Felix Salmon

What’s Ackman’s Herbalife game?

Felix Salmon
Dec 31, 2012 22:27 UTC

Bill Ackman sure knows how to make a splash: his presentation laying out his Herbalife short is rapidly approaching 3 million pageviews on Business Insider, plus many more from his own website. What’s more, it has already made him a lot of money: even with Herbalife stock up more than 12% today, at about $33 per share, it’s safe to assume that Ackman put on his short at between $45 and $50. If John Hempton is right and the short is on the order of $1 billion, then that means Ackman has made more than $300 million in the past couple of weeks.

And as Michelle Celarier notes, that $300 million is going to come in very handy when Ackman puts together his year-end report, not to mention if and when he ever tries to take Pershing Square public. As of the end of September, his fund was down for the year; Herbalife should change that.

Celarier also notes that Ackman’s broadside was carefully timed: it not only came just before year-end, but also came during a Herbalife “quiet period”, during which the company’s retaliatory arsenal is temporarily depleted.

The amount of sheer theater surrounding Ackman’s short — he literally presented his idea from a stage, and followed up his presentation with a big round of media appearances — makes it clear that the presentation itself is part of the trade. Ackman’s an activist investor, who tries to make money by changing the state of the world, and in this case it’s very clear what change he wants to see: he’d like the US government to prosecute Herbalife for being a pyramid scheme.

Ackman says that he has a price target of zero on Herbalife stock, which is extremely aggressive given that this is a company which makes a lot of money every year. The only way that Herbalife goes to zero is if it gets prosecuted for being a pyramid scheme. But there’s no evidence that a prosecution is forthcoming: after all, Herbalife has been around for 32 years, and the FTC has done nothing so far.

Ackman, when asked, says that the purpose of the theater is to bring the “facts about Herbalife” to the attention of people who would otherwise be duped by its sales pitch: if those people knew the truth, he says, they would never sign up with the company. But there’s basically zero overlap between the kind of people who read 334-page slideshows, on the one hand, and the kind of people who dream of getting rich selling Herbalife products, on the other.

The vast majority of Ackman’s presentation is devoted to an attempt to prove that Herbalife is a pyramid scheme. That’s hard: the distinction between an illegal pyramid scheme, on the one hand, and a legitimate multi-level marketing scheme, on the other, is largely in the eyes of the beholder. All of these things look pretty skeevy from the outside, but that doesn’t make them illegal, and people like Kid Dynamite are doing a good job of chipping away at many of the key bits of Ackman’s presentation.

That’s the bit which doesn’t add up, for me. Ackman has a pretty good short thesis on Herbalife even if it’s a legal MLM operation: he thinks it’s running out of markets and demographics to exploit. But he buries that short thesis inside hundreds of pages of heavy-handed argument on the pyramid-scheme front, and claims loudly that he thinks that Herbalife is going all the way to zero.

The problem is that he doesn’t ever spell out his argument, and explain why he thinks it’s probable that Herbalife is going to zero. After all, in order for that to happen, you need a lot of things to break Ackman’s way:

  1. Ackman has to be right about Herbalife being an illegal pyramid scheme
  2. The FTC has to be persuaded that Ackman is right about Herbalife being an illegal pyramid scheme
  3. The FTC has to then make the decision to prosecute Herbalife
  4. The FTC then needs to win its prosecution against Herbalife
  5. The FTC victory over Herbalife needs to be so decisive that the stock goes all the way to zero.

No matter what probabilities you put on each of these events, the chances of them all happening can’t be particularly high. And the initial one — the determination of whether or not Ackman is right about the pyramid-scheme thing — is not even all that important: you can put that probability at 100%, and you still don’t have a compelling case that Herbalife is going to zero.

All of which makes the Ackman presentation look to me like it’s a lamb dressed up as a lion, and that Celarier might well be right: Ackman could just have been trying to engineer the biggest possible year-end drop rather than genuinely betting on the demise of the entire company. It wouldn’t surprise me in the slightest to see this story go nowhere in 2013, with both Ackman and Herbalife quietly dropping the matter rather than continuing to fight for no good reason. Ackman has made a lot of money on this trade already: it’s not clear that he has any particular need to kill Herbalife as a whole.

The question, of course, is the degree to which Ackman has now covered his shorts, and the degree to which he’s still betting on substantial further declines. It could even be that today’s rise was caused by Ackman taking profits on his trade. After all, it’s always nice to be able to cash such things in, rather than just see them on paper.


That not a scheme then great opp. for CEO to purchase bargain HLF shares an make a big buck. But he ain’t buying, is he? Why ain’t he buying?

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Counterparties: Resolution without reconciliation

Ben Walsh
Dec 31, 2012 20:30 UTC

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

The fiscal cliff deal is here — at least in the Senate.

The President confirmed in an afternoon appearance that a deal was “close”, but offered no specifics and blasted Congress for their procrastinating ways. It’s not even clear that the latest deal would have the support to be put to a vote in the House, let alone pass.

Depending on which baseline is used, the deal includes between $600 billion and $800 billion in debt reduction, Ezra Klein tweeted; Sam Stein and Ryan Grim report that this will come “almost entirely through revenue hikes.”  But as Justin Wolfers tweeted, any last-minute deal that doesn’t include raising the debt ceiling pretty much guarantees another round of panicked negotiations.

The latest deal raises income taxes for families who earn more than $450,000 per year or individuals who earn more than $400,000. Taxes on inheritances larger than $10 million for families or $5 million for individuals would increase to 40% from 35%.

Left unaddressed is the “sequester”, which would result in painful automatic spending cuts. Gone also are cuts to social security, through “chained CPI”, which Republicans abandoned on Sunday. Still, Joshua Green judges the whole thing a winner for the GOP, not least because “Republicans would hold onto their greatest point of leverage” — their ability to hold the country hostage over debt-ceiling negotiations.

Paul Krugman isn’t happy that this deal won’t raise the debt ceiling. Matt Yglesias thinks the last-minute haggling is pointless, with Congress already having missed its chance at a “grand bargain”. The Dallas Fed wonders if “the real question today is whether we have entered an era of permanently greater polarization in Congress and permanently higher fiscal policy uncertainty”.

If US does go over the fiscal cliff, Matt O’Brien details exactly how your taxes will rise. “Even in a best-case scenario, 2013 will be a year of tax increases for all”, he writes, thanks to payroll taxes going back up. Those payroll tax increases pushed one analyst to halve his growth projection for the first quarter to just 1%. — Ryan McCarthy and Ben Walsh

On to today’s links:

You can’t use your iPad during flights because the FAA says so – Nick Bilton

Funding a Vermont ski resort by selling green cards to wealthy foreign investors – NYT

China’s huge overinvestment problem – Business Insider

The Fed
“Ferbus, Edo and Sigma” – A look at the Fed’s “deeply flawed” computer models – WSJ

Yet another indication that Congressional ineptitude is hurting the economy – WSJ
The Republican Party in one tweet – Ezra Klein

Why statistics don’t tell the full story of income inequality – Chris Dillow
Stop obsessing about taxes – Aswath Damodaran
Why isn’t the 30-year mortgages rate 2.6%? – NY Fed
Rortybomb’s awesome 2012 round-up of econo-geek links – Mike Konczal

US surgeons leave a foreign object in a patient an average of 39 times per week – Baltimore Sun

Popular Myths
IQ is a “myth”, study says – The Toronto Star

In 2012, I learned that… – Josh Brown

Netflix CEO gets 100 percent pay raise – AP


America’s massive spending on old-age healthcare - (Oops, that chart turns out to be wrong.)



The global cost of fiscal indecision

Felix Salmon
Dec 31, 2012 16:28 UTC

Happy fiscal cliff day! The fiscal prognosis is, amazingly, probably fuzzier today than it has been in weeks: the only thing that seems certain is that no one has a clue what’s going to happen, especially in the House. But amidst the chaos of the intraday news chase, I think two broader stories have failed to get the attention they deserve.

The first is that we have now officially reached the debt ceiling. Naively, I had assumed that any fiscal-cliff deal would automatically include raising the debt ceiling — after all, after going through the present legislative nightmare, who’s going to have any appetite for another one immediately afterwards? And yet, astonishingly, it seems as though even if the fiscal cliff does manage to get averted, the debt ceiling will remain in place, and raising it will require its own separate legislation.

The second broad narrative is the slow death of the Grand Bargain. If and when we do get some kind of fiscal cliff deal, it will be a patched-together hodgepodge of policies designed with exactly one goal in mind: finding a piece of legislation which is capable of getting, somehow, through Congress. It will not be a shiny new tax code which radically rethinks US fiscal policy to put us on a healthy long-term footing: instead we’ll just get something better than the fiscal-cliff alternative of doing nothing at all.

So if you were hoping that the cliff might finally give us the opportunity for a deep rethink of something like the mortgage-interest tax deduction, or even tax expenditures more generally, think again. And other reforms are similarly not going to happen. For instance, Bob Pozen and Lucas Goodman have a sensible idea: pay for a reduction in the corporate income tax rate by allowing corporations to deduct only 65% of their interest expenses.

It’s fun to look at Pozen’s idea side-by-side with that of Cromwell Coulson: Coulson proposes that we tax dividends at the same rate that we tax income, but that we also allow all dividends to be tax-deductible to corporations.

The point in both cases is that both dividends and interest payments are ways of returning capital to people who funded the company, but debt is more systemically dangerous than equity is. So why structure the tax code to make debt more attractive than equity?

This was exactly the kind of debate that the fiscal cliff was supposed to engender: after many years of a “permanent temporary tax code”, we’d finally be forced to implement the kind of profound fiscal revamp that all politicians agree is needed.

And yet, we have failed. The solution to the fiscal cliff will be just as tenuous and temporary as anything which went before it, and will include nothing radically new. The legislative process in the US makes all fiscal policy extremely path-dependent, and the degree of dysfunction in Congress makes any path at all extremely rocky and tenuous. No matter how attractive the final destination, the further away it is, the more likely it is that you simply can’t get there from here.

The result is complete idiocy like running up against the debt ceiling, or raising taxes on pretty much every income-earning American, despite the fact that nobody wants either thing to happen.

If you look at legislatures around the world over the past five years or so, they have all — consistently — proved either reluctant or incapable of making big fiscal decisions when necessary: this is one reason why central bankers have become so incredibly important to the world economy. I don’t know if this is some kind of bug which is found in mature democracies, but the problem is real, and it’s global. And I suspect that even if it doesn’t cause another recession in the US, it’s ultimately going to shave many trillions of dollars off global GDP in the years to come.


Nice read, Felix. The game is emotions. The term ‘fiscal cliff’ implies doom. If that does not work we face the dreaded ‘recession’ word. Frightening. Yes, it is a sign of the times. And we are all emotional pansies jerked around by the latest fear we decide to accept.

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Counterparties: Today’s Links

Ben Walsh
Dec 28, 2012 22:01 UTC

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

The Counterparties team remains on a semi-hiatus and will return in full force in the New Year.

Port strike, and another lamely alliterative geological metaphor, avoided for 30 days – CNBC

The Instagram apocalypse that wasn’t – Zach Seward

The Fed
Ben Bernanke is begging Congress to borrow more – Matthew O’Brien

EU Mess
Greece has fewer tax cheats if you ignore relatives of the finance minister – Reuters

The Singularity
A great robots vs capital linkfest – Izabella Kaminska

“Ideological meaning and agendas are not incidental to thrilling films and cinematography” – Reuters Opinion

What Twitter will look like when Margaret Thatcher dies – Martin Belam

Microsoft IR: “Value trap is a funny term” – Businessweek

The anti-Dodd-Frank campaign would have worked, if it weren’t for that meddling whale – WSJ

Google, Apple, Facebook, Amazon, and Microsoft are The Internet – Alexis Madrigal

“For God’s sake, please just stop” international aid to Africa – Der Spiegel

Counterparties: Today’s Links

Ben Walsh
Dec 27, 2012 21:40 UTC

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

The Counterparties team remains on a semi-hiatus and will return in full force in the New Year.

Among the “wide-ranging reforms” at Foxconn factories: chairs to sit in – NYT

Must Read
How the heirs of China’s top communist leaders became ridiculously rich – Bloomberg

Geithner: We’ll hit the debt limit on December 31 – Treasury Department
Our nation is teetering on the precipice of the “milk cliff” – Suzy Khimm
Millionaires dying to avoid estate taxes – John Carney

Guns kills people, in one chilling graph – Ezra Klein
The social costs of gunownership: “An intensification of criminal violence… greater harm to the community” – Philip Cook and Jens Ludwig
Hawaii is literally dissolving from within – Honolulu Star-Advertiser

New Normal
Income inequality in contemporary US worse than Tsarist Russia – Matt Yglesias
Computers replace humans as authors of hoax academic papers – Cory Doctorow

Financial Arcana
Snow futures, anyone? – CME

Popular Myths
If the economy were normal, the deficit actually wouldn’t be that big of a problem – Evan Soltas

“The key downside risk for the US economy in 2013 is too much austerity, too quickly” – Calculated Risk

Sweden’s war on cash - Ludwig von Mises Institute

95 Goldman employees in the UK made $273 million in 2011 – Guardian

Counterparties: Today’s links

Ben Walsh
Dec 26, 2012 22:50 UTC

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

The Counterparties team remains on a semi-hiatus and will return in full force in the New Year.

Japan is moving toward “explicit monetizing of deficit spending” – Tim Duy
Paul Krugman considers robots, wonders if economic growth could be over – NYT
Artifical intelligence is the key to economic growth — or economic stagnation – Mother Jones
Philanthropy: You’re doing it wrong – Felix

Over the last decade, hedge funds have been absolutely crushed by basic investing – Economist

Right On
It’s time for the government to stop subsidizing obesity – Mark Bittman

The economy will take a hit under almost every fiscal cliff deal scenario – Sudeep Reddy

The 100 best lists of all time – New Yorker

The hottest internet stock of the year has been AOL for some reason – Kara Swisher

The “must read” business stories of the year – Ryan Chittum

Tough Choices
Get a college degree or make $50,000 a year working in an oil field? – NYT

It’s Academic
Researchers discover that elephants have four distinct personality types – BBC

A VC at Passion Capital arrested for “groin thrusting” on London’s Tube – TechCrunch


4 different personality traits, not different personality types.

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Philanthropy: You’re doing it wrong

Felix Salmon
Dec 26, 2012 04:10 UTC

Merry Christmas! Maybe it’s because of some vestigial religious undertones to this holiday, or maybe it’s because the end of the tax year is rapidly approaching, along with the urgency of maximizing your annual deductions. Either way, this is a particularly philanthropic time of year. And since I’m personally feeling very charitable right now, I’ve decided to do you all the favor of telling you that when it comes to philanthropy, you’re doing it wrong.

Interestingly, philanthropy is one of those areas where the richer you are, the more likely you are to be doing it spectacularly wrong. So to make you feel better still, this is aimed mainly at the mega-philanthropists: the people who give away millions of dollars and feel fantastic for doing so. These are the people at the heart of the debate over capping the mortgage-interest tax deduction: they receive an outsized proportion of its costs, on the grounds, to quote Bob Shiller, that

charitable giving can substitute for a good part of the things that the government would otherwise be doing itself, a factor that is rarely introduced into budget calculations. Indeed, in many cases, individual philanthropy may be more effective than government expenditures.

Being “more effective than government expenditures” is a pretty low bar to hurdle. But that doesn’t mean it’s reasonable to assume that most philanthropic donations hurdle it with ease. Remember John Paulson, with his $100 million gift to the Central Park Conservancy: I think I’m entirely safe in saying that the government, in the form of the New York City Department of Parks & Recreation, spends its money a lot more carefully and effectively, despite the fact that it has to divvy up its budget across 5,000 different properties, including Central Park.

And the much bigger problem is that Paulson is no exception here. Let’s run down the list of things you’re likely to be doing wrong, if you’re a rich philanthropist:

You meddle in the internal workings of the charities you donate to, even though you’re not on the board.

If you’ve done your homework, then you’re giving to a certain charity precisely because you admire the way it gets things done. If you don’t admire the way it gets things done, then you should find a different charity: there are many very good ones out there.

What’s more, your experience in the for-profit world is not nearly as valuable as you think it is. The executives are probably good at flattering you by asking you for your advice: the slogan in the non-profit world is “if you want advice, ask for money; if you want money, ask for advice”. Once again, be humble. They live these issues every week; they know them better than you do.

Remember: the things which work in your business aren’t necessarily a good idea in your philanthropy. One of the reasons why so many rich businessmen give money to microlenders is that it’s a model they’re intuitively very comfortable with. Even if there’s very little evidence that it actually does much good.

You set up your own foundation.

The classic waste of money and resources. Foundations are expensive things to run, both in terms of overhead costs and in terms of opportunity costs. A well-run foundation will be staffed with qualified philanthropic professionals; such people are not easy to find, and if you do find them, the fact is that their talents could almost certainly be put to better use elsewhere.

The main reason why people set up foundations rather than just giving their money to the needy is that foundations are a have-your-cake-and-eat-it-too form of philanthropy: you get to say that you’ve given your money away while at the same time continuing to have ultimate control over that money. That’s great for your own personal power and influence, but it’s almost never the most effective way to spend your money.

Personal foundations are also the easy way out: a way of saying “I know I want to give my money away, but I can’t be bothered to actually do it yet.” If you’re committed to philanthropy, that’s not good enough. You’re trying to improve the world, rather than trying to create a tax dodge which gives away the bare minimum every year.

You give your money to Harvard, or any other large endowment.

The Harvard endowment currently stands somewhere north of $30 billion. If it grows at 5% a year, that’s $29 million per week. The marginal utility of your donation is probably smaller here than anywhere else. The general principle here is this: giving money to a well-endowed institution is just another way of not actually spending your money.

You fund architecture.

It’s generally easier to raise money for a new building than it is to raise money for continuing operations, which is one reason why charities often embark on huge capital campaigns. But such campaigns often end in tears, with cost overruns which necessitate staff cutbacks or even high-level resignations. Leave the ego-infested world of architecture to others: your money can always be better spent elsewhere. Mission-building is more important than edifice-building.

You encourage mission creep.

If an organization is doing great work in Cambodia, don’t offer it a large amount of money to do the same thing in Nicaragua. Donations with strings attached are bad; donations which essentially force a non-profit to do something it never particularly wanted to do in the first place are much, much worse. Examples would include most cancer wings at hospitals; or a dedicated yoga center at a university. (I’ll come back to that example.) Charities are under constant pressure to move away from their core mission and towards where the money is; don’t be part of the problem.

You kid yourself that your mere presence on the board, or your “celebrity endorsement”, is valuable.

It’s your money that’s valuable — the money you give to the organization, and the money you can persuade others to give to the organization. The main value of your presence on the board is the implicit or explicit financial commitment that comes with it.

You are a rich and important person, but no one is going to give money to this organization just because you did.

You’re a tease.

Charities are forced to put a lot of effort into buttering up donors and potential donors. Don’t be part of the problem: don’t waste their time. If you’re going to give money, give money. If you’re not, then say so, clearly.

You confuse philanthropy with social climbing.

Philanthropy is one way of feeling better about yourself; buying the admiration of your friends and peers by ostentatiously giving money to their favorite causes is another. Do not confuse the two.

You think that going to to charity balls constitutes charitable activity.

Some people actually enjoy these things. If you’re the kind of person who likes to dress up in black tie spending an evening in an orgy of rubber chicken and self-congratulation, then by all means go to as many of these things as you like. But if you’re not that kind of person, and you feel that you can’t politely decline, then just take the money you would otherwise spend on a table, and donate it to the organization directly. That way the charity gets all of the donation, and you get four hours of your life back.

Amazingly, charity balls aren’t even the most inefficient way of giving to charity. Paul Sullivan recently glowingly profiled Cindy Citrone, who went to Sotheby’s and spent $425,000 on “a small, pink-diamond ring and diamond bracelet that had the word love written on it in rubies.” That was probably near the market price for those jewels, and in any case, given that this was an auction, there was certainly an underbidder willing to pay almost as much. So even though the auction proceeds were going to charity, the marginal benefit of Citrone’s $425,000 was pretty tiny. And yet, somehow, Sullivan managed to write a column implying that this was a good way of giving money to charity. Donating the jewels was a genuine charitable act; buying them, not so much.

You put your name on a building, or anything else, for that matter.


You transactionalize your giving.

The world of non-profit fundraising has become increasingly transactionalized: everything’s a tit-for-tat operation, these days. Give a small amount of money and you get a yellow wristband; give a large amount of money and you get to rename the entire organization you’re funding after yourself. It’s an invidious trend, and the only way to reverse it is for prominent philanthropists to refuse to play the game. The Jewish charitable tradition of tzedakah calls out anonymous gifts for especial praise: philanthropists and charities alike should take note.

All too often, meetings between fundraisers and donors turn into a kind of bargaining session: if you give us this, we’ll give you that. The conversation ignores the important — how the charity will use the money to improve the world — and concentrates instead on the banal: what the charity can do to publicly thank the donor.

In one particularly odious recent case in New York, two foundations which helped pay for a big new FDR memorial on Roosevelt Island went all the way to the state’s Supreme Court to ensure that their names appeared so prominently as to damage the whole architectural construct. In their minds, the quality of the memorial itself was less important than the conspicuousness of the thank-yous.

It’s incredibly easy to find examples of all of these sins, but one in particular jumps out at me for the way it encapsulates many of them at once. Here’s Andrew Rice, talking about the way that the University of Virginia’s Teresa Sullivan tried to get money from one of its richest alums:

One of Sullivan’s most promising targets was Paul Tudor Jones, a Virginia alumnus, billionaire hedge-fund manager and philanthropist. Though he had given away countless millions, Jones considered his brain to be his primary asset: he was fond of saying that “intellectual capital will always trump financial capital.” He had already given large sums to his alma mater, and he told Sullivan that he and his wife had an exciting new idea: endowing a center for yoga.

“I thought, Oh, man, people are going to be very cynical about this,” recalls Bob Sweeney, UVA’s fund-raising chief. So Sullivan convened a dinner at her home with professors of religion, medicine and other disciplines. “I said, ‘O.K., let us think about it a little bit,’ ” she said. “We began talking about, wait a minute, it’s not just yoga.” The group swiftly produced a proposal for a multidisciplinary Contemplative Sciences Center, which was vetted by Jones’s paid yoga consultant. In April, Sullivan announced the $15 million gift, one of the largest of her tenure.

This was all part of a multi-year buttering-up campaign, of someone who is convinced that just by thinking about the University of Virginia in the right way, he can do more good than by giving it money. The University, of course, knew exactly what it needed money for, but Paul Tudor Jones wasn’t interested in what the University thought: he had his own ideas — and his own paid yoga consultant.

When someone offers you $15 million, and a very large part of your job is to raise money, you can’t just laugh and say their idea is ridiculous. Instead, you have to spend an inordinate amount of valuable management time, across multiple university faculties, and eventually construct a white elephant that no one actually wanted in the first place.

And so the lesson here is pretty simple: Don’t be Paul Tudor Jones. Instead, have some humility. Here’s one idea: for every dollar you spend on overhead and payroll at your foundation, make sure that you donate a dollar earmarked for overhead and payroll somewhere else. Those are the funds which are always the hardest to raise, after all.

If you did that, you would be helping to counteract one of the most corrosive and invidious memes in the nonprofit sector: the idea that it’s incredibly important to look at the “overhead ratio”, and give only to charities which spend a small proportion of their money on overhead, and a large proportion of their money on program activities. It really isn’t. But partly because a lot of people think that it is, this year I gave to DNDi, the Drugs for Neglected Diseases initiative, an amazing nonprofit which is basically all overhead. Its job is to coordinate the work of organizations all over the world, from non-profits to pharmaceutical companies to multilateral organizations to national health ministries, and to get them all working together to create drug cocktails which can cure devastating diseases in some of the most forlorn parts of the world.

What else should you do? Well, if you’re one of those extremely wealthy people who has pledged to give away most of their money, then follow the spirit of the pledge, rather than just the letter. It’s not enough to set up a foundation which will receive most of your wealth when you die: that’s, quite literally, a cop-out. Instead, embrace the concept of front-loading, and give the money away right now, as much as you can. In a world which is getting richer, your money is best put to use now, rather than in the future. And in a world with many vicious cycles, an increase in up-front investment can prevent enormous damage down the road. You’re not building a business with permanent equity capital, you’re trying to make a difference. And if you think that the world would be better off if you invested the money, made a huge return, and then gave away that much larger sum — well, that’s just your hubris at work. Remember, in philanthropy, you’re meant to be the humble one. The graveyards are full of people who dreamed of giving away hypothetical future riches. Much better to give away real present ones.

What’s more, if it turns out that you really are very successful, and that your wealth is going up rather than down, increase your giving commensurately. This is a tough one: even very large-scale philanthropists like George Soros have found it very difficult to make a serious dent in their wealth by giving it away. But it is possible. Do it.

Finally, there’s something that all of us can do, whether we’re dynastically rich or really rather poor: volunteering. But weirdly, volunteering is harder for the rich, who can more easily afford the time commitment: they often think that time spent volunteering is wasted.

The logic, after all, is simple and clear. The value to the charity of my labor is $x; so if I just donate $y>$x then the charity is better off. What’s more, the value of my time is $z>$x, so in a way I’m destroying value by volunteering.

The problem with this logic is that it ignores the enormous value to the volunteer of volunteering. Volunteering is the best and most effective way of piercing the bubble that all wealthy people live in every minute of every day, and of giving such people a gut-level understanding of the problems the charity is trying to solve.

On that level, volunteering is much more effective than some fact-finding poverty tour, where a bunch of rich donors or potential donors jet in to observe the Great Work Being Done in some far-flung country. The logistics involved in organizing such tours are substantial, and the good they do is minuscule. So if you want to see for yourself what an organization is doing, find out by doing that work yourself.

But volunteering is also worthwhile for its own sake. It gives an extremely valuable perspective on life, one that’s hard to find elsewhere. And it can be incredibly rewarding, in ways both expected and unexpected. Find time to do it: almost nobody ends up regretting the time they spent volunteering.

The theme here is humility, mixed with seriousness. Giving away money effectively isn’t fun or easy, and although it can be rewarding, it’s important to keep your eyes on the job at hand, rather than on maximizing those rewards. Philanthropy has always been self-serving in large part, and that’s never going to end. But there’s no good reason why you should be part of the problem.


A big thank-you for writing this article. When I read the title it made me sad, because I think that generosity is sorely lacking in our culture, and so it seemed weird to be critical of philanthropy. But I agreed with almost everything you said. It sounds like you’re not against philanthropy at all, you just have some good concerns for how it could be done a lot better. Thank you!

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Counterparties: Merry Christmas

Ben Walsh
Dec 24, 2012 21:44 UTC

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

The Counterparties team is spread across the western hemisphere today, with Ben in Oregon, Felix in Dorset, and Ryan in an overpriced and overcrowded retail outlet doing some last-minute shopping. Wherever you are, we wish the very best to you and yours, and thank you for all the support and tips since we launched this newsletter in March.

There won’t be an email tomorrow, and it’ll be links only on Thursday and Friday. After that — assuming we all survive the drop off the Fiscal Cliff — we look forward to joining you in a happily eventful 2013. May your holidays be happy, your right tails fat, and your billionaires whimsical! — Felix, Ryan, and Ben

And on to today’s links:

Meet the Jim Cramer of China – Businessweek
The time Steve Cohen got an ATM for Christmas and other reported anecdotes – NYT
Bill Ackman’s full presentation on his Herbalife short – Pershing Square
Herbalife won’t let Bill Ackman’s lies disrupt their vacation plans – WSJ
Why Bill Ackman is wrong about Herbalife – Kid Dynamite
The age of macro may be coming to an end — until the next crisis – Joe Weisenthal

Why taxes may need to go up (briefly, at least) for a fiscal cliff deal to happen – Calculated Risk

The Fed
The Federal Reserve is running out of ways to make credit cheaper – WSJ

The Reformed Broker’s comprehensive guide to the financial blogosphere – Josh Brown

New Normal
The slow death of the American mall (or why the e-commerce revolution isn’t over yet) – Jeff Jordan

Great Expectations
The sad story of high-achieving, low-income students struggling to stay in college – NYT

We Can’t Have Nice Things
Two reasons to doubt the potential of 3-D printing – Tyler Cowen

Charitable donations continue to fall – FT

Says Science
“We appear to be on the frontier of procrastination” – International Journal of Psychological Studies

Unpuzzling those puzzled by interest rates and the fiscal cliff – Mark Thoma

Happy Holidays
Santa’s privacy policy – McSweeney’s
“America’s pop cultural-industrial complex seems to have nearly abandoned the Christmas business” – TNR

Be Afraid
ConEd drones. Seriously. – Bloomberg

It takes an average of 58 work days to earn enough to pay for your health care spending – Sarah Kliff

Fake ideas and fake beauty have taken over our culture – Aeon

An oral history of Newsweek – Daily Beast

Counterparties: Grimes and misdemeanors

Dec 21, 2012 23:07 UTC

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When Morgan Stanley won the lead role in Facebook’s IPO in February, its lead technology banker Michael Grimes insisted that he be the “single driver” of the deal. In exchange, he acknowledged that it would be “his throat to choke” if anything went wrong.

In the wake of Facebook’s botched IPO, however, it looks like Grimes doesn’t have to be worried about any retribution from his employer. Fortune’s Stephen Gandel reports that Morgan Stanley won’t use its stringent clawback rules “to take any disciplinary action against Grimes or any of the bankers involved in the Facebook IPO”. This despite the fact that Morgan Stanley has been fined $5 million by Massachusetts’s securities regulator for selectively disclosing financial information to research analysts, a tactic Grimes did “everything but make the phone calls himself” to execute.

Perhaps Grimes is keeping his pay because he did nothing wrong. Jonathan Weil says the settlement is “farcical”, and that Morgan Stanley should have let the case go to a jury: “even viewed in the worst possible light,” he writes, “none of the conduct described by Galvin was an obvious breach of anything.” Weil suspects that “the real crime here seems to be that Facebook’s stock price fell a lot after the company went public in May, which of course isn’t a crime at all.”

Grimes is also keeping his pay because even after the Facebook fiasco, he’s still the biggest rainmaker on the Street. Gandel reports that in the seven months since the Facebook IPO, Morgan Stanley has generated $32 million in fees from 14 technology IPOs; JP Morgan is a distant second, with just 5 deals to its name in the same period. Grimes’s throat was safe all along, it seems. Just so long as he kept on bringing in the deals. — Ben Walsh

And on to today’s links:

The best 34 charts of 2012, as chosen by economists and business journalists – Matthew O’Brien

The NYT paywall is working much better than anyone expected – Edmund Lee

Modest Proposals
It’s time to sell Alaska – WaPo

Even More TBTF
The new threat to the financial system: derivatives clearinghouses – Bloomberg

Household formation and why it’s crucial for the US economy next year – Cardiff Garcia

Former Speaker of the House? – Ezra Klein
GOP revolts against fiscal cliff Plan B – NYT

Popular Myths
Structural changes do not explain high unemployment – NBER

Strange Bloomberg Headlines
“Carney Not Yet With Pink Set Sharing Policies Beyond BOE Circle” – Bloomberg

EU Mess
Southern European unemployment: The “largest policy failure in the developed world since the second World War” – Stuart Staniford

Debt is “one of America’s greatest exports” – Neil Irwin

The unemployed will be remotely monitored in the UK to ensure they’re looking for work – Telegraph

Financial Arcana
The tri-party repo market is improving by getting smaller – WSJ

Slideshows: a “wonderful, native storytelling tool” – Digiday

Crime and Punishment
Peter Madoff is $143 billion dollars in debt – Reuters

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