Felix Salmon

Counterparties: Apple’s superlative borrowing

Apr 30, 2013 22:35 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.

Apple has a long list of superlatives to its name; this week, it added two more titles to the roster. It’s now the world’s biggest dividend payer, and also the company behind the largest investment-grade corporate-bond offering of all time. Today’s $17 billion in bonds, which attracted an order book of $50 billion, constitute Apple’s first debt issuance since 1994; the company ended up raising more money than even the Facebook IPO did.

All of the proceeds will end up in the pockets of shareholders: Apple plans to return $100 billion in total by the end of 2015, through stock buybacks and bigger dividends. That makes the offering the latest act in Apple’s recent history of legal tax avoidance. Over two-thirds of the company’s $145 billion cash pile is located overseas, and borrowing money, rather than repatriating overseas cash, will help Apple avoid a tax hit of up to $35 billion.

Apple issued six different bonds in total; the pricing was aggressive, with the new three-year bonds coming at a yield of 0.51%, just 20bp over Treasuries, and the 30-year bonds pricing 100bp over, at 3.88%. That’s in line with the triple-A yields commanded by Microsoft; Apple is rated one notch lower, at AA+.

Apple’s decision to tap the debt markets is emblematic of the continued surge in corporate bond sales this year (a “bond bacchanalia,” as Bloomberg put it). Companies are taking advantage of historically low interest rates — Matthew Yglesias points out that Apple is borrowing at a negative real yield — and an excess demand for safe assets. So far this year, they’ve borrowed $1.39 trillion: that’s almost $17 billion per day. – Peter Rudegeair

On to today’s links:

Home prices jump 9.3% over last year — and a whopping 23% in Phoenix – S&P/Case-Shiller

How retirement fees cost you, a scrolling explainer – Frontline

JC Penney’s disastrous ex-CEO was paid 1,795 times the average department store worker – Bloomberg

New Normal
There’s an “epidemic of joblessness” among the world’s young – The Economist
Chart: The Insane levels of youth unemployment in Europe – Joe Weisenthal

EU Mess
Unemployment in Europe hit a record high in March – BBC
Eurozone unemployment in eight charts – Quartz

The studies behind austerity are weak. The study behind “uncertainty” is worse – Ezra Klein
Americans don’t care as much about inequality as academics would like – Real Clear Markets
Does income inequality lead to political inequality? – Bruce Bartlett

Google just launched its own payment card (in Kenya) – Quartz

Fred Wilson regrets how his company managed TheStreet.com – A VC

David Petraeus may be looking to rebuild his image by joining a private equity firm – Valleywag

So Hot Right Now
Chickpea farming is booming thanks to America’s growing appetite for hummus – WSJ

Hedge funds are leading the push to privatize Fannie and Freddie – Bloomberg

And, of course, there are many more links at Counterparties.



This is a great move by Apple. I think they are going to slowly but surely lose their marketing appeal and innovation edge. This is one way to not only keep people happy when they think about your company, but keep the mainstream media talking about you as well.

Posted by UICJim | Report as abusive

Learning from breast cancer

Felix Salmon
Apr 30, 2013 15:12 UTC

Over the weekend one of my friends took to Facebook to ask a very good question. Her four-year-old daughter was going to run a lemonade stand, and my friend wanted suggestions “to incorporate an element of giving into the project”. Which charity should the daughter start supporting with her lemonade-stand profits? There were some very good answers, but there was also one woman who suggested, of all things, breast cancer research.

The Facebook post appeared at roughly the same time as Peggy Orenstein’s excellent 6,600-word NYT Magazine cover story on the problems with the breast cancer industry. Orenstein concludes:

It has been four decades since the former first lady Betty Ford went public with her breast-cancer diagnosis, shattering the stigma of the disease. It has been three decades since the founding of Komen. Two decades since the introduction of the pink ribbon. Yet all that well-meaning awareness has ultimately made women less conscious of the facts: obscuring the limits of screening, conflating risk with disease, compromising our decisions about health care, celebrating “cancer survivors” who may have never required treating. And ultimately, it has come at the expense of those whose lives are most at risk.

There are broader lessons to be learned from what we’re seeing in the world of breast cancer.

Firstly, Americans are bad at statistics. When it comes to breast cancer, they massively overestimate the probability that early diagnosis and treatment will lead to a cure, while they also massively underestimate the probability that an undetected cancer will turn out to be harmless. They’re bad at pathology: they’re easily convinced that something called ductal carcinoma in situ (DCIS) is a form of cancer, for instance, partly because the cancer industry insists on referring to it as “Stage Zero” cancer. They’re bad at biology: they think that it’s physics, basically, and that cancers are discrete, localized growths which start small and get bigger, and that the earlier you find and treat them, in large part by physically cutting them out of the body, the more likely you are to be cured.

But bigger than all of these is the fact that Americans are loving, compassionate people who really want to think that they can help, or make a difference. So they wear pink t-shirts, and ribbons, and football cleats; they spread the word in the name of “awareness”; they file up in their millions for mammograms and encourage everybody else to do so as well. (“If you haven’t had a mammogram, you need more than your breasts examined.”)

Orenstein does a good job of glossing the unpleasant consequences of such actions. Money which could be put to research into treating metastatic cancer — the kind of cancer which kills you — is instead put overwhelmingly into “awareness” campaigns and mammograms. There’s an epidemic of overtreatment, which carries massive physical, psychological, and economic costs. (And even attempting to measure such costs is considered almost treasonous in the cancer community.) More recently, the pink wave has spread to teenage girls, who are being educated, as Orenstein says, “to be aware of their breasts as precancerous organs”.

When a loved one dies of breast cancer, we all want to feel that there’s something we can do, some way we can help, some possibility that might prevent other people going through the same thing. The urge which causes people to donate to the Red Cross when there’s a big natural disaster? Is very similar to the urge which causes people to donate to the Susan G Komen Foundation when they have a nasty run-in with breast cancer.

But there are much better places to send your money than Komen. In a follow-up blog post, Orenstein points to Breast Cancer Action as one of them. It doesn’t have the feel-good aura that Komen does, and it’s unabashedly political. But it’s passionate, it’s reality-based, it doesn’t hide the people who are dying of breast cancer, and it doesn’t pretend that we have a way of stopping that from happening.

There are lots of reasons why people give to charity, and there are lots of reasons why some charities grow into Komen-sized behemoths while others stay small. But scientists and policymakers shouldn’t give especial weight to big charities just because they’re big, and physicians shouldn’t fall into line behind the cancer industry’s talking points unless those talking points have a solid scientific basis.

More generally, it behooves all of us to be a bit more critical of our intuitions. The Komen Foundation has become a spectacular success by playing to Americans’ fallacious intuitions, rather than trying to gently correct them. That’s depressing. Especially when so many lives are at stake.


Thanks for the important information, I am seeking this tropic for one many days. Treatment For cancer Guide is the Best Selling eBook on Cancer, breast cancer and chemotherapy. It documents all types of cancer and finds a cure for cancer

Posted by caiencer89 | Report as abusive

Counterparties: Central banks vs austerity

Apr 29, 2013 22:58 UTC

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

Both the Federal Reserve and the European Central Bank will meet this week, and they’re expected to continue their current policy, which Bloomberg describes as “flooding the world with cash.” Bloomberg also cites an estimate from Barclays that central banks will buy $2.5 trillion in assets this year – more than twice the amount purchased in 2012. This week, the ECB may lower interest rates to 0.5%, although it’s far from a done deal, according to Reuters. The Fed, Jon Hilsenrath reports, is likely to keep its rates at their current level.

There are a number of voices concerned that fiscal policy (read: austerity) has made monetary policy less effective. Mike Konczal writes:

If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner.

Paul Krugman largely agrees, saying that, “as a practical matter the Fed — while it should be doing more — can’t make up for contractionary fiscal policy in the face of a depressed economy.”

There are still those who believe in the power of the central bank. Economist David Beckworth — who proposed back in 2011 that the Fed do exactly what it has been doing over the past six months — says Konczal and Krugman undersell how well monetary policy has worked. He points to nominal GDP, which has been steadily growing since austerity measures began in 2010 (though slower than before the crisis).

Nouriel Roubini has also chimed in, arguing that whatever the Fed does from here forward will likely be a problem. “The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system,” he says. – Shane Ferro

On to today’s links:

Primary Sources
If there is a limit to money buying happiness, we haven’t reached it yet – Brookings

Facebook is reportedly losing millions of users in major markets – Guardian

America’s education system leaves no rich child behind – Sean Reardon

JPMorgan’s co-COO — and a top Dimon ally — is leaving – DealBook
JPMorgan tops Goldman in investment banker pay – Bloomberg

EU Mess
Spain’s economic crisis is creating a permanent underclass – Matthew O’Brien

Possibly Useless Data
New study finds Google Trends may be a useful stock-picking tool – Nature
Back in 2010, the same researchers found Google Trends couldn’t predict stock market fluctuations – Science

Charting the difference between critics and haters – Ann Friedman

The battle over a dead NFL player’s brain – Frontline

Data Points
The racial wealth gap in the US is 50% worse than it was before the recession – NYT

The golden age of the blog has ended – The New Republic

EU Mess
Moody’s says Italy may still need a bailout – Reuters

And, of course, there are many more links at Counterparties.


the “Nature” link goes to an Atlantic article?

Posted by dsquared | Report as abusive

The tragedy of Cooper Union

Felix Salmon
Apr 29, 2013 18:29 UTC

This time last year, I wrote about the pressure that public companies face to grow at all costs, and how destructive that pressure can be. Growth is, weirdly, inimical to longevity: if you want something to last for a very, very long time, then what you really want to create is something large — but not huge — and which doesn’t need to grow at all. The world’s oldest companies are nearly all family-owned affairs; they’re big enough to keep those families well-off, and they tend to produce goods or services for which there is a steady demand across the centuries. (Hotels, for instance, or wine.)

Peter Cooper understood this well. A wealthy man, he owned a lot of land in Manhattan — including the land underneath what is now the Chrysler Building — and he knew that land would, literally, produce healthy rents in perpetuity. A philanthropist, Cooper knew exactly what he wanted those rents to be spent on: he created the Cooper Union, a college with the defining characteristic that it would charge its students nothing. It was — and is — a noble cause. And in the early days, its trustees quite literally bought into that cause: they helped out with its endowment, and covered its deficits in years where it lost money.

Cooper understood that free education doesn’t really scale. If you’re charging, then extra students provide extra income which can pay for extra teachers and administrators and buildings. But if you’re giving education away for free, then it’s imperative that you operate strictly within your means. The only way to grow is if you persuade some new generations of wealthy benefactors to contribute their own money or land. But at Cooper Union, that hasn’t happened for many decades.

As a result, Cooper Union has always been an extremely special educational institution, the kind of place where a little went a very long way. The faculty was not well paid; the facilities were bare-bones. But the students were fantastic, because Cooper could pick the very best of the very best. And the college’s overriding social mission engendered a huge amount of loyalty and love for the institution, as well as being reflected deep in its curricula. Here’s Sangamithra Iyer, for instance:

When I graduated from Cooper, in 1999, I received a scholarship for a master’s program in geotechnical engineering at UC Berkeley. That summer, a major earthquake devastated Turkey. The first day of classes, the first thing one professor said was that Turkey smelled “like 40,000 dead people” and that “engineers who know that smell do their work a lot differently than those who don’t.” It was this sense of social responsibility that led me to pursue engineering, but also to leave it from time to time. A Cooper education freed me from debt, and allowed me the freedom to pursue purpose, not profit-driven endeavors. Its Union, for me, not only united the arts and the sciences but also was about making connections between the technical, the political, and the social.

While the Cooper Union ethos never left the students or the faculty, however, it did seem to desert a significant chunk of the Board of Trustees and the administration. Starting as long ago as the early 1970s, the board started selling off the land bequeathed by Cooper, not to invest the proceeds in higher-yielding assets, but rather just to cover accumulated deficits. Cooper hated debt and deficits, but that hatred was not shared by later administrators, who would allow debts to accumulate — bad enough — until the only solution was to sell off the college’s patrimony, thereby reducing the resources available for future generations of students. If you visit Astor Place today, the intersection once dominated by the handsome Cooper Union building, the main thing you notice are two gleaming new glass-curtain-walled luxury buildings, one residential and one commercial, both constructed on land bought from Cooper Union.

Then, when you turn the corner and look at what hulks across the street from the main Cooper Union building, you can see where a huge amount of the money went: into a gratuitously glamorous and expensive New Academic Building, built at vast expense, with the aid of a $175 million mortgage which Cooper Union has no ability to repay.

The bland name for the building is a symptom of the fact that Cooper’s capital campaign, designed to raise the money for its construction, was a massive flop: no one gave remotely enough money to justify putting their name on the building. It’s also a symptom of the fact that no one on the board had any appetite for naming it after George Campbell, the main architect of the scheme which involved going massively into debt in order to construct this white elephant.

Campbell, pictured grinning widely in a now-notorious 2009 WSJ article, claimed that Cooper was a financial success story when in fact it was on the verge of collapse. He’s the single biggest individual villain in the Cooper story, and it’s a vicious irony that Cooper’s latest Form 990 shows him being paid $1,307,483 in 2011 — after he left Cooper’s presidency. (Cooper Union explains that the amount represents six years of “deferred compensation/retention payments”, but the timing couldn’t be worse.)

Campbell’s enablers and cheering squad were a small group of trustees, many of them Cooper-trained engineers gone Wall Street, who had so internalized the ethos of the financial world that it never occurred to them that they shouldn’t be constantly trying to get bigger and better and shinier. Campbell was paid $668,473 in his last year at Cooper — he was one of the highest-paid college presidents in the country, despite running a naturally small institution with serious space and money constraints. Board-member financiers enabled his dreams of growth and glory, hoping that some of the glamor from the newly-revitalized institution would reflect back on themselves. Naturally, when the whole project turned out to be a disaster, they scurried ignobly off the board as fast as they could.

The turnover on the board continues: the latest Form 990 alone shows six trustees — Marc Appleton, Robert Aquilina, Judith Rodin, Moshe Safdie, William Sandholm, and Philip Trahanas — resigning their posts over the course of the year. And if you look at the current list of trustees, you’ll see there have been other resignations since then: Douglas Hamilton, Vikas Kapoor, Audrey Flack, Stanley Lapidus, Giorgiana Slade, Cynthia Weiler, and Ronald Weiner. That’s 13 resignations in the course of just over two years; the entire board has only 22 members.

For an institution which was founded to exist in perpetuity, this kind of board turnover is decidedly worrying, especially since it was the board which decided and announced that Cooper Union will start charging tuition. If this board is just passing through, with precious little aggregate tenure or institutional memory, the legitimacy of that decision is surely greatly reduced.

What’s more, a weak board puts extra power in strong presidents — and both the current president, Jamshed Bharucha, and his predecessor, George Campbell, seem to have been able to persuade the board to implement anything they wanted to do. Bharucha is no fan of Campbell, for obvious reasons, but in many ways the two well-paid presidents are quite similar. I recently obtained a highly-unofficial transcript of the September 2012 board meeting*, where Bharucha was far from despondent or apologetic about the fact that Cooper’s board felt as though it was being forced to choose between charging tuition and closing down entirely. “Turning adversity into opportunity is really an opportunity that very few institutions have,” he said, before talking about something called “a vision process”. Later, he comes out with this:

I resonate very much to future-oriented thinking about higher education. I assure you that I will be guiding the institution to embrace these technologies and we’re not going to be trapped in the past. I think if we get over this hump there will be so much opportunity… I think we can lead… We don’t have a global brand. We’ve got to build that global brand.

Similarly, the trustees’ statement includes worrisome language like this:

Maintaining the highest standards of excellence means that we must constantly aim to improve through investment. We must engage in a continuous process of strengthening our academic programs, our faculty, and the clarity of our academic reputation. The institution will invest in our programs and our faculty to ensure that we always are, and are regarded as, equal to the best.

This is emphatically not Peter Cooper’s vision. The United States is full of higher-education institutions trying to carve out “a global brand” for themselves, often through “investment”. They generally have multi-billion-dollar endowments, global name recognition, and undergraduate tuition costs somewhere north of $40,000 a year. You could name a dozen of them off the top of your head, and Cooper Union would never be one of them. On the other hand, what you can’t do is name a dozen — or even two — institutions like Cooper, based on a social mission and free tuition and low-key excellence, where the pedagogy is not reliant on the provision of climbing walls, and where the health of the institution is not reliant on jet-setting deans who address the World Economic Forum on the subject of Global Leadership.

An investment is what you do when you spend money today, with an eye to reaping a profit in the future. Investments, by definition, are associated with future cashflow: if they’re not, then they’re not investments. Once Cooper Union starts “investing” in programs and faculty, it will have to charge for those programs and faculty in order for the investments to bear fruit. All of which is to say that this tuition charge is permanent: once it’s implemented, the chances of it being reversed are de minimis.

Bharucha, like Campbell before him, is intensely focused on improving Cooper Union’s name recognition. Cooper Union has historically not been very well known, even among New Yorkers: they often think it’s some kind of labor union, rather than an undergraduate college. That’s fine: the people who matter — the teenagers applying to the art school, the entire architectural profession — know exactly what Cooper Union is, and what it stands for. Not every non-profit organization needs its own awareness campaign — but of course if Cooper Union now has to start attracting richer kids capable of paying $20,000 a year in tuition, it’s going to have to start marketing itself more aggressively. Again, that’s not something it historically ever wanted or needed to do, and it’s not something Peter Cooper would be remotely happy about. His resources were meant to go towards education, not towards marketing and billing and “development”.

Another thing that Bharucha and Campbell had in common: both entered into talks about essentially selling Cooper Union to a deeper-pocketed institution. Campbell talked to NYU in the mid-2000s; Bharacha talked to Bard more recently. Obviously, none of those talks got very far; the NYU discussions ended when it decided to buy Polytechnic University instead, in 2008. In either case it’s hard to see how Cooper Union’s social mission and commitment to tuition-free education could have been preserved in perpetuity.

But the end result — what we ended up with — is arguably worse. Once you start charging tuition, you can’t go back: you build a huge amount of infrastructure for students who feel entitled to certain amenities, given how much they’re paying. And the college becomes a business with a P&L, having to chase revenues and persuade potential students that it’s a better financial deal than the various alternatives they have.

The result is that Cooper is certain to lose its much-cherished selectivity: according to the transcript, the September board meeting discussed a report from Maguire Associates which concluded, intuitively enough, that there’s simply no way to charge $20,000 a year and still accept less than 8% of applicants. That selectivity helps Cooper Union rank top among “regional colleges” in the influential US News ranking; both the selectivity and the ranking are sure to fall once tuition is introduced. (Cooper Union claims that it will have “need-blind” admissions, and that if you’re eligible for any kind of Pell Grant, you will get a full scholarship. But there’s no getting around the fact that it will need a certain number of paying students in order to make the math add up.)

Bharucha has also managed to ensure the undying opposition of Cooper Union’s most passionate students. Just this weekend, they painted the lobby of the architecture school black in protest, unaware that during the September board meeting, Bharucha complained about their “politics of destruction”. The relationship between Cooper Union’s administrators and its students has never been worse — and that’s not going to make it easy for Cooper to be able to paint itself as a prestigious institution worth paying $20,000 a year to attend.

In September, according to the transcript, Bharucha talked of the “enormous reputational risks” of charging tuition, and the “difficulty recruiting new students”. So it’s not like any of this was unexpected. “If it weren’t for all this noise”, Bharucha said in the meeting, he would be much more confident that charging tuition could work. But with it, he said, “it will be very difficult” to make a success of the new strategy.

The board has gone along with Bharucha’s strategy anyway, in the belief that all the alternatives are worse. In large part they were forced into their decision by the mortgage on the New Academic Building: you can’t shrink your way to sustainability when you owe MetLife $175 million, and you have to come up with the eight-figure debt-service payments somehow. Given that no one was about to write a $100 million check to Cooper Union, the only other place to find the necessary money was by charging. Even if doing so means destroying the very basis upon which Cooper Union was founded.

*A word about this transcript. Cooper Union spokesman Lloyd Kaplan told me that board meetings are not officially recorded or transcribed in any way, which is consistent with what my sources are telling me — which is that the meeting was recorded without the knowledge or consent of the board members.

The transcript is an important document, and I’m sure it will make its way onto the internet sooner or later. I’m not going to be the one to do that, however, because I have no evidence which can vouch for its authenticity, or demonstrate that the people named in the transcript actually said what it says they said. Conversations with two different sources have convinced me that the transcript is accurate; even then, however, I have only directly quoted Jamshed Bharucha, the president, rather than any unpaid board members.

Kaplan has told me that Cooper will have no comment on whether Bharucha actually said the things I’ve quoted him saying: he won’t confirm that he said them, but neither will he deny that he said them. My sources and I are sure that the quotes are accurate, but you should be aware that it’s never going to be possible to be 100% certain on that question.


Just looked this up after hearing the author accused of inaccuracies on Democracy Now, and yet that “Trustee” did not give any examples, good important story!

Posted by Reader3421 | Report as abusive

Counterparties: America persists in underwhelming

Peter Rudegeair
Apr 26, 2013 22:15 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 one thing that can be said with certainty about this morning’s GDP figures, which showed the US economy advancing at a weak 2.5% pace, is that they’re ephemeral. Many of the data points that make up this advance estimate “could vanish in a flash of re-estimation,” as Matt Yglesias writes. Besides, the Bureau of Economic Analysis is about to recalculate all GDP data back to 1929 in order to better account for the value of intellectual property.

Those caveats aside, the today’s GDP figures show economic growth that’s “persistent” but “underwhelming,” in the words of Credit Suisse’s Jay Feldman. Government spending, which fell at 4.1% rate in the first quarter, continued to be a drag on growth, as it has been in 10 of the previous 11 quarters. The six-month decrease in government spending was the largest since the end of the Korean War, according to Capital Economics. The fall was driven in large part by an 18.5% annualized decline in defense outlays over the past two quarters. The White House chalked up a piece of that drop-off to sequestration, although those mandatory budget cuts went into effect only in the final month of the quarter.

Investment was more of a mixed bag: residential investment rose, but business investment in structures like factories and office buildings fell. Though business investment in equipment and software was up, it increased by a lower rate than earlier in the recovery, observes Neil Irwin.

The data on personal income and spending were also a bit puzzling. Disposable income fell by over 5%, thanks in part to the increase in the top marginal tax rates, the expiration of the cut in the payroll tax, and more expensive energy. However, that dip seemed to have little impact on personal consumption expenditures, which rose at a 3.2% annual rate.

It’s unclear what this resilience in consumer spending means for the future. Ryan Avent says this month’s numbers suggests that “household deleveraging may have many families feeling more financially secure and ready to spend.” However, it appears many consumers could only afford to spend more by drawing down savings: Jared Bernstein points out that the savings rate fell by two percentage points to 2.6%, the lowest since the fourth quarter of 2007. — Peter Rudegeair

On to today’s links:

New Normal
Who really needs an AAA rating these days? Not the world’s largest economies – FT Alphaville

Meet Apple, the new Microsoft – Matt Phillips

Reinhart and Rogoff defend their research on debt and GDP – NYT
Dear Robert Shiller: “not all price increases are temporary” – Adam Ozimek

Crisis Retro
Goldman’s “Fabulous Fab” is now pursuing a doctorate in economics at the University of Chicago – WSJ

Even More TBTF
Is the Brown-Vitter banking reform bill too simplistic? – DealBook
“This is the appropriate direction for regulation” – Matt Yglesias

Long Reads
Spring break for nerds: Inside the SXSW industrial complex – Noreen Malone

Our feel-good war on breast cancer – NYT
February 2012 analysis: The proportion of money the Susan G Komen Foundation spends on scientific research has been steadily declining – Reuters

Fiscally Speaking
28 slides on the Federal budget – CBO

Gray Areas
Banks won’t do business with Colorado’s legal marijuana growers – Guardian

Ties to a Russian mob-run poker ring may have cost Marc Lasry the ambassadorship to France – NY Post

Mobile Wars
Low to mid-market smartphones could undercut the Samsung-Apple war – WSJ

They’re Just Like Us
C-list socialites squabble over child support payments – DealBook

The world’s first Bitcoin local economy: “Bitcoin scares people in suits, which I like” – Guardian

Be Afraid
Thousands of radioactive pigs are wandering Europe, thanks to Chernobyl – Modern Farmer

George Soros buys a 7.9% stake in JC Penney – DealBook

And, of course, there are many more links at Counterparties.


@Fifth, the 2% payroll tax increase hits everybody, and is a larger increase than the token gesture of raising the top tax rate on the ultra-wealthy.

I’m sure the cut in government spending is having an impact on growth, but that is simply not a sensible or cost-efficient avenue for generating growth.

And I’m not surprised that the savings rate is falling. We are trying to cut our own savings rate (simply not doing a very good job), as we over-saved during the recession, profited heavily from the stock market rebound, and at this point have more than we need for investments.

We are holding a large amount of cash at this point, as the greatest risk to our financial future is a stock market collapse — but we are also generating new cash rapidly, so there is no need to accumulate even more.

It has been an uneven recovery. Those who are doing well enough to even consider saving have already put enough away that they can afford to cut back at this point. Those who need to save more can’t afford to do so.

Posted by TFF | Report as abusive

Counterparties: Europe’s economic decoupling

Apr 25, 2013 23:12 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.

Economic data out today paints an even more depressing picture of Europe’s major economies. As the Guardian reports, the UK just barely managed to avoid a triple-dip recession, eking out 0.3% GDP growth in the first quarter.

While British Chancellor George Osborne said the news was encouraging, others were less impressed. “Normally, we would expect the economy to grow by around 12% over any five-year period. The fact that it has contracted by 2.6% instead means almost 15% of potential output has been lost,” the Institute for Public Policy Research’s chief economist Tony Dolphin told the Guardian. Oxford economist Simon Wren-Lewis summed up the British economy in three charts, and wondered if slow growth is here to stay:

The upside of this incredibly poor productivity performance is that employment has been much more buoyant than the GDP numbers would normally imply. However a moment’s thought reveals that this could be really bad news, because it might imply that the recession has led to a permanent reduction in what the UK economy can produce.

In even more bad news: Unemployment in Spain is now 27.2%, the highest since the Franco years, and now equal to Greece as the highest rate across the Eurozone. “The people left behind are coalescing into the hard core of a new Spanish underclass that will become more difficult to dissolve with every month that passes,” Tobias Buck says of Spain’s unemployed. David Keohane says Spanish unemployment is a “more potent argument against the logic and political tenability of austerity than any Excel error”.

Despite the unemployment crisis, the WSJ reports that bond market is booming in both Spain and Italy because of investor confidence that the ECB will intervene in the event of a crisis. Citi strategist Jose Luis Martinez called this a “shocking decoupling between the real and the financial economy”.

However, in Germany, unemployment, which stood at 6.9% in March, is forecast to fall to 6.6% by 2014, according to Bloomberg, and the country’s leaders seem more worried about inflation at home than turmoil to the south. The ECB, meanwhile, still somehow seems committed to austerity. – Shane Ferro

On to today’s links:

Popular Myths
No, the US doesn’t have a shortage of scientists, engineers and mathematicians – Matt Yglesias

The Fed
Meet the likely next head of the Fed, who believes a little inflation can be a good thing – NYT

20% down payments might not be such a good idea after all – Peter Eavis
The invidious “down payment requirement” meme – Felix

Citi’s new CEO got a cash bonus four times larger than his base pay – eFinancial Careers

Crisis Retro
NY’s attorney general criticizes the Obama administration’s mortgage fraud investigations – Ryan Grim and Shahien Nasiripour

Easing Ain’t Easy
The world’s central banks are loading up on equities – Bloomberg

Thought lead to the sweet sounds of Tom Friedman’s insights as he guides you into the The New Next World – Jason Linkins

Preying on the innumeracy of the general public, part 784 – Kevin Drum

“Painting has changed my life… I mean, I look at colors differently and I see shadow” – George W. Bush

Sad But True
The free market simply can’t solve the unemployment crisis – Chris Dillow

Inside the “single most important heterodox economics department in the country” – Dylan Matthews

And, of course, there are many more links at Counterparties.


Someone who cannot scrape together 20-40k with a few years notice and the help of a partner or family members is someone who cannot afford a house.

Posted by QCIC | Report as abusive

The invidious “down payment requirement” meme

Felix Salmon
Apr 25, 2013 14:24 UTC

I feared this would happen. Peter Eavis has a column today about what his headline calls “Down Payment Rules”. Here’s his lede:

It seemed an easy fix to prevent the excesses of the housing market: make home buyers put more money down.

Read on, and you’ll find lots of talk about “down payment requirements”, “restrictions” on lenders, and whether “requiring a down payment” is a good idea or not, given that we want to both encourage homeownership and prevent systemic risk.

But the subject of Eavis’s column — something called the qualified residential mortgage, or QRM — was never designed to be “an easy fix to prevent the excesses of the housing market”. Rather, it was designed as a loophole to allow banks to wriggle out from an entirely sensible skin-in-the-game requirement.

I covered this subject in some depth back in June 2011, so go read that post if you want the details; nothing has really changed. (For even more on the subject, read Kevin Wack’s excellent treatment from a couple of months later.) But the basic story is simple: under Dodd-Frank, banks need to hold on to at least 5% of the loans that they make. The QRM is a loophole in that requirement — loans with high down payments are exempt from the law, and banks can sell the entire thing, rather than just 95%.

If low-down-payment loans are as safe as the critics of high down payments say they are, there shouldn’t be a problem. The bank will make the loan, will hold on to 5%, and will profit twice: first by selling the other 95% for a quick-flip gain, and secondly by getting a non-defaulting income stream from the remaining 5% of the loan.

Somehow, however, the loophole has expanded to encompass pretty much the entire mortgage market, so that high down payments are now considered an outright “requirement” for new loans, rather than just being a way for banks to avoid holding on to a tiny bit of the loan that they themselves are making.

Really, this whole debate is concentrating on entirely the wrong thing. The question about high down payment mortgages is a relatively arcane backwater of financial underwriting, and we can leave it to the statisticians and bond investors to decide just how much, if at all, such down payments reduce defaults. Instead, we should be concentrating on the banks here, the institutions which seem to be entirely unwilling to underwrite any mortgage at all, unless and until they’re allowed to flip the entire thing, 100%, to bond investors, for a quick, risk-free profit.

This violates common sense. If the bank is underwriting the loan, the bank should retain at least a tiny amount of the risk in that loan. Indeed, if I were a bond investor, I would as a matter of course require extra yield on any loans which were sold by a bank without any skin in the game at all. After all, there’s not much point in being assiduous about your underwriting if you’re just going to sell the entire loan anyway.

So instead of debating down payments, let’s hold the banks’ feet to the fire, a little bit, instead. “Banks do not like” rules requiring them to hold on to 5% of a loan, says Eavis. Why not? Until we get a good answer to that question, we shouldn’t even be talking about down payment “requirements” which aren’t really requirements at all.


@Sechel History has recently shown us that without some skin in the game “LTV, DTI, documentation” is quite likely to be more fairy tale than substance.
Unfortunately there is currently a shortage of real bankers, ones who can do real honest underwriting of loans. The employees of today’s megabanks are not trained as bankers, but as corporate climbers. They know that, since their employer has no skin in the game, they will never be held responsible for the quality of their loan underwriting.

Posted by QuietThinker | Report as abusive

Counterparties: A recovery for the 7%

Ben Walsh
Apr 24, 2013 21:38 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.

Here’s the post-crisis recovery in a nutshell: from 2009 to 2011, the “mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%”, according to new report by the Pew Research Center.  The reason for this, Pew says, is clear. Capital markets, where the wealthy hold a disproportionate amount of assets, boomed, while the housing market, the biggest source of wealth for most Americans, was flat.

Josh Brown looks at the Pew study and concludes that “wealthy American households have never had it quite so good”. He sees a statistical portrait of American rentiers, a class with “investment portfolios who essentially extract an income from the nation and return very little (in the form of jobs or spending) in comparison to what they take”. At the other end of the spectrum, America’s dealing with the quiet humanitarian disaster of long-term unemployment, which Paul Krugman says is creating an increasingly “permanent class of jobless Americans.”

The WSJ’s Neil Shah tries to find a slight silver lining in other data from the Federal Reserve, which show that “Americans have recouped much of the wealth they lost during the recession”. Household wealth at the end of 2012 was $66.1 trillion, just a little more than a trillion short of its 2007 pre-recession peak.

Unfortunately, housing may not return to its former role in the US economy. Amir Sufi, an economist at the University of Chicago, writes in a new paper that the “days when housing was the predominant force driving economic activity are gone”. Housing’s vaunted wealth effect, Sufi finds, was most evident among poorer homeowners. They’ve now been largely shut out of the the housing market, and aren’t likely to be coming back anytime soon. — Ben Walsh

On to today’s links:

EU Mess
Jose Manuel Barroso’s anti-austerity comments anger Germans, encourage everyone else – Der Spiegel

Brown and Vitter unveil the first draft of their bill to reform Dodd-Frank – Tim Fernholz

Not-So Small Government
The US government’s investment in electric cars is not going well – NYT

Hot Money
The world’s largest commodities firm did hundreds of millions of dollars of business with Iran last year – Guardian

The vanishing Wall Street trader – Bloomberg
Human traders are winning, reports increasingly scarce human trader – Bloomberg

Paul Krugman rules the land of economic punditry as “KrugTron the Invincible” - Noah Smith
A high risk, high return solution to the EU mess – Dan Davies

Reddit users’ failure to identify the Boston bombers doesn’t debunk the wisdom of crowds – James Surowiecki

“If Jill Abramson were a man…” – Ann Friedman

Growth Industries
Diseased pig carcass disposal is becoming a big business in China – Caixin

Popular Myths
Don’t buy a stock because you like a product – NYT

The SEC may require public companies to disclose all political contributions – NYT

The internet is obsessed with North Korea, even when there isn’t any real news – BCA Research

And, of course, there are many more links at Counterparties.


I hope some of your readers will follow the link to that Noah Smith piece on Krugman. It isn’t as pro-Krugman as your tease would indicate.

Here is a quick spoiler: Smith says that yes, Krugman has had a good prediction record of late, measured against both the overly optimistic (J. Paulson) and against the overly pessimistic (N. Ferguson). And Krugman himself surely believes that his prediction success validates his Keynesian view of the world.

BUT, Smith suggests, maybe there is another explanation. After all, Smith himself is not a Keynesian (he declares himself “agnostic” on key Keynesian matters), but his expectations have been in line with PK’s.

Perhaps those who have predicted successfully have simply presumed that the US and Europe [for whatever macroeconomic reasons] are following the course laid out for them by Japan since the early 1990s. The presumption that “we are like japan” accounts for the right predictions nicely without a lot of baggage.

Posted by Christofurio | Report as abusive

It’s time to air Cooper Union’s dirty laundry

Felix Salmon
Apr 24, 2013 19:44 UTC

If you want to really understand the importance of Cooper Union and its century-long tradition of free tuition, I can’t recommend Sangamithra Iyer’s excellent article in n+1 highly enough. And it contrasts greatly, of course, with the official statement from Cooper Union’s Board of Trustees, saying that the college is going to stop being free very soon: beginning, in fact with the students entering in September 2014. The statement is curiously upbeat, for a decision which essentially marks the death of Cooper Union as we know it. And it’s chock-full of the kind of doublespeak which is all too easily deciphered:

After eighteen months of intense analysis and vigorous debate about the future of Cooper Union, the time has come for us to set our institution on a path that will enable it to survive and thrive well into the future…

Under the new policy, The Cooper Union will continue to adhere to the vision of Peter Cooper, who founded the institution specifically to provide a quality education to those who might otherwise not be able to afford it…

Maintaining the highest standards of excellence means that we must constantly aim to improve through investment…

Although we appreciate that these decisions are difficult for everyone to accept, we look forward to working together with all of you to building a future that will ensure the preservation of Cooper Union as a great educational institution that remains true to Peter Cooper’s founding principles.

The fact is, as Iyer clearly lays out, that charging tuition runs in direct violation of Peter Cooper’s vision and his founding principles. Indeed, the original Cooper Union charter held the institution’s trustees personally responsible for any deficit, while ensuring that education was free to all enrolled students.

Over the past 40 years or so, however, Cooper Union has been living beyond its means, financing structural deficits by periodically selling off various bits of land that it owned inside and outside New York City. That’s clearly an unsustainable strategy, and it finally came to an end when Cooper Union sold off the last sellable plot it had — the old engineering building at 51 Astor Place, which is now becoming a big ugly office block. The proceeds from that sale failed to remotely cover the costs of building the fancy New Academic Building at 41 Cooper Square — a building which the NYT’s architecture critic, Nicolai Ourourssoff, declared upon its opening to be an icon of the “self-indulgent” “Age of Excess”.

But here’s the most astonishing thing, at least to me: no one seems to care how this happened, no one has been held responsible, no one has been blamed. The current trustees talk vaguely about how they “share your sense of the loss” of free tuition, but they don’t apologize for their decision, and not one of them, as far as I can tell, has resigned in protest or shame.

Make no mistake: Cooper Union suffered a massive failure of governorship, and its trustees have abandoned the principle which underpinned the entire institution. A trustee is someone who governs for the benefit of others — and Cooper Unions trustees have failed, spectacularly, in their first and highest role, which was to preserve Peter Cooper’s tuition-free institution.

And after failing so miserably at their own jobs, the trustees then had the nerve to announce, right in the middle of dropping their bombshell, that they expected the current students of Cooper Union to give more to the institution! Never mind that Cooper Union will never be the same again, and that the whole reason why it is so beloved has now been jettisoned. Start donating today, and maybe future students might be able to save a few hundred bucks on their future tuition bills. Or maybe the president will just get a raise to $1 million a year. Who knows: the trustees seem to be capable of anything.

There’s a lot of recrimination going around right now, and the entire Cooper Union community is in desperate need of some catharsis; the trustees, collectively, and over time, managed to break the very thing that they were entrusted to preserve. Cooper Union’s students, and alumni, and faculty, and supporters all deserve a full accounting of exactly how that happened, and who was primarily to blame. It’s in the nature of institutions like boards of trustees that they are very good at protecting the guilty, but in this case the trustees have to come clean. No one will ever trust Cooper Union, or its trustees, or its president, unless and until such an accounting is made public. And, justice demands it.


While hindsight is always terrific, the need for at least a new engineering school building was very clear to me in 1998. At that time, I took a tour of the school with my two kids, who were looking at colleges at the time.

When we looked at the engineering school, unfortunately, I can only say that the facilities compared very poorly to those of Cooper’s peers. It looked like very little had changed in the 25 years since I graduated, and that made me very sad.

In the end, my kids ended up at Rose-Hulman and Carnegie Mellon. They would not even consider applying to Cooper.

I am very grateful that Cooper’s no tuition policy allowed me to get a degree that I am extremely proud of. But I also know that the world has changed and I would hope that the trustees and alumni would work together to make sure that the school’s finances are stable while also providing the top notch faculty, facilities and equipment that are needed to attract the very best students.

Posted by Ethan919 | Report as abusive