme — at least as currently designed — is going to end up going nowhere.

San Bernadino, which seemed to be very interested in the idea originally, is now backpedalling:

“We see it as intriguing, but it’s definitely not something we’ve decided to do,” says San Bernardino spokesman David Wert. “We just wanted to get all the information and see if it might actually work.”

And most importantly, a grand coalition of powerful interest groups has released a strong broadside saying that MRP’s plan is a really bad one. Check out some of the names here: The American Bankers Association, the American Securitization Forum, the Association of Mortgage Investors, the California Bankers Association, the Community Mortgage Banking Project, the Mortgage Bankers Association, Sifma, the Financial Services Roundtable — it’s an impressive list, and at this point it’s pretty much impossible to find any institution which supports the idea, other than those directly involved.

The letter from the various interest groups does not, in truth, make particularly compelling arguments. For instance:

If eminent domain were used to seize loans, investors in these loans through mortgage-backed securities or their investment portfolio would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas.

This is pretty silly stuff: the fact is that nearly all new mortgages in San Bernadino and across the country are being financed by the government, and insofar as there is a little bit of private-sector financing, it’s probably not coming from people who bought subprime CDOs at the height of the bubble.

But really the point of the letter isn’t to make an argument: it’s to make a point. Two points, really. Firstly, there’s the word “unconstitutional”, which appears very high up. That’s code for “we’re going to appeal this thing all the way to the Supreme Court, so you’d better be willing and able to spend an enormous amount on legal fees.”

And secondly, the letter sends a very clear message that CDO investors are not on board with this scheme. And that’s the thing which ultimately will result in its death.

In principle, a plan like this could be put together in a way that investors could get behind. But it wasn’t, and MRP got greedy, and as a result it’s not gaining traction: just this morning, for instance, the LA Times came out against it.

The problem, at heart, is that MRP is looking to buy up only seasoned, performing mortgages: precisely the ones which are worth the most money, and which don’t present much of a systemic danger to the San Bernadino housing market. We’re talking here about loans which were made during the height of the bubble, on homes which have since plunged in value — and yet the homeowners have diligently made all of their payments on time. If I’m a mortgage investor holding a portfolio of mortgage loans, these are the ones I love — they’re the ones which help to offset the fact that so many of my other loans are in default. Yes, it’s true that I will have written down the value of my holdings on the grounds that my mortgages aren’t worth as much, in aggregate, as they were during the bubble. But that doesn’t mean that I’m valuing the performing loans at deeply-discounted rates. Quite the opposite, in fact: many of them are worth more than par, trading at about 106 cents on the dollar, just because the interest rates are high and the underwater status of the loan means that it can’t be refinanced.

MRP, by contrast, wants to pay vastly less than par for these loans. To use Kathleen Pender’s example, where a homeowner owes $300,000 on a house now worth $200,000, MRP might pay $170,000 for the loan. Which works out at just 57 cents on the dollar. That’s a highly-distressed price for a performing asset, and I can definitely see that MRP would have a huge amount of difficulty persuading the court that it was a fair price. After all, the only way you get to such a price is by assuming that there’s an extremely high probability of future default — despite the fact that the homeowner has remained current through the largest financial and housing crisis in living memory.

There’s a very big collective action problem in the distressed-mortgage world, and in principle the use of eminent domain is just what the doctor ordered to sort it all out. But I fear that MRP has done everybody a disservice here by putting forward the worst possible use of eminent domain: basically buying up precisely the mortgages which no one is particularly worried about. What’s desperately needed here is a plan which CDO investors can get behind. Right now, they own many mortgages they’d love to get out of, but instead they’re holding on to them because the way that the CDOs are structured, they basically can’t be sold and have to be serviced instead, at significant expense, even when they’re deeply in default.

So let’s see an eminent-domain plan which is designed to buy up defaulted properties, rather than ones which are current on their mortgages. Let’s see a plan which buys properties themselves, rather than just the liens on those properties. And most importantly, let’s see a plan which is constructed by the owners of CDOs, rather than by a bunch of outside financiers looking for a huge profit opportunity. In principle, there’s a way to do this right. It just isn’t the MRP way.

On Thursday, I looked at the way in which cultural institutions tend to spend a huge amount of money on architecture, even if they would be better off spending that money more directly on their missions. In response, I got a fascinating email from a professor at NYU, asking me about its plan to spend some $6 billion on a hugely ambitious construction project — one which is fiercely opposed by local residents and NYU faculty.

The opposition is predictable, of course: Greenwich Village is as Nimbyish as communities get, and the professors who are railing against the plan are precisely the people who are going to suffer the most from endless construction work and ultimately the disappearance of the views and light many of them currently enjoy. But that doesn’t mean they’re wrong to oppose the plan. As we saw at Cooper Union, ambitious construction projects can be hugely damaging to colleges — especially ones which don’t have a large endowment to fall back on.

At Harvard, the empire-building of Larry Summers resulted in a disaster — but at least the endowment is huge enough that if Harvard loses $1.8 billion, it’s not the end of the world. At NYU, by contrast, the size of the endowment is significantly smaller than the budget for the university’s expansion. And as a result, the whole project is significantly riskier. If NYU ends up having to dip into its endowment to fund losses on this project, then that could be hugely damaging for an institution which is already under-endowed by the standards of most top-tier US colleges.

The situation at NYU Is, I think, the flipside of the saga we just saw at the University of Virginia. There, a popular president found herself at odds with trustees who had been successful in the private sector; at NYU, the faculty is similarly opposed to the plans of the trustees, but in this case the president is very much aligned with what the trustees want.

In both cases, it seems, the faculty seems pretty happy with the state and status of the university as it stands, and are looking for low-risk stewardship. The trustees, by contrast, are much more aggressive, and are looking for growth and full-bore engagement in the higher-education arms race known as Bowen’s Rule. Here’s how Howard Bowen put his five-point rule in 1980:

1. The dominant goals of institutions are educational excellence, prestige, and influence.
2. In quest of excellence, prestige, and influence, there is virtually no limit to the amount of money an institution could spend for seemingly fruitful educational needs.
3. Each institution raises all the money it can.
4. Each institution spends all it raises.
5. The cumulative effect of the preceding four laws is toward ever increasing expenditure.

On top of that, there are many New York-specific idiosyncrasies involved in the NYU plan. NYU is nestled in the heart of downtown New York, on some of the most valuable land in the world. That makes expansion insanely expensive, of course — but it also raises opportunities for a higher-education form of regulatory arbitrage.

New York has strict and recondite zoning laws, which are largely responsible for the value of any given plot of land. Take a site in Greenwich Village: if all you’re allowed to build there is a few townhouses, it’s going to be worth a fraction of its value if you’re allowed to erect a 40-story hotel. Every so often, zoning is changed, normally in the direction of allowing more development. When that happens, the people lucky enough to own the land in question make windfall profits.

This dynamic helps explain the way in which property developers are deeply enmeshed in city politics — and it also, I think, helps explain a lot of NYU’s behavior. NYU, quite aside from being an educational non-profit, is also the largest property developer in downtown New York. And with this plan, it’s trying to change the zoning for a lot of the Washington Square area in a way that will, if all goes according to plan, essentially drop a huge pile of money in the university’s lap. Hence the proposals for things like hotels and retail: they’re not allowed right now, and if they do become allowed, NYU fully intends to build such things and make substantial profits from them.

This isn’t a stupid plan. It makes sense, if you don’t have a $30 billion endowment throwing off huge amounts of cash every year, then you look for income in other places.

On the other hand, when a university turns property developer that’s decided mission creep — and it’s mission creep accompanied by billions of dollars in debt. Property magnates generally do really well for themselves — until they don’t. And here’s where you can see the cleavage between NYU’s trustees and its faculty. The trustees tend to be successful businesspeople — people who have had the requisite combination of risk appetite and luck that’s necessary to make lots of money. And rich people have another characteristic, too: they nearly always overestimate the amount of skill and underestimate the amount of luck which went into their success. Plus, they think that success is somehow infectious: if they’ve made their millions through levering up, then that’s probably a good strategy for the non-profits whose board they’re on, too.

On top of that, the president-and-trustee class of people has a natural tendency to want to build monuments to themselves, as well as a certain emotional detachment when it comes to empathy with other people. They’ve seen the plans: the architects have shown them glossy pictures of what Greenwich Village is going to look like in 2031, but they don’t really feel the amount of noise and pain involved in getting there from here. They don’t live in Washington Square Village.

And most importantly, they don’t need to rack up enormous student loans just to attend NYU in the first place. Here’s the chart, from the NYT’s excellent infographic on university tuition and student debt:

You can see from this chart that while there are lots of colleges which charge NYU-level tuition fees, NYU is among the very worst of them in terms of the amount of debt its students are burdened with upon graduation. That’s partly because it has a relatively small endowment, and therefore can’t offer the level of financial aid that, say, Princeton can; it’s also, of course, a function of the fact that New York is an incredibly expensive place for a student to live. But either way, if NYU cared about its students as much as it cares about its reputation, it would be searching hard for ways to decrease the debt they’re graduating with.

Instead, NYU is embarking on a building plan which will almost certainly, in one way or another, feed through into higher tuition fees and higher levels of student debt at graduation. After all, tuition fees are a hugely important source of income for NYU, and NYU is going to need all the income it can lay its hands on if it’s going to be able to pay off the loans it takes out to construct all these new buildings.

I’m no preservationist stick-in-the-mud: I think that cities need to evolve over time, and that if Greenwich Village had a bit more density, New York would cope just fine. I also carry no torch for things like “the acclaimed Sasaki Garden”, which turns out to be a bunch of concrete planters which are all but inaccessible to real New Yorkers. If NYU wants to replace that garden with something better, I’m all ears.

But I do think it’s worth asking some pointed questions about who exactly all this construction is supposed to benefit. It’s certainly not the current students, who will be long gone by the time it even gets started. It’s not the current faculty, whose lives will be disrupted and who are almost unanimously opposed. And there’s a strong case that it’s not future students, either, who will see even higher tuition fees and I’m sure won’t welcome the extra student loans they’re going to have to take out.

Universities will always have plans to expand — and indeed NYU already has campuses in no fewer than four different countries. Before embracing this particular plan, then, it might be worth looking at the history of previous university expansion projects, and asking whether they actually delivered on the promises they made at this point in the process. Because the costs of this particular project seem a lot more obvious than the benefits do.

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

On June 27, Bill Johnson, the CEO of Progress Energy, signed a contract to become the next CEO of Duke Energy. On July 2, the year-and-a-half-old merger agreement between Progress and Duke closed with the stipulation that Johnson would become the new company’s CEO.

Yet, on July 3, Johnson’s resignation was announced. Here’s how Duke Energy explained what happened in its regulatory disclosure:

On July 3, 2012, Duke Energy announced that Mr. Johnson has resigned from all of his positions at Duke Energy and will no longer serve as President and Chief Executive Officer of Duke Energy or as a member of Duke Energy’s Board of Directors…effective as of 12:01 a.m. on July 3, 2012… Also, on July 2, 2012, the Board reappointed Mr. James E. Rogers as President and Chief Executive Officer of Duke Energy, effective as of 12:01 a.m. on July 3, 2012, in addition to his role as Chairman of the Board.

Yes, you’re reading that right: Johnson served only one day as CEO. Here’s Dealbreaker’s Matt Levine: “I have no way of researching this but I’ll go out on a limb and say it’s unlikely that any company has ever previously announced the hiring and firing of a CEO within three paragraphs of each other in the same 8-K”. The WSJ somehow needed to speak to actual sources to make following assertion: “New chief executives almost never quit days after accepting an employment contract, executive-compensation consultants said”.

The former lead director of Progress Energy is not pleased, calling Johnson’s removal “the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street”. S&P is also not pleased and put Duke on a downgrade watch.

Johnson’s ego is no doubt bruised, but on the bright side he’s eligible for $44 million in deferred compensation and pension benefits. This includes a $1.5 million lump sum payment for not disparaging the company that fired him after just one day. – Ben Walsh

On to today’s links:

Primary Sources
US economy adds just 80,000 jobs in June in yet another crappy jobs report – BLS

Jobs
The “simplest way for the government to create jobs is simply for the government to stop firing people” – Felix
Federal job cuts outpacing state, local reductions – WSJ

Data Points
A reminder that today’s much-hyped BLS jobs numbers are very much subject to revision – Politico

Charts
Visualizing Big Pharma’s many multibillion-dollar fines for drug-marketing fraud – Propublica

LIBOR
UK’s Serious Fraud Office decides to investigate possible criminal fraud – WSJ
“The Libor fiasco is the latest black eye for the FSA” – WSJ
“You have two groups of banks … One group is trying to pull LIBOR up, the other is trying to pull LIBOR down” – Aleph Blog
The LIBOR scandal and “the rotten heart of finance” – Economist

Long Reads
Learning to love abstraction: a brief history of money – James Surowiecki

In Vain
RIM cuts vacations, moves to six-day workweek to deliver product that is probably a dud anyway – Ottawa Citizen

Reversals
“I see Microsoft as technology’s answer to Sears” – Vanity Fair

Wonks
Autos and homebuilding will save America from a recession – Pragmatic Capitalism

Disgusting
China arrested more than 800 people for auctioning off babies for $7,800 each – Bloomberg

Confessions
“It’s easier to get people talking about drugs than about insider trading” – Guardian

Barclays is to Liebor as Goldman is to structuring dodgy synthetic CDOs: not the worst offender, necessarily, but the first to hit the headlines.

The Economist has a good overview:

Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average…

Among banks regularly submitting much lower borrowing costs than Barclays were banks that subsequently lost the confidence of markets and had to be bailed out. In Britain these included Royal Bank of Scotland (RBS) and HBOS.

Regulators around the world have woken up, however belatedly, to the possibility that these vital markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world’s biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.

Court documents filed by Canada’s Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in co-operation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS.

And here’s Jonathan Weil:

What’s truly depressing is the thought that Barclays is only the first bank to settle with regulators over the Libor affair. Eventually, when others reach their own accords, similar inquiries will be made of their top officers.

David Merkel has a fascinating analysis of what the various different banks did, and he reckons there was a “tug of war” between two groups of banks. One group, including Barclays along with BTMU, Credit Suisse, HBOS, Norinchuckin, and RBS, was putting in high bids to raise Libor; another group, which included Citi, HSBC, JP Morgan, Lloyds, and Rabobank, was putting in low bids to bring Libor down. But of course given the almost complete absence of interbank lending during the crisis, it’s not entirely obvious whether there was even a “real” interbank offered rate at all.

In any case, when the other shoe drops, the headlines are going to be smaller: this kind of activity is never as shocking the second time around. Look at what happened to Citigroup, which was actually more evil than Goldman when it put together the Class V Funding III CDO. (The profits from Goldman’s Abacus deal went mostly to John Paulson; the profits from the Citi deal went straight to Citi.) Citi settled the case for $285 million — less than Goldman paid — and suffered almost none of the PR backlash that was inflicted on Goldman.

The truth is that Barclays is being hammered here, and its CEO has lost his job, not because Barclays was worse than anybody else, but rather because its employees were stupid enough to leave a written record, in emails, of exactly what they were doing. Similarly with Goldman: it was those emails from “Fab” Fabrice Tourre that really did for the bank. And so it goes, back through Henry Blodget and further. It’s not the act which matters, it’s the contemporaneous documentation thereof.

There will be many very large settlements to come, of course, both directly with regulators and also with clients who can claim to have lost money as a result of the manipulation. But banks can afford large settlements. What they hate is bad PR, and plunging share prices. And every single bank which isn’t Barclays is breathing a massive sigh of relief right now, and thinking “there but for the grace of god”.

Today’s payrolls report was a relatively dull one, showing the same story we’ve seen for the past couple of months: job growth which is barely positive, and certainly isn’t big enough to bring down the unemployment rate or even keep up with population growth.

Go one level down, and you can see the way that the payrolls number is split, between the private sector and the government. This month, the headline growth of 80,000 jobs represented 84,000 new jobs in the private sector, and 4,000 jobs lost in the public sector. And that story — jobs in the private sector growing, while jobs in the public sector are shrinking — turns out to have been in effect basically as long as the recovery has been in place.

The chart above shows the period of the recovery: the years from 2010 onwards when we stopped losing jobs and started gaining them. Or, at least, when the private sector stopped firing people and started hiring people. The government gets the credit, or the blame, for all that job creation. But really, the only job creation that the government can directly control is its own. And since the beginning of 2010, net government job creation is massively negative: we have 536,000 fewer government jobs today than we did in January 2010. (That red spike you see in May 2010 is the census; all those jobs and then some were lost in the following months.) During the same period, the private sector created 4.3 million jobs.

Those lost government jobs are good ones: well paid, with solid benefits. They’re one of the key areas of middle-class employment. And there’s no sign that they’re coming back.

Meanwhile, if you look at the unemployment data, most of the unemployment rates are unchanged this month, with the headline unemployment rate remaining at a woeful 8.2%. But there’s one datapoint which jumps out: the unemployment rate for African Americans soared to 14.4% in June, from 13.6% in May. That’s a number which won’t be lost on Barack Obama, who knows full well that the government is a hugely important source of employment for African-Americans.

In any event, this chart must surely put the lie to anybody who claims that Obama is on any kind of spending spree. Government employment naturally trends upwards, as the population grows and the act of governing becomes increasingly complex. But since January 2009, when Obama took office, total government employment has plunged by 612,000 people. If those people were earning $50,000 each, on average, then that’s more than $30 billion a year in government wages which have been cut.

There’s lots of talk, these days, about how it’s fiscal policy rather than monetary policy which is needed to create jobs and bring down the unemployment rate. That’s true. If the government spent more on important things like infrastructure, that would help create jobs across the economy. But never mind that: the easiest and simplest way for the government to create jobs is simply for the government to stop firing people. The private sector did that more than two years ago. Why can’t the government follow suit?

In 2002, Richard Florida published The Rise of the Creative Class, and created a whole cottage industry of people — himself foremost among them — flying around the country and the world, telling cities how to attract creative people and thereby thrive. In truth, however, these cities didn’t need much persuading. Between 1998 and 2001, expenditure on creative-industry construction projects — theaters, museums, performing arts centers — quadrupled, from a little over $400 million per year to almost $1.8 billion. Here’s the chart, from Set in Stone, a major new research project from the University of Chicago’s Cultural Policy Center:

Clearly, around the turn of the century, cities decided that building new cultural centers was a great idea: in total, American cities spent some $16 billion on cultural construction projects between 1994 and 2008. But was spending those billions good for the creative class, for cities, or for creativity? That’s far from obvious. For one thing, the more money you spend on construction, the less money you spend on people:

Our survey evidence suggests that as a result of investing in projects during this period, many organizations also had to cut staff sizes significantly. The negative relationship between the number of cultural managers and per capita investment may just suggest that capital and labor act as substitutes, thus an organization that invests more in physical capital invests less in labor.

One case study can stand for many, here:

In Roanoke, Virginia, the art museum embarks on the facility planning process with the humble goal of expanding its gallery space, but over time, and partially inspired by the Guggenheim Bilbao, it decides to build a sprawling $68 million architectural landmark so as to redefine the city’s identity and boost economic development. The post-modernist design proves controversial as well as more expensive than originally anticipated. Once the new Taubman Museum of Art opens, attendance is far below estimates, while the cost of operating the new facility is far above them. To balance its books, the museum is forced into multiple rounds of layoffs and drastic increases in its admission charges.

Here in New York, I’ve been following the sad saga of Cooper Union, whose massively expensive new academic building seems to have been the final nail in the venerable institution’s coffin. Essentially, the college took out a monster mortgage to build the project, but projected no extra income that would allow it to make its mortgage payments.

And when I was in Aspen last week, I talked to two different museum directors, both of whom have very shiny brand-new buildings, about the whys and wherefores of embarking on such massive projects. One of them, in particular, admitted to me that the amount of money and effort that was poured into architecture was difficult to justify when looked at from the perspective of his institution’s mission. But he said that raising money for a new building was vastly easier, always, than raising money for an endowment, or for general operating expenses.

Which is not to say that it’s easy. “In our sample,” says the report, “the number of leadership transitions that occurred from the time the project was initially proposed to when it opened its doors to the public was striking”.

This is not surprising. Big architecture tends to be accompanied by big egos — the architects, the board members writing the big checks, the museum directors with outsize ambitions, the municipal burghers wanting to make their mark, and so on and so forth. Missions are easily subsumed to a general feeling that if something new and shiny enough is built, massive crowds and critical acclaim will automagically appear.

Buildings have names slapped on them, and you can see the money in a way that you can’t if you’re spending on things like curatorial staff or acquisitions or touring budgets or insurance. Most other forms of arts spending feel ephemeral, in a way that putting up some huge edifice doesn’t. Even if the money spent on that edifice would much better serve the mission of the institution in some other way.

What’s more, there’s something naturally ponderous about non-profit institutions housed in some kind of Big Architecture. Here in New York, for instance, consider Zankel Hall, the $72 million project to create a more intimate sibling for Carnegie Hall, which was designed to attract a younger, cooler, crowd. And then compare it to Le Poisson Rouge, a minimally-redesigned nightclub downtown, which manages to put on equally exciting programming at no higher prices, all while being run on a for-profit basis. All too often, if you build something expensive, all you really create is new layers of administrative headaches and bureaucracy.

That said, there are few major civic institutions which don’t live in grand buildings. Constructing something showy is a statement of ambition and intent — one which doesn’t always work out as planned, but which is probably a necessary precondition if you want to lay the foundations for a major arts organization which will last for many decades and which will have a national or international reputation. Maybe we should look at all this construction much as a portfolio manager might: there will be winners and there will be losers, but overall it has surely been a benefit to the nation. And frankly, $16 billion over 15 years is a pretty low sum — less than a dollar per US household per month, most of which was donated by rich philanthropists who would otherwise have given much less.

That’s the real reason that cultural institutions build, I think: directors reckon — rightly — that a large part of the money is additional to what they would otherwise receive, and that if they don’t build, they’ll never get it. When the philanthropically-inclined rich decide that mission-building is more important than edifice-building, that will change. I’m not holding my breath.

(HT: Badger)

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

How’s this for uncanny timing? Central banks in Europe, the UK and China all decided to actually do something about the slowing global economy today. As the NYT notes, these moves somewhat magically happened in the span of an hour.

ECB President Mario Draghi denied any sort of central banking master plan: “On coordination, no, there wasn’t any”. Still, the European Central Bank cut rates to a historic low of 0.75% from 1%; China cut its main interest rate by 31 basis points, to 6%; and the Bank of England announced it would buy $78 billion worth of assets. (David Keohane has the respective releases here.)

The ECB’s move gathered the most attention, if only because Spanish and Italian bonds got trounced after Draghi’s speech announcing the rate move today. Economist Dario Perkins saw the ECB’s move as mostly about optics: “It appears some ECB members wanted this trivial move to be a reward for politicians ‘doing the right thing’ at their recent summit. If that’s the case, it’s a silly, highly political way to run monetary policy.” The WSJ‘s Charles Forelle summed it up this way:

@CharlesForelle: ECB summary: Plenty of monetary-policy easing, no hint of philosophical easing. The ball is still in Germany’s court

Sober Look notes that, at least from a balance-sheet perspective, the ECB’s approach has been shifting: In just over a year, the ECB’s lending to banks has doubled as a percentage of its balance sheet.

But the most pressing issue is that the ECB’s latest actions, which also included cutting the deposit rate to zero, are well short of what’s needed. Given the worries of a global manufacturing slowdown, central banks may quickly realize that Europe’s platitudes about growth pacts and a still quite undefined banking union are not enough. Here’s Nouriel Roubini:

@Nouriel: Trifecta today of monetary easing / policy rate cuts: PBOC, BOE & now ECB. A clear sign of how weak global growth is & how worried CBs are

– Ryan McCarthy

On to today’s links:

Barclays
Bob Diamond says he felt “physically ill” after reading LIBOR-fixing emails – Guardian

Crisis Retro
The credit bubble, not the housing bubble, boosted GDP before the crisis – Tim Duy

The Good News
Healthcare spending is no longer growing like crazy (for now) – WSJ

Crisis Retro
Angelo’s many friends: Countrywide made hundreds of “VIP” loans to buy influence – House of Representatives

TBTF
“Banks Prove That They Are Not Too Big To Fail By Saying ‘We Can Fail’ On A Piece Of Paper, Moving On” - Dealbreaker

Governance Lite
Silicon Valley, where “it is not the board’s role to offer counsel or advice” – DealBook

Hackers
How Anonymous evolved into a leaderless “self-appointed immune system for the Internet” – Wired
Why the Stuxnet virus attack on Iran will come back to haunt the US government – NYT

Emerging Markets
Credit is easy to get…in Bangalore, from dentists – NYT

Apple
Get ready for a smaller, cheaper iPad in September – WSJ

Politicking
WSJ editorial page: Romney campaign “looks confused in addition to being politically dumb” – WSJ

MF Doom
Jon Corzine reportedly “haggard and unfocused”, subsisting in some sort of Hamptons exile – NY Post

Wonks
The origins of misbehavior (and not just at Barclays) – Stumbling and Mumbling
On “the handoff” from manufacturing to housing – Calculated Risk

Here’s a reminder, from Stephanie Clifford, of just how two-tier the US economy has become:

Walmart says the majority of in-store purchases are made with cash or debit cards, and that about 15 percent are made with credit cards.

I wrote on Monday about the downside of painless payments, which is that they make it too easy to spend money. And customers at Walmart, it seems, are acutely aware of that particular syndrome.

Megan McArdle moved to a no-debts, no-credit-cards personal-finance system in 2009, where you set up a detailed budget and put cash in different envelopes. “It sounds unbearably tedious,” she wrote. “But it’s actually incredibly freeing. I have never before felt like I had total control over my money”.

This is the downside of any payments revolution: the easier and cheaper it is to spend money, the less control we have over our own spending. Which in turn means that ultra-convenient payments, probably using your phone in some way or another, are realistically going to be a luxury for the middle classes and a cause of stress and danger for families living paycheck-to-paycheck.

Such families, it turns out, are very good — by necessity — at budgeting. Being forced to pay for everything with cash, or with its plastic equivalent, the prepaid debit card, is not an inconvenience so much as a helpful discipline. There are debt instruments out there, for emergencies — but credit cards aren’t used as a payments technology, because they make it far too easy to get into expensive debt without even realizing you’re doing so.

Clifford’s story, about the increasing number of people paying for things online and then picking them up in person, talks a lot about convenience: a Sears spokesman, for instance, is quoted talking about customers’ “need for immediacy”, while a chap from the Container Store conjures up a mom running errands with kids in the car, who just wants to pick stuff up and move on.

But it seems to me that the convenience here runs just as much the other way. Yes, there are people who are shopping online, who want whatever they just bought, and who want it now. These are people who would be shopping online anyway, and who just don’t want to wait to get their goods.

But there are many more people, I think — in number if not in purchasing power — who limit themselves to cash or its functional equivalents, and who welcome the idea of being able to browse and shop online. Shopping at Walmart is never exactly fun, and if you can just punch in an order online — especially if you can simply re-enter your family’s regular weekly shopping list — that saves time in the store and also makes it less likely that you’ll be tempted by some impulse purchase. This kind of customer isn’t using a different fulfillment channel for what would otherwise be a regular online order; instead, they’re basically just using a more convenient way of picking out the stuff they want at a store they’d visit anyway.

At Walmart, clicking the “pay with cash” option doesn’t literally mean you’re going to pay with cash:

In the first weeks of the cash option, Walmart noticed that a different set of customers also found the service appealing. About 40 percent of the customers who paid with cash when ordering online ended up using noncash options, like a credit card or check, when they arrived at the store. They simply had not wanted to provide that financial information online. “There’s still a large segment of people out there afraid of identity theft or just plain putting their credit card online,” Mr. Anderson said.

My gut feeling here is that although fear of identity theft might be part of what’s going on, another part is simply good financial self-discipline. If you want to keep track of where your money is, and if you want to minimize temptation, a “never buy anything online” rule is simple and effective. If you can enter a card number online to pick goods up at a store, then you can enter the same card number online to buy things from just about any website in the world. And many people simply can’t afford to open themselves up to those kind of opportunities.

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

In January, Mitt Romney released his 2010 and 2011 tax returns. Disclosing his 13.9% effective tax rate for 2010 didn’t make the issue go away. Now, Vanity Fair‘s Nicholas Shaxson has a fascinating deep dive into the arcana and ambiguity of Romney’s tax records: “The assertion that he broke no laws is widely accepted. But it is worth asking if it is actually true. The answer, in fact, isn’t straightforward.”

Shaxson details Romney’s stake in a series of inscrutable offshore corporations, one of which, Sankaty High Yield Asset Investors Ltd, is particularly hard to decipher, partly because it was absent from several Romney financial disclosures before he finally disclosed it in his 2010 tax return.

And the blind trust that the Romney camp cites to deflect questions about potential conflicts of interest? It invested $10 million in a hedge fund co-founded by Tagg Romney. The trustee, Romney’s personal lawyer R Bradford Malt (yes, that’s his actual name), explains his investing philosophy by saying that he “liked Solamere because of its diversified approach and because he knew the founders”. There are also a now-closed Swiss bank account and continued interest in at least a dozen Cayman Islands-based Bain funds. Those funds form a large portion of Romney’s multimillion-dollar IRA. How could the IRA have grown to as much as $102 million if the maximum annual contributions were normally just $2,000? Probably by putting artificially low valuations on the securities the Romneys put into their tax-free retirement accounts in the first instance.

The issue for Romney appears to be about more than just his low effective tax rate or the many other details that were pulled from his disclosures in January. After all, many Americans pay low effective tax rates, but precious few have made such deft use of the tax code or even have the ability to. He’s not just in another tax bracket, he’s playing a different game. – Ben Walsh

On to today’s links:

Defenestrations
Bob Diamond quits as head of Barclays over rate-fixing scandal – BBC
“Behold, the British establishment, panicked” – BBC
“If Diamond had showed up in the company gym, someone would have clocked him” – John Carney
Can Barclays be salvaged? – Felix

Primary Sources
Full Barclays memo on the LIBOR scandal: COO believed BOE instructed bank to lower LIBOR rates – Barclays

TBTF
Big banks finally release “living wills” – FDIC

Disgusting
The CEO of Exxon blames an “illiterate” public and “lazy” journalists for exaggerating climate change – Indystar

JPMorgan
“It said financial adviser on my business card, but that’s not what JPMorgan actually let me be” – DealBook

Alpha
Meet the investor whose fund could make $300 million betting against JPMorgan’s failed hedges – Bloomberg

Tax Arcana
Mitt Romney made $68,000 speaking to a hedge fund in 2010 – Business Insider

Polemics
“Lawmaking is The Wire, not Schoolhouse Rock”: the limits of open data – Crooked Timber
A lament against “big data” and physicists practicing economics – Mark Thoma

Old Normal
Debtors’ prisons are back – including for scofflaws – NYT
Jailed over a $280 medical bill – Huffington Post

Silver Linings
One possible upside from yesterday’s bad manufacturing data: lower energy prices – FT Alphaville

Investigations
JPMorgan under investigation for inflating electricity prices by at least $73 million – FT

Profiles
Attending the opera with Ken Feinberg – NYMag

The resignation of Bob Diamond notwithstanding, it seems that Barclays is sticking to its scorched-earth, if-we’re-going-down-we’re-taking-you-with-us strategy. In its submission to the UK parliament in the run-up to Bob Diamond’s testimony tomorrow, Barclays is very aggressive and not at all contrite.

The submission starts with a statement that Barclays should somehow be viewed in a better light than all the other banks:

The bank has invested nearly £100m to ensure that no stone has been left unturned [in the investigation]. The bank’s exceptional level of cooperation was expressly recorded by each of the Authorities, and was described by the DoJ as “extraordinary and extensive, in terms of the quality and types of information provided” and ”the nature and value of Barclays cooperation has exceeded what other entities have provided in the course of this investigation.” That cooperation has led to Barclays being the first to reach resolution of these issues. It ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation.

It then launches into a long disquisition about the now-notorious phone call between Diamond and the Bank of England’s Paul Tucker:

On 29 October 2008, Bob Diamond received a call from Paul Tucker, the Deputy Governor of the Bank of England. The substance of that call was captured by Bob Diamond via a note prepared at the time…

Subsequent to the call, Bob Diamond relayed the contents of the conversation to Jerry del Missier. Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to Jerry del Missier. However Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high and he therefore passed down a direction to that effect to the submitters.

All we know of the phone call is Diamond’s contemporaneous note of it, preserved in a fuzzy photocopy.

This is Barclays’s none-too-subtle attempt to finger the Bank of England in the whole sordid affair, implying that its Libor price-fixing was somehow a consequence of this phone call from Tucker. But if you look at the FSA’s Final Notice on the Libor fixing, all of the dubious activity takes place before the phone call — between January 2005 and July 2008.*

Besides, only in the minds of traders who had been fixing Libor for years would Tucker’s conversation have ever been taken as a nod and a wink to do just that. Libor is a measure of the interest rate at which banks lend to each other; Tucker was clearly just saying that Barclays should work with those other banks to get that rate down.

There isn’t a transcript of this conversation anywhere, but I can easily imagine Tucker saying something like this: “lots of senior Whitehall types are seeing the high rates you’re paying in the Libor market, and they’re asking me about it. I’m sure you don’t need my advice here, but you really shouldn’t be so high”. That’s a regulator doing what regulators should do — telling banks to get their act together and normalize their operations. What he meant, I’m sure, is that Barclays should do whatever it took to improve its reputation with other banks, so that they would lend to Barclays at lower rates.

And yet the corrupt Barclays operation, including Jerry del Missier, reckoned that it would be easier to just go back to their old sordid ways, and nobble the Libor fixings instead. Or at least that’s the impression you get from the Barclays document. If you look at official-sector documents, the worst thing that Barclays did in the wake of the phone call was basically compliance-related.

Barclays, in its submission, tries very hard to show that for most of the time that the Libor price-fixing was going on, it still reported higher rates than most other banks. In other words, Barclays is still trying to exonerate itself, and/or point fingers at other banks and even the Bank of England. I’m sorry, but it’s far too late for that. The verdict has come down, the fine has been paid. The job of Barclays, now, is to put the whole episode in the past, say that it’s sorry, and move on — under a new chairman and a new CEO.

But don’t expect much along those lines from Diamond, tomorrow. He’s still sore — and he’s going to make sure that parliament knows it.

*Update: Thanks to James Mackintosh for finding allegations of more dubious activity in paragraph 12, which talks about “numerous occasions between September 2007 and May 2009″. Obviously the beginning of that period still predates the phone call, but the end doesn’t.

It’s easy to be rude about banks’ boards, and how they tend to be filled with tick-the-boxes types: the management consultant, the retired general, the business-school professor, and a bunch of “private investors” (or “people who inherited their money”, as they’re also known). And given its manifest incompetence over the past week, I clicked over to the list of Barclays board members fully expecting to see the same usual suspects — especially since the chairman, Marcus Agius, sounds like he really ought to have been born about 2,000 years ago.

But the fact is that the Barclays board is actually not bad, on its face. Yes, 10 of the 12 members are white men in their 50s or 60s. But if you were looking for a board which clearly understands issues in both finance and governance, I’d say that this lot was pretty good, compared to any US bank I can think of. Which makes it all the weirder how they managed to get such a spectacular amount of egg on their collective faces this week.

It was always a bit peculiar that Barclays’ chairman would resign while the CEO remained in place. “As chairman, I am the ultimate guardian of the bank’s reputation,” he said yesterday. “Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside.” This of course begged the obvious question: was Bob Diamond, the CEO, somehow not a guardian of the bank’s reputation? And given that Agius’s main failures were in the way that he managed Diamond (or, more to the point, didn’t manage Diamond), how would Agius’s resignation with Diamond still in place help anything?

Today, it looks as though the board was attempting to sacrifice Agius — who had already said he was retiring next year in any case — in a doomed attempt to placate the UK’s parliament and media. Obviously, it didn’t work, and now we see an ignominious switcheroo: Diamond is out, along with COO Jerry del Missier, and Agius is back atop the board, looking for a successor.

“To state the obvious,” as Robert Peston says, “the impression has been created that this hugely important institution is not in charge of the basics of its destiny.”

Indeed, Peston reports that the decision to defenestrate Diamond was taken not by the newly-leaderless board at all, but rather by Mervyn King’s eyebrows. It’s surely right that when a board finds itself with a complete absence of testicular fortitude, top regulators have to step in to force the issue. But there’s something fishy here, too: Clive Horwood reports that at his scheduled testimony to Parliament tomorrow, Diamond was planning on blaming not himself for the Libor-fixing scandal, and certainly not Agius but rather — wait for it — the Bank of England. Which turns out to be the very institution which kicked him out, the day before he was due to testify.

The whole thing is incredibly messy and opaque, and will only serve to further damage Barclays’ reputation. Can that reputation be salvaged? I’m not sure it can: institutions the size of Barclays are hard to change, especially when a large cohort of their highest-paid employees used to work at Lehman Brothers. I very much doubt that any internal candidate could turn this ship around, and even a high-profile outsider — Bill Winters, perhaps — would find it incredibly difficult to take this peculiar beast and turn it into something comprehensible and manageable. Especially if he would be expected to raise the share price while doing so.

In the meantime, it seems that the newly-unemployed Diamond will still testify tomorrow; his departure today is unlikely to soften the blows from Britain’s parliamentarians. And given that Diamond’s resignation was clearly involuntary (Diamond pulled out of a Romney fundraiser yesterday “to focus all his attention on Barclays”), if anything he’s going to be more likely to veer off-message and start railing against those he blames for his own downfall. Who surely include Mervyn King. This is not likely to be an edifying spectacle, although it might be compelling in a car-crash kind of way.

I suspect the best bet for Barclays’ board and its new CEO, whoever that turns out to be, will be to get out in front of Vickers, and make a virtue out of necessity. Ringfence all the UK retail-banking operations and turn them into a boring utility. Then take everything else, including the whiz-bang traders and investment bankers, and list them as a separate company, most likely in the US, which can take on as much risk as its regulators allow it to. I believe the LEH ticker is still available.

Brian Chen has the news today that Uber is rolling out a cheaper version of its service:

Uber’s convenience comes with a cost. People are paying not just for the service, but also the gas used by the big sedans. That’s where hybrid vehicles will help bring down the price: drivers will spend less time and money fueling up…

In San Francisco, for example, the hybrid cars will cost $5 for the base fee, and then $3.25 a mile after that. By contrast, the town cars cost $8 for the base fee and then $4.95 a mile.

A quick back-of-the-envelope calculation shows that this has very little to do with the amount of money that drivers spend fueling up. Compare a Prius (51 miles per gallon) to an Escalade (10 miles per gallon): if gas is $3.78 per gallon, that puts the cost of gas per mile at 7.4 cents for the Prius and 37.8 cents for the Escalade — a difference of 30 cents per mile. Whereas Uber’s price for the Escalade is a premium of $1.70 per mile.

What’s more, since the drivers of these cars can’t pick up hails on the street, they have a lot of downtime waiting for the next gig. As a result, it doesn’t really cost the Escalade driver extra money if she ends up having to refuel once a day rather than once a week. Obviously, the fuel costs are higher — but the opportunity cost of her time is negligible.

Here’s Chen:

The company convinced its car-service partners to buy a total of 50 hybrids just for customers coming through Uber — a sign that drivers are making money with the start-up.

But of course it’s more complicated than that. If drivers were happy with the money they were making with Uber, then they’d stick happily with what they’ve got. In order to be persuaded to switch over, they have to believe that they’ll make more money in a hybrid than they would in a sedan. And that’s despite the fact that “in general”, according to Uber’s Scott Munro, “hybrids will cost 30 to 40 percent less than Uber’s black town cars”.

If that’s the case, then if you compare a sedan driver and a hybrid driver, the hybrid driver will need to be making three trips for every two the sedan driver makes, just to end up with the same amount of money. In order for the hybrid to be more attractive than the sedan, and taking into account the fact that at the margin you’d rather make fewer trips than more trips, a typical driver would realistically be hoping to double the number of fares she was getting before she was happy switching to the cheaper car.

But I suspect that the real relationship here is not between Uber and its drivers, so much as it is between Uber and car-service companies. Any given driver might well prefer to continue driving a sedan, rather than being moved over to a hybrid. But the car-service companies make money on every fare, and so their best interest is served just by increasing the total number of fares, rather than the average income received per driver per day.

As a result, I suspect that this move is going to decrease Uber drivers’ take-home income, on average, rather than increase it. As you might expect, when prices drop. But it will increase income for both the car-service companies and for Uber itself — and it will increase the total number of Uber drivers.

It’s easy to sign up with Uber if you’re a company; much harder if you’re a single driver. The Uber model is that Uber contracts with the owners of capital, who then employ the labor needed to provide the service. And once again, the rich will end up making more, the not-rich will end up making less, and the rich will present the whole thing as a victory for all concerned.

But there’s something else going on here, too, which is the way that companies love to push the idea that we’re paying for extra costs, even when we’re not. Uber sedans are more expensive than Uber hybrids because Uber reckons that’s the way it can best maximize its revenues and profits — not because the sedans are significantly more expensive to drive. Another example of this? Gas stations which offer different prices for cash and credit.

I like this idea, in theory, because gas prices are the most salient prices in America: we’re much more conscious of how much gas costs than we are of how much anything else costs. And if the price for gas on credit is significantly more than the price for cash, then that will help drive home just how big those credit interchange fees are.

Except, gas stations have no particular reason to charge just the interchange fee as a premium. Is the difference 10 cents a gallon? That’s about 3%, which is at the high end of credit interchange fees. After that, it’s all just pure profit for the gas station — and sometimes the difference can be as much as 2 dollars a gallon.

That isn’t a condign surcharge; it’s price gouging. And even a relatively common 20-cent surcharge is basically a convenience or ignorance fee, a way of extracting extra money from people who don’t have the cash or who don’t realize how much extra they’re paying. The rate of paying-with-plastic ranges between 60% and 100%, which means that realistically what we’re talking about here is essentially a bait-and-switch: attract customers with a low headline price, and then charge them a higher one.

Part of modern life is the way in which we naturally gravitate towards easy and automatic ways of paying. If you give Uber your card number once, you never really need to pay at all; you just find the charge on your credit-card statement. It’s certainly convenient — but it also allows Uber to charge quite enormous sums for what they provide. And similarly, at the gas pump, we just want to swipe our cards and get out of there, rather than faffing about with cash. And so there’s an incentive for companies like Uber and gas stations to inexorably increase the implied convenience fee we get charged for using easy payments methods — even if those payments work out cheaper for them. (After all, it would cost Uber a fortune if we paid our drivers in cash and then Uber had to try to reclaim its share from those drivers.)

My radical new universal payments system would help a little bit here, since it would make it impossible for vendors to claim that the more convenient payments method was somehow more expensive for them. But it wouldn’t solve the deeper problem, which is that the more painless payments are, the less we feel the pain. And so merchants will always find ways to charge us more now, if we’re not going to really feel how much we paid until much later. And then, when customers start revolting at the high prices they’re paying, the merchants will act like they’re doing us a favor by offering an inferior and cheaper option.

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

It’s a holiday week, which means that you should be doing relatively little. Unfortunately, the world economy seems to be doing exactly the same.

In the US, today’s data from the ISM showed “contraction in the manufacturing sector for the first time since July 2009″. (As usual, Reuters’ Scotty Barber has the charts.) There were two particularly troubling data points. No one seemed very interested in buying things – new orders fell at the fastest pace in a decade; and people paid less for those things – prices paid fell at the fastest rate since just after 9/11. This is, as one analyst put it to the WSJ, a bad omen: “It is only a matter of time before the service sector mirrors the real goods slowdown and overall employment gains moves from sluggish to worse.”

In its own manufacturing index released today, Markit Economics suggested the US manufacturing industry is slowing, but not quite in contraction. But like the ISM report, Markit’s data also showed that new orders fell. And the company’s own economist acknowledged that “the ISM suggests something drastic happened in June”.

Then there’s Asia, where South Korea and Japan are in full manufacturing contraction territory. China’s manufacturing sector also shrank in June, and, as Kate Mackenzie notes, “the components of the index suggest the companies surveyed were busily producing without necessarily having any customers lined up”. Zero Hedge has BofA’s compilation of all of the grim global details: 17 of 24 major economies’ manufacturing sectors are now shrinking. Add all this up, and it explains why, globally, the manufacturing sector is technically in contraction.

Thank God US fiscal policy is going to help out. Oh… wait. – Ryan McCarthy

On to today’s links:

Alpha
Buy your rubber-stamp hedge fund director in the Cayman Islands – DealBook

China
China’s OMG moment – FT Alphaville

Defenestrations
Barclays chairman quits over LIBOR scandal – Reuters

Confessions
How I manipulated LIBOR – Telegraph

New Normal
Midlevel Wall Street jobs increasingly not on Wall Street – NYT
For IPOs, Shenzen is the new Hong Kong (which was formerly the new New York) – Reuters

Must Read
How Chief Justice John Roberts switched his vote on Obama – CBS News
When the Supreme Court leaks – Felix

Reversals
Toobin: Roberts’s tax argument was a port in a “constitutional storm” – New Yorker

Tax Arcana
Obamacare is the biggest tax increase in history…if you ignore history – The Incidental Economist
Reddit’s fantastic, in-depth Obamacare explainer – Reddit
The second-largest natural-gas producer in the US has paid almost no income taxes on its profits in two decades – Bloomberg
Obama, the Supreme Court and “the bipartisan allergy to taxes” – Economist

Emerging Markets
Africa is an economic dynamo – Nicholas Kristof

Long Reads
Money may actually make you act less human, studies suggest – NYMag

Old Normal
David Frum: It’s time to start saying no to the elderly – The Daily Beast

Servicey
Busyness as an “existential reassurance” – NYT

Yikes
Money market funds basically want to be unregulated banks – NYT