Felix Salmon

Chart of the day, Fed-tightening edition

Felix Salmon
Jun 29, 2013 19:14 UTC


This chart comes from Gavyn Davies’s excellent post on Fed tightening, which ought to be required reading for all members of the FOMC. He demonstrates the effect of the Fed’s tapering warnings in two ways: by showing that the expected short-term interest rate in mid-2016 is now about 100bp higher than it was at the beginning of May; and also, with the chart above, by showing that the market is now expecting rates to start rising much earlier than it had previously anticipated.

This chart isn’t, strictly, a tapering chart: it shows when people expect the Fed to start raising interest rates, rather than slowing down on QE. But that all-important first rate hike now has a 65% probability of taking place in 2014, according to the market — up from less than 15% in the NY Fed’s April survey.

Which raises the trillion-dollar question: given that the Fed hasn’t changed its messaging on rate hikes at all, what has caused this enormous change in expectations? Davies explains:

The markets have rationally taken the Fed statements on tapering as a signal that their thinking on monetary policy is changing. This signal of Fed intentions may be more powerful than the other forms of forward guidance they have given about their intentions.

There is evidence that this signalling effect of Fed balance sheet changes might be very powerful. If the Fed is not willing to “put its money where its mouth is” by buying bonds, then the market might take its promises to hold short rates at zero less seriously than before. According to this recent research by the San Francisco Fed, it is possible that a sizeable proportion of the total effect of QE on bond yields came from these signalling effects rather than the portfolio balance effects which have usually been emphasised by the central banks.

Put another way, you and I and Ben Bernanke might think that QE works because when you drop money from helicopters and that money is used to buy bonds and take them out of circulation, the price of those bonds goes up and their yield goes down. But in fact, the main reason that yields fell has nothing to do with the mechanistic consequences of buying bonds — as generations of investors have found out, buying up assets generally has only a very short-term and modest effect on the price of those assets.

Rather, QE turns out to be a surprisingly effective way of signalling to the market that rates are going to stay at zero for a very long time. And when you say that QE isn’t likely to stay in place much longer, the market takes that as tantamount to saying that rates are not going to stay at zero for nearly as long as they had thought.

Think about it this way: there is a nominal zero lower bound on rates. But there is a way for policymakers to be more accommodative than simply setting rates at zero: they can switch from “rates are at zero for the time being” to “rates will stay at zero for the foreseeable”. The markets don’t like taking words at face value, however: they want to see the Fed putting its money where its mouth is. As a result, when the Fed starts saying that it’s going to taper, the market sees rates rising again.

Fed officials are desperately making a concerted attempt to tell the markets that they’re wrong, but history tells us that when policymakers rail against the markets, the markets smell blood and often end up turning out to be right. The markets don’t care about “forward guidance”; they consider the Fed’s deeds to be more important than its words. As a result, so long as the Fed says that tapering is on the horizon, we’re never going to return to the interest rates we were seeing just a month or two ago.


Rates are unlikely to go as low as the were last year or even last month no matter what the Fed does at this point. There was clearly more at work there than QE. I know its odd to think that that’s more to the market than the Fed, but it’s true. Treasury rates were pushed down to record lows in part by renewed fears in Europe, and rates were already rising again well before the Fed said anything about tapering. The Fed accelerated a trend that was already underway, it didn’t change the course of the market.

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How a Goldman Sachs scavenger hunt is like a private equity deal

Felix Salmon
Jun 28, 2013 18:47 UTC

The one thing missing from Euny Hong’s wonderful dive into the all-night adventure that is the Goldman Sachs scavenger hunt is an explanation of what, to any Goldman type, is surely the most interesting bit of all: the finances.

Hong does tell us that there were 20 teams, made up mostly but not entirely of some 180 Goldman Sachs employees, and that after paying $270,000 in expenses, they raised $1.4 million for charity. So, each employee ponied up about $9,300, of which about $7,800 was tax-deductible, right? Of course not. This thing was structured by a Goldman partner, Elisha Wiesel, so it was obviously much more complicated than that.

Wiesel came up with a solution: He would charge no entry fee, and he would launch the event as a non-profit fundraiser for Good Shepherd Services, where he is a board member. The roughly $270,000 of operating expenses were covered by Goldman Sachs Gives, a philanthropic fund financed by the firm and directed by its partners, through a grant made at his recommendation. “I wanted to be able to tell donors that every dollar they donated would go to the charity and not to operating costs,” he said. He appealed to his Goldman colleagues’ competitive spirit by asking them to support one or more teams with their own grant recommendation or donation to Good Shepherd Services, a New York-based non-profit that provides support for over 25,000 at-risk youth and their families every year. The event netted $1.4 million for the organization, the bulk of which executive director Sister Paulette LoMonaco said would go toward giving high school dropouts the training needed to finish school.

The first thing to note here, in terms of structured finance, is the weird and really rather clever use of the grant from Goldman Sachs Gives. Most philanthropic funds like to see their money put directly to good use. Goldman’s $270,000, by contrast, was spent on putting together one of the most lavish scavenger hunts the world has ever seen. Is it really a good philanthropic use of money to develop an iPad app which changes the color of the Bank of America tower? In Goldman’s eyes, yes, it is: because once Goldman was covering the expenses of the event, another $1.4 million poured into the coffers of Good Shepherd Services. By directing its money towards for-profit game designers rather than what non-profits like to call “program activities”, Goldman effectively managed to multiply its grant by an impressive multiple of more than 5X. No one knows better than Goldman that money is fungible; as a result, Goldman Sachs Gives doesn’t mind that it wasn’t their money which went to Good Shepherd Services. Truly this is a structure worthy of a Goldman partner.

And then, of course, there’s the tax angle. If Wiesel had simply sold 180 tickets at $9,300 each, then only $7,800 of each ticket would have been tax deductible, since each of the scavenger hunters received $1,500 (!) in scavenger-hunt value over the course of their sleepless night. Instead, under Wiesel’s structure, the full $1.67 million ended up being fully tax-deductible.

The trick here is to note that there was no entry fee: tickets, if they existed, were free. Wiesel separated out capital and labor, in the scavenger-hunt stack, as elegantly as he might create differing tranches of a collateralized debt obligation. Here’s how he explained it in an email to me:

The important thing to understand about last year’s event is that – for the most part, there are always exceptions – there were “payers” and there were “players”.

Senior professionals, mostly partners, at GS ponied up the $70k/team. For the most part this population did not play the game. These are the “payers”.

More junior professionals, again with rare exceptions, gave up their weekend and spend 15 grueling hours racking their brains and undergoing sleep deprivation, and did not pay for this privilege. These are the “players”.

I made my own GS Gives recommendation and covered the $13.5k/team operational costs such that the $70k/team raised was net rather than gross proceeds.

Think of this as you would a private equity deal. First, you have the founders, who aren’t rich but who are willing to put in sweat equity; they’re the talent, and without them nothing could happen. In this case, the founders are the teams — the 180 sleepless Goldmanites who ran around Manhattan all night solving clues.

But founders can’t do anything without money — they need people who are willing to invest in them. So you have the limited partners — the investors who put up the bulk of the cash. Here, the LPs are the Goldman partners, and other senior Goldman types, who ponied up $70,000 for charity so that they could sponsor teams in the hunt.

Finally, there’s the general partner, the architect of the whole thing, the person who makes it happen and who multiplies his initial investment. Clearly, the GP here is Wiesel, who managed to tun a $270,000 donation into a $1.4 million donation by dint of funding a scavenger hunt. (And in typical GP style, even that money wasn’t fully his: it came from the bigger Goldman Sachs Gives pot.)

Because the players aren’t contributing any money, they don’t need to worry about whether their contribution is fully deductible or not. Because the payers aren’t directly receiving the benefit of running around Manhattan all night, they don’t need to subtract the cost of the event. And because Goldman Sachs Gives gave the $270,000 to Good Shepherd Services rather than directly to the organizers of the scavenger hunt, that donation too was fully deductible.

It’s all quite admirable, in its own convoluted way: pretty much what you’d expect when Eli Wiesel’s son joins Goldman Sachs. I’m something of a connoisseur of Goldman Sachs charitable adventures: buy me a drink one day, and I’ll tell you the story of Hank Paulson, Tierra Del Fuego and the Bronx Zoo. This one isn’t nearly at that level, but it’s clever all the same, and I hope it gets repeated. Although at some point you do have to wonder whether they really needed to spend that much money on the game design.


sic sic

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The spread of link rot

Felix Salmon
Jun 28, 2013 14:04 UTC

When Anil Dash lamented, last December, about the web we lost, he wasn’t speaking literally — he was talking about a culture which got swept away by a tidal wave of Silicon Valley money. But with today’s news that Google seems to be about to vaporize a significant number of the blogs on its Blogger platform, it’s becoming increasingly clear that the problem of link rot isn’t going away — if anything, it’s getting worse.

I’m a great believer that once something is placed on the internet for free, it should continue to stay there, for free, unless there’s an extremely good reason to delete it. Back when hosting websites was difficult and expensive, that was easier said than done. But now web hosting is effectively free, there’s really no excuse — and one might hope that, as a result, we’d see less link rot.

But that’s not what’s happening. For one thing, the institution of the permalink is dying away as we move away from the open web; if you’re not even on the web (if, for instance, your content comes in the form of a show on Netflix), then the very concept makes no sense. What’s more, we’ve moved into a world of streams, where flow is more important than stock, and where the half-life of any given piece of content has never been shorter; that’s not a world which particularly values preserving that content for perpetuity. And of course it has never been easier to simply delete vast amounts of content at a stroke. (For instance: the Kanye West and Alec Baldwin twitter feeds.)

The Wikipedia page on link rot says (at the time of writing) that “permalinking stops broken links by guaranteeing that the content will never move” — but in the real world that’s not much of a protection at all. Content management systems change, and when they do, many publishers don’t bother to ensure that the old links still work. (Which is why, for instance, old links to Gawker tend to die, even though the website is still going strong.) And of course permalinking can’t prevent an entire blog from getting deleted — as Google is now threatening to do with certain adult sites.

Small personal blogs die every day, of course, but it’s no protection being owned by a huge media company, either. My boss, Jim Ledbetter, used to edit a site called The Big Money, which was unceremoniously killed off by the Slate Group, its archives lost to history; more recently, Thomson Reuters did the same thing to one of their sites, News and Insight. (The press release announcing the move was one of its victims; a shadow of it lives on here.) When these decisions are made, the fate of the archives never seems to matter; the result is thousands more dead links scattered across the internet every day, pointing to once-valuable resources which no longer exist.

These mass deletions are huge; they make me feel almost sheepish about the anger with which I greeted, say, Greg Mankiw’s decision, back in 2007, not only to close his blog to comments, but at the same time to delete all the previous comments which had been made, with no warning. All the conversations which had taken place in his comments section, all the smart rebuttals which had been made — all of them just disappeared, overnight. Today, I’d barely blink at such a thing: after all, it happened to me, a couple of years later, when all the comments on my Portfolio blog got deleted.

What I fear is that the entire web is basically becoming a slow-motion Snapchat, where content lives for some unknowable amount of time before it dies, lost forever. Sites like archive.org can’t possibly keep up; and the moguls who own most of the content online are simply not invested in the ideals of the link economy. When even Google is giving bloggers just three days to save their sites or see their content disappeared — three days when many of them are on summer vacations, no less — it’s pretty obvious that there’s no such thing as a truly benign online organization any more. There may or may not be one or two, at the edges; I have a decent amount of faith, for instance, that the BBC is going to honor its permalinks for many years to come*. At the other end of the spectrum, Anil will, as well. But for those of us who make our livings linking to other things on the internet, it’s simply a fact of life that most of our links will die. If, that is, our own permalinks aren’t killed off first.

*Update: Or, maybe not!


The communistic cloud cannot be avoided. You see that blogger blogs aren’t “safe,” in that they can be deleted any time. It happened to my first blog. Many wonderful years of posts vanished overnight. I did manage to save the first two years using software called HTTracker. Those two years of chronicles now exist only on the harddrive of an old Windows 95 computer. With thousands of posts on my current blogspot blog, which I have kept since 2006, I no longer fear deletion. I just accept the fact that it could happen anytime. I started a new wordpress blog, and I will admit my whole approach to and awareness of blogging has changed dramatically since (1) my blog was deleted (2) all this ‘cloud’ stuff arrived on the scene and (3) I realized and now understand just how powerful entities like Facebook and Google are.

We netizens are like ants. When one of us “dies” there is always a replacement nearby, left to carry on.

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Corzine’s disgrace

Felix Salmon
Jun 27, 2013 23:52 UTC

The CFTC complaint we were waiting for has now arrived: MF Global, Jon Corzine, and MF’s former assistant treasurer, Edith O’Brien, have all been charged with misusing — stealing, effectively — almost $1 billion in customer funds. They took the money out of customer accounts knowing that they weren’t allowed to do so, and they failed to repay it, and they also failed, naturally, to tell the CFTC what they were doing.

Corzine, as the CEO of a highly-regulated financial institution, was responsible for ensuring that his company didn’t break the law, but he didn’t seem to care nearly as much about those responsibilities as he did about his own trading account. And while other investment-bank CEOs at least pay lip service to the idea of being client-focused, Corzine seemed to care about clients mainly as a source of funds he could use to meet margin calls.

During the summer of 2011, Corzine directed Holdings’ CFO to explore all potential sources of funds and assets that could be used to meet the liquidity needs of MF Global’s proprietary trading activities. This included the use of customer funds to satisfy, in part, MF Global’s need to increase its capital by hundreds of millions of dollars to meet its obligations…

On October 6, 2011, in response to the Firm’s liquidity stresses, Corzine told an MF Global Treasury Department employee that they were going to do all the things they could do to not draw on the revolver the next day, even if that meant “go[ing] negative” in the FCM customer accounts.

“Going negative”, here, means exactly what you think it does: that the amount of money in segregated client accounts was lower than the amount of money those clients were being told that they had.* And Corzine was saying this as early as October 6, when he still had a $1.2 billion credit line to play with, and well over three weeks before Halloween, when MF Global eventually ended up filing for bankruptcy.

The complaint tells a clear tale: by October 17, MF Global was violating its own policies with regard to customer accounts, and raiding them for cash. By October 26, it found itself unable to repay that cash by the end of the day, and had “a deficiency by the close of business of over $298 million in its customer segregated accounts”, in the wake of a transfer of more than half a billion dollars out of MF Global’s customer segregated accounts and into its proprietary accounts. That deficiency rose to $413 million the following day, October 27, when the following conversation took place on a recorded phone line:

Corzine: We have a money management account at Chase, if my memory serves me.

Employee #1: Yeah, it’s the JP Morgan Trust account, but that’s cash seg for clients — it has nothing to do with greasing our wheels for Chase to move.

Corzine: I understand but you put it in a tri-party, and then once the securities have started moving, then you move it back to the, um — this is the same thing we did last night, they left it in the tri-party, the seg money.

“Seg”, here is short for “segregated”, as in “this money is put aside for clients and we can’t touch it”. Except Corzine clearly does want to touch it: he essentially wants to borrow against it, and then send the proceeds to Chase as MF Global money.

Certainly there was a lot of chaos at MF Global at the time — but that’s no excuse for committing a $165 million “bookkeeping error”. And in any case, of course, the chaos was ultimately Corzine’s fault: he was the person who fired risk managers and spent no time worrying about risk controls, preferring instead to put all of his effort into trading. Even at the end, Corzine seemed much less worried about customer funds than JP Morgan was. JP Morgan asked for a signed letter attesting to the fact that the money it was receiving had not come from customer accounts; Corzine just forwarded the email on to get signed (it never was signed), and never asked anybody to find out whether customer accounts had, in fact, been raided. (Probably because he knew the answer.) States the complaint: “Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used.” (My emphasis.)

Even heading into the final weekend, when Corzine was explicitly told that MF Global had raided customer funds* and had not managed to repay them, he did nothing to inform regulators of that fact.

It’s impossible to know how this lawsuit is going to play out, but Corzine’s own lawyer seems flustered:

Andy Levander, counsel for Corzine, said: “This is an unprecedented lawsuit based on meritless allegations that Mr Corzine failed to supervise an experienced back-office professional who was located in a different city and who did not report to Mr Corzine or even to anyone who reported to Mr Corzine.

“After 20 months of thorough investigations by the Department of Justice, two bankruptcy trustees, and the CFTC, no evidence has been found that contradicts Mr Corzine’s sworn testimony before Congress.

“Mr Corzine did nothing wrong, and we look forward to vindicating him in court.”

As Levander knows, there’s much more to this lawsuit than accusations that Corzine simply failed to supervise O’Brien — at the very least, it accuses Corzine of failing to supervise the entire bank. At some point, when you’re a fiduciary, incompetence becomes downright criminal, and if the CFTC wins this suit, I wouldn’t be at all surprised to see criminal charges follow. What’s more, the CFTC suit does not accuse Corzine of perjury, with respect to his Congressional testimony — so it’s fascinating that Levander picks that imaginary charge out in particular to deny it.

Of course, the CFTC complaint is only one side of the story — and in general expensively-represented financial professionals tend to have a pretty good track record at trials. But after reading this complaint, I doubt that even an acquittal would clear Corzine’s name. Someone like Bob Rubin might be deeply implicated in the financial crisis, but he still gets to trot around the globe being great and good. Corzine’s career, by contrast, is over. That’s not nearly sufficient punishment, but at least it’s a start.

Update: A Corzine spokesman calls to explain that when Corzine is quoted as knowing about “going negative” in the complaint, that does not mean he knew that customer funds were being raided. If you look at the account, there are the customer funds; and then there are the bank’s funds, which come in two different flavors. There’s the money which is freely accessible to the bank; and then there’s “excess seg” — the money which the bank needs to keep in the account but which doesn’t actually belong to customers.

Apparently, when Corzine was told that MF Global was “going negative” in the account, that meant that the bank would be left with less than the minimum required “excess seg”. It did not mean, necessarily, that the bank was raiding customer money. And so when Corzine was told on the Friday evening that O’Brien was “net short $106 million”, that might have meant only that the excess seg was short $106 million, but that the customer money was still untouched.


Whoa…Corzine is the “smartest man in America when it comes to the economy” or so Joe Biden and Barack Obama said during the 2008 election. WHY isn’t this creep in jail with Robert Rubin and Jaime Dimon?

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Snapchat’s early cash-out

Felix Salmon
Jun 26, 2013 22:42 UTC

Dan Primack is awesome when he’s angry, and boy is he angry today, reacting to the news that Snapchat’s two co-founders have cashed out to the tune of $10 million apiece as part of its latest funding round. “This is desperate lunacy,” he writes, adding that these kind of deals “should scare the hell out of venture capitalists”:

The LP-VC-founder alignment has now been skewed, because only the last part of that triangle is now in the money…

Don’t I want entrepreneurs building for the long-term, rather than ones just waiting for the first decent exit opportunity? Entrepreneurs who care as much about their vision for its own sake, as they do for the dollars that vision can represent?…

VCs in general have gotten a bit too comfortable handing out millions of LP dollars to individuals who don’t really need it. Maybe that’s because certain VCs no longer view $10 million as the fortune it really is.

I agree that little good can come from these deals, from the VC point of view — but I’m less angry about it than Primack is.

For one thing, the LP-VC-founder alignment has always been skewed, with VCs getting by far the best deal. Most VC-backed companies fail; historically, that has meant the founders walking away with nothing. And LPs have not done very well either. Only the VCs seem to get paid no matter what. By allowing founders to sell equity outright in early rounds, VCs are allowing them to monetize crazy early valuations — just as they themselves monetize those crazy early valuations by using them to market their next multi-billion-dollar fund. Is it bad that the pendulum is swinging back a little bit from capital (VCs) to labor (founders)? No, it not.

Secondly, it is absolutely understood in the founder community that the deal you make, when you accept your first dollar of VC funding, is that you will be building for growth and exit, rather than trying to create something which you will bequeath to your children. If you want “entrepreneurs building for the long-term”, you want entrepreneurs who aren’t taking VC money in the first place.

Thirdly, especially in Silicon Valley, it’s downright silly to expect entrepreneurs to “care about their vision for its own sake”. This is the home of the pivot, of the serial entrepreneur, of the fail-fast culture, of A/B testing, of trying many different things until you find one which works. This isn’t about vision, it’s about the ruthlessness of the market. Indeed, founders who care too much about their vision, rather than about maximizing VC returns, are liable to get unceremoniously ejected.

Fourthly, if VCs have reached the point at which they no longer think of $10 million as being a particularly large amount of money, then it’s about time that a few founders could join those ranks as well.

Finally, we’re living in a world where VC-backed companies almost never IPO any more, and where private exchanges like SecondMarket and SharesPost are becoming an increasingly important source of liquidity. I had lunch with the CEO of Green Dot yesterday; it was funded by Sequoia Capital in 2003, and Sequoia is still the single largest shareholder in the company, ten years later, with no final exit in sight — despite the fact that Green Dot went public back in 2010. In that sense, IPOs have become just another funding round. If companies are privately raising sums of money which five or ten years ago could be found only in IPOs, then you have to expect founders to start getting liquid around those rounds, just as they used to do during IPOs.

From a personal-finance perspective, of course, it makes all the sense in the world that Snapchat’s founders should diversify their net worth away from being 100% invested in the highly volatile and illiquid equity of their company. VCs and LPs are all perfectly sophisticated when it comes to managing their personal wealth; founders should be allowed to be just as sophisticated. Otherwise, accepting VC money starts too look far too much like indentured servitude.

So good on Evan Spiegel and Bobby Murphy for cashing out: they created a great product, and now they’re rich. That’s how Silicon Valley is supposed to work. And if the current valuation doesn’t work for the latest tranche of investors, that’s more the LPs’ problem than it is the problem of Snapchat’s co-founders.


I’m surprised that Primack is so concerned about money for the founders because he also covers buyouts. It’s routine in buyout deals that executives are taking some dollars off the table while also maintaining a go-forward equity position. It’s not just top execs for large go-private deals who are pocketing meaningful amounts. That’s also very common in relatively small middle-market deals, because so many of those companies are family-owned businesses who are maintaining a minority ownership stake going forward. Overall, I’d say it’s common – perhaps even the norm – that the CEO of a private equity backed company has more wealth in outside investments than in company stock.

As an LP, what would scare me is to see a VC putting my money into (pre-revenue) Snapchat at an $800 million valuation. (In fairness to Primack, he also makes this point.) Maybe I’m too old to appreciate Snapchat, but it sounds more like one feature of a social network or mobile OS than a standalone platform, so I view the valuation upside as limited. Tough to see how Snapchat generates major advertising revenue because the whole point of it is to look at photos that quickly disappear. I’d also think some advertisers wouldn’t want their ads showing up next to sexts.

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Can philanthropists be ruthless?

Felix Salmon
Jun 25, 2013 23:06 UTC

130621_Cover201.jpgCharles Kenny and Justin Sandefur have taken over the cover of the latest issue of Foreign Policy, with a classic of the QTWTAIN genre. The tl;dr version of their 4,000-word article (which is free, behind a registration wall): no, Silicon Valley cannot save the world. Still, there are some very good development innovations out there; the surprising thing is that you’re likely to find them not in Palo Alto but rather in Washington DC.

The strongest point that the article makes is simply that you can’t easily apply Silicon Valley techniques to development. If you look at the bright ideas of the recent past, many of them have failed — which is entirely typical of Silicon Valley. The problem is that the people who develop and fund those bright ideas tend to be the winners of the Silicon Valley lottery, tend to think that their ideas are golden, and are loathe to kill them off. As Kenny and Sandefur write:

When working with new technologies and approaches, we should expect lots of failures. Tech entrepreneurs are used to a culture of failure — 10 bad ideas that sink before one gets to its multibillion-dollar initial public offering. But the advantage of the system in which they operate is the market test. As a rule, the bad ideas go bankrupt (if sometimes only after the multibillion-dollar IPO).

But by moving the model to development, we’ve taken tech entrepreneurs’ high tolerance for failure and penchant for hyping harebrained schemes to an arena where the market test is considerably diluted. Ideas get funding from Kickstarter and philanthropies on the basis of their appeal to donors and philanthropists in the West rather than consumers in Africa. And that’s what leads to the Soccket, the PlayPump, and One Laptop per Child.

One of the joys of the cover story is the way in which it elegantly dismantles these innovations, using a combination of empirical evidence and simple logic. (“You can get a solar-powered lamp for $10. It isn’t clear why anyone would pay 10 times that for a light whose power source you have to kick around for half an hour to get less illumination.”)

But after scolding “tech gurus” for being “wildly overoptimistic” in the first half of the article, it’s then a little jarring for Kenny and Sandefur to start getting all starry-eyed themselves in the second half, talking up a tiny division of USAID as the engine which, even if it won’t save the world, could at least save millions of lives and have an enormous positive impact on development.

Kenny and Sandefur run down a list of three bright ideas funded by a Washington venture capital fund called Development Innovation Ventures; all of them seem very promising. But the whole point of the first half of the article is that promising bright ideas are all too easy to come by, in the development world: the difficult thing is identifying which ones aren’t working — and then killing those ideas with all the ruthlessness of a Silicon Valley venture capitalist. And there’s nothing in the article which shows DIV being particularly good at that.

This area — of judging nonprofit development projects by their empirical outcomes — is one where GiveWell has probably done more work than anyone. And if you read down their analyses, you’ll learn quite quickly that it’s an incredibly hard thing to do. Kenny and Sandefur make it seem that “rigorous testing” is something which can be implemented relatively easily — but in reality it ranges from the incredibly difficult to the downright impossible. Remember that even in carefully-designed peer-reviewed settings, most published research findings are false. And when you’re out in the field, trying to create a replicable test — which of necessity will involve withholding aid from a control group of people who likely need it — becomes extremely fraught on both a practical and a moral level.

In other words, what the article lacks is not only some kind of evidence that DIV’s bright ideas would not have been funded without it. It also could use, ironically enough, a rigorous demonstration that DIV is particularly good at rigorous testing, and that as a result it’s measurably more effective than the Silicon Valley crew. If Kenny and Sandefur really want to differentiate DIV from the rest of the field, they’re going to need to talk much more about its failures, and about the well-intentioned projects which it cold-bloodedly defunded for the greater good of the larger program. Otherwise, we’re left basically where we started, telling feel-good stories.


“Tech entrepreneurs are used to a culture of failure — 10 bad ideas that sink before one gets to its multibillion-dollar initial public offering.”

That’s not true. It’s VCs that fund 10 bad ideas to get one good one; also, not all good ideas must exit with a multi-billion dollar IPO. That’s the Hollywood take on the start-up world.

The tech entrepreneurs who try to save the world are not the ones who have 10 bad ideas; usually they are the ones who have had at least one great idea, and maybe many more. The ones that have had 10 bad ideas don’t get funded, and don’t have the money to save the world.

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How the world benefits from Chinese piracy

Felix Salmon
Jun 25, 2013 06:09 UTC

Kal Raustiala and Christopher Sprigman have a  fantastic article in the latest issue of Foreign Affairs about IP laws and piracy in China. The title, which I love, is “Fake It Till You Make It,” and the gist is clear:

Given that Chinese copying has benefits as well as costs, and considering China’s historical resistance to Western pressure, the fact is that trying to push China to change its policies and behavior on intellectual property law is not worth the political and diplomatic capital the United States is spending on it.

This is if anything a vast understatement. Chinese IP piracy — if what we’re talking about can properly be called that, given the degree to which it is condoned by the Chinese government — is wonderful for China, for its economic growth, for helping hundreds of millions of its citizens out of poverty, and for the sake of global innovation more broadly. You and I, as US consumers, actually benefit from it. The only losers are the large US corporations who seek to extract rents from various copyrights and patents — even as they, notoriously, tend to be quite unwilling to pay taxes on any of their overseas revenues.

Raustiala and Sprigman make a strong case that Chinese piracy, far from being symptomatic of a deep-seated inability to innovate, is actually an economically vital form of innovation. After all, we’re generally not talking about outright counterfeits here. Within China, most piracy falls under the general heading of “indigenous innovation” — a euphemism, to be sure, but an accurate one all the same:

Nearly all creations rest on prior work, and the ability to freely copy and refine existing designs fuels fields as varied as fashion, finance, and software. Copying can also foster stronger competition, grow markets, and build brands…

Many Chinese have gained valuable design and manufacturing skills by copying goods originally produced elsewhere.

Raustiala and Sprigman use the example of Xiaomi, a phone company which has sold some 7 million phones, for a total of more than $1.6 billion, since its launch less than two years ago. Xiaomi copies a lot of Apple’s innovations, but it also generates many of its own, and it iterates much faster than Apple does. Much the same can be said for Weibo, which started by copying Twitter but which at this point is arguably more advanced than the original.

Or look at the Chinese YouTube, Youku, which is displacing television in large part because it has no copyright verification. As Chinese media companies evolve to take advantage of Youku, they will be much better placed to compete in the 21st Century than US companies which rely on copyright laws to keep consumers boxed in to increasingly-unnatural modes of consumption. If you’re playing litigious defense, that might help your current cashflows — but it’s not going to help you win a generation which will increasingly neither know nor care what “live TV” means.

Chinese piracy also brings innovation within the grasp of a huge population of poorer Chinese, with long-term positive effects for all. Raustiala and Sprigman talk about the phenomenon of shanzhai — low-cost copies of items which would not be affordable otherwise.

Like so much else in China, the meaning of shanzhai is undergoing a drastic change. As The Wall Street Journal recently noted, “Once a term used to suggest something cheap or inferior, shanzhai now suggests to many a certain Chinese cleverness and ingenuity.” Indeed, Beijing seems to believe that shanzhai is something to cultivate. In 2009, an official from China’s National Copyright Administration declared that “shanzhai shows the cultural creativity of the common people.” He added, “It fits a market need and people like it”…

China’s huge population is still poor, and few can afford Western products. Copies of Western products, as a result, do not necessarily represent lost sales. Instead, they often serve as effective advertisements for the originals: gateway products that, in the long run, might spur demand for the real thing as China’s burgeoning middle class grows… Although shanzhai products are celebrated, those Chinese who can buy the original products generally do.

None of this should be surprising to America, which, as Raustiala and Sprigman show, used pretty much all of these tactics when its own economy was rising. None other than Benjamin Franklin himself made a substantial sum from republishing the works of British authors without permission or payment. The phase that China is going through is a natural and healthy one, both for China and for the US; the big multinational IP giants might not like it, but they are clearly the winners in the global economy already, and hardly need an extra legislative boost.

Indeed, my only complaint with the article is that it doesn’t go far enough. For instance, it cites a 2011 figure from the US International Trade Commission that piracy costs the US economy some $50 billion a year; it doesn’t say that that figure is highly implausible. (The reasons why are left as an exercise for the reader; you might want to start here.) And the authors assert, without bothering to argue the case, that strong IP rights “are essential in fields such as pharmaceuticals”. I’d disagree.

In any case, I hope that Michael Froman, the newly sworn-in United States Trade Representative, pays close attention to this article. As Raustiala and Sprigman conclude, “the United States should consider its own history as a pirate nation — and relax.” Maybe if Froman takes that advice, he’ll have much more success making progress at the WTO.


very funny
China has weibo BECAUSE they can’t use twitter or facebook
they use Youku BECAUSE they are not able to access Youtube
it is a tyranny state without freedom and rule of law
and you are suggesting that they have no need to promote intellectual property law?

you talk about Benjamin Franklin, i am wondering if they had the idea of intellectual property at that time, how can you compare him with China?

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The Fed’s bad timing

Felix Salmon
Jun 24, 2013 15:07 UTC

If you only read one article on US monetary policy and the latest actions of the Fed, it should be Wonkblog’s interview with St Louis Fed president James Bullard — an interview that answers pretty much every question you might have, with the exception of the “why did they do this” one.

Bullard — who was the sole dissenting dove at the last FOMC meeting — released a formal statement shortly afterwards, in which he explained that he is more dovish than the rest of the committee just because inflation is significantly lower than the Fed’s target. The statement explained:

President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

This is clearly the message that the market received, too. While the official message from the Fed was still state-contingent rather than based on the calendar, the FOMC did deliberately choose, at this meeting, to start talking about its economic forecasts and, in doing so, to start talking about exactly when (if the forecasts hold) QE might start tapering off.

Bullard has two problems with this. The first is that monetary policy is in large part an expectations game, and a key part of monetary easing, up until now, has been a concerted effort to move away from giving guidance on when monetary policy might change in the future. Now that the dates have reappeared, says Bullard, that unambiguously constitutes “tighter policy”.

Secondly, says Bullard, one of the reasons that central bankers tend to care more about inflation than they do about unemployment is that they have more control over inflation than they do over unemployment. But right now, inflation is going in the wrong direction: it’s falling, rather than rising towards the Fed’s inflation target. So this is not the time you want to start tightening policy.

The consequences of the Fed’s statement are profound. The Fed spent years trying to get control of long-term interest rates — but we’ve just seen a rise in those rates which was so sharp and dramatic that it has taken the breath away from even hard-bitten Treasury traders. To give you an idea of how fast things are moving, Paul Krugman’s column today talks scarily about how the yield on the 10-year Treasury bond rose from 1.7% two weeks ago to 2.4%, after the FOMC meeting. But that’s print deadlines for you: this morning, the 10-year is at 2.62% and rising, while stocks are continuing to fall.

The market turmoil is bad for wealth, of course: total global stock-market losses last week were more than $1 trillion, while the US bond market has lost almost as much. But more importantly, it’s bad for growth. If you want investment capital, you’re going to be raising either equity or long-term debt. And right now the cost of both is rising sharply: in the case of debt, it has risen more than 50% in the past couple of weeks.

David Reilly tries to make the case, today, that none of this is particularly worrying. The “Bernanke put” is an unhealthy thing: the Fed’s job is not, and should not be, to support stock prices. And when it comes to debt, says Reilly, just about everybody with market access has already taken advantage of incredibly low interest rates to lock in cheap funding. “if anything,” he says, “slightly higher rates might be good if they reduce the temptation for companies to engage in financial engineering by borrowing to pay out big dividends.”

Reilly isn’t even worried about the effect of rising interest rates on the housing market: “the prospect of rising rates,” he writes, “coupled with increasing home prices, may induce more buyers to come off the sidelines.” I’m inclined to agree on that front: the connection between mortgage rates and house prices is incredibly weak.

Still, even if we grant Reilly’s point that the Fed should ignore market noise and concentrate on its mandate, the FOMC decision to start talking about implementing tighter policy doesn’t really make sense. The latest Cleveland Fed estimate of 10-year expected inflation is 1.55%, very near the all-time low, and well below the Fed’s official target. And here’s the spread between the 10-year Treasury bond and the 10-year TIPS, which gives a day-to-day indication of what the market thinks inflation is going to be over the next 10 years: as you can see, it’s been falling of late to a decidedly un-worrying level.

With unemployment nowhere near the point at which wage pressures could create inflation, both of the Fed’s mandates are still pointing strongly towards loosening (if that were possible) rather than tightening. Reilly is right that QE is going to have to end at some point. But he has no good reason to believe that weaning markets off QE tomorrow would be harder than attempting it today. The market, for one, is telling him that in no uncertain terms.


“That” vs. “Which.” I wish Felix Salmon would adopt the American style!

Posted by rmm2015 | Report as abusive

Why MoneyGram is going private

Felix Salmon
Jun 21, 2013 20:51 UTC

File this under “highly misleading Bloomberg headlines”: “MoneyGram Seen Cashing In at Decade-High Price”.

The story is about a company which has put itself up for sale; today’s price is about $21.50 per share, which means the merger arbs don’t buy the Bloomberg tale that the final price could be as high as $27. But even if MoneyGram does end up selling for $27 per share, that would be a long, long way from constituting a “decade-high price”. MoneyGram’s IPO took place in 2004, at $16.93 per share; on a split-adjusted basis, that’s equivalent to $133 per share today. By the beginning of May 2006, MoneyGram was trading at more than $280 per share — more than ten times the best possible sale price in 2013. Here’s the stock chart, to put today’s share price in perspective:


So what is Bloomberg talking about? Here’s the way they justify their headline:

MoneyGram may be able to fetch as much as $27 a share, said Macquarie Group Ltd. and Compass Point Research & Trading LLC. At 37 percent more than the stock’s 20-day average, it would be the highest takeover premium in the commercial financial services industry since 2003, according to data compiled by Bloomberg.

This has nothing to do with stock price, or even corporate valuation. Rather, it’s just a measure of the takeover premium that MoneyGram might be able to fetch: the amount that the company is worth to a strategic buyer, or to some PE shop, compared to the amount that public shareholders have been willing to pay of late. Another way of looking at that number is that it’s the discount inflicted on the company for being public.

Why would being public mean that a company like MoneyGram trades at a discount? Simple: it’s one of those companies which is very profitable today, but whose long-term future is dim indeed. Money transfer is in the process of being disrupted: never mind bitcoin, all you really need is ubiquitous smartphones, and it’s not long before any number of companies have developed apps making money transfer incredibly cheap and easy. Money transfer used to have enormous barriers to entry; technology is eroding them, and the long-term future for MoneyGram and Western Union is cloudy at best.

That’s why MoneyGram is trading at a pretty depressed level for a cash cow which is going to have more than $100 million in earnings next year and whose income is hitting new highs. The current market capitalization is about $1.2 billion, for a forward p/e of 12. The forward earnings yield is a very healthy 8.3% — much higher than the cost of funds for just about any financial buyer.

MoneyGram, then, is up for sale for two different reasons. The first is simply that its current owners can sell it at a substantial profit to the bargain-basement price at which they recapitalized it at the height of the financial crisis. The second is that it’s a perfect PE play: it is a company throwing off large amounts of cash, and PE shops are great at maximizing the value of such companies, even if they ultimately go to zero.

Being publicly-listed is good for companies which are growing. It’s not good for companies which are shrinking. As a result, when a company is about to embark upon a long period of profitable decline, that’s normally the best time to take it private. The MoneyGram sale might come at a premium to the public share price. But that doesn’t mean MoneyGram itself has a rosy long-term future. Quite the opposite.


“Being publicly-listed is good for companies which are growing. It’s not good for companies which are shrinking.”

You assert this as true? Is there some particular reason I am to believe it is true? I can imagines reasons it might be true, and reasons the reverse might be true.

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