Felix Salmon

Tyler Cowen has no truck with the Bubble Crew. He aligns himself with Paul Krugman and against Jesse Eisinger; we can add Gillian Tett to Eisinger’s side of the debate, and Jim Surowiecki to Cowen’s.

The bubblista side of the argument, at heart, says that the flood of money being poured into the global economy by the world’s central banks is driving up asset prices to well beyond fundamental valuations, and that if and when valuations revert to sanity, the unwind (the “burst”) could be disastrous in all manner of unpredictable ways.

This is a prediction which is very easy to make, not least because it has no time stamp associated with it. Tett, indeed, says that “these distorted conditions will remain in place far longer than most people expect”, which is little a bit weird: the whole reason why assets are expensive is precisely because, as Krugman says, “long-term rates are low because people, rightly, expect short-term rates to stay low for a long time.” And when long-term rates are low, that doesn’t just affect the price of long-dated bonds; it also drives up the price of stocks, which have infinite maturity.

Still, this is a good place to start, because there does seem to be consensus here: low interest rates, across the curve, are causing asset prices to rise, around the world. Is that prima facie evidence of a bubble? I’d say clearly not. The first job of financial markets is to be a place where you can convert future cashflows into a present-day lump sum, and that lump sum is naturally going to be higher when interest rates are low. Similarly, if and when interest rates start to rise, asset prices may well start to fall. But that’s just what financial markets do: they go up, and they go down. Not every rise is a bubble, and not ever fall is a bubble bursting.

The word “bubble”, at least for me, is a loaded term, with a specific meaning. For one thing, it implies speculation: people buying an asset which is going up in price, just because they think they’re going to be able to sell it to a greater fool at a substantial profit. The dot-com bubble was a prime example of that, with investors jumping onto high-flying technology stocks not because they thought the stocks were cheap but just because they thought the stocks were rising, and that they could make money day-trading these things. Much of the housing bubble looked like that too: you could buy a tract home in Phoenix with no money down, hold on to it for a few months, and then flip it for a substantial payday — even if you never expected to live in it. And certainly the bitcoin bubble fits the bill: pretty much the only reason to buy bitcoins and hold them for more than about 10 minutes is that you think they’re going to go up in value and that you’ll be able to make money as a result.

Is it possible to have a non-speculative bubble? In certain rare cases, perhaps. For instance, there was the market in Impressionist paintings in the 1980s: they went up in value enormously, and then the bubble burst and values came back down again. But people weren’t buying these things to flip them, and — importantly — no real harm was done to anybody when prices stopped going up and started going down. Similarly, in 2007, I said that if Manhattan property prices were in a bubble, then it wasn’t a speculative bubble. And again, whether you call it a bubble or not doesn’t really matter: when Manhattan property prices declined during the housing bust, no real harm was done to anybody.

In any case, the truly defining characteristic of a bubble is surely its bursting. The reason to be worried about bubbles has nothing to do with fear of what happens when everybody is happily making money. Rather, the problem with bubbles is that they burst; bursting bubbles are dangerous, unpredictable things which we should rightly be afraid of. Or, to put it another way: if asset prices simply decline without causing substantial collateral damage, then you weren’t in a bubble to begin with; you were simply in a bull market which then became a bear market.

Looking at the markets today, they show every indication of being bull markets rather than bubbles. For one thing, there’s not much speculation going on: no one’s day-trading junk bonds. Eisinger says that the One Percent are getting wealthier “through speculation”, and cites private-equity firms in the “house flipping” business, but that’s really not what’s going on at all: the One Percent are getting wealthier just because they own stocks and those stocks are going up, while the private-equity firms buying houses aren’t flipping them, but are rather renting them out, as part of their global search for yield. That’s real investment, it’s not speculation. What’s more, when Eisinger points to this chart as evidence that stocks are overvalued, he’s pointing to a chart which shows that — except for a deep “V” at the very height of the financial crisis — shows stocks trading at pretty much their lowest valuation of the past 20 years. Nasdaq 5,000 this is not.

More importantly, investors aren’t leveraged in the way they were during the housing boom: no one’s buying houses with no money down, and no one’s borrowing billions of dollars to invest in super-senior CDO tranches. The dot-com bust wiped out hundreds of billions of dollars of paper wealth, but only caused a relatively mild recession: the reason was partly the fact that Alan Greenspan was able to slash interest rates, but it was also in large part a function of the fact that very little of the dot-com bubble was fueled by leverage.

Today’s markets might well be frothy — but, in the short term at least, that’s a good thing for the real economy. So far this year, we’e seen 1,413 companies issuing stock onto either the primary or secondary markets, raising $288 billion in the process — that’s up 33% from the same period last year. (And remember, the same period last year included the Facebook IPO.) Amazingly and wonderfully, that total includes $74 billion of issuance in Europe, up a whopping 44% from the same period in 2012. Companies don’t generally raise equity capital just to sit on the cash: they raise it so that they can invest the proceeds into their business, thereby creating jobs and economic growth.

Companies are raising equity capital right now because doing so is cheap for them: the higher that stock prices go, the more that we can expect this trend to continue. And that’s good for the economy. And, of course, investors are getting wealthier, which causes some nonzero wealth effect in terms of the amount of money they spend. So, what’s not to like, in terms of markets going up? If it means that the population gets richer and companies have more money to invest in their business, what’s the downside?

Over the long term, expensive stocks are bad for people who are trying to save for retirement: the more you pay for your investments, the lower your ultimate return is going to be. But that’s a relatively minor concern right now. The bubble-worriers have something else on their minds — something more moralistic. They see the rich getting a free lunch: central banks dropping money from helicopters, most of which is going directly into the pockets of the top 1%. That isn’t fair, and they are sure that there’s some kind of cosmic karma which means that wherever there’s a party, there’s bound to be a hangover.

The view that “we have to pay a price for past sins” is nearly always wrong, and in any event the only real sin being committed here is that the rich aren’t sharing their good fortune with everybody else. The stock market is a rising tide which is lifting only the luxury yachts; everybody else is underwater. That is genuinely deplorable. But it doesn’t mean that we’re in a bubble, and it doesn’t mean that if and when the tide goes out, the rest of us are going suffer massive injuries. There are always tail risks, of course: there are always unknown unknowns. But for the time being, the most likely scenario is that when asset prices start to fall, the main people to be hurt will be the ones owning the assets in question. In other words, the people who can best afford it. That’s not a bursting bubble: it’s just a common-or-garden bear market, of the type that all investors should be able to withstand.

When Apple CEO Tim Cook appeared in front of Carl Levin today, I was hoping for an epic showdown, as presaged by Levin’s highly-aggressive press release yesterday. I was sorely disappointed — although I did end up with a newfound admiration for Tim Cook’s ability to acquit himself with dignity and intelligence and integrity in the toughest of situations.

The Apple executives at the hearing spent most of their time politely listening to various senators pontificate about taxes. But every so often, in response to a rare direct question, they would try to explain why they didn’t think they were evading billions of dollars in taxes.

The Levin report is very long and dry, so let me oversimplify a little. Apple revenues basically end up in one of two places: California, for sales in the Americas; and Ireland, for sales everywhere else. Apple pays US taxes on the money which ends up in California, but only pays US taxes on the interest on the money which ends up in Ireland. Which isn’t very large.

A lot of the hearing was taken up, unhelpfully, with senators asking whether Apple pays taxes on the income from sales made in the US, and Apple saying yes. (Although, as Tim Fernholz points out, “between 2009 and 2011, the company told investors it was setting aside $13.7 billion to pay federal taxes—but it has actually paid only $5.3 billion”. The amount the government receives is significantly lower than we had all been given to believe from Apple’s SEC filings.)

The more interesting questions concern Ireland, the money flowing in there, and the degree to which those enormous sums of money constitute tax avoidance on a massive scale.

There are two parts to this question. The first is the sheer amount of money flowing into Apple Operations International (AOI), a company without tax jurisdiction and which hasn’t filed a tax return in five years. The Apple executives were unflustered about that fact: all of Apple’s various subsidiaries in Europe and Asia pay local tax on their profits. They could then just hold on to those profits themselves, if they wanted. But because it’s nice for Apple to be able to look after all of its money in a single place, the various subsidiaries send it all to Ireland to be invested. It has already been taxed at that point, and shouldn’t be taxed again.

This is more than a little disingenuous, because it seems that Apple is extremely good at ensuring that the “local subsidiary” in question, accounting for the overwhelming majority of the profits being fed into AOI, is ASI — another Irish company without tax jurisdiction. When Apple ships product from its factories in China to its stores in Singapore, the stores in Singapore don’t make much if any profit. That’s because somewhere in the South China Sea, ASI takes ownership of that product at a very low cost, before selling it on to Apple Singapore at much higher cost. The hardware never goes anywhere near Ireland, but title to the hardware changes hands, and substantially all of the profit associated with that hardware thereby ends up being taxed at friendly Irish rates, somewhere south of 2%, rather than at whatever the government of Singapore might charge. Here’s the Levin report:

Transferring title in this manner allowed Apple to retain most of its profits in Ireland, where it has negotiated a favorable tax rate and maintains entities claiming to have no tax residence in any country, and limit the income it reported in the non-tax haven countries where the company did most of its business. For example, in 2011, Apple reported $34 billion in income before taxes; however, just $150 million of those profits, a fraction of one percent, were recorded for Apple’s Japanese subsidiaries, even though Japan is one of Apple’s strongest foreign markets. ASI, meanwhile, reported $22 billion in 2011 net income. Those figures indicate that Apple’s Japanese profits were being shifted away from the United States to Ireland, where Apple had negotiated a minimal tax rate and maintained two non-tax resident corporations.

So we shouldn’t take Apple’s executives at face value when they say that all of the money in AOI has been taxed once already. That might technically be true, but only at extremely low rates.

What’s more, Apple actually does, under the spirit of the law, owe substantial US taxes on that income. The law in question is something called the foreign base company sales income rule — a regulation specifically designed to prevent companies from jurisdiction-shopping when it comes to taxes. Under US law, Apple has to pay US tax on the income that ASI receives on things like the profits from all those Singaporean gadgets. But Apple uses something called the “check-the-box loophole” to make ASI “disregarded” by the IRS. Instead, the IRS looks only at the parent company, AOI, which, being merely a holding company, does not have any foreign base company sales. According to the Levin report, this clever two-step — first putting the income in to ASI, and then disregarding that income using the check-the-box loophole — “allowed Apple to avoid paying taxes on nearly $44 billion in income from 2009-2012″.

The second part of the question is even more important, and surrounds something called a Cost Sharing Agreement which Apple has signed along with its Irish subsidiary, ASI. Under that agreement, ASI pays 60% of Apple’s R&D costs, and in return gets to keep 60% of the income from Apple’s intellectual property. This agreement, Apple executives repeatedly said, was signed “at arm’s length”, with the 60/40 ratio representing the respective proportions of Apple’s sales split: Europe and Asia account for 60% of Apple’s sales, with the Americas accounting for 40%.

But the fact is, as Levin hammered home at the end of the hearing, that Apple’s intellectual property is its crown jewel; that the amount it spends on R&D is in no way reliant on the fact that it’s getting some of that money from Ireland; and that in no conceivable universe would Apple ever sell off 60% of the rights to its intellectual property in return for a promise to pay 60% of present and future R&D costs. Not in a genuine transaction with a non-Apple counterparty, anyway. As Levin said, “95% of the creativity that goes into that product is in California. But two thirds of the profits are in Ireland.”

Apple receives enormous benefits from being based in California — Cook was entirely genuine when he said that it simply never occurred to him that the company might ever be headquartered anywhere else. And yet Apple has decided, in its wisdom, that 60% of the fruits of its Silicon Valley creativity should end up in a corporate shell in Ireland, never to be taxed by the US Treasury. This system has been in place for many years — since long before the Macintosh was invented — but that doesn’t make it any less of an obvious tax dodge. Apple Inc gets to claim the entirety of its global income for its shareholders, but less than half of it is ever taxed in the US. If an American company makes billions of dollars from its creativity and its enviable geographical location, it’s reasonable that the US authorities should be able to tax those profits, rather than helplessly watching them accumulate offshore.

Here’s the Levin report, again:

Despite the fact that ASI conducts only de minimis research and development activity, the cost sharing agreement gives ASI the rights to the “entrepreneurial investment” profits that result from owning the intellectual property. According to Apple, over the four year period, 2009 to 2012, ASI made cost-sharing payments to Apple Inc. of approximately $5 billion. ASI’s resulting income over those same 3 years was $74 billion, a ratio of more than 15 to one, when comparing its income to its costs… the cost-sharing arrangement for Apple Inc. makes little economic sense without the tax effects of directing $74 billion in worldwide sales revenue away from the United States to Ireland, where it undergoes minimal – or perhaps – no taxation due to ASI’s alleged non-tax resident status.

That’s no arm’s-length agreement, that’s a tax dodge — and a pretty blatant one at that. That’s why I’m astonished that Cook emerged from this hearing so unscathed: the facts were against him, but somehow none of the senators — not even Carl Levin — really managed to put him on the spot. It’s almost as though he had some kind of reality distortion field around him.

Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple’s tax strategies is Pulitzer-worthy stuff. When Apple CEO Tim Cook testifies in front of Levin today, it’s going to be one of the most uncomfortable grillings of his life. Steve Jobs could be intense — but Carl Levin, in full flow, is truly formidable.

The first discrepancy I’d love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were “nearly $6 billion” in FY2012, for “a US federal cash effective tax rate of approximately 30.5%”. (Those numbers imply taxable income of about $19.6 billion.)

The Senate report, by contrast, looks at the 2011 calendar year, and reproduces Apple figures showing $3.884 billion in current federal taxes, plus holding on to $2.998 billion in deferred federal taxes, for a total of $6.882 billion; that means an effective tax rate of 20.1%. (Again, working backwards, the implied total taxable income increases here to $34.2 billion.)

The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the 1099 1040 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.

The report doesn’t convert those figures into an effective tax rate, just saying that the number would be “well below the statutory tax rate”. But in in the year ended September 23, 2011, Apple overall reported net income of $25.9 billion, while in the following year its net income was $41.7 billion. Much of that income was overseas, of course. Still, it does seem that Apple’s total actual federal tax payments in both FY2010 and FY2011 were less than 10% of its reported net income.

This is particularly shocking to the US public, which has to pay taxes on its global income. Every other country’s billionaires are extremely good at escaping into a state of tax-free statelessness; America’s aren’t, and we expect that if you’re rich American, you’re going to pay a substantial amount of US taxes.

American multinational corporations, in this sense, lie somewhere in the middle: they don’t need to pay income tax on their global income, and so they can avoid billions of dollars in taxes by moving income to tax-friendly jurisdictions like Ireland, or to subsidiaries such as Apple Operations International and Apple Sales International, which pay taxes in no jurisdiction at all. (Their headquarters are in Ireland, so they are sheltered from US taxes, but since their operations are mostly in the US, they don’t pay Irish taxes, either.)

The only real punishment for avoiding taxes, if you’re a US corporation, is that your offshore profits are stuck offshore, where it can be hard to invest them or return them to shareholders. So when Apple claims in its testimony that it “supports comprehensive reform of the US corporate tax system”, note its two key provisos: that such reform be “revenue neutral”, and that it allow “free movement of capital back to the US”. The first would mean that US corporations wouldn’t actually pay the taxes they’re avoiding right now: total corporate taxes would remain at an all-time low. And the second would mean that the biggest corporate tax loophole of all — the ability to pay no taxes on foreign earnings — would be made substantially bigger.

The Senate report quotes Mark Keightley, making a very important point:

Corporate tax revenues have declined over the last six decades. In the post-World War II era, corporate tax revenue as a percentage of gross domestic product (GDP) peaked in 1952 at 6.1%. Today, the corporate tax generates revenue equal to approximately 1.3% of GDP. The corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue.

What we’re seeing here is a corporate class which is vastly more effective at evading taxes than individuals are; I don’t see that trend going away any time soon.

Instead, I have a modest proposal of my own: why not at least require all public US companies to file their federal tax returns with the SEC. They already report the amount of taxes that they pay, but as we’ve seen, the reported numbers, calculated under GAAP, can differ substantially from the actual cash numbers. I’m not saying we’d shame companies overnight into suddenly paying more taxes. But at least we’d be able to see which ones are evading taxes most effectively.

Amidst all the positivity coming out of Yahoo and Tumblr, any self-respecting pundit is going to want to pour cold water on the whole deal. Especially since billion-dollar mergers almost never work out very well. But here’s the weird thing: the more I look at this tie-up, the more it makes sense to me.

Yahoo has more than enough money to pay for Tumblr in cash, which is exactly what it’s doing. Here’s one easy way of seeing why this is a good deal for Yahoo: profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly. For Yahoo, having $4.4 billion in cash plus Tumblr is clearly going to be better in terms of the future than having $5.5 billion in cash, waiting interminably for some kind of Godot to come along and be bought. $1.1 billion is a lot of money, but it’s not so much money that it’s going to change the way that investors look at Yahoo’s balance sheet.

More fundamentally, Yahoo is acquiring 300 million young, mobile users at a stroke — along with invaluable information about what they like to consume online, and how they like to consume it. It’s a four-fer, in fact.

First, there’s the immediate traffic boost.

Second, there’s the ability to use Tumblr’s data to help optimize the rest of Yahoo’s pages. If I’m logged in to Tumblr, as I normally am, then when I go to Yahoo, I should see the kind of material that Tumblr knows I’m interested in, rather than some one-size-fits-all generic home page.

Third, Tumblr is Marissa Mayer’s opportunity for a Flickr do-over. The big portals have been extremely bad at building out genuinely interactive properties in the age of self-expression, and Tumblr knows how to attract a new generation of users who want to create rather than just consume.

And finally, Tumblr is the perfect platform for Yahoo’s brand advertisers to use if they want to start building up relationships with consumers, rather than just bombarding them with banner ads. (My friends at Percolate, an official Tumblr partner which was designed to solve this stock vs flow problem, are incredibly well placed to be huge winners from this deal.)

From Tumblr’s point of view, founder David Karp has extracted many promises from Mayer that she will leave the company alone, in New York City, to do its thing. “We’re not turning purple,” he says. More importantly, Karp can now outsource to Sunnyvale a lot of the gnarly monetization problems which the NY team was only slowly beginning to solve. The plan right now — which might change — is to give Tumbloggers the option to start running ads on their sites, presumably with some kind of revenue-sharing deal. But from day one, Yahoo’s sales team could simply start insisting that any brand wanting to buy ad space on the Tumblr dashboard will also have to buy a bunch of space on the Yahoo network. That’s a great way of leveraging the amount of money that Tumblr brings in.

And then of course there are the itchy VCs: Tumblr raised its first money back in 2007 at a $3 million valuation, resulting in a glorious 365X return for early investors including Fred Wilson and Jacob Lodwick.

Lodwick is on the record saying that acquisitions like this one are always a failure for the company being bought: “Big companies aren’t just big versions of small companies,” he writes. “They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders.” But part of the deal you make, when you accept VC funding, is that there will almost certainly be an exit within 5-10 years, and it will almost certainly not be an IPO where the founder retains control. This kind of exit, where the company is big enough to retain a modicum of independence, is the least bad outcome that Karp could realistically achieve.

It won’t be easy: as Peter Lauria points out, Yahoo’s decision to ban Kara Swisher and Peter Kafka of All Things D from the press announcement is exactly the kind of heavy-handed corporate meddling that Lodwick is talking about. And Tumblr’s users are predictably unhappy about the whole thing. But Yahoo certainly has the tools to help boost Tumblr’s flattening traffic numbers, while Karp should be able to retain enough control of Tumblr that his users don’t revolt entirely. After all, it’s far from clear where else they could go.

Most mergers fail, and this one could fail as well. But on the spectrum from “obviously doomed” (NewsCorp/MySpace) to “obviously sensible” (Google/YouTube), I’d put Yahoo/Tumblr well within the “sensible” half. Which is rare enough to be noteworthy.

It’s tragic that Cooper Union has decided to start charging tuition. The fateful announcement was made by Mark Epstein, the self-aggrandizing chairman of the board of trustees, and was greeted with dismay by thousands of Cooper students, faculty, alumni, and friends.

It’s the trustees who are in charge of the school, and the trustees who most need to be held accountable for what happened. To date, Jamshed Bharucha, the president of Cooper Union, has shouldered most of the blame — and he does deserve a good chunk of it. The decision would not have been taken without his pushing for it, and while he has the full support of the board, which is paying him $650,000 per year, he has signally failed to garner the support of the broader Cooper community. (It will take the tuition payments from 67 average students just to cover Bharucha’s salary; to put that in context, a full freshman class comprises about 20-35 architecture students, 65 in art, and 115 in engineering.)

That said, Bharucha’s situation is a bit like that of Greece’s George Papandreou: he’s a leader who inherited a crisis which was much deeper and more serious than he had any reason to believe. Cooper’s parlous state was bequeathed to him by the previous president, George Campbell, but also by the a board of trustees which signed off on a series of dreadful decisions, most catastrophically the decision to borrow $175 million to build a shiny new building, while having no ability whatsoever to pay that money back.

In order to recover from such atrocious decision-making, the first thing you have to do is to draw a clear line under the past, being very explicit about what went wrong and where. If you can’t admit your own past mistakes, then you’ll be doomed to continue to make those mistakes in the future.

Which is where Mark Epstein comes in. Epstein, unlike Bharucha, was intimately involved in most of Cooper Union’s worst decisions. He should therefore be disqualified from making even more bad decisions, at least unless and until he can demonstrate that he understands what the board did wrong and how they managed to bring Cooper Union to its fiscal knees. This is one reason the tuition announcement was received so badly: the Cooper community quite understandably has no reason to trust that Epstein’s board will do the right thing. Quite the opposite.

There has been no hint of any apology or remorse from Epstein when it comes to the board’s past mistakes; indeed, he hasn’t even come out and admitted that the board made any mistakes at all. When I appeared on Democracy Now with him Thursday morning, he aggressively defended everything the board did in the past, including the decision to build the ridiculously expensive New Academic Building.

Epstein set the tone for the conversation from the very start:

Let me first categorically state that had we had enough money and were able to generate enough revenue to cover our expenses and keep the school with 100 percent scholarship policy, that was our intention. But we can’t. We don’t have the ability to raise enough revenue.

A big part of that problem—and I’ve made this public before—is that we don’t have enough alumni support. Traditionally, only 20 percent of our alumni, who have gotten 100 percent scholarships, give back to the school on a regular basis. You know, contrast that with Princeton. Princeton charges now $40,000-some-odd a year for scholarships, and they’re one of the best schools at alumni participation. They get a participation rate of approximately 65 percent.

I’ve pretty much responded to the first part of this already, so suffice to say: if you’re running a free school, you don’t start with your expenses and then try to work out how you’re going to “raise enough revenue”. Instead, you start with your revenues, and then work out how many students you can educate with that sum of money.

As for the idea that the alumni are to blame, and that Cooper should be more like Princeton — well, that is so misguided, on so many levels, that no one capable of making that statement should ever be the person who makes the decision to start charging tuition. Princeton is very good at being Princeton, but Peter Cooper was never trying to create a center of research excellence, where Nobel laureates regularly rub shoulders and where undergraduates can study any subject under the sun.

Cooper prides itself on being one of the most selective colleges in America, and picking students solely on merit. Princeton is also highly selective, but can’t claim that its admissions process is entirely merit-based: some 40% of legacies applying to Princeton end up being admitted, compared to just 9% of non-legacies. Alumni donate to Princeton in large part because they rationally believe that doing so will help their kids get in there; Cooper’s alumni, in contrast, would be horrified were Cooper to start admitting applicants on the basis of who their parents are. Besides, most kids don’t even want to attend Cooper, given that the only choices it offers are art, architecture, and engineering.

Epstein basically wants Cooper’s students to pay for their education after they’ve graduated — but if you wanted to create the kind of school where students effectively paid their tuition ex post rather than ex ante, you wouldn’t create Cooper Union. Art students don’t tend to go on to particularly lucrative careers, and neither do architects, who generally have an astonishingly low incomes given the amount of skill and education required to do their jobs. Even the engineering school only rarely generates highly-paid graduates, and then often only when they leave engineering to pursue a career on Wall Street.

Within days of Epstein’s announcement that Cooper would be forced to charge tuition for the lack of alumni donations, Ronald Perelman announced that he was giving $100 million — to Columbia Business School, a place which really doesn’t need the money. Perelman will get his name on a building, of course: The Ronald O. Perelman Center for Business Innovation will sit across from the Henry R. Kravis Building, which was itself the result of another $100 million donation. But that kind of thing has never been what Cooper Union is about, and it’s profoundly depressing that Epstein seemingly aspires to it.

On Democracy Now, Epstein talked about how Cooper had “raised $60 million in specific naming opportunities for the new building as part of the capital campaign”; as far as I know he has never admitted that the campaign was anything other than a glowing success story: “a triumph of grit, determination and the gradual evolvement of dedicated volunteer leaders: the board, alumni and friends”.

In 2007, Cooper Union’s five-year strategic plan talked about alumni giving as a key area of success, and added:

Current financial projections indicate that in fiscal year 2008, the college is likely to achieve positive cash flow for the first time in about a quarter century, and longer term projections indicate that the overall annual cash deficit problem will then be left behind for the foreseeable future.

As late as June 2009 — with the worst of the financial crisis behind it — Cooper’s board was still getting the message out that the college had “sidestepped the crisis” and was “basking” in good fortune. No hint there of desperate financial straits, or any need for massive and urgent alumni donations, without which the board might be forced to break the century-old tradition of free tuition.

So you’ll excuse me if I raise an eyebrow when Epstein points the finger at tight-fisted alumni, rather than accepting any blame at the board level. Cooper has never had much in the way of alumni donations, and in fact alumni donations have been much higher in the past 15 years or so than they ever were before. So where did this sudden desperate need for extra alumni donations come from — and who on the board decided that it made sense to embark on a plan which required unprecedented levels of alumni giving? Cooper’s alumni have a lot of love for the institution. But there aren’t very many of them — it’s a small school — and they don’t tend to become massively wealthy.

According to Epstein’s version of events, Cooper is a victim of circumstances largely outside its control: “the costs of education have gone up,” and Cooper Union’s revenues haven’t managed to keep pace. And it’s certainly true that Cooper’s costs have gone up. Never mind the enormous presidential salaries, just look at the interest payments on the loan which Cooper took out to construct its New Academic Building.

Stay with me here: according to Epstein, the poorest 25% to 30% of students will still get a full scholarship, and the richest 25% to 30% of students will be expected to pay the maximum amount of $19,250; the rest will be assessed on a sliding scale between the two endpoints. To a first approximation, then, we can anticipate that total tuition payments will average out to roughly $9,625 per student. The interest payments on the $175 million loan from MetLife come to $10.3 million per year, which means that Cooper will need the income from roughly 1,070 students just to pay the interest on the loan. (Never mind the extra $5.5 million per year in principal repayments which start in 2019.) Coincidentally, 1,070 is pretty much the size of Cooper’s entire student body.

The conclusion is hard to resist: Cooper Union’s tuition payments are required to pay off the interest on its $175 million loan, and if it hadn’t taken out the loan, then charging tuition might not have been necessary.

So, is that $10.3 million per year — all of which goes directly into the maw of a giant insurance company — a legitimate “cost of education” at Cooper Union? Yes, in that Cooper can’t educate its students unless it makes those payments. But we’re not talking, here, about some generalized and inchoate force which is driving tuition payments up across the board; we’re talking about a very specific decision, made by Cooper’s trustees, which had dreadful consequences.

Of course, Epstein doesn’t see it that way. Here’s what he said on Thursday:

The building helped us financially; it did not hurt us. We had two buildings that were in need of tens of millions of dollars in upgrading to make them building and fire code compliant, to make them ADA compliant. The accrediting boards that determine whether or not we can offer degrees questioned the validity and the viability of our facilities, because they were falling behind par.

The new building was paid for by selling the ground lease under our old engineering building, which we got $97 million for, right before the crash. And we raised $60 million in specific naming opportunities for the new building as part of the capital campaign. The new building going up on our old engineering building site, being built by Minskoff, will generate $2 million a year at least, ongoing, to the school. The building was paid for by those funds, not the loan.

The loan proceeds were eaten up by the deficit.

Let’s be very clear about what Epstein is saying, here. Cooper borrowed $175 million, in the form of a 30-year fixed-rate mortgage. It then built a new building at a cost of slightly less than $175 million. But don’t for a minute conclude that the loan was used to pay for the building! Not at all! The loan was simply “eaten up by the deficit”.

Here’s my challenge to Epstein, and to Cooper Union: find me one person — just one — who (a) believes this version of events, and (b) isn’t a member of Cooper’s Board of Trustees, either now or when the decisions were made. In fact, I would be astonished if even a majority of the current board would agree that the new building was helpful rather than harmful, financially. You just need to look at it to see how much of a white elephant it is; you don’t need to know that the engineering faculty — which mainly uses the new building — voted against it twice, and that the myth about the new building being required in order for Cooper to keep its accreditation is, well, let’s just say that none of the faculty believes it.

The reality is that you don’t need to know anything about the building at all in order to understand that you can’t take Epstein at face value here. All you need to know you can be found in one sentence from the official Cooper Union FAQ:

The MetLife pre-payment penalty for the 30-year loan is approximately $81 million (as of August 2012).

You read that right: even if some gazillionaire (or capital campaign) dropped $175 million into Cooper’s lap tomorrow, they still couldn’t pay off their $175 million loan: it also has a whopping $81 million prepayment penalty.

The trustees’ story is basically that they expected to be able to pay for the new building through their capital campaign: one of them told James Stewart that the college expected to raise $125 million more than it actually did. And Epstein told me, when I asked what the $175 million was for, that “part of it was used as a bridge loan, while the building was being built, because the moneys from the capital campaign takes years to come in”.

But here’s the question: if the MetLife loan was meant to just be a bridge to future alumni donations, then why was it structured as a 30-year fixed-rate loan with a prepayment penalty of as much as $81 million? The capital campaign ended in 2012, not in 2036.

All of which is a very long-winded way of saying that Cooper’s trustees, who couldn’t be trusted a year ago, still can’t be trusted today — and that so long as Mark Epstein is chairman of the board, the broader Cooper community simply will not rally behind him and give his decision to charge tuition any kind of broad-based legitimacy.

On Friday, Kevin Slavin — one of the most outspoken opponents of charging tuition at Cooper — was elected to the position of alumni trustee for the period from December 2013 to September 2017. Slavin didn’t even run: he was a write-in, a protest at the way in which Cooper’s trustees seem to be unaccountable to anybody. The vote wasn’t for Slavin, so much as it was against Bharucha, and Epstein, and everybody else on the board who has consistently downplayed their own culpability in the Cooper fiasco.

Charging tuition doesn’t solve Cooper’s financial problems — far from it. In order for Cooper to get onto a sustainable footing, it’s going to need to regain the admiration of multiple constituencies, including current students, alumni, current faculty, and prospective students. It’s pretty clear that the board isn’t going to get that support by blustering and stonewalling and pretending that they didn’t do anything wrong. So maybe, if and when Bharucha manages to find a new communications chief, that person could start by persuading the board to give a full explanation of — and take full responsibility for — everything which went wrong.

Jeff Jarvis reprints the clip above, in an article dismissing the privacy concerns surrounding Google Glass. The Victorian attitudes of Newport’s cottagers, he clearly implies, were misguided and misplaced. “Rest assured,” he writes. “ I will ask you whether it’s OK to take a picture of you in private.”

The key words, here — words which weren’t even part of the cottagers’ vocabulary — are “in private”. We now live in a world where we have public lives and private lives — and for over a century now, since roughly the point at which the above article appeared, the portion of our lives considered “public” has been expanding, while the portion of our lives we can consider “private” has been contracting. What’s more, Jarvis himself is a prominent proponent of the idea that we should maximize the speed at which we move our lives into the public realm; he also equates a desire for privacy with being “scared of the public” .

Never before have we faced so many opportunities to turn the formerly-private into the newly-public. As those opportunities arise, many people adopt them, and turn “public” into the new norm for such activities. Eventually, the norms become societally entrenched, to the point at which it is now utterly unobjectionable for those who once would have been labeled “kodak fiends” to take photographs outside a Newport tennis tournament.

My point here is that technology has a tendency to create its own norms. The classic example is the automobile — a technology which kills more than 30,000 Americans every year. From the 1930s through the 1990s, societal norms about who roads belonged to, and what people should do on them, were turned on their head thanks to the new technology. The dangerous new activity allowed by the new technology became the privileged norm, to the point at which just about all other road-based activity — and roads have been around for thousands of years, remember, since long before the automobile — essentially ceased to exist. Eventually, we reached the point at which elected representatives were happy saying that if a bicyclist gets killed by a car, it’s the bicyclist’s fault for being on the road in the first place.

If Google Glass — and wearable computing more generally — takes off and fulfills its potential, it will change society’s norms about what is public and what is private. It is therefore entirely rational, whatever you think of the set of norms we have right now, to assume that they will end up moving towards something more well disposed towards the new technology.

Jeff Jarvis will welcome that move, and can come up with dozens of reasons why it would be a good thing rather than a bad thing. “There’s no need to panic,” he writes. “We’ll figure it out, just as we have with many technologies—from camera to cameraphone—that came before.” But let’s be clear here about how much weight is carried by that “we’ll figure it out”. Realistically, “figuring it out” means, in large part, changing norms: irrevocably moving the line between what is private and what is public. That might be a good thing, it might be a bad thing. But if you like the norms we have right now — or if you think they’ve already gone too far in terms of robbing individuals of their privacy — then you have every reason to worry about what the onset of wearable computing might portend.

Update: Noah Brier points me to a quote from Daniel Mendelsohn, who goes back further still than the Victorians:

I am amused by the fact our word idiot comes from the Greek word idiotes, which means a private person. It’s from the word idios, which means private as opposed to public. So the Athenians, or the Greeks in general who had such a highly developed sense of the radical distinction between what went on in public and what went on in private, thought that a person that brought his private life into public spaces, who confused public and private, was an idiote, was an idiot. Of course, now everybody does this. We are in a culture of idiots in the Greek sense.

Jamie Dimon is wagging his finger from newstands across America this week, above the kind of headline his PR team can only dream of: “DIMON IS FOREVER: Why Jamie Dimon is Wall Street’s Indispensable Man”.

The story itself, by Nick Summers and Max Abelson, consists mainly of rich corporate insider types talking about how wonderful Jamie Dimon is, and how ridiculous it is that anybody might consider stripping him of the chairmanship of JP Morgan. Here’s a doozy:

Admiring rivals have been known to call Dimon “the sun god.” That cosmic aura has real use, says Kathryn Wylde, who served on the Federal Reserve Bank of New York’s board with Dimon until his term ended last year. “There’s no doubt that it helped the bank, because so much of that business is built on confidence.” The intrusion of shareholders, in the form of a vote on Dimon’s dual roles, she adds, is “indefensible if the company is performing well.”

Wylde is one of those great-and-good people who turn up on boards all over the place: not only the New York Fed, but also everything from the NYC Economic Development Corporation and the Manhattan Institute to the Lutheran Medical Center and the US Trust Advisory Committee. Her day job is serving as the president and CEO of the Partnership for New York City, a partnership made up exclusively of large companies and the rich people who lead them. JPMorgan is unshockingly among them. Her view of the role of shareholders in corporate governance is fascinating: it’s “indefensible” for them to care about such things so long as they’re getting paid.

But clearly shareholders do care about governance: both Institutional Investors Services and Glass Lewis, advisory firms paid to work out what is in the best interests of shareholders, have come to the entirely reasonable conclusion that Jamie Dimon should not keep his job as chairman of the board.

The battle line between princpals and agents has never been more clearly delineated than it is here. The shareholders of JP Morgan — the owners of the company — want a board which represents their interests, and which can control what the CEO does. The managers and captured professional board members, on the other hand — the CEO class — have rallied around Dimon in an impressive display of high-wattage solidarity. Bloomberg Businessweek quotes Bill Daley, John Mack, Jimmy Cayne, Phil Gramm, Dick Kovacevich, and “two dozen of Dimon’s peers and colleagues” in his defense; Andrew Ross Sorkin, for good measure, adds Barry Diller and Hank Paulson.

Will shareholders see this awesome display of PR firepower and decide that Jamie’s right, he should stay on as chairman after all? If they’re narrowly focused on the short-term future of the JP Morgan share price, then probably they will. After all, Dimon has petulantly threatened to quit if the motion goes through, which would be bad for the share price — and as all of these articles are at pains to point out, there’s not much evidence that splitting the chairman and CEO roles is likely to do any particular good for JP Morgan’s share price over the medium term. (It can help underperforming companies, but that effect disappears with respect to relatively strong ones.)

The cult of the CEO is still going strong: just look at the way Bloomberg has appointed the ex CEO of IBM to try to help the company recover from its recent data scandal. So maybe if you get enough CEOs supporting Dimon, their collective weight will help tip the balance. (Although it’s hard to believe that any shareholders particularly value the opinion of Jimmy Cayne on this issue.)

But the fact is that Dimon should not be chairman of JP Morgan, and shareholders can see exactly why just by looking right there at the cover of Bloomberg Businessweek. No one man should ever be indispensable, and it’s the job of the chairman to ensure that the company is in good solid health no matter what happens to the CEO.

A fuller, and quite wonderful, explanation has also been offered up by the Epicurean Dealmaker, who makes a few more salient points. He explains:

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically.

Even if Dimon is a great CEO, there’s really no evidence at all that he’s a great chairman, and JP Morgan’s shareholders have the right to install the best possible officeholder in each of those roles.

How do we know that Dimon is a bad chairman? Well, there’s the fact that there’s no good succession planning, for starters. And then there’s the board itself, which is basically a bunch of supine muppets, who do as they’re told rather than actually representing shareholders and holding the CEO to account.

Most intractably, there’s the question of shifting goalposts. As the Epicurean Dealmaker points out, Jamie Dimon is the very last person on the planet who should be in charge of judging whether Jamie Dimon is doing a good job as CEO. For instance: it’s impossible for a bank with $2.4 trillion in assets and 256,000 employees to stay out of regulatory trouble entirely. But how many fines is too many? As Businessweek points out, “the litigation section of the bank’s quarterly filings now runs to almost 9,000 words, or 18 single-spaced pages.” At what point does the litany of legal and ethical lapses become so long that the CEO has to take responsibility, and/or break up the company into small-enough-to-manage chunks? This is an important question, and Jamie Dimon cannot answer it. You need an independent board to do that — to set the goalposts — and JP Morgan’s board is not independent.

In theory, shareholders elect directors, who hire the CEO to run the company. In practice, the CEO picks the directors he wants, pays them a handsome stipend for doing nothing, and they in turn make no attempt to listen to what the company’s shareholders might desire. In fact, they’re quite offended when it’s suggested that they might want to do that at all.

The debate about this vote often seems as though it’s two groups of people talking at cross purposes to each other: the Dimon defenders are making it all about him personally, and what a good job he’s done running the company, while the good-governance types generally say nothing personally about Dimon at all, and instead insist that all they’re doing is standing on principle.

But in fact this is about Dimon personally: it’s about how much power one man can or should be allowed to have. Dimon has too much. It’s time to give him a boss.

Ezra Klein has a good summary of the latest CBO budget projections, which show that the national debt really isn’t going to be a problem at any point in the foreseeable future. The deficit isn’t going away, of course: the smallest it’s likely to get, according to the CBO, is $378 billion, or 2.1% of GDP, in 2015. But that’s entirely manageable, and puts the national debt-to-GDP ratio on a pretty flat trajectory over the medium term.

Of course, in the real world, none of this is actually going to happen as forecast. It’s hard enough to forecast what’s going to happen in 2013, let alone what’s going to happen in 2023: the CBO projection for this year’s deficit has fallen from $845 billion to $642 billion just in the past three months, so it’s worth taking all future forecasts with a large pinch of salt — especially since the one thing that’s certain is that there will be substantial changes to US fiscal policy between now and 2023.

This chart contrasts quite dramatically with the bipartisan consensus that America’s national debt — and especially the way that it is built up by the entitlement programs of Medicare, Medicaid, and Social Security — are serious problems. As Paul Krugman explains wonderfully in his latest essay for the NYRB, America’s social safety net was actually a key channel through which countercyclical government stimulus entered the economy in the wake of the financial crisis. And given how difficult it is to legislate expansionary fiscal policy on the fly, there’s a strong purely economic case for keeping such programs.

With any luck, then, this chart will help us to stop bellyaching about the debt, and create a bit of space where we can try to work out how to really get the debt-to-GDP ratio down over the long term, by concentrating on increasing the denominator rather than decreasing the numerator. But don’t hold your breath. Even the CBO takes pains to warn of debt problems in the future, saying that a debt-to-GDP ratio around 75% “would have serious negative consequences” in terms of interest expenses, lower wages, and worse:

A large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

In the USA, this risk is de minimis, barely even worth mentioning: not only do we print our own currency, but in general US government bonds are universally considered the safest assets on the planet. So what’s the CBO playing at, here?

Krugman has a fascinating explanation for what might be going on:

Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed.

I’d argue that Keynes was overwhelmingly right in his approach, but there’s no question that it’s an approach many people find deeply unsatisfying as an emotional matter. And so we shouldn’t find it surprising that many popular interpretations of our current troubles return, whether the authors know it or not, to the instinctive, pre-Keynesian style of dwelling on the excesses of the boom rather than on the failures of the slump.

My opinion is that it’s even simpler than that. Krugman naturally sees macroeconomic problems in terms of cycles: there are booms and busts, and there are emotional reasons why economists prefer to concentrate on the problems with booms, and apply the solutions to those problems (spend less money) even during busts where they are contraindicated.

But I think the general view of the public, and of our mainstream elected representatives, is even simpler. These people aren’t economists, and don’t think in terms of cycles; they certainly can’t clearly articulate the difference between a financial crisis and a fiscal crisis. Everything just reduces to “we spent too much, we should spend less”, which makes intuitive sense: the biggest problem with Keynes is that, just like Ricardo, a lot of what he discovered is deeply counterintuitive.

In which case, Krugman’s cyclical arguments are not going to carry the day politically: it’s hard to explain that the right thing to do changes according to various measures of resource utilization. Instead, it might be best, on a tactical political level, just to point at the CBO’s debt-to-GDP chart and say look, we’ve solved this problem now. Even if the CBO wouldn’t really agree with that interpretation.

All social networks are based on a cognitive con. No one likes to give out valuable personal information to some huge corporate entity, so the trick is to make people feel as though they have some kind of control or ownership, even when they don’t. Most of Facebook’s privacy controversies boil down to much the same thing: people share personal information with their friends, using the convenient Facebook platform, and then are shocked when it turns out that Facebook has access to that information and is making money from it.

The more centralized and controlling a social network is, and the less that it’s run on a peer-to-peer basis, the more likely it is to run into this kind of trouble. So it probably should come as little surprise to learn that Bloomberg, the highly-centralized and highly-controlling social networking company, has now run headfirst into its very own privacy scandal. (Bloomberg is a competitor of Thomson Reuters, which is my employer and owns Reuters News.)

The Bloomberg terminal is a take-it-or-leave-it proposition, as far as its users are concerned: they either sign on the dotted line, pay their $20,000 per year, and get their terminal — or they don’t. Just as with Facebook, the Terms of Use are non-negotiable: unless you agree to them, you don’t get to use the service. And as everybody who’s ever tried to put a naughty word into a Bloomberg message knows, once you’re signed into the Bloomberg system, Bloomberg is watching you.

Zach Seward‘s sources say that Bloomberg logs every keystroke of every customer; Bloomberg declined to comment to Seward and declined to comment to me, so it’s hard to know what the truth is. But it’s well known that Bloomberg accumulates a truly enormous amount of information; right now, for instance, it says it is hiring big data architects in an attempt to manage it all. That dataset is one of Bloomberg’s great competitive advantages.

Indeed, Bloomberg’s clients in many cases may want it to implement Panopticon-style monitoring of everything their employees do. As Seward says, “at Bloomberg, omniscience is a feature not a bug”: even if the individual employees aren’t enthusiastic about losing all their privacy, their employers, institutionally, see a lot of upside, in terms of compliance and risk management, in keeping a record of everything that their workers do online. If Bloomberg will help do that work for them, included in a terminal subscription they’re going to pay anyway, then so much the better.

Besides, both Bloomberg and its clients have an aligned incentive when it comes to making the terminal as excellent as possible in terms of giving subscribers the information they want as quickly and comprehensively as possible. You can’t do that unless you know how clients are using the terminal — what they’re looking up, where they’re getting frustrated, where they spend most of their time. By sharing usage data and trusting Bloomberg to keep it confidential, subscribers can help make the product even better.

But journalists are a special case. As Bloomberg editor in chief Matthew Winkler says, Bloomberg’s “reporters should not have access to any data considered proprietary” — and it is “inexcusable” that they did. The problem derives from Bloomberg’s in-house news organization priding itself, at least at the outset, on being deeply embedded into the broader company, and making the maximum use of the information on the Bloomberg terminal.

Bloomberg News’s Kevin Reynolds, for instance, talking to Brill’s Content in 2001, boasted that “as a reporter here, you have knowledge going into the interview that your competitors don’t even have at the end,” thanks to the information in the terminal. And in case there was any doubt that, as Amy Chozick writes, “the news operation was assembled in the 1990s primarily as a way to sell more terminals,” it was laid to rest by Mike Bloomberg himself, in his autobiography. “Most news organizations never connect reporters and commerce,” he wrote in Bloomberg by Bloomberg. “At Bloomberg, they’re as close to seamless as it can get. That’s our system.”

In that context, it was absolutely natural for journalists to have access to the same data being seen by the sales staff: at Bloomberg, the reporters were deliberately tied as closely as possible into the commercial terminal-sales function. Too closely, it turns out. As times changed, and, in Winkler’s words, “as data privacy has become a central concern to our clients,” it became necessary for Bloomberg’s journalists to be completely removed from client data. They weren’t, and, as Bloomberg CEO Daniel Doctoroff writes, “although we have long made limited customer relationship data available to our journalists, we realize this was a mistake.”

So, Bloomberg says it made a mistake, it has apologized, and it is not going to happen again. End of story? Not entirely. For one thing, the Europeans have pretty strict privacy laws, and are talking to Bloomberg about what happened; no one knows how those talks could conclude. On top of that, for all that Winkler’s apology runs under the headline “Holding Ourselves Accountable,” so far there have been no reports that anyone at Bloomberg is being held accountable. A Bloomberg spokeswoman declined to comment.

Bloomberg’s reporters use the Bloomberg terminal for everything they do: they’re an inextricable and central part of the Bloomberg social network. And while the newsroom has now lost its access to certain functions, the company would not comment on the degree to which the changes are affecting the vast majority of Bloomberg employees who don’t work in the newsroom. For the time being, it seems, thousands of Bloomberg employees around the world have retained their access to key information about employees of Goldman Sachs, the Federal Reserve, the ECB, the US Treasury, and countless other organizations — information which, in many cases, is fiercely protected even within the organizations themselves. (If an employee has been quietly suspended and is no longer actively working for the organization in question, that’s not going to be common internal knowledge, but it’s easy to see if you can see when they last logged in to their Bloomberg.)

Many of Bloomberg’s clients, especially the Europeans, are likely to be unhappy about the fact that such sensitive information could continue to be widely available within the company. But, just like participants in other social networks, they don’t have a lot of choice in the matter. The more time you spend on your Bloomberg, the more value you get out of it — and the more that Bloomberg staffers are going to know about when and how you work. That’s been the bargain from the beginning, whether you liked it or not.

Dan Primack is excited about a new bill which would give small-cap companies the option to have their stocks be quoted at 5-cent or 10-cent increments rather than the standard one-cent gap. He explains:

Small-cap stocks are trapped in a cycle of arrested development. They are small, so they are ignored by analysts and market-makers. And because they are ignored by analysts and market-makers, they remain small.

The first part of this is surely true: analysts and market-makers do tend to ignore small-cap stocks. But from there on in, things start getting very sketchy. For one thing, there’s no evidence that if you’re ignored by market-makers, your company finds it harder to grow. Even today, in order for a company to grow, it needs more than just a fluffy stock price: it also needs things like increasing profits, or revenues. And while higher profits can feed quite easily into a higher share price, the causality is much harder the other way around — having a high share price doesn’t particularly* help you grow, especially if you’re not interested in acquisitions.

So the premise here is pretty unconvincing to start with: the idea that if we get more analysts and market-makers to cover a particular stock, that will help publicly-listed small-cap companies grow. But there’s a hidden premise here as well, which is even less convincing: that if we allow stocks to be quoted in increments of 5 cents or 10 cents, that will improve the quantity and quality of the market support those companies receive.

One of the good things about the world is that the world of stockbrokers is in secular decline. Americans are — finally — beginning to realize that discount brokers and ETFs and index funds are much more sensible ways to invest than the old method, where a friendly sales guy from Merrill Lynch would chatter away about this stock and that stock and eventually charge you an enormous commission for the privilege of buying or selling at what was invariably exactly the wrong time.

Congressman David Schweikert, who is putting forward the new bill and who represents Scottsdale, Arizona, is puzzled that the SEC has done nothing on tick sizes, despite “overwhelming evidence that wider ticks for small-cap companies will stimulate liquidity, encourage capital formation, and grow jobs”. But I for one haven’t been overwhelmed by any such evidence, and the people pushing it seem to be exactly the industry insiders who would make lots of money from it.

The Schweikert bill is particularly interesting because it doesn’t actually decimalize the small-cap stocks in question. Instead, it quite explicitly just funnels money from small investors to bigger investors and brokerages. Here’s the key bit, with my emphasis added:

The Spread Pricing Liquidity Act allows companies with public float of less than $500 million and average daily trading volume under 500,000 shares to select to have their securities quoted at increments of either 5 or 10 cents, while maintaining trading between the quoted ticks.

Essentially, what this does is disembowel the wonderful NBBO system which has done more to protect small investors than anybody else. NBBO, which stands for National Best Bid/Offer, is the system whereby all of the stock quotes on all of America’s exchanges are aggregated, so that all investors can at any time see the very best bid and the very best offer for any stock. If you’re a small investor, these days, you can pretty much always get immediate execution at NBBO, the best price in the market. The combination of decimalization and high-frequency trading has, in the words of former SEC commissioner Arthur Levitt, “transferred billions of dollars from the pockets of brokers into the pockets of investors;” for the first time ever, small investors get the best execution in the market, rather than the worst.

(This, incidentally, is one of the reasons why it’s hard to write about the problems with high-frequency trading for a generalist audience — there’s no Wall-Street-is-ripping-off-the-little-guy angle, for all that everybody would love to find one.)

Under the Schweikert bill, however, all that goes away. While the brokers and the algobots will still continue to trade in penny increments, smaller investors — and quite possibly bigger investors, too — will only see prices quoted in multiples of 5 cents or 10 cents. For instance, say a stock is quoted at $13.35/$13.40. If you put in a buy order, you’re going to pay $13.40. But the real trading will be going on inside the spread, and your broker can go into the market and snap it up at $13.38, while you still pay the higher price. There’s no way that small investors can possibly benefit from this.

Will brokers take the rents they extract from small investors and reinvest them in deeper coverage of small-cap companies? That’s the hope, but I’m not holding my breath. In a shrinking market, they’re much more likely to hold on to their profits as much as they can. And besides, it’s not like companies need David Schweikert to come to the rescue if what they want is a wider bid-offer spread: all they need to do is have a stock split.

Schweikert was one of the prime movers behind the problematic JOBS Act, where the SEC has done a good job of stalling on various silly yet Congressionally-mandated reforms. This bill seems like a replay: Schweikert wants to force the SEC’s hand on dedecimalization, since the agency is being sensible and dragging its feet. I hope he fails.

*Update: Primack points out that a higher share price can be helpful if companies want to raise subsequent equity rounds, after they’ve gone public.

James Stewart has an important column on Cooper Union today: if you read it carefully, it hints at how much further Cooper might yet fall from its founding mission of providing free education. Cooper’s trustees are press-shy these days, but Stewart snagged an on-the-record interview with one of the most important ones: John Michaelson, the chair of the investment committee.

Stewart chides Michaelson for his reliance on hedge funds, which have not served the Cooper endowment well. In the 2012 fiscal year, for instance, Cooper’s returns on its managed endowment were negative: they were down 5%, in a period where a standard mix of 60% stocks and 40% bonds would have returned a positive 8%. And with more than $100 million in hedge fund investments in 2008, Cooper was paying more than $2 million a year in hedge fund management fees alone, never mind performance fees. That’s the kind of money the college desperately needs for operational expenses.

Still, overall, Stewart is far too gentle on Michaelson, who was pictured grinning next to former president George Campbell in a highly-mendacious 2009 WSJ article extolling the performance of the Cooper endowment. Here’s how Stewart characterizes the endowment’s performance:

Compared with many universities, Cooper Union did a good job managing its endowment through the recent financial crisis. As recently as 2009, the school maintains, it ranked first among all American universities for endowment performance.

In reality, as Stewart never really explains, that “endowment performance” was entirely fictional — it was magicked out of thin air when Michaelson revalued the land under the Chrysler building upwards in order to mask a torrid performance from the rest of the endowment.

On top of that, Cooper levered up its endowment at exactly the wrong time, borrowing $34 million at an interest rate of 5.875% and investing it in the endowment, where it promptly evaporated during the financial crisis. Michaelson tries to explain this away by saying that the borrowed money was kept in cash, while it was the rest of the endowment which lost money. But if you look at the endowment that way, then, as Stewart points out, hedge funds accounted for more than 60% of the funds Michaelson was managing. That’s an insane ratio, especially given that Michaelson was quoted in the WSJ as being “especially critical” of the Yale Model of investing in illiquid alternative asset classes.

Stewart also goes easy on the trustees — Michaelson foremost among them — for making their single biggest mistake: borrowing $166 million to build the grandiose New Academic Building. “Hardly anyone disputes Cooper Union’s need for new engineering facilities,” he writes — and he’s hilariously, egregiously wrong about that. Virtually everyone outside the Board of Trustees disputed Cooper’s need for new engineering facilities — even a large chunk of the engineering faculty, which had the most to gain from the new building. The “need”, it’s now abundantly clear, was not a real need at all; instead, it was a device, an excuse to make the decision to construct the new building seem reasonable, even necessary.

Stewart essentially says that Cooper did need to build something new, it just didn’t need to build something quite as grand and expensive as it ended up with. But he’s deeply and importantly wrong about that. Here’s the thing about mortgages: they’re not just free money, they’re something you need to pay off, over time. And in order to do that, you need income. When Cooper Union’s trustees, including Michaelson, took out a $175 million 30-year fixed-rate mortgage at 5.875%, they knew exactly how much money Cooper would need to repay that mortgage every year.

And they had no idea where that money was going to come from.

This — much more than any endowment mismanagement — was the colossal, fatal error made by Cooper’s trustees. There are generally two ways of paying down a mortgage: either you go to work and earn money you then use to pay the mortgage, or else you rent out the building itself and use the income it generates to cover the mortgage payments. Neither route was available to Cooper: all of its income, and then some, was needed to run the school, which meant that there was nothing left over to pay the mortgage. And with the exception of a tiny coffee shop on the ground floor, Cooper isn’t renting out any of the new building.

At the end of Stewart’s piece, Michaelson makes a very important admission:

Mr. Michaelson conceded that the school could have continued to invade the endowment to cover deficits and would have survived until 2018, when the higher payments from the Chrysler lease kick in. “But what kind of school would you have had by then?”

The answer, of course, is a free one; if this really was an option, then the trustees owe the Cooper community a serious, detailed explanation of how and why they ended up making the decision to charge.

But the real answer is that while the higher payments from the Chrysler lease would be enough to cover the operating costs of a small, excellent college, they would not be enough to cover Cooper’s operating costs and the mortgage payments on the new building. Michaelson is making it sound, here, as though he decided to charge tuition for the sake of the school. In fact, he decided to charge tuition because that’s the only way that the school can pay off the monster loan he took out with no conception of how he could ever pay it off.

What’s Michaelson’s explanation of where he thought the money for the mortgage payments was going to come from? He doesn’t seem to have one, but the closest thing that Stewart finds is a deluded “if you build it, they will come” mindset:

Trustees told me that the college’s development consultants told them that a signature building with a marquee architect — in this case, Thom Mayne of Morphosis Architects — would attract a large donor eager to have his or her name on a trophy building.

But no such donor materialized, and experts I consulted said Cooper Union had it backward — the first step is to attract the donor, who then is involved in choosing the architect and designing the building. “I’ve never heard of a case where you build the building first and hope a donor comes along,” said Kenneth E. Redd, director of research and policy analysis for the National Association of College and University Business Officers.

Passing the buck like this to anonymous “development consultants” is just despicable. It was the board which borrowed $175 million without being able to pay it back, not the development consultants. And what’s more, it was the board which locked in a fixed 5.875% interest rate for the next 30 years, which isn’t the kind of thing you do if you’re basically just borrowing money on a short-term basis before a deep-pocketed donor comes along to pay off the mortgage in full.

And in any case, according to what we now know, once the building had been constructed and no beneficient billionaire had materialized to pay for it, Cooper was financially doomed: it had no ability to pay off the monster mortgage. If that was the case, then why on earth was Michaelson telling the WSJ — after the New Academic Building was finished — that Cooper’s financial condition was positively rosy?

All of this, however, is stuff we already knew, pretty much. The scariest part of Stewart’s article comes with another quote from Michaelson, where he grumbles about the fact that most of Cooper’s income comes from the Chrysler Building. (The land under the Chrysler Building was bequeathed to the college by Peter Cooper.)

Stewart quotes Michaelson as saying that having 84% of the endowment in a single asset “is against everything I stand for”. He then does a lot of back-of-the-envelope calculations designed to show that maybe Cooper should sell the land under the Chrysler Building, and intimates that the main reason Cooper hasn’t done so is the board’s “nostalgic attachment” to the asset.

On its face, this is completely crazy. The land under the Chrysler Building is worth substantially more to Cooper Union than it is to anybody else, because under a deal that Cooper Union struck with New York City, the college receives more than $18 million per year in something called payments in lieu of taxes, or PILOTs. That’s the amount of money that the building would normally generate in property-tax payments for the city; instead, those payments end up going straight to Cooper Union, and New York City gets no property tax revenues at all from the iconic skyscraper.

If Cooper sold the land under the Chrysler Building, all those property tax payments would revert to New York City, rather than the new owner, and a substantial revenue stream would be effectively destroyed, rather than sold. I don’t know what the net present value is of the Chrysler Building’s PILOTs, but it’s got to be somewhere in the region of half a billion dollars, if not more. It makes no sense whatsoever to give that up for nothing.

So why is Stewart taking this cockamamie talk seriously, and why is Michaelson talking with a straight face about selling the land under the Chrysler Building? The answer, I fear, is that Cooper Union, in deciding to charge tuition, has given New York City more than enough ammunition to tear up the deal whereby Cooper gets the Chrysler Building’s PILOTs.

Cooper Union says that the current occupation of the president’s office “has created a poisonous and dangerous atmosphere that can potentially destroy the school forever”. No one in the administration is going to come out and say explicitly what that means, so let me translate it into English for you: they’re saying that the more noise Cooper’s students make in protest at the tuition decision, the more likely it is that New York City is going to decide that it wants its property-tax revenues back, and that Cooper Union, without free tuition, is not a worthy enough cause to justify an effective $18 million per year public subsidy.

If Cooper loses its PILOT payments, then that really would be financially devastating for the college, and it would at that point be effectively forced to liquidate the Chrysler asset, whether it wanted to or not. It seems to me that Michaelson is using Stewart to help lay the groundwork for such an eventuality, and is trying to make the case that selling the Chrysler Building land is not such a dreadful thing to do after all.

I don’t buy it. But looking at what Michaelson says in Stewart’s piece, I can’t help but wonder whether maybe there is a solution here after all. The problem, remember, is that Cooper can’t sell the Chrysler Building land because if it were to do so, the new buyer wouldn’t receive those massive PILOT payments. But what if the purchaser of the land were another important civic institution? Could Cooper Union, working with the Bloomberg administration, work out a deal whereby the Chrysler Building land — with its PILOTs intact — could get sold to Trinity Church, or one of New York’s big non-profit hospitals, or even possibly the Bloomberg Foundation? New York has no shortage of massively-endowed foundations and non-profit organizations which have the wherewithal to buy such an asset; many of them might be interested in it.

It’s not clear why New York City would have any particular desire to go along with such a deal, unless they could by doing so claim to have managed to preserve Cooper Union as a tuition-free college embodying Peter Cooper’s founding principles. In other words, Cooper’s board of trustees would have to go back on their decision to start charging tuition. But the proceeds from selling the Chrysler Building land would be more than enough to pay off the mortgage on the New Academic Building; and at that point, the trustees would just have to work out how many students they could afford to teach on the income from the money left over. Cooper Union would continue to exist, it would continue to be free, and Mike Bloomberg would end up capping his tenure as mayor by saving a noble institution from the brink of disaster. I think Jamshed Bharucha should put in a call, even if he has to do so from his home phone.

Back in December 2011, the Daily Mail had 45.3 million unique visitors, according to ComScore. By March 2013, 15 months later, that number had grown to 46.4 million, again according to ComScore. We learn the latter figure — but not the former — from Christine Haughney’s article about the website today:

For now, many analysts consider the Mail Online a growth source for a strait-laced media company. The parent company’s total annual revenue is about $2.7 billion and its net income is $466 million. It depends on newspapers for about 20 percent of its profits, according to Mr. Reynolds.

Alex DeGroote, a media analyst with Panmure, Gordon & Company, said that while Mail Online was still not profitable, its growth had helped its broader company’s stock price grow roughly 80 percent in the last year.

This is crazy. For one thing, as we’ve seen, the Mail Online isn’t really growing: on the internet, 2.4% growth in 15 months is decidedly weak. For another thing, as DeGroote points out, it isn’t making any money. But more to the point, DMGT, the parent company, is so enormous that Mail Online can’t possibly account for the rise in its share price.

DMGT’s market capitalization is $2.84 billion; it has risen some $1.26 billion in the past year. If DeGroote really thinks that Mail Online accounts for a significant chunk of that growth, he would have to think that the rise in the value of Mail Online, just in the past 12 months, has been the best part of a billion dollars. By that logic, given that the site was already extremely popular a year ago, the overall value of Mail Online would probably have to be more than the entire value of its parent company.

In reality, the value of DMGT has almost nothing to do with Mail Online. The site might be a traffic powerhouse, but the internet is full of high-traffic sites which are worth very little. Traffic, in and of itself, is worth very little, and there’s no indication that readers are willing to pay for Mail Online, or that advertisers are willing to pay much for those readers. (The site’s revenue of $7.2 million is about 0.25% of DMGT’s $2.7 billion total revenue.)

DeGroote, here, is falling victim to the visibility fallacy: Mail Online is by far the most visible part of DMGT’s business, and so he thinks that it must account for most of the change in its share price. In reality, however, if DMGT decided to shut down the entire site tomorrow, its value would probably barely be affected. If you want to find a reason for why DMGT’s share price has performed so well of late, you’re going to have to look elsewhere.

How do you value a hedge fund? It’s impossible, really. You can see how much it earned in any given year, but past performance is a very bad guide to future results. In any case, all future income is reliant on both the investors and the managers sticking around, which means that the value of a hedge fund to its managers is always going to be higher than the value of a hedge fund to an outside investor with little ability to keep the managers in place.

Partly as a result, almost nobody buys and sells stakes in hedge funds as an investment. (As Peter Lattman recalls, Anthony Scaramucci tried to do that, and failed, before he became a fund-of-funds manager.) Indeed, there are precious few hedge funds where such stakes are even traded. If you want exposure to a certain manager’s alpha-generating abilities, then you’re better off just investing with her and paying 2-and-20.

This is bad news for banks forced to get rid of their hedge fund arms as a result of the Volcker Rule. If they just close them down, then they’ll lose money. But there also aren’t willing buyers for such things out there in the world. So Citi, for one, is doing the only thing it can. It spun off Citi Capital Advisors at the beginning of March; the firm is now called Napier Park Global Capital. It’s mostly owned by its managers, but Citi has retained a Volcker-compliant 25% stake, so if Napier Park does well on its own, Citi should be able to make something out of the deal.

Bloomberg’s Donal Griffin is not happy about this — not happy at all. He first wrote about the spin-off in January, when he found a hedge fund consultant, with the wonderful name of Ezra Zask, who was willing to say that Citi Capital Advisors was worth $100 million. Griffin managed to obtain “unaudited, internal CCA performance data” from the company, but he didn’t reveal the contents of that data — only that it had somehow managed to get extrapolated into the $100 million price tag.

Griffin’s story appeared under the headline “The Great Citigroup Hedge Fund Giveaway”, and quoted a professor at George Mason University asking why Citi wasn’t selling the unit. (Griffin didn’t bother to ask whether anybody on the planet would be willing to buy it, in such a deal.)

Griffin has now returned with another story on the same subject, and once again he has obtained confidential documents — this time “internal projections” of the fees it might make in future. Those fees are incredibly uncertain, of course: they rely on the company being able to raise new money from investors, as well as outperform the markets. But guess what, here’s Ezra Zask again, right at the top of the article:

Jonathan Dorfman and James O’Brien are among executives who got 75 percent of the investment firm for free when it broke off from Citigroup earlier this year. The business may be worth $360 million, according to hedge-fund consultant Ezra Zask.

Zask evinces no sheepishness about more than trebling his valuation for the company over the space of four months, and Griffin doesn’t explain why Napier Park is worth so much more today than he thought it was worth in January. He does, however, go get a few more estimates for how much the company might be worth: one said it “could be worth as much as $300 million by 2016 if the firm replaces Citigroup’s money with outside investment and attracts extra cash”, while another gave a range of somewhere between $61 million and $251 million. But those estimates are much lower down in the article: Zask’s highball estimate comes at the very top. And again, Griffin never bothers to explain who on earth would be willing to pay any such sum for a stake in the company.

There’s a reason that you don’t often see estimates for hedge funds’ valuations, as opposed to their assets under management: such numbers are generally hypothetical to the point of meaninglessness. But Griffin is convinced that since Citi has given away something very valuable, something smelly must be going on here.

It’s true that if Napier Park’s principals manage to turn the company into a success, then they will do very well for themselves. That’s the way that hedge funds work. But what I don’t see is what kind of choice Citi had in the matter. It can’t own the company any more, and it is being forced to withdraw the money it has invested there. So it really only had two choices: it could spin out the company, retain a minority stake, and hope that it manages to do well in the future — or it could just close it down entirely, and suffer a substantial loss. The former is clearly the more attractive option.

If Griffin is going to write a series of articles talking about Napier Park’s value, then it really does behoove him to explain what exactly he means by that. Was there a third option on the table? Could Citi have found a buyer for the business, who would have paid the bank some nine-figure sum for the privilege of owning it? If so, who might that buyer have been? And if not, in what sense do all these valuation figures mean anything at all?

Not all cash flows are created equal: an asset is worth, in the real world, only what someone else is willing to pay for it. Absent such a bidder, it seems to me that anybody talking about Napier Park’s valuation should start at zero, rather than with some academic discounted-cash-flow analysis.

The tragedy of Cooper Union is endemic to most American higher education, outside a few community colleges; Cooper is just the special case where the blind rush to some kind of global greatness directly and explicitly violates the institution’s founding mission. Now a fantastic report by Stephen Burd shows that it’s not just Cooper which is becoming more expensive for precisely the students who can least afford it. Rather, that’s happening across the US: aid which should be going to the poorest students is in many cases going to some of the richest.

The title of the report is “Undermining Pell”. The Pell in question is Claiborne Pell, the Rhode Island senator who created the first grant designed to remove the financial barriers that prevent low-income students from enrolling in and completing college. The Pell Grant system has been growing fast, and reached $33 billion in the 2010-11 academic year, thanks in large part to the effect of the recession on poorer families’ incomes, and the way that high youth unemployment has encouraged American kids to go to college.

But the money is not, in truth, making college more affordable. Quite the opposite, writes Burd:

There is compelling evidence to suggest that many schools are engaged in an elaborate shell game: using Pell Grants to supplant institutional aid they would have provided to financially needy students otherwise, and then shifting these funds to help recruit wealthier students. This is one reason why even after historic increases in Pell Grant funding, the college-going gap between low-income students and their wealthier counterparts remains as wide as ever. Low-income students are not receiving the full benefits intended.

The big picture here is that colleges are spending as much money as they can on “merit” scholarships, rather than “need” scholarships. The former have two big advantages over the latter, as far as colleges are concerned. Firstly, by attracting the best students, rather than the merely impecunious, they improve the quality of the student body, at least in theory. Secondly, and more importantly, because they are smaller, they allow the university to make much more money. As Burd puts it: “it’s more profitable for schools to provide four scholarships of $5,000 each to induce affluent students who will be able to pay the balance than it is to provide a single $20,000 grant to one low-income student.”

The result, if you’re a poor student, looks something like this:

Go play with the full interactive chart, it’s worth it. But a glance tells you a lot. Along the y-axis is the proportion of Pell Grant recipients in the student body; at the top it reaches 50%, while the color cutoff, between orange/blue and red/green, comes at 15%. Along the x-axis is the amount of money that a poor student, coming from a family with a household income of less than $30,000, would need to pay to attend the college in question. It goes all the way up to $48,000; the color cutoff, between orange/red and blue/green, comes at $10,000. And yes, that’s per year.

What you can see, quite clearly, is that the vast majority of colleges sit to the right of that cut-off: it costs their poorest students more than $10,000 a year to attend, even after getting a Pell Grant. You can also see that a lot of poor students are paying a lot of money for their education: some colleges have 30% or 40% or more of their students collecting Pell Grants, and still charge those students through the nose.

Pell Grants are not aimed at the middle classes: you really can’t get one if you come from a family earning more than $50,000 a year, and most Pell Grant money goes to families earning less than $20,000 a year. And it turns out that the trendy tuition structure du jour, the one known as “high tuition, high aid”, is particularly and surprisingly ill-suited to such students.

In theory, the structure should work well. Rather than charge every student the same amount, have a high rack rate, paid by the richest students, and then use the proceeds to put in place a generous scholarship system which will help support the poorest students.

In practice, however, that doesn’t happen. The scholarships go towards “merit aid”, which is often, dismayingly enough, a polite way of saying that the college is helping to pay for wealthy kids to attend, even if they’re not particularly smart. Some 20% of students with GPAs below 2.0, for instance, receive merit aid. And at the same time, the “need aid” is carefully calibrated so that poor kids won’t take the colleges up on their offers:

In its latest survey of college admissions directors, Inside Higher Ed found that more than one-third of public colleges and nearly two-thirds of private colleges engage in “gapping” — providing lower-income students with aid packages that don’t come close to meeting their financial need. In the parlance of enrollment management, this is often called “admit-deny,” in which schools deliberately underfund financially needy students in order to discourage them from enrolling.

“Admit-deny is when you give someone a financial-aid package that is so rotten that you hope they get the message, ‘Don’t come,’” Mark Heffron, a senior vice-president at the enrollment management firm Noel-Levitz, told The Atlantic Monthly back in 2005. “They don’t always get the message.”

In other words, “high tuition, high aid” generally has the emphasis on the former, rather than the latter. There are exceptions, foremost among them Amherst College, but the story running through Burd’s report like a thread is the story of colleges which try to become more “competitive” by doing everything they can to attract the particular students they want, who are rarely the poorest students.

What is the competition? Narrowly, it’s the competition to rise up the US News rankings. But more broadly, it’s the competition to enter the rarefied world of international luxury goods. Education, these days, is no longer a right: instead, it’s increasingly a way for the children of the rich to be ridiculously pampered as they float their way to lives of “international leadership”. Just in the past few days we’ve seen Jenny Anderson’s description of the Avenues school for the NYT magazine, and Lisa Miller’s revelation of the cosseted lives led by students at NYU Abu Dhabi. Such places might pay a minimum of lip service to the principle of diversity, but it’s clear they’re all about the global plutocracy.

This trend seems to have been missed in Washington, where graduates of elite institutions are prone to taking what those institutions say at face value. Even when, as Tori Haring-Smith, president of Washington & Jefferson College, puts it, colleges have been engaged in “increasingly progressive rhetoric and increasingly regressive actions.” From a societal perspective it’s obvious that the most effective thing we can do to improve our workforce is to get more poor kids into college. But the prices and obstacles facing those poor kids are only getting worse.

This is not a problem which can be solved simply by throwing more money at the Pell Grant program: as Burd shows, that money might well only end up getting effectively redirected elsewhere. But we do need to do something. In our information-age economy, America can ill afford to let the bottom half of the population be in large part excluded from tertiary education. That’s the outcome we’re seeing right now, and that’s the outcome which desperately needs to change.

There’s a lot of money and power at the nexus of banking and policymaking, home of the infamous revolving door and the natural habitat of people like Mike Froman, America’s new trade representative, who has shuttled back and forth between government and Citigroup and who, behind the scenes, helped pick all of Barack Obama’s initial economic team. And wherever there’s money and power, you’re sure to find turmoil. If Promontory is the big winner these days, there’s also bound to be a big loser. Let me introduce you to the IIF.

The Institute for International Finance describes itself as being “the most influential global association of financial institutions” — where by “influential” it means that it aspires to have the ability to persuade policymakers what to do. For most of its existence it was run by Charles Dallara, a former Treasury official who spent two years at JP Morgan before becoming head of the IIF in 1993. He stayed in that job for 20 years; in 2011, the last year we have numbers for, he was paid $3,955,381 for his efforts. That’s 20% of the IIF’s total payroll; the other 104 employees, between them, took home a slightly more modest, but still impressive, average of $153,870 each.

Dallara was replaced by Tim Adams, another former Treasury official — but “replaced” is not really the right word. The IIF was Dallara, and without him, it seems, the IIF is nothing. For all that it has 105 employees and prides itself on having a truly global membership, Dallara turned the IIF into what Adams calls, in a Powerpoint presentation circulated to the entire staff, a “founder-led, personality-driven” enterprise. (The presentation, entitled “An Era of Rapid Change, Repositioning and Renewal”, is essentially Adams’s buzzword-laden manifesto for keeping the IIF relevant.) Dallara was a notoriously tyrannical micro-manager; the not-so-secret of career success at the IIF was always to do everything and anything Dallara wanted, and nothing else. When Dallara left, his yes-men — and the IIF’s top execs are overwhelmingly men — had no idea how to react, and the Institute inevitably collapsed into a viper-pit of political infighting.

Already, there have been two high-profile casualties: the IIF’s long-standing chief economist, Phil Suttle, has been fired, as has its PR chief, Gary Mead. (Unsurprisingly, the IIF didn’t manage to respond to my requests for comment.) More worryingly, Bank of America has resigned its membership, and there seem to be questions over whether other big US banks might follow suit, with at least one of them allegedly hundreds of thousands of dollars behind on its membership fees. That’s very bad news for the IIF, which is nothing if it’s not a shop where the world’s most important policymakers can rub shoulders with senior executives of the world’s biggest banks. The IIF’s membership changes over time, but at its core is always the select global group of systemically-important financial institutions. If it’s losing the likes of BofA, it’s losing its raison d’être.

In recent years, the IIF has also become something of a ham-handed lobbying shop, to the point at which a capital-markets-friendly outlet like Euromoney will happily and openly dismiss its claims as so much self-interested claptrap. The change dates back to the global financial crisis, which caused a massive rise in demands for global financial institutions to be regulated much more assiduously. The institutions fought back, through the IIF, with 161-page report detailing the gruesome economic consequences of doing so. A taster, to take you back to the summer of 2010:

IIF Deputy Managing Director and Chief Economist Philip Suttle, who is the lead author of the new report, said the impact is not the same in each part of the world, given differences in each banking system and in the roles banks play in the broader economy. The analysis suggests that for the Euro Area a weaker recovery with real GDP some 4.3% less than otherwise might be the case and with new job creation, therefore, being potentially some 4.6 million lower over the 2011-2015 period than otherwise might be the case. The respective projections for GDP and for employment on this basis for the United States would respectively be 2.6% and 4.6 million. For Japan the projected numbers on this same scenario would be 1.9% and around 0.5 million jobs to 2015.

Suttle, here, was essentially saying that if the Basel Committee and others actually did their jobs and regulated the banks to the point at which they were significantly less likely to blow up the global economy, then the cost of doing so would be trillions of dollars and millions of jobs. The banks don’t like to be reminded of this report, partly because it was based on ludicrous assumptions, and partly because the reforms ended up happening anyway, and as a result the banks now need to claim, at least in public, that they’re fully supportive of their wise regulators.

As a result, Suttle got thrown under the bus — although the report came from the institution as a whole, and had the sign-off of a very high-powered board, including Dallara. The problem is that the IIF is still trying to have it both ways. Even as it tries to butter up policymakers, especially in central banks, it continues to talk about the enormous cost of proposed policies. And if the press doesn’t take its pronouncements seriously, policymakers are even less impressed: within serious institutions like the New York Fed, for instance, the IIF has become little more than a punchline to an unfunny joke.

Charles Dallara might have been, as I described him last year, an “amiable buffoon” — but at least he was an amiable buffoon with access. Since his departure to a Swiss private-equity shop, the IIF has not only been leaderless and rudderless; it has also been completely out of the loop on key issues such as the treatment of deposits in Cyprus. In a world where the financial services lobby has never been more sophisticated, the IIF feels like an anachronism, and Adams’s attempts to reinvent it are doomed to fail. If he were starting up a new association that would be hard enough, but given the quantity of entrenched dysfunction at the IIF, turning it around to be, in his words, “faster, shorter, sharper, relevant” is simply not going to happen. Adams may or may not have a clear vision of where he wants to go — his presentation is pretty vague and fluffy — but even if he does know where he’s going, there’s really no way of getting there from here.

The IIF won’t be missed, at least by anybody who isn’t a banker with a fondness for rubber chicken. But its fate should be salutary for any institution with a powerful chief executive. If that chief departs without some very clear succession planning in place, it can be extremely difficult for the institution to survive.