Felix Salmon

Argentina has done as the Second Circuit Court of Appeals ordered, and has now formally put forward its proposal for paying off Elliott Associates and the other bondholders suing it in New York court.

You could be excused for not entirely understanding what Argentina is proposing, in this 22-page filing: it’s not particularly easy to understand. But the upshot is simple, and pretty much as everybody expected: Argentina is offering to give Elliott pretty much exactly the same deal as it gave all the other holders of its defaulted bonds. In practice, that means that Elliott would swap into new Discount bonds with a present market value of roughly $120 million; if settling the case in that way helped Argentina’s bonds to rally back to where they were trading in October, then the market value would rise to about $176 million.

Argentina is at pains to point out that “this proposal is a voluntary option”: they’re not proposing that the court force Elliott to accept the deal. But at the same time, Argentina knows full well that the chances of Elliott voluntarily accepting this deal are exactly zero. Elliott is suing for a total of $720 million, and while it might be willing to settle at a modest discount to that sum, there’s no way it’s going to accept the same kind of 70% haircut that it has consistently rejected all along.

Indeed, it’s entirely improbable that any of the current plaintiffs, having rejected two previous exchange offers and having spent many millions of dollars in legal fees, would be remotely inclined to accept this offer were it put to them. Which makes it really hard for the court to accept this proposal as a good-faith attempt to pay the plaintiffs what they’re owed.

The court specifically asked Argentina how it was going to make current the obligations of the original bonds; and/or how it might repay those original obligations going forwards. Argentina, in response, has proposed doing neither. Instead, it is proposing to give the plaintiffs the 70% haircut, on those original bonds, which they have consistently rejected.

The AP’s Michael Warren says that Argentina’s proposal is “creative”, but I don’t see much evidence of creativity here: instead, I see a lot of the failed rhetoric which helped bring Argentina to this fraught position in the first place. “Plaintiffs cannot use the pari passu clause,” writes Argentina’s lawyer, Jonathan Blackman, “to compel payment on terms better than those received by the vast majority of creditors who experienced precisely the same default as plaintiffs”. But of course they can do that, or at least they’re trying to, and so far, New York’s courts have ruled quite consistently that they have every right to do so.

There are signs of real desperation in Argentina’s filing: it spends a lot of time, for instance, talking about the price at which Elliott bought its debt, and the profit that Elliott would make if it got the full $720 million it’s asking for. It’s an incredibly weak argument: for one thing, there’s no law against making money in the markets, and for another, it ignores all the judgment debt that Elliott holds, and isn’t getting paid on, and isn’t litigating in this case.

Indeed, it’s far from obvious whether Argentina is extending this offer to judgment creditors, who make up the vast majority of the country’s holdouts. But one thing is clear: everything in this filing is entirely consistent with the behavior which has already been found to be “contumacious”. Argentina is a sovereign nation, and it’s staring down the court, here, daring it to go through with its dangerous plan. And frankly it’s very hard to imagine that at this point, because of this filing, the court is finally going to blink.

I’ve been largely sympathetic to Argentina’s position in this case all along, but in the wake of the various rulings which have already been handed down, Argentina doesn’t really have a legal leg to stand on any more. That’s why it’s resorting to desperate measures like saying that Elliott is going to make an unconscionable amount of money if it wins: where legal reasoning has failed, all that’s left is an attempt to bypass the law and attempt to scramble onto the moral high ground. The problem, of course, is that it’s really hard for the contumacious Argentines to occupy any kind of moral high ground at all, even when their opponent is a notorious vulture fund.

As far as I know, Argentina has not hired any kind of bankers to run this proposed exchange offer. Which is further evidence, if any were needed, that it will never see the light of day. You’ve heard of giving someone an offer they can’t refuse: this is an offer the plaintiffs can’t accept, and Argentina knows it. I find it extremely hard to believe that the New York courts, having come as far as they have, will consider it a remotely adequate remedy.

A small country which has adopted a major global currency finds itself with massive debts and insolvent banks. Its only real hope is that it controls areas rich in hydrocarbons; the problem is that it has neither the wealth nor the expertise to exploit those hydrocarbons on its own. The result: it ends up essentially selling itself to an omnivorous global superpower which is interested only in access to resources rather than in domestic economic growth and prosperity.

This is the narrative which might well end up playing out in Cyprus. The local population is so unhappy with the euro that they’re seriously looking to bitcoins as an alternative, despite the fact that there is no real bitcoin economy, and insofar as there is one, it’s inherently deflationary. Much of the country’s political, economic, and religious elite is seriously talking about leaving the euro. If they decided to do that, Cyprus would probably become even more controlled by Russia than it is already — especially given that Gazprom is by far the most obvious candidate when it comes to finding a partner which can exploit Cyprus’s natural gas reserves.

If you want to see an example of what this story looks like in practice, just take a look at Ecuador, which adopted the dollar as its national currency back in 2000. Since then, it has had a brutal debt restructuring, causing most foreigners to give up on putting their money into the country. Predictably, China stepped into the vacuum, and is now by far Ecuador’s largest source of funds.

The latest development is that Ecuador is probably going to sell about three million hectares of pristine Amazonian rainforest — that’s about 12% of the total area of Ecuador — to Chinese oil companies. Ecuador might not be drilling in Yasuni — yet — but this new parcel is right next door, and if the Chinese come in to drill for oil there, the effects on Yasuni can’t possibly be positive.

Ecuador’s indigenous population is up in arms, but is effectively powerless in the face of China’s tsunami of cash. For its part, China has no real interest in Ecuadorean economic growth or the wellbeing of its people; it just wants to control Ecuador’s natural resources, and is willing to pay many billions of dollars to do so.

If Cyprus once again restructures its debt and/or leaves the euro, could we end up in a world where Russia controls Cyprus to anywhere near the degree that China controls Ecuador? The answer to that has to be yes, given Russia’s imperial ambitions and the degree to which Russia’s wealth dwarfs anything in Cyprus right now. Cyprus has already announced that its harsh capital controls are going to be in place for at least a month; realistically, they’re likely to stay much longer than that. So long as they remain in place as the Cypriot economy suffers the deepest recession in the history of the eurozone, it’s going to be very difficult to persuade Cypriot voters to accept the status quo.

The EU, then, should be thinking very hard about how it can bring Cyprus back into the European fold. There are as many differences between Cyprus and Ecuador as there are similarities — but still, Ecuador is a sobering reminder that rich, resource-hungry powers really can end up essentially taking over a nominally sovereign democratic nation. For many years, the EU looked down at emerging-market countries suffering major crises, with an attitude of “it could never happen here”. Well, we’ve now learned, the hard way, that big crises can happen in the EU. The lesson must surely be that nothing is unthinkable.

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Because even algorithms need a break, markets are closed today. We’re cutting straight to the good stuff: today’s somewhat truncated collection of links. We trust you’ll find additional ways to enjoy your Easter weekend. — Counterparties

Alpha
Steve Cohen’s week gets worse: SAC fund manager arrested by the FBI – Bloomberg
SAC fund manager pleads not guilty; will be released on $3 million bond – WSJ
Did the SEC and the DOJ allow Steve Cohen to “buy off the US government”? – John Cassidy

Takedowns
Time magazine’s terrible and terribly cover on cancer – Seth Mnookin

New Normal
“The future that the bond market sees for America: a slack and depressed economy” – Brad DeLong

Long Reads
How Samsung became the biggest smartphone maker in the world – Businessweek

Oxpeckers
“Westeros Playbook: Mike Allyn’s must-read briefing on what’s driving the day in King’s Landing” – Free Beacon

Wonks
A great, in-depth look at the intrinsic value of the US stock market – Aswath Damodaran

Politicking
Interest rates for subsidized student loans are set to double unless Congress acts – AP

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Simon Johnson has a rather startling claim in his NYT column today: “the decision to cap the size of the largest banks has been made. All that remains is to work out the details.”

It’s worth reading the entire piece, but Johnson makes a few key points about why the conversation about America’s big banks has changed. First, the world is beginning to learn from Cyprus, which, Peter Gumbel says, proves that Europe has entered a “brave new world where nobody is too big to fail.” This should have come as little surprise: the European Commission last year all but declared that taxpayers wouldn’t be put on the hook for bank rescues. In other words, Gumbel writes, European officials have made it clear that nothing like this will ever happen again:

The Commission has calculated that between October 2008 and October 2011, it approved a staggering $5.75 trillion, the equivalent of 37% of the EU’s GDP, in state aid measures to financial institutions. Of that, about $2.05 trillion was actually used between 2008 and 2010, as banks in countries from Ireland to Greece teetered on the brink of collapse and had to be rescued.

In America, Johnson says, a similar change is happening: “Opinion on Capitol Hill has now moved in a way that will continue to reinforce itself.” Ben Bernanke told Congress earlier this month that too big to fail is “still here” — though Bernanke also said policy on this is “moving in the right direction”. The break-up-the-big-banks crowd now includes liberals, conservatives, ex-bankers, and Mormons. Last week, the Senate unanimously passed a non-binding (and possibly entirely symbolic) amendment that would end any market subsidy for banks with over $500 billion assets. A bipartisan too-big-to-fail bill from Senators Sherrod Brown and David Vitter is currently being written, Johnson says.

So what could actually happen in Congress? Not much, says Ben White: “There is virtually no chance any significant piece of legislation will pass Congress that would meaningfully reduce the size of the nation’s biggest banks or restrict their activities.” But, as one industry source told the American Banker, it may not take a single bill to break up America’s banking giants: “I just think they will make it so damn hard, burdensome and expensive to be big, eventually some may decide it’s not worth it.” — Ryan McCarthy

On to today’s links:

EU Mess
Cypriot banks gorged on Greek bonds yet somehow passed EU stress tests – WSJ
“The last thing the Eurozone needs right now is uninsured depositors thinking hard about the prudence of their investments” – Pawel Morski
Austerity is threatening Europe’s envied infrastructure – Reuters
Pictures of lonely, expectant journalists waiting for a Cypriot bank run that isn’t happening – New Statesman

New Normal
What the “sharing economy” means to Wal-Mart: you work for them, for free – Reuters
How the food-stamp program evolved to become a “more permanent feature” of the US economic landscape – WSJ
Is job polarization holding back the labor market? – Liberty Street Economics
Student loan default rates are so high, the Department of Education’s collection system can’t keep up – CNBC

Interesting
Gamblers bet twice as much money on the NCAA Tournament as the Super Bowl – NYT
It costs more to live near a stadium of an elite Major League Baseball team – Trulia
The top four zip codes for credit card complaints are on the Upper West Side and South Florida – Bloomberg

Oxpeckers
The internet apocalypse, a story manufactured by an internet security company – Sam Biddle

Servicey
“Access to clean drinking water and sanitation”, and 9 other tips to improve your startup success – Anil Dash

Real Talk
The biggest threat to national security: wars – Spencer Ackerman

Says Science
Like journalists, gang members’ main online activities are “self-promotion and braggadocio” – BetaBeat

Alpha
The Yale Model of endowment investing is past its prime – Pragmatic Capitalism

Missed Opportunities
Salman Rushdie, Julian Schnabel, and Lou Reed were asked to appear together in Talladega Nights – The Talks

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John Kemp might just have delivered the perfect John Kemp column yesterday: 1,700 words on an obscure commodity you probably didn’t even realize was a commodity. In this case, it’s a noble gas: the Federal Helium Reserve (yes, there’s a Federal Helium Reserve) is at risk of imminent shutdown, which in turn threatens everything from the semiconductor industry to MRI scanners. Already, at least one particle accelerator had to delay operations “because of problems obtaining fresh supplies of helium.”

Kemp’s column is based in large part on a 17-page GAO report which includes this chart, showing the seemingly inexorable rise in the price of refined helium. (Another thing you didn’t know: helium comes in both “crude” and “grade A refined” versions.)

As you can see from the chart, the problem here isn’t finding crude helium, so much as it is refining the stuff into something usable. Reports Kemp:

Problems at helium refineries in Texas, Oklahoma and Kansas, as well as start up delays with new refining facilities in Qatar in 2006, led to shortages and rationing, as well as price spikes for some customers.

Reliable and affordable supplies are essential. But around half of the helium used in the United States, and roughly a third of the gas consumed worldwide, is sourced from a stockpile in northern Texas left over from the Cold War.

At the moment, the only way that helium can be sold from that stockpile is in order to pay down the debt which was run up in 1960 building the Texas facility. But thanks in large part to the soaring helium price, there’s virtually none of that debt left — and when it’s all gone, the government can’t sell any helium any more. As a result, it’s pretty urgent that Congress put in place some kind of mechanism to keep the sales going. The alternative would be devastating to many industries including the medical profession.

It also turns out that the US government’s role in the helium market is not dissimilar, in some ways, from its role in the mortgage market. Here’s Kemp:

The cost-recovery pricing formula ensured BLM was originally charging much more for its helium than other suppliers, minimizing the market impact.

But BLM has become such an enormous seller, in a market with few other competitors and substantial barriers to entry, that other suppliers have taken it as a benchmark, and moved their own prices higher to match it.

Essentially, when you’re the US government and you’re a major participant in a market, you can’t help but become the marginal price-setter. Whatever Frannie pays for mortgages becomes the market price for mortgages; whatever the government asks for helium becomes the market price for helium.

In both markets, the government wants out and wants the private sector to take over. But in both markets, the process of disentangling the government from the market is extremely difficult, because it can’t just shut down its operations and leave the market to its own devices.

Because Congress has left the helium problem to the last possible minute, it’s unlikely they’re going to be able to come up with an elegant solution here. Instead, they’ll just kick the can down the road by allowing the stockpile to continue to sell helium for another year or so. But over that time, someone is going to have to work out how to extricate the US government from the global helium market. If and when that happens, I hope that mortgage-minded legislators are paying attention. Because it’s long past time that the government stopped underwriting the vast majority of home loans in this country, and they could use all the ideas they can find.

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Today, Cyprus announced it will impose capital controls restricting where, when, and how depositors can access and use their money. Here are some of the things depositors won’t be able to do when the banks open in Cyprus tomorrow:

• cash a check
• withdraw more than €300 a day
• take more than €3000 in cash per person in any currency out of the country
• purchase more than €5000 in foreign goods and services with a credit card each month
• Make non-cash payments outside Cyprus without documentation showing they are paying for imports

These restrictions are intended to last for seven days, but Hugo Dixon doubts they’ll be that short-lived. In Iceland, capital controls have been in effect for seven years, and will stay in place for at least another two.

We’ll know for sure what an economy under these restrictions looks like when banks open tomorrow for the first time in ten days, but it’s pretty far from a modern, functioning economy. As far as the euro goes, David Keohane says the clear-headed thing: capital controls obviously “make a mockery of the idea of a currency union”.

Cardiff Garcia looks at at a meta-study on capital controls and finds that only once — in Malaysia — were they effective. In that case, the controls were “accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar”. Those things aren’t happening in Cyprus and won’t be.

Paul Krugman thinks the only way forward for Cyprus is a euro exit. Unfortunately for its citizens and economy, he doesn’t think it will come anytime soon.

All of which means that in Cyprus, a cash-stuffed mattress is once again the ultimate safety net. — Ben Walsh

On to today’s links:

EU Mess
Cyprus’s economy could shrink by as much as 20% from 2013-2015 – Institute for International Finance
Greece’s growth forecasts are again looking too rosy – FT Alphaville

Real Talk
Why a country is not a household: “The fed is much better off when it is short on cash” – Helaine Olen

Investigations
At least eight federal agencies are investigating JP Morgan – DealBook

Wonks
How the London Whale trade could have been stopped: Liquidity provisions – Rhymes With Cars & Girls
Global banking’s post-crisis legal tab will soon surpass $100 billion – WSJ

Talking Your Book
High-speed trading totally fine, says Columbia researcher financed by high-speed trading firm – HuffPo

Long Reads
“What are foundations for?” – Rob Reich

Tough Choices
Faster smartphones, or better battery life? – Farhad Manjoo

For the Record
Wells Fargo: The Harlem Shake is inconsistent with our image – Channel 11, Atlanta

Fiscally Speaking
Gay marriage could save the Federal government $450 million a year – Josh Barro

Says Science
Organic food extends the lifespan and fertility of the fruit flies – Atlantic

Negative Indicators
Companies that favor bullish analysts on earnings calls are more likely to restate earnings – WSJ

Servicey
“Syncing to paper is no more complicated than it sounds” – Robert Grerner

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It’s paywall season right now: the Washington Post, the San Francisco Chronicle, the Telegraph, the Sun — all have recently announced plans to erect paywalls in an attempt to extract subscription revenues from their most loyal online readers. And other paywalls are being tweaked: the NYT paywall is getting less porous, while Andrew Sullivan’s is being tightened up, with a new $2/month option to complement the existing $20/year price point.

The trend here is clear. There is now only one major US newspaper without a paywall of some description, although others have free spin-off sites, like Boston.com or SFGate.com, which act a bit like the outside-the-paywall content on other sites.

There are three big drivers of these decisions. The first is that there’s no hope that online ad revenues will ever grow to replace print ad revenues. They’re barely growing any more, even as they’re still only a small fraction of total ad revenues. The second is that for various reasons, newspapers need to “cling to the mantle of quality at near insane costs”, as Sarah Lacy puts it. If costs are stubbornly high while revenues are shrinking, then the only possible solution is to try to raise new revenues by any means necessary — or go bust.

Finally, there’s the behavioral aspect: newspapers in general, and the NYT in particular, are quite deliberately habituating readers to the idea of paying for content. This was an obvious strategy even before most of the paywalls launched, back in 2010: first get people used to the idea of paying at all, and then, slowly, raise the amount that you ask them to pay over time.

There are an infinite number of points on the spectrum between tip jar and paywall, but there does seem to be a clear move to the right over time, towards less porous and more expensive paywalls. Some paywalls, like the FT’s, are what you might call Metropolitan Museum paywalls, porous in name only. While in theory the FT works on a meter system, giving people a certain number of free articles before asking them to pay, in practice if you want to read an FT article you’re going to be asked to pay — even, annoyingly, if you’re already a subscriber. (I would dearly love a subscription which authenticates based on device rather than on an easy-to-forget and hard-to-enter username/password combo: can’t the FT just see that it’s my phone accessing the site, and let me read anything I want if I’m a subscriber?)

And in general, the more you’re asking for, the more coercive you need to be. At a buck or two a month, loyal readers are happy to support you. At $15 or $20 per month, you need to break out the sticks as well as the carrots.

One of the problems with paywalls is that everybody wants their paywall to be simple and transparent and easy for everybody to understand. But if you do that, you can’t A/B test; you can’t work out empirically what the optimum price is or what the best place to set the meter is. Which is where the raft of different paywalls out there comes in handy.

Here’s my prediction: At some point, the industry is going to informally settle on a single management-consultancy company to ask for paywall advice from. Everybody’s going to use the same company, with the result that the consultancy in question is going to see real internal figures from lots of different newspaper publishers, with lots of different models. The consultancy will then — for a price — tell its clients what “best practice” is in the industry, which is code for “this is the way that the most successful newspapers are doing it”. No one site can easily do A/B testing on its own. But put them all together in the head of a well-connected management consultant, and it becomes much easier to see what’s working and what isn’t.

But all of the paywalls and consultants in the world won’t change the fact that the amount of information freely available on the internet continues to grow very fast, and that the number of people willing to pay for any kind of news online is always going to be a small fraction of the total online news-reading population. As Lacy says, there’s an exciting future for online news — even if the prospects for legacy-burdened newspapers are dim. The paywalls might help with newspapers’ finances. But they’re certainly not going to help make them any more relevant.

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The FHFA today announced that it might finally do something about the force-placed insurance industry, a particularly lucrative — and scandalous — corner of the mortgage industry.

Jeff Horwitz, who has been leading on this story since 2010, says that the long-overdue move is a “blow to banks and other mortgage servicers.”

Horwitz’s original report explains what the problem is: mortgage servicers foist overly expensive and unnecessary insurance policy on homeowners. When a homeowner lets their property’s insurance policy expire, the mortgage servicer can step in and buy a policy on the homeowner’s behalf. This is meant to protect both homeowner and the lender, but it quickly becomes egregious: homeowners were often stuck with insurance that cost 10 times more than their previous policies. In turn, mortgage companies made millions for referring homeowners toward specific insurance companies.

FHFA’s proposal is pretty simple: it bans the kind of payments between insurance companies and mortgage servicers that Horwitz likened to “simple kickbacks”. Not surprisingly, pushing homeowners into pricy policies they didn’t need was very profitable. JP Morgan reportedly made $600 million since 2006 through its relationship with Assurant, one of the largest force-placed insurance companies. One report found that 15% of force-placed premiums go straight back to banks.

The crackdown on kickbacks is also a long time coming. FHFA, the Fannie Mae and Freddie Mac regulator run by the widely criticized Ed DeMarco, privately announced to industry execs in February that the agency had killed a force-placed insurance reform that would have saved taxpayers at least $145 million annually.

As Karen Weise notes, FHFA is also lagging states. Last week New York announced a $14 million penalty and settlement with Assurant. This follows actions by a handful of state actions, including by Florida and California.

Assurant, meanwhile, told the WSJ it’s premature to speculate about the effect of FHFA’s proposals. In some sense, Assurant is right: its stock was actually up today — to a new post-crisis high — and the public is now free to comment on the proposal, as are Assurant’s lobbyists. The industry that has received many millions in kickbacks for overcharging homeowners will now have 60 days to comment on how it feels about losing out on those kickbacks. — Ryan McCarthy

On to today’s links:

Ugh
TurboTax is fighting to keep simple, free tax filing from becoming a reality – Liz Day

Data Points
A majority of Americans, and 70% born after 1981, support gay marriage – Ezra Klein

Facebook
Nasdaq is paying $62 million to market makers who lost $500 million in Facebook’s IPO – Reuters

Welcome to Adulthood
Almost half of all college grads are underemployed — and likely to stay that way – WSJ

Tax Arcana
Tax havens are the biggest source of foreign investment in the BRICS – Quartz

Alpha
The second-largest pension fund in the US may switch entirely to passive investing – Investment News
“Don’t do it CalPERS! If you’re not allocating capital to its most productive uses, who is?” – Matt Levine
Steve Cohen bought a Picasso for $155 million “as a gift to himself” – NY Post

Housing
Another great housing report: Home prices up 8.1% over last year, Phoenix up 23% – S&P
“All 20 cities posted annual increases in January, as New York ended a string of annual declines” – WSJ

Wonks
“It’s not a question of whether these things should or shouldn’t be traded… It’s simply that they cannot be” Noah Smith

Goldbuggery
“Money has always been whatever society agrees on” – Armstrong Economics

Sad Declines
My tweets! The hashtags do nothing! – Nieman Lab

Huh
Almost half of surveyed US workers haven’t noticed the higher taxes they’re paying – WSJ

Real Talk
Repeat after me: “A country is not a company” – HBR

Terrifying
Buzz Bissinger spent $587,412.97 on clothes in three years – GQ

Crisis Retro
FYI: Hiring Dick Fuld “might attract negative publicity” – WSJ

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Dell might not be Michael Dell’s much longer. Dell has teamed with private-equity firm Silver Lake to buy the company he founded for $13.65 per share, or $24.4 billion — but now Blackstone and Carl Icahn have each submitted rival bids. Those bids are both worth slightly less than $15 a share, the WSJ reports. If either is successful, Michael Dell is likely to find himself far less powerful at his own company — or even out of a job entirely.

The WSJ’s David Benoit has a great side-by-side comparison of the three competing offers, and breaks out six different scenarios for a deal to be done.

Under a “go-shop” provision in the initial deal, Dell’s board was allowed to freely seek competing offers; in fact, the board owes a fiduciary duty to Dell shareholders to get the best deal possible. Steven Davidoff notes the Dell board can only keep talking to the rival bidders if they “conclude after consultation with outside counsel and its financial advisers that one offer, or both, could reasonably be expected to result in a superior proposal”.

According to Reuters’ Jessica Toonkel and Greg Roumeliotis, Dell’s board thinks the new bids might indeed be superior to Michael Dell’s. It’s unclear whether leaking that view to the media was intended to provoke an improved bid from the founder.

When it comes to putting a price on Dell, Roben Farzad points out one wild card: the company’s 3,449 patents (with another 1,660 pending). Those patents are surely worth something, but as patent expert David Pratt says, their value “is often misunderstood and difficult to price”. Which is surely catnip to the hundreds of bankers and lawyers advising three private equity firms, a corporate board, and Michael Dell himself. – Ben Walsh

On to today’s links:

TBTF
Who wants to break up big banks? The Senate apparently – Suzy Khimm

EU Mess
Why the Cyprus crisis isn’t over yet – Felix
“I call this Cyprus leaving the euro but keeping the word “euro” to save face” – Tyler Cowen
After Cyprus, the “unrestricted movement of capital is looking more and more like a failed experiment” – Krugman
“Do capital controls make a mockery of the concept of a currency union? Yes, obviously” – Joseph Coterill
The Dutch financial minister commits a Kinsley gaffe about Cyprus – Tim Fernholz
“As soon as the money leaves, the people who go to restaurants, buy cars and buy property leave too” – FT

Housing
Cash buyers (read: mostly investors) account for about one-third of all U.S. homes sales – WSJ
The connection between single-family housing starts and the unemployment rate – Calculated Risk

Popular Myths
Why meritocracy is a terrible idea – Matt Yglesias
Please remember that the benefits of college aren’t entirely economic – Evan Soltas

The Fed
Bernanke: Don’t worry about currency wars – Calculated Risk

Alpha
The sell-side research industry is maybe, possibly worrying about Twitter – Joe Weisenthal

Right On
A blacklist of business jargon – Bryan Garner

New Normal
One of the fastest growing unions in the US doesn’t negotiate wages, but it does provide healthcare – NYT

Oxpeckers
Punditry in financial media, in one hilarious screenshot – Floating Path

Crisis Retro
Employees at Bear Stearns and Lehman also made really bad personal mortgage decisions – WSJ

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If a gaffe is what happens when a politician accidentally tells the truth, what’s the word for when a politician deliberately tells the truth? Dutch finance minister Jeroen Dijsselbloem, the current head of the Eurogroup, held a formal, on-the-record joint interview with Reuters and the FT today, saying that the messy and chaotic Cyprus solution is a model for future bailouts.

Those comments are now being walked back, because it’s generally not a good idea for high-ranking policymakers to say the kind of things which could precipitate bank runs across much of the Eurozone. But that doesn’t mean Dijsselbloem’s initial comments weren’t true; indeed, it’s notable that no one’s denying them outright.

Dijsselbloem’s interview can be summed up simply: we’re not bailing out banks any more. Instead, we’re going to let them fail.

When a European bank runs into difficulties in the future, under this view, the EU is not going to help bail it out. Instead, it will go down a list: the bank’s executives come first, then its shareholders, then its bondholders, and finally its uninsured depositors. All of them will take losses before the national or European authorities step in with bailout money.

In principle, this makes perfect sense. Given the choice between Ireland and Iceland — between guaranteeing all bank creditors, on the one hand, or just letting the banks fail, on the other — the latter seems to inflict pain where it’s warranted, on irresponsible lenders, including foreign lenders, rather than on the country as a whole.

What’s more, what you might call the Dijsselbloem Principle does help to remind people that depositors are creditors, and that when you deposit money with a bank, you’re lending that money to an entity which might not pay you back. Deposit insurance is basically a government guarantee backstopping that loan: if the bank can’t pay you back, the government will. But deposit insurance is only there for insured depositor — it can’t mission-creep its way into backstopping uninsured depositors and even the bank itself.

Such a principle would have consequences, of course, both intended and unintended. Paul Murphy provides the requisite parade of horribles:

It’s a direct call to depositors across the eurozone — retail and corporate alike — to move cash now and spread it across a portfolio of the largest available banks. It’s direct advice to dump bank debt. And it’s a direct invitation to speculate that the EFSF, the ESM, and the rest of the alphabetic bailout soup is going to be discarded in favour of calling on depositors’ money across the Continent.

Much more unnerving than the potential future consequences of the new policy, however, was the immediate reaction of bank stocks to Dijsselbloem’s comments: the Euro Stoxx Banks index fell almost 4% on his comments.

Which brings up what you might call the Other Dijsselbloem Principle: you can do anything you like, just so long as it doesn’t spook the markets. This was the crucially-important background to the negotiations between Cyprus and the EU: the Europeans were emboldened to be tough on Cyprus by the fact that global markets seemed utterly unconcerned about what was going on in an economy which accounts for about 0.15% of European GDP, and shrinking.

After all, anything that the Eurogroup did in Cyprus would have set a dangerous precedent somehow, even if they had simply capitulated and agreed to a full €17 billion bailout of both the sovereign and the banks. We still don’t know what kind of capital controls Cyprus might impose on its banks when they reopen for business in the morning: those controls ensure that a Cypriot euro is not fungible with a German euro, and as such represent Cyprus’s first steps towards fully-fledged exit from the eurozone.

Indeed, for all that Dijsselbloem’s comments caused the most immediate market reaction, traders with a slightly longer-term time horizon would do well to pay attention to the real powers in Cyprus: people like  lawmaker Nicholas Papadopoulos, Nobel laureate Christopher Pissarides, and even Archbishop Chrysostomos II, the head of the Cypriot Orthodox Church. All of them are talking openly about exiting the eurozone — the one degree of freedom which Cyprus really has, now that the Troika has imposed austerity, bank resolution, and everything else onto the island from above.

Think about it this way: exiting the euro is a bit like the US hitting its debt ceiling and defaulting on its Treasury bills. Both of them are meant to be unthinkable, impossible. But both of them are thought about at length, and entirely possible in theory. What’s more, the opportunity is always there. No country has exited the euro in the past, just as the Treasury has not defaulted in the past. But even if the probability at any given point in time is small, over a long enough time horizon it still grows. And right now, the probability of a country exiting the euro is not small: no country has ever been more likely to exit than Cyprus is right now.

Dijsselbloem’s interview today was undoubtedly a prime piece of political incompetence: there’s no reason at all for anybody in the Eurogroup to be drawing broader lessons from Cyprus at this point. The market can speculate about the Cypriot precedent all it likes; it behooves no politician to to be clear about what they think it means, least of all the Eurogroup president. Maybe, in a few months’ time, when the Cyprus chaos has died down, the EU could start putting out extremely long and dry papers about what has been learned from Cyprus, along with a detailed look at the costs and benefits of letting banks fail rather than bailing them out. But if you’re making policy on the fly in Cyprus, the last thing you want to do is turn that cobbled-together precedent into something semi-binding on the rest of the continent — whatever the policy might be.

Still, the toothpaste is out of the tube now, and the traders selling off bank shares were acting entirely rationally. The chances of European banks being allowed to fail are higher now than they were pre-Cyprus. As a result, we should expect uninsured deposits to continue to flow from the periphery of Europe towards the center. Which in turn means extra pressure on Italian and Spanish banks, just when it’s least needed.

This was not a good weekend for Russian billionaires. First, Boris Berezovsky was found dead at his English country estate. Now, all the uninsured depositors (read: Russian plutocrats) at Cyprus’s two largest banks are going to be hit much, much harder than they feared they might be when the Cyprus crisis first erupted last week.

Back then — a long, long week ago — Cypriot president Nicos Anastasiades stood firm: there was no way he would allow uninsured depositors to lose more than 10% of their money. What a difference a week makes: now, if your uninsured deposits are at the Bank of Cyprus, you’re probably going to lose about 40% And if they’re at Laiki, you’re going to lose everything.

The agreement between the Cypriot government and the Troika of the EU, IMF, and ECB is a bold and brutal geopolitical power-play. There might be language in the official communiqué about how “The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution”, but given the billions of euros that Russians are being forced to contribute unwillingly, the chances that they’ll happily throw a bit more money into the pot have to be tiny.

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU. For one thing, there won’t be any capital controls: that’s a good thing. (Some deposits at Bank of Cyprus will be frozen, which is a kind of capital control, but there aren’t corralito-style barriers on the general movement of euros in and out of the country.) On top of that, public markets have been left unruffled: there’s been no panic on Europe’s bolsas, partly because the biggest hit has been taken by private Russian citizens.

Much more importantly, the two main vectors of contagion — hitting insured deposits, and exiting the euro — have been avoided. And most elegantly of all, from the Troika’s point of view, the whole thing has been constructed under existing bank-resolution authorities, which means that no vote needs to be put to the Cypriot parliament, and therefore no amount of Russian pressure can veto the deal in Nicosia.

Of course, the game does not end here. It’s unlikely that Russia will appear bearing a better deal at some point in the next 24 hours, but the hit to Cyprus’s GDP is going to be so enormous that staying in the euro over the long term, absent another round or two of massive debt relief, is going to be extremely difficult. The deal as constructed is, in Pawelmorski’s wonderful phrase, “Iceland without the fish”: Cyprus, as Iceland did before it, is letting its banks fail, since they’re too big for the government to bail out. But Iceland has other industries besides banking — and, more importantly, has a floating currency as well, which by weakening can make those industries more competitive.

In order to truly become Iceland, then, Cyprus is going to need to devalue and default. If it doesn’t, then it will live unhappily under the yoke of Europe-imposed austerity until such a time as the parliament revolts, the austerity measures are revoked, and the island drops out of the euro, and probably out of the EU as well. Cyprus’s economy is going to suffer greatly over the next few years, and its citizens are going to blame Europe for their woes; it’s entirely possible that they will voluntarily leave the euro, if the alternative is negative economic growth as far as the eye can see, along with a massively overvalued currency. If and when those rumblings start appearing, expect the Russians to start being extremely nice to the Cypriots all over again.

Meanwhile, the resolution of Laiki is going to give the world a very real example of what happens when a too-big-to-fail bank is allowed to fail. Laiki is small by global standards, but very large by comparison with Cyprus’s GDP. If Cyprus can survive Laiki’s collapse, then maybe — just maybe — the world could cope with the “resolution” of a big bank like Citigroup. But that’s a very big “if”. More likely, the costs to Cyprus of allowing Laiki to fail will be enormous, both politically and economically. And 800,000 Cypriots will for years to come be paying the price of what Mohamed El-Erian elegantly calls “bailout fatigue”.

I can’t remember ever thinking that I might not go to college. Both of my parents have graduate-level degrees, as does my sister; I’m the least-educated member of my family. Which is why I’m shocked but not surprised by the amazing series of charts that Evan Soltas has put together about the way in which educational attainment is inherited.

The short version can be told in two charts. The first shows the clear relationship between income (which runs along the x-axis) and educational attainment. You can’t read the x-axis here, but the middle of the chart corresponds to an annual income of about $100,000 per year; below that, very few people have a college degree, while only at the very top of the income spectrum does it become the norm.

Now look at the same chart, but looking only at people whose fathers have a college degree. Suddenly it’s a sea of yellow, even at lower incomes, while the red bars (high-school dropouts) have pretty much almost entirely disappeared.

The lower graph, of course, is what we would want the US population as a whole to look like, in some ideal world: just about everybody graduating high school, with lots of bachelor’s (light yellow) and graduate (dark yellow) degrees. This is the world of opportunity facing people whose fathers graduated college, and it would be great if people whose fathers didn’t graduate college had a glimpse of it.

Sadly, they really don’t. As Caroline Hoxby Christopher Avery show, poor kids simply don’t apply to the best universities, and often end up at subpar two-year colleges even when they have excelled at high school and could get full scholarships to the best colleges if only they just applied.

Meanwhile, at the other end of the spectrum, rich kids are paying far too much for graduate degrees which simply aren’t worth it. Matt Yglesias makes that point about journalism school: at $83,884 for one year, not to mention the opportunity cost of all the money you could have earned and connections you could have made by staying in the real world, it’s an insanely expensive piece of paper, which makes working for free online look downright lucrative in comparison. And Bendor Grosvenor has a clear-eyed look at the world of $75,000 degrees in art business, of all things: they’re “next best thing”, he says, to working for free for a few years as an art-world intern.

Educational qualifications are a way of getting your foot in the door, of getting entry to a certain world. Getting your high-school diploma opens up a huge world to you which would never otherwise be within reach; getting an undergraduate degree opens up a smaller but more lucrative world. Graduate degrees don’t carry the same kind of clear cost/benefit advantage, but they do nearly always give you some kind of opportunity — in the world of journalism, or in the art world, or even as a lawyer — which would otherwise most likely be closed off to you. The chances of becoming a tenured professor, for instance, are slim at the best of times, but they’re pretty much zero if you don’t have a PhD.

College isn’t always worth the money, and it’s almost never worth it if you end up dropping out. If more people go to college, more people will drop out, and in general more people will end up having wasted their money, and would have been better off never going in the first place. But from a public-policy perspective, as Soltas says, the numbers are inarguable — especially when you realize that once a single person graduates from college, you’re not getting just one degree out of that deal. Rather, you’re getting many generations’ worth of college graduates: the degree-holder’s kids, and their kids, and so on.

America greatly admires people who were the first person in their family to go to college — and rightly so. We should put some real money, and some policy, where our admiration is. If we want to become a better-educated society, we have to target the low-lying fruit — the non-U families — rather than spending any extra effort on pushing a college education on the kind of people who are always going to get a degree anyway.

Update: Thomas Lumley has prettier versions of the charts.

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Where the hell should you put your money these days? If you’re like most Americans, you probably haven’t saved enough for retirement. That the stock market is flirting with an all-time high isn’t actually helpful — it’ll make it that much harder for savers to catch up.

People used to listen to brokers for this kind of thing, but the brokerage industry isn’t what it used to be. “Commissions are drying up,” Zeke Faux wrote in October. The industry’s fees are down 31% since 2009,  and average daily volume is down 36%. “It’s an impossibly tough business,” the CEO of ThinkEquity said.

Into that mix, Nathaniel Popper reports, comes LPL Financial, which has quickly become the largest nation’s fourth-largest broker, just behind traditional Wall Street powers like Merrill Lynch and Morgan Stanley. LPL’s lower-cost model uses brokers that are “essentially contractors”, and they’ve targeted rural America. They’ve also been hit with more than their share of penalties “for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.”

Unlike its competitors, the company doesn’t have its own investment products. (JP Morgan has been accused of favoring  its own financial products, but it’s also a classic stockbroker conflict.)

Then there’s the question of whether you should use a brokerage firm at all — especially when lower-cost services like target-date funds or Wealthfront do all the work for you and are showing real promise. Mebane Faber reminds you that you are not a good investor — and, in fact, very, few people are. “Simply picking a stock out of a hat means you have a 64% chance of underperforming a basic index fund, and roughly a 40% chance of losing money!” he writes. Howard Lindzon, on the other hand, argues stock-picking is ok — just make sure it’s a hobby and that you don’t care about underperforming benchmarks.

Tadas Viskanta has one of the best, linky rundowns of the new state of individual investing. His conclusion is ultimately similar to Helaine Olen’s: almost every facet of the personal finance industry has lead us astray, from professional advisers to the traditional 60/40 portfolio. Here’s Viskanta:

In the end it may be the case that our financial goals are simply too ambitious and that we need to lower our sights. What is clear is that we as a society have failed and are continuing to fail the average saver.

– Ryan McCarthy

Alpha
Stevie Cohen’s secret sauce: make big bets before market-moving events (and be right) – WSJ

EU Mess
“The future of the euro zone has been put on the line for a few billion euros” – WSJ
Cyprus’s choice: “become a gimp state for Russian gangsta finance, or turn fully towards Europe” – FT Alphaville
Russia turns down Cyprus’s latest aid offer – Rueters
What are the Russian’s playing at? – Felix

Popular Myths
America’s debt is hurting the economy — unless you look at actual, real data – Bloomberg

Ugh
The rich give less than the poor, and when they do give, they don’t give to the poor – The Atlantic
Lose $6 billion in a very public way and you too could be lauded at a Wall Street awards dinner – WSJ
Betting against the London Whale was a “fairly easy and obvious trade to do” – William Alden
“Things to keep in mind when looking at buying a German castle” – WSJ
Google alerts are “broken” and “useless” – Venturebeat

Hope/Change/Etc.
Why isn’t the White House defending its sweeping financial reform bill? – Jeff Connaughton

Retractions
Richard Florida admits that coffee shops filled with graphic designers discussing yarn bombing won’t save cities – Daily Beast
“My response? Bollocks.” – Richard Florida

Billionaire Whimsy
David Rubenstein knows more about panda mating habits than you do – FT

Compelling
“In money management what sells is the illusion of certainty” – Research Puzzle

Servicey
Working on planes is a terrible idea. Just drink – Businessweek

Great Headlines
“Gonorrhoea, online dating and credit card phishing scams” – John Hempton

Vintage Bess
“Text world leaders during late-night bike rides and watch the pounds melt right off – Bess Levin

Hackers
John Doerr still uses AOL, gets hacked – TSG

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Paul Murphy, watching Cypriot finance Minister Michael Sarris returning empty-handed from Moscow, says that “Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why”. His point is that the most likely outcome right now — he calls it “popping the red pill” — is that big depositors at Laiki Bank (read: rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it?

I don’t pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense.

Firstly, it’s worth noting that Russia is actually moving backwards on the amount of help it’s likely to extend to Cyprus. When the bailout plan was first announced, it included Russia extending its existing €2.5 billion loan to the country by five years, as well as reducing that loan’s interest rate. Now, Russia is refusing to agree even to that.

More generally, Russia is taking an absolutist stance with respect to Cyprus. No, we won’t restructure the money you owe us. No, we won’t buy a bank off you. No, we aren’t interested in your natural-gas reserves. And underlying it all, of course, an unspoken — and all the more powerful for being unspoken — physical threat to any Cypriot who causes powerful Russians to lose billions of euros.

Why would Russia be acting this way towards Cyprus? The obvious answer is that Russia knows exactly who’s sitting around this poker table: it’s not Cyprus that they’re playing, it’s the EU. If Russia were to enter into good-faith negotiations with Cyprus right now, that would help the EU, by reducing the amount of EU support that the island nation needs. Moreover, any deal that Russia made with Cyprus could be vetoed by Germany, or the Eurogroup, or the ECB, or even possibly the IMF. Russia is too big and too important to try to do deals which could be forcibly unraveled on a German finance minister’s whim.

And while we have a pretty good idea what the Russian prime minister is saying to Sarris in Moscow, we have a much less clear idea of what other Russians are saying to Cypriot lawmakers in Nicosia. The Cypriot capital is reportedly full of mysterious Russians right now, and it might not be all that hard for them to nobble a vote in parliament — especially given that just about any vote is going to be massively unpopular with voters. Remember that if the Cypriot parliament does nothing, then Cyprus collapses; we’re going to need a big show of political unity to prevent that. And so far, the only political unity we’ve seen has been against the bailout, not for it.

Which brings me to the blue pill, as described by Murphy:

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

Murphy says it’s “obvious” which choice Cyprus should take. But it’s probably much less obvious to Cyprus’s parliament. As Paul Krugman says, Cyprus is very attached to its shady banking sector. And what exactly does Murphy have in mind when he talks about an economy based “on something more sustainable”? Natural gas? Well, given Cypriot national ties, it’s easy to see which company has pole position in terms of getting that mandate: Gazprom.

All of which is to say that there’s a real possibility — maybe not an outright probability, but certainly a good chance — that Cyprus will end up taking the blue pill rather than the red pill, and becoming a Russian client state, either inside or outside the euro. After all, Cyprus is a Eurogroup client state right now, and has wound up in this sorry place as a result. If it pops the red pill, it will have essentially no autonomy for the foreseeable future in any case.

It’s also easy to imagine that Putin’s Russia views its relations with the EU as something of a zero-sum game. Russia also has a more than 150-year obsession with acquiring influence, if not outright control, over warm-water ports in Southern Europe. Looked at that way, the loss of Cyprus from the EU to Russia would be a clear loss to the EU and a clear win for Russia.

Which, in turn, might explain why Russia is doing absolutely nothing which might help the EU. It’s making a risky and aggressive move to essentially seize Cyprus from the hands of Europe, and to gain an important geopolitical foothold in the eurozone. The downside to that move is that if Cyprus pops the red pill, then a lot of Russians, especially the ones with deposits at Laiki, could lose a lot of money. But even if that does happen, Russia will be waiting patiently on the sidelines, with a lot of new money if needed, ready to snap up Cypriot assets at fire-sale prices.

There’s no doubt that the best outcome for Cyprus, and for the EU, would be for Russia to extend its help now, before Cyprus’s banks reopen on Tuesday. But Russia doesn’t want what’s best for Cyprus, or for the EU: Russia wants what’s best for Russia. And the way it’s acting reminds me of nothing so much as a classic Wall Street bear raid, designed to drive down the price of something you want to be able to pick up very, very cheap. What’s more, it might even work.

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Resurrecting asset classes that fell out of favor after the financial crisis is all the rage this week. First, there was the news that the synthetic CDO market has risen from the dead (kind of). Now, we learn that JP Morgan is selling a small new batch of mortgage-backed securities, the first such transaction from any of the biggest banks since the financial crisis.

Some characteristics of JP Morgan’s new offering are reminiscent of crisis-era securities and have drawn skepticism from credit raters and investors. Specifically, Fitch was concerned that the deal was “significantly diluted” by weak guarantees the bank made about the quality of the 752 underlying loans. This prompted David Reilly to warn that even though underwriting standards have tightened in recent years, the lesson of 2007 and 2008 remains: “investors shouldn’t quickly or easily give up their right to seek redress.”

Maybe that explains why the loss buffers on JP Morgan’s offering are greater than similar deals brought recently by smaller issuers. That feature, says Houman Shadab, is “probably ultimately more valuable to investors” than putback rights.

Moreover, as Matt Levine says, the loans underlying this bond are jumbo mortgages to high-quality buyers with an average loan-to-home-value ratio of just 65%. On top of that, all the loans were examined by an independent reviewer. That’s a far cry from the bubble-era no-doc loans with loan-to-value ratios in excess of 90% and sometimes even 100%.

Whether or not investors should jump back into the private-label RMBS market right now, it’s still far too tiny to be of much consequence to the overall health of the financial system. The market is still small: only $13 billion in non-agency mortgage debt was issued in 2012, or about 1% of the equivalent figure in 2005. At some point, the private sector is going to have to get back into the mortgage game. But for the time being, it’s a bit player. — Peter Rudegeair

Alpha
PIMCO’s new investment strategy: direct property purchases – Reuters

EU Mess
Cyprus is the “sum of all FUBAR” – Paul Krugman
“We have never seen this”: Notes from European officials’ crazy conference call on Cyprus – Reuters
Statement from the Eurogroup President on Cyprus – Eurogroup

The Fed
“You can thank Ben Bernanke that we are not in a global depression” – Stanley Fischer

Quote Of The Week 
Lululemon CEO: “The only way to test for the problem is to put the pants on and bend over” – WSJ
All the best worst Lululemon puns in one post – Business Insider

JPMorgan 
Jamie Dimon, inequality crusader? – Louisville Courier-Journal
JPMorgan’s management rating secretly downgraded by regulators – John Carney

Wonks 
We can mostly blame old people for our deficit problems, not higher healthcare costs – Ezra Klein
Income inequality in America is increasingly permanent – Ryan McCarthy
Why it’s time for balanced-budget stimulus – Robert Shiller

Niche Markets 
The rise of the Amish romance novel – LA Review of Books

Says Science 
Children are awful to each other – NPR

Whoops 
Stan Chart CEO corrects himself: we definitely committed “knowing and willful criminal conduct” – Reuters

Real Talk 
“Profit margins are probably the most mean-reverting series in finance” – Climateer Investing

TBTF 
Hilarious: An idea for a TBTF ETF – Barry Ritholtz

Bubbly 
A PE firm is investing in an “innovative” partially-popped popcorn company – Fort Mill Times

Oxpeckers
David Grann explains his excellent Twitter account – The Awl

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