Felix Salmon

At some point in the next 15 months, assuming everything goes according to plan, the US government will no longer have a stake in General Motors. Treasury announced today that it’s selling 200 million of its 500 million shares back to GM, at $27.50 per share; it will then sell the other 300 million “pursuant to a pre-arranged written trading plan”. Interestingly, the news that a monster block of GM equity is about to hit the market did not have the effect you might think: GM stock is up 7% today, at $27.27.

This sale raises the tantalizing possibility that the government might actually manage to exit the GM bailout without losing all that much money. It invested a total of $49.5 billion in 2008 and 2009, and has managed to get back $28.7 billion to date; that number is now going to rise to $34.2 billion after the GM buyback. Which means that the government is in the hole to the tune of $14.8 billion, with 300 million shares remaining. If it can sell those shares at $50 apiece, it will even end up making a profit. That’s not likely: the highest the stock has ever traded is $39.48, in early 2011. But the stock is on something of a tear right now, hitting a new 52-week high today, so anything is possible.

GM stock has, frankly, been a bit of a disappointment to Treasury: it burst out of the IPO gate in November 2010 at $35 per share, but rapidly fell back. If you look over the course of its 25-month life, the volume-weighted average price is $27.95 per share, which means that in aggregate, investors in GM stock have lost money on it at these levels.

It’s no coincidence that Treasury’s sale of AIG stock, where the TARP fund is making a profit, was announced before the election, while the sale of GM stock, where the TARP fund will take a loss, is being announced after the election. In the grand scheme of things, a few billion dollars here or there doesn’t really make much difference: the purpose of TARP was never to make money, but rather to provide the last-resort liquidity needed for the nation’s banks and automakers to stay functioning. But there’s a symbolic importance to TARP’s profitability, which is why things like AIG’s favorable tax treatment is never taken into consideration when the numbers are summed. And when the symbols are disappointing, you release the news when it is likely to have zero electoral consequences.

It’s impossible to know why GM stock rose today, rather than falling: Vipal Monga hazards a few ideas, but none of them are particularly compelling. It does seem that the market is pretty happy that GM is no longer going to be a state-owned company — even though there has been very little evidence of meddling from GM’s largest shareholder. Still, the big news here is the fact that the government is able to exit its stake at all. Would that they could do the same with Fannie and Freddie.

Call me naive, but after the Barclays revelations, I actually thought that I couldn’t be shocked about the extent of Libor manipulation. Boy, was I wrong. I could quote all 40 pages of the FSA notice fining UBS for Libor fraud: this is far, far worse than simply understating UBS’s borrowing costs so as to make investors think the bank was healthy. In fact, a lot of the fraud was designed to move Libor up rather than down: whatever the traders could make the most money manipulating.

The FSA concludes, quite explicitly:

UBS’s misconduct is, although similar in nature, considerably more serious than Barclays’ because it was more widespread within the firm, being exacerbated by the control failings, in particular the inherent conflict of interest in its submission function. More individuals, including Managers and Senior Managers, participated in or knew about the manipulation and there were more instances of individual manipulation, across more currencies. Furthermore, the extent to which UBS colluded with others was significantly greater and involved financial rewards being paid to Broker Firms.

The latter point is key: UBS didn’t just manipulate its own submissions, but actively attempted to manipulate other firms’ submissions as well. And at points the bribery was so explicit as to beggar belief that anybody would ever communicate such things on the record:

If you keep 6s [i.e. the six month JPY LIBOR rate] unchanged today … I will fucking do one humongous deal with you … Like a 50,000 buck deal, whatever … I need you to keep it as low as possible … if you do that …. I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want.

A “50,000 buck deal” here does not mean a $50,000 deal: it means a $50 billion deal. If the broker on such a deal siphons off a fee of 0.0001%, that’s $50,000 right there.

The $1.5 billion that UBS is paying in fines here is enormous, but it’s not remotely enough: if the chairman and CEO of Barclays were forced to resign over much lesser Libor fraud, then we’re going to need to see heads roll at UBS too. And, with any luck, some individual criminal prosecutions of UBS executives, to boot.

That said, UBS has already taken the most drastic action it could: it has basically shut down its entire fixed-income business. That unit made enormous profits when things were going well — but it was staffed by rogue traders, who manipulated Libor rates around the world as a matter of course, and who on top of that contrived to lose mind-boggling amounts of money during the financial crisis.

Other fines, for other banks, are sure to follow this one — but if Barclays was dreadful and UBS was much worse than Barclays, it’s hard to imagine that anybody has clean hands here. You want to know why pretty much the entire financial sector is still trading at less than book value? This is why: the number of investors who trust the banks is now zero, and banking seems to have become a game of picking up fraudulent nickels in front of a relentless justice-department steamroller. (And for good measure there are all the civil suits as well: the $1.5 billion that UBS is paying today is just a down-payment on the all-in cost of its Libor fraud.)

The fixed-income department at UBS was the merged product of many storied firms: Swiss Bank, SG Warburg, Dillon Read, Paine Webber, Kidder Peabody, Phillips & Drew, and many others. And that’s the most depressing part of this whole story: there were good and honest managers at all those shops, and they all got pushed out by the fast-buck merchants. The inevitable conclusion: if you’re a senior fixed-income executive in the investment banking world, you’re necessarily suspect. Because this isn’t the kind of world where honest men live long.

I share most if not all of Anil Dash’s nostalgia for the web we lost. Once upon a time, in the wake of the dot-com crash, there was a real feeling that the mammals would supplant the dinosaurs, and that the web would increasingly become a real network of individual sites, rather than being dominated by a handful of enormous portals. There were lots of companies working to that end, including Anil’s own company, Six Apart. And those companies cared deeply about empowering the mammals:

In the early part of this century, if you made a service that let users create or share content, the expectation was that they could easily download a full-fidelity copy of their data, or import that data into other competitive services, with no restrictions. Vendors spent years working on interoperability around data exchange purely for the benefit of their users, despite theoretically lowering the barrier to entry for competitors.

In the early days of the social web, there was a broad expectation that regular people might own their own identities by having their own websites, instead of being dependent on a few big sites to host their online identity. In this vision, you would own your own domain name and have complete control over its contents, rather than having a handle tacked on to the end of a huge company’s site. This was a sensible reaction to the realization that big sites rise and fall in popularity, but that regular people need an identity that persists longer than those sites do.

But an interesting set of things happened to the blogosphere. Firstly, it became professionalized: as early as 2002, Nick Denton was paying other people to blog for him, and in the other direction, a lot of professional journalists started using blogging tools. The network of non-professional individual bloggers which Anil and I remember from 2003 didn’t last long; while it still exists, it’s not much bigger now than it was then. What’s more, the individual bloggers who do exist tend not to blog on their own websites: instead, they use some hosted service or other. (Six Apart itself was part of this trend.)

And there’s a very good reason for that. Back in October 2003, I wrote a post entitled “Blogging is hard“, which explains just how difficult it was to set up your own blog on your own website. Very little has changed since then, except that many sites have disappeared: except for the links to my own content, pretty much every other link in the post is now dead. Owning your own identity, it turns out, is an ongoing thing: if you let it lapse, then your identity pretty much disappears. Even Top Geeks like Marc Andreessen and Nick Denton let their individual blog archives rot away, unloved.

So it’s easy to understand the appeal of services like Twitter and Facebook and Pinterest and Instagram (and even MySpace, back in the day): they’re Not Hard, and they stay up without any work on the end-user’s part. If self-expression is the new entertainment, as Arianna Huffington likes to say, then the new entertainment industry is giving people the ability to express themselves as effortlessly as possible.

Now Anil’s point is that in doing so, these companies don’t need to break the web; instead of being “web-hostile”, he says, these sites could just as easily have embraced and respected everything the web stood for, with open standards and people owning their own content and so on and so forth. But the fact is that we had lots of services which did just that, including Six Apart, and they never got anything like the traction that the big social-media sites have achieved.

I asked Marc Andreessen what he thought of Anil’s post, and he replied saying this:

It’s a nice idea but it’s the web version of Mitt Romney’s rose-colored nostalgia of a Ward-and-Harriet-Cleaver 1950′s American past that never existed.

It’s also a variation on a theme I’ve been hearing since 1993 that the Internet was much better before the great unwashed arrived via {AOL, Hotmail, Geocities, Yahoo, Friendster, MySpace, etc.}.

This is also a good point: as the number of people online has exploded, there’s always going to be a feeling that things were much better and more civilized back when Usenet was actually useful, or when links hadn’t been monetized by Google, or when everybody freely gave out their email address because no one worried about spam. But any network becomes messier as it grows, and one of the things that Facebook and Twitter and Instagram and Pinterest do is that they declutter the web and make it user-friendly.

For the billions of people coming online today, the web can be just as hard, just as daunting, as blogging was to me in 2003. Anil wants to “re-educate” them and to “teach them that there is so much more to the experience of the Internet than what they know”. But the fact is that most of them don’t really want to be taught such things. Anil and his readers (and my readers, for that matter) are atypical in caring about this stuff. I would loathe to live in a world where Facebook was my main window to the rest of the internet, but hundreds of millions of people find that world very comforting and personal. And while Anil is right that Facebook could, if it wanted, be much more web-friendly, I think he’s wrong that doing so would make Facebook even more profitable than it is now.

I would love to live in Anil’s world — the world where giving users flexibility and control doesn’t hurt growth or profits. As Andreessen told me, I’m a person who “doesn’t believe in capitalism”. In the capitalist world, however, it’s very easy to see that we’ve tried it Anil’s way, and we’ve tried it Mark Zuckerberg’s way, and Zuckerberg has proved that the way to win capitalism is to break the web. More’s the pity.

Earlier this month, Yves Smith had a message for Strike Debt: “Rolling Jubilee should get one of its sympathetic celebrities to write a check to a serious tax lawyer to take a proper look,” she said, in order to make sure that its delicious idea didn’t end up inflicting enormous tax liabilities on unsuspecting debtors.

Well, it seems that Strike Debt has indeed managed to get a serious tax lawyer to take a proper look at its idea.* Nick Pinto spoke to that lawyer, whom he characterizes as someone who “works in the tax department at a top international law firm”. And it seems that Strike Debt has tweaked its model, a little bit, in order to bolster its case that the forgiven debt should be counted as a gift rather than as taxable income.

At this point, it seems, Strike Debt is buying up only distressed medical debt, rather than any other kind of debt. And that, in turn, serves to underscore the charitable purpose of Rolling Jubilee:

Recipients don’t have to be poor to receive tax-free debt forgiveness. “This is focused on medical debt,” she says, “and people with health problems can be categorized as distressed. You don’t need to show that they’re impoverished.”

This seems to both resolve and confirm a lot of Smith’s worries. “Middle class borrowers are not considered a proper charitable class under the tax law”, wrote Smith: “if you have moderate income, even if you are up to your eyeballs in debt through no fault of your own, it appears the IRS will not regard your financial duress as making you a suitable case for charity.”

So the fact that Strike Debt is buying up only medical debt seems to indicate that the income-tax problem is a real one. At the same time, however, by restricting itself to a definably distressed class of people, Strike Debt does seem to have given itself a pretty strong case that it’s involved in a charitable operation.

Smith has other concerns as well, chiefly that buying the debt in the first place counts as “commercial activity”, but that part of her argument seems a lot weaker to me: the relationship between Strike Debt and the borrower — which is the relationship which matters here, is clearly a noncommercial one. The IRS is right that it’s hard to determine “donative intent” in a “business setting” — but this isn’t a business setting, and the donative intent is very, very clear.

Of course, it’s impossible to be certain in these matters. Strike Debt is sending lovely packages, wrapped up in a literal bow, telling borrowers that they have cancelled the debt in question. “You no longer owe the balance of this debt,” says the letter. “It is gone, a gift with no strings attached. You are no longer any obligation to settle this account with the original creditor, the bill collector, or anyone else.” But once the package is received, the borrower knows that the debt has been forgiven, raising the question of what they’re meant to do with that information. Specifically, should they declare the forgiven debt on their tax return?

Strike Debt is not sending the borrowers a 1099-C form, and they clearly don’t expect the borrowers to declare the forgiven debt as income. I think that’s reasonable — and if the IRS does start asking pointed questions, I’m sure that Strike Debt’s lawyer will help them explain why the write-off was a gift, rather than taxable income. But let’s hope it doesn’t come to that. This is a lovely and public-spirited thing that Rolling Jubilee is doing, and the IRS has much, much bigger fish to fry.

*Update: Strike Debt says their lawyer has been involved for months, since well before Yves’ post. But I think the medical-debt-only policy is new: I for one haven’t seen it mentioned before.

Since I’m on the subject of fallen emperors, it’s worth catching up with the latest Robert Parker news.

Decanter’s Adam Lechmere has seen an email to French wine blogger Vincent Pousson, which seems to confirm the rumors: Parker isn’t just giving up editorial control of The Wine Advocate, but also ‘command and control’ of the business as a whole. The new jefe is Soo Hoo Khoon Peng, a Singaporean wine importer who seems to have bought the franchise, Parker included, for $15 million. Of that, Parker got $10 million, with the rest going to the deal’s two brokers, who are reportedly “connected with Deutsche Bank and Goldman Sachs.”

The price here seems astonishingly low. If Parker has 50,000 subscribers paying $75 per year, that’s $3.75 million in annual print revenue alone; the company’s new revenues, from online advertising, “virtual tastings”, and a series of international wine education courses, will probably be bigger still. And the value of Parker’s brand is huge. I hope that at the very least he negotiated a seven-figure salary for himself to stay on judging the wines of Bordeaux and the Rhone — after all, without Parker, The Wine Advocate’s brand value evaporates very quickly.

That said, Parker’s influence has already been evaporating for some time, as Eric Asimov points out; Talia Baiocchi, for one, reckons that he’s had very little influence on her at all. One reason: Parker helped make first-growth Bordeaux so expensive that it’s nowadays basically impossible to afford what Brits of my father’s or grandfather’s generation would consider a basic wine education. When Parker can at a stroke raise the value of a vineyard’s annual production by millions of euros, it’s easy to see how the new owners see a huge amount of profit potential in his name.

Among Parker’s acolytes, however, his influence is still incredibly strong. Jeff Leve was shocked that I might say that an 85-point wine is sometimes better than a 95-point wine, and in the comments even goes so far as to suggest that it’s possible to do the same thing for pop music. (“Perhaps “Sgt Pepper” is the pinnacle and deserves 100 Pts, while “What goes on” bores me and is at best an average cut and might earn 80 Pts.”)

I was also recently pointed to a column by Jason Wilson, who teaches a wine class for students. The students, displaying an admirable quantity of common sense, pushed back when Wilson tried to describe wines by talking about “the sensation of licking stones”, or cow manure, or petrol. “It wasn’t the wines that my students found gross,” he writes: “it was the descriptions — the standard wine-world terms — that were turning them off.”

And yet Wilson was seemingly incapable of stopping himself from using such ridiculous terms to describe wine. He’d become so deeply Parkerized that the only way he could talk about wine was by using elaborate and silly olfactory metaphors — the kind of language that, pre-Parker, no one would ever dare attempt. (The Brits had their own silly wine language, too — as wonderfully recounted by Malcom McLaren — but it wasn’t as silly, even if it was just as intimidating.)

Parker’s influence will live on, then, whatever happens to TWA, and even if we’re seeing a diminishing marginal effect of his new ratings on wine values. Every time you pick up a label which starts talking about raspberries and vanilla, every time you see a wine graded on a linear point scale, and nearly every time you encounter any kind of blind tasting: behind it all is the influence of Parker. I sincerely hope that the whole edifice will crumble, but that’s going to take decades. But at least now we’re headed in the right direction.

Talking of VCs who don’t like it when founders decide to sell, here’s Marc Andreessen on the subject of the $1.26 billion sale of one of his portfolio companies, Nicira:

That company, standalone, would have done about $2 million of revenue this year; we just sold it to a public company, VMware, for $1.26 billion. We think that [the founders] sold too soon and too cheap. We wish that they hadn’t done that. We’re happy for their outcome, and they’re at VMware, and I think they’re going to be a huge success at VMware. We wish they had stayed an independent company. Because if they had succeeded in their vision as an independent company, it would for sure have ended up being worth many multiples of the $1.26 billion.

But there’s a problem with this kind of attitude, which Andreessen is well aware of: he doesn’t invest forever, and at some point his limited partners are going to want to see a return on their investment. If companies don’t sell, and they don’t go public (Andreessen isn’t a fan of going public, either), then how can VCs get their exit? Andreessen has an interesting answer to that one:

We want to fund the companies which are so successful, and so in control of their own destiny, that they don’t sell, and they also, ideally, don’t go public. And then in 10 years, 15 years, they’re all sitting in our portfolio; they’re all big, and successful, and private. And then we get  just enormous pressure and backlash from our limited partners, our investors, saying, basically, where’s my money. Why haven’t you taken these companies public, why haven’t you distributed the stock.

It’s a smart way of putting it: most VCs would love to have the problem of (a) owning the next Google, or Amazon while (b) not having returned the relevant stake to their investors. But there are two big problems with this model, beyond the hypothetical-future-fights-with-LPs problem. The first is that VCs concentrate very much on something called compound annual growth rate: they tend to want to maximize their annualized return on any given investment, rather than their total return. And the bigger and more mature that a company gets, the harder it becomes to generate annual returns in the 25% range. If the LPs aren’t complaining about not getting their money back, they might well be complaining about being invested in large, mature companies — which is not the point of VC investments at all.

The second problem is bigger: you can’t build a large, mature company in Silicon Valley (where Andreessen Horowitz makes substantially all of its investments) without paying smart engineers in equity. Silicon Valley employees don’t dream of working for the same private company all their lives: they dream of the riches that flow from options and restricted stock. If the employees of one of Andreessen’s companies genuinely believed that the aim was to be a closely-held mature private company in 15 years’ time, it would be much more difficult to attract top-tier talent.

No one has yet cracked this nut. There might be ways of selling non-voting minority stakes to investors with genuinely permanent time horizons — university foundations, for instance, or sovereign wealth funds — but that still leaves the question of price discovery: how is anybody to say how much the company (and therefore the equity) is worth? So long as the founders and investors have an interest in keeping that valuation as low as possible for as long as possible, any employee selling equity into such a scheme is likely to wonder whether they’re getting ripped off.

So while I applaud Andreessen for aspiring to staying private as long as possible, I doubt he’ll ever have the problem he’s talking about here. Which is also why his LPs won’t be concerned by these statements in the slightest.

Nick Bilton’s column about the Instagram fairness hearing is annoying on a number of levels. When I mentioned one of them this morning, Dave Winer asked for “a brief post” explaining a bit more. OK then!

It’s worth saying up front that Bilton has got himself a genuine story here: it looks as though Instagram’s CEO, Kevin Systrom, was economical with the truth when he testified in front of the California Corporations Department in August. He said that Instagram “never received any offers” from any potential acquirers other than Facebook, and generally dissembled madly:

At the end of the hearing, regulators asked Mr. Systrom a third time about other offers: if there had been “any other inquiries from third parties about a possible acquisition of Instagram” after the Facebook deal was announced. Although Twitter executives had since tried to contact Mr. Systrom, he replied, “I and the board have not received any.”

The first annoying thing about Bilton’s column is that although he quotes Systrom at some length, he never provides a transcript of what was said at the hearing: we just have to trust him that he’s characterizing everything correctly. Bilton is happy to tell us what “the transcripts show”, so there’s no excuse for not showing us those transcripts as well. Once again, we’ve got a situation where the NYT doesn’t care about posting primary documents, and in this case there’s no copyright reason not to post them.

The second annoying thing about Bilton’s column is that he’s approaching decisions made in March with the benefit of great hindsight. “Given that the privately traded Twitter is expected to make $1 billion in revenue next year, which would increase its valuation considerably,” he writes, “Instagram investors might have made millions of more dollars.” But of course at the time that Systrom made his decision, he had no idea what Twitter’s 2013 revenue was going to be. And even Bilton, frankly, has no idea what’s going to happen to Twitter’s valuation next year: it’s just as likely to go down as it is to go up.

The third annoying thing about Bilton’s column is that he’s he’s desperate to find a deeper scandal here, beyond the issue of what Systrom said when under oath. The fairness hearing, he says, “sought to determine if Facebook’s acquisition of the photo sharing service was in the best interest of Instagram investors”, and it’s possible that if Instagram had put itself up for a more public auction, then the final sale price could have been higher. “It is possible investors would have been better off selling in an open auction, to Twitter or even to Google or Microsoft,” writes Bilton, as though it’s somehow self-evidently scandalous that anybody might ever sell their company for less than the maximum possible amount of money.

But the fact is that the fairness hearing was not at heart an attempt to see whether Instagram sold for the maximum possible amount of money. It was rather, as the name implies, an attempt to see whether the price paid was a fair one. It was necessary because Facebook issued new stock to pay for Instagram, and as a result of issuing stock the company had to go through an arduous registration process with the SEC. In California, a fairness hearing is just a cheaper and easier way of being able to issue stock without having to go through the SEC — so that’s what Facebook did.

Bilton’s most annoying sentence comes when he writes this:

Although it might seem unimportant whether wealthy investors made a few million dollars less than they could have, those investors often represent funds that include workers’ pensions and mutual funds.

Firstly, wealthy investors, just like much poorer investors, always make less money than they could have; no one ever succeeds in maximizing their returns. This is especially true of investors who take minority positions in closely-held private companies. As Bilton notes, Instagram was controlled by its two co-founders: they could and did, within reason, sell to anybody they wanted, at whatever price they wanted. What’s more, Systrom was no naïf in such matters: he had a previous stint in Google’s M&A department on his résumé. The venture capitalists who invested in Instagram, like all venture capitalists, knew full well that they were taking a risk that the founders might sell for less money than the VCs wanted.

It’s one of the most well-known and biggest risks in the VC business: when founders are faced with the opportunity to make an eight- or nine-figure sum for themselves, they are very tempted to accept that offer, even if they would be better off holding tight. What’s more, personal relationships often make founders more receptive to approaches from certain individuals (like Mark Zuckerberg) than from other potential acquirers.

A VC investing in Instagram, then, or any other company controlled by its founders, is well aware that if the founder decides to sell to a certain company at a certain price, then that’s what’s going to happen. Even when the founder doesn’t control the company, the same thing can happen: once Arianna Huffington decided she wanted to sell the Huffington Post to AOL, for instance, her investors basically had to go along. The people running the venture capital funds take those risks on behalf of their own investors, the limited partners in those funds. And if you’re not comfortable with such risks, you certainly should never be an LP in any venture capital fund.

And while it’s true that pension funds do sometimes invest a small percentage of their holdings in venture capital, that really doesn’t change anything. I see this kind of argument all the time: talk to any demonized vulture funds, for instance, and they’ll very quickly bring up the fact that some of their investors represent pensions and teachers and motherhood and apple pie. (For a classic example of the genre, take a look at the press release headlined “US teachers march on the Capitol for a solution on unpaid Argentine bonds”.)

Bilton’s wrong about mutual funds: they don’t invest in venture capital. But never mind that. Systrom controlled Instagram, and he sold it for a billion dollars before it had a single penny of revenues, making his VC backers lots of money in the process. He had every right to do that, even if there was a better formal offer on the table from Twitter or someone else, which there wasn’t. His minority investors were never an obstacle in his way, and they never had any right to hold out for a better deal.

In fact, the only obstacle between Systrom and the Facebook acquisition was antitrust concerns. If the antitrust authorities thought that Facebook and Instagram were getting together in a sweetheart deal to sew up a large part of the social-networking market, then they could block the whole thing. Systrom didn’t dissemble in front of the fairness hearing because he was worried about being accused of short-changing his minority investors. Instead, he dissembled in front of the fairness hearing because he was worried that the FTC might block the deal on antitrust grounds.

In any event, it’s the dissembling which is the story here, not the fact that Systrom might have been able to get more money from someone else. It’s not a crime to sell too low.

James Stewart has a long attack this weekend on the one idea from the presidential campaign which managed to receive genuine bipartisan support: the cap on deductions. He’s a first-rate reporter and columnist, so it’s worth going into some detail about all the different places he’s wrong.

Stewart starts off his column by summing up his two main arguments against a cap on deductions:

Without addressing larger tax preferences, like a lower rate on capital gains, it does almost nothing to cure the so-called Buffett problem, in which Warren Buffett’s secretary pays a higher effective rate than her billionaire boss. It doesn’t even raise much revenue.

Saying that a cap on deductions doesn’t cure the Buffett problem is a bit like saying that some random bit of Dodd-Frank doesn’t solve too-big-to-fail, or wouldn’t have prevented the 2008 financial crisis. It’s true, but it’s irrelevant. You can’t approach the current fiscal negotiations with the idea that solving the Buffett problem is a necessary precondition for any fiscal-policy tweak: you’d never get anywhere if you did. The task right now is to come to an agreement on a set of policies which will raise revenues and cut expenditures; a cap on deductions does exactly that. And what’s more, while it won’t mean Warren Buffett paying a higher tax rate than his secretary, it will at least reduce the distance between them.

As for the idea that a cap on deductions “doesn’t even raise much revenue” — well, that’s in the eye of the beholder. The dog not barking here is that Stewart never actually comes out and say how much money a cap on deductions would raise. Here are the numbers, from the Tax Policy Center: a cap at $50,000 would raise more than $700 billion over ten years, while a cap at $25,000 would raise some $1.2 trillion. That’s real money. Even if you exempt charitable donations from the cap, you’re still raising almost $500 billion at the $50,000 level, and more than $800 billion with a $25,000 cap.

Stewart is at least honest about the main reason he opposes this cap:

It would hit people like me: taxpayers in higher brackets who rely on earned income as opposed to investment income or an inheritance, who give to charity and live in a high-tax state. Assuming a $35,000 limit on itemized deductions, my federal tax last year would have risen to 27 percent of my adjusted gross income, from 22 percent.

Stewart talks about his own personal tax rate a lot in his column; he must think it’s of great interest to the rest of us. Interestingly, he always talks about his tax rate as a percentage of his adjusted gross income, which is surely a lot higher than his tax rate as a percentage of the total amount of money he makes every year. (As a self-employed professional, Stewart can take a large number of expenses, including housing expenses, and deduct them from his income before calculating any tax at all.)

Stewart’s point is absolutely correct, as far as it goes. The three major deductions are state and local taxes; mortgage interest payments; and charitable contributions. So people who spend a lot of money on those three things every year — people like Stewart — are going to be precisely the people who are most hit by a cap on deductions.

At the same time, however, Stewart is rich, and everybody knows that the rich are going to have to pay more in taxes, one way or another. Indeed, Stewart says he’s OK with that: he claims that he “wouldn’t mind paying more” in taxes, just so long as the top 400 taxpayers in the country all paid more in taxes as well.

But here’s the thing — they would! According to Stewart’s own calculations, the taxable income of the top 400 taxpayers would rise by $32 million, on average, while their overall tax rate could go up to 25% from 20%. Seems like a big hike to me. But because that 25% is lower than Stewart’s own 27%, he’s decided that we’d be better off not capping deductions at all.

This is profoundly myopic. I can see how on a philosophical level it makes sense to ask the top 400 taxpayers in the country to pay a higher tax rate than James Stewart. But the top 400 taxpayers are, by definition, a highly exceptional bunch, who spend millions of dollars a year on tax-avoidance strategies. It might or might not be possible to construct a tax regime which makes the top 0.0001% pay a higher tax rate than James Stewart, but I really don’t think that failure to do is reason to do nothing at all.

Maybe realizing that he’s on to a losing argument here, Stewart shifts course at this point, describing the deduction cap as “a stake aimed at the heart of the charitable deduction”. And once again, the dog doesn’t bark: he quotes lots of people who work in the non-profit sector, saying that this move would reduce the amount of money that people give to charity. But not once does he hazard a guess at the amount by which charitable giving might decline; indeed, he quotes Patrick Rooney, of the Center on Philanthropy at Indiana University, as saying that he hasn’t studied that question.

Rooney has studied similar questions, however. For instance, his institute looked at the effect of capping the deduction at 28%, even for taxpayers with a higher marginal tax rate. That tweak would reduce charitable giving by some $2 billion per year, they found — but it would raise ten times that amount in new tax revenues.

And when the CBO recently looked at various different ways of changing the charitable tax deduction, they came to much the same conclusion:

In each case that CBO examined, the reduction in the subsidy (and thus the increase in revenues) would exceed the reduction in charitable contributions, whether measured in dollars or as a percentage change.

If there’s one constant when it comes to the charitable deduction, it’s this: its opponents love to get quantitative, while its defenders generally refuse to talk numbers at all. For instance, check out Bob Shiller’s column this weekend: despite the fact that he’s a fine economist, he never once talks costs and benefits, instead relying on general principles such as the one saying that “income that is freely given away should not even be considered as taxable income”. And then compare Dick Thaler, or any of the many other critics of the charitable deduction: they ground their arguments in reality, rather than in the clouds.

So when Stewart starts saying that capping deductions will hurt the poor, on the grounds that the poor go to hospitals and museums, and those hospitals and museums are reliant on charitable donations — well, take it all with a pinch of salt. And move on to Stewart’s next argument, which revolves around the deductibility of state and local taxes:

According to the Census Bureau, state taxes per capita in 2011 ranged from $3,491 in New York to $1,674 in South Dakota. For many higher-income taxpayers in high-tax states, state and local taxes alone would exceed the cap limit, completely depriving them of the mortgage and charitable deductions.

This is an interesting use of the word “many”. If the cap was put at $25,000, that would be more than seven times the average state taxes in the state with the highest taxes in the union. If the cap was at $35,000, it would be more than ten times New York’s average state taxes. So yes, if you pay ten times the average amount of taxes in your state, and if you live in New York, then you might use up all of your cap with state taxes alone. You’ll excuse me if my heart doesn’t bleed.

Stewart concludes by reiterating that he would rather see other people pay more in taxes, rather than himself — especially people who rely less on income and more on capital gains. I’m inclined to agree with him, on a policy level: I too would like to see unearned income taxed at the same rate as earned income. But the fact is that all the big deductions — charitable, mortgage-interest, even state and local taxes — are bad public policy. We should cap them, at a high level if necessary, and then bring down the cap over time, until it reaches zero. That, in turn, will help income tax rates to converge on capital-gains tax rates, again over time. Few things in fiscal policy happen overnight. But capping deductions is a step in the right direction. And Stewart should embrace that, rather than fighting it.

Carol Vogel has a good summation of the craziness at Gagosian right now. Within the space of a week, the largest and most important art gallery in the world suffered three massive defections: first Jeff Koons announced he would have a major show with archrival David Zwirner, then Damien Hirst said he was leaving Gagosian entirely, and then Yayoi Kusama said that she, too, was leaving.

It’s hard to overemphasize how unthinkable even one of these moves is, let alone three at once. Gagosian is the gallery you move to, not the gallery you move from. At every other gallery in the world, the big fear is that if they’re successful and help one of their artists become a global star, then Larry will swoop in and sign that artist up, grabbing all that juicy future income for himself. Because his access to the biggest and richest collectors in the world is rivaled only by the two big auction houses, an artist will always see their prices rise across the board the day they jump into his welcoming arms.

And if Larry really loves you, he’ll do the kind of thing that no other gallerist could even dream of: a simultaneous show of spot paintings, for instance, in eleven different galleries around the world.

But even that proved insufficient for Hirst, who has left Gagosian while remaining with his UK gallery, White Cube. (Similarly, Kusama is remaining with Victoria Miro in London.)

So what’s going on? Vogel quotes Sotheby’s contemporary-art honcho Tobias Meyer as saying that the world’s biggest artists are “self-propelled”, and bigger than any gallery. Which might be true. And Hirst and Koons, along with Takashi Murakami, are by far the most commercially-savvy artists out there, and the most likely to be able to go entirely self-sufficient. But neither of them is leaving the gallery system entirely; indeed, Koons is adding a new gallery to his list of representatives.

Rather, there seems to be some kind of issue with Gagosian specifically. Hirst, for instance, is playing well with everybody else: he was ubiquitous at Art Basel Miami Beach, and even recently painted a dozen crocodile backpacks for the Olsen twins. Meanwhile, Greg Allen is raising all manner of questions about Gagosian’s latest show in New York, of Bob Dylan paintings (yes, that Bob Dylan): it seems to be some weird art world in-joke, with a central role played by another Gagosian superstar, Richard Prince.

The obvious conclusion would be that Gagosian is losing his touch: maybe the Gagosian gallery, along with its network of tens of thousands of relationships, has become too global and sprawling for one man to manage effectively. All galleries — none more so than Gagosian — are an exercise in exploiting information asymmetries, and Larry Gagosian keeps his valuable secrets as close to his chest as anybody else. But that always raises a suspicion, in the eyes of all of his counterparties, that he’s profiting at their expense. Gagosian has a fiduciary duty to his artists, but does he really always do what’s in their best financial interest, rather than what’s in the best interest of the Gagosian gallery or its most valued collectors? To ask the question is to answer it.

No man is immortal, and there was always going to be a time when Gagosian was no longer a world-straddling colossus. What’s interesting about these developments is that we might be much closer to that point than anybody could have suspected, just a couple of weeks ago. And the implications for the art world are simultaneously enormous and unknowable. Many rivals, including David Zwirner, will aspire to take his place, but it’s likely that no one will, and that his unique role as the chief architect and beneficiary of the current contemporary-art bubble will turn out to be irreplaceable.

If this is the beginning of the end of Gagosian’s career, or at least the point at which the zenith of his influence is clearly in the past rather than the future, then Hirst’s move away from the gallery and increasingly into the luxury-goods space makes perfect sense. Koons and Kusama, too, surely made the right decision in diversifying away from Gagosian, and doing so before any possible stampede. It’s even possible to start making sense of things like the recent massive expansion by Sean Kelly: he’s positioning himself to be an attractive destination for any artist thinking of leaving the Borg. (Everybody from Hiroshi Sugimoto to the estate of Joseph Beuys would fit perfectly at Sean Kelly.)*

Essentially, the rest of the art world has two choices here: it can either expand to fill the void created by Gagosian shrinking, or else it can fall into that void. Expanding is expensive: if you sign on as the official gallery for someone like Koons, for instance, that involves committing, at least in theory, to buy just about anything he’s ever produced. On the other hand, seeing the entire art bubble burst would be much, much more expensive for all concerned.

The art world has had many years to build up the money and information needed to take over Gagosian’s role in the market. If it manages to do so successfully, then that would be a good thing for the art market as a whole: there’s an inherent fragility when so much power and influence resides in a single institution. On the other hand, if in stretching to fill the void the high-end gallery world just ends up overextending itself and making promises it can’t keep, then the alternative to a fragile unipolar world could turn out to be an even more fragile multipolar world.

There are a lot of shoes left to drop when it comes to this Gagosian story, and if you don’t know what’s really going on, then now is a very dangerous time indeed to be making big bets. The risk is that not making big bets could turn out to be just as dangerous.

*Update: It turns out that although Sugimoto is still listed as a Gagosian artist on the Gagosian website, he actually left for Pace in 2010.

Andrew Martin has a very long, and not particularly illuminating, article about college indebtedness in today’s NYT. The title of the piece is “Colleges’ Debt Falls on Students After Construction Binges”, and it’s almost 3,000 words long, but somehow Martin fails to even hazard a guess as to the degree to which colleges’ debt is falling on students after construction binges. We’re certainly told that it’s happening:

A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish to attract students — has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill…

Higher debt payments and other expenses have contributed to the runaway inflation of college costs, and the impact on students is real and often substantial.

How big are these bills? How substantial is the impact on students? Martin doesn’t hazard a guess: instead, he just says that “the costs are not easy to isolate”. But there are a few hard numbers, far down in the piece:

Outstanding debt at the 224 public universities rated by Moody’s grew to $122 billion in 2011, from $53 billion in inflation-adjusted dollars in 2000. At the 281 private universities rated by Moody’s, debt increased to $83 billion, from $40 billion, in that period. Rather than deplete their endowments, some colleges borrowed to help pay bills after the financial crisis, but most borrowing was for capital projects.

Since 2000, the amount paid in interest and principal has increased 67 percent at public institutions, to $9.3 billion in 2011, and it increased 62 percent at private ones, to $5 billion last year.

Martin doesn’t tell us what this works out at on a per-student basis, so let’s try. According to the Census Bureau (see Table 5), there are 20.4 million students enrolled in US colleges, split between 16.6 million undergrads and 3.8 million graduate students. According to Martin, using numbers from Moody’s, the amount of college-level debt being borne (in part) by those students has gone up by $112 billion, and the annual debt service has gone up by $5.6 billion. (These are numbers Martin could have just printed directly, but for whatever reason he chose not to; instead, you need to back them out of the numbers he cites.)

Students don’t bear all those extra costs: as Martin notes, “in some states, including New York, California and Connecticut, borrowing for public colleges and universities is mostly paid for by taxpayers, so students are not directly responsible for payments on the debt”. But for the sake of argument — and despite the fact that the University of California is the single biggest debtor, with SUNY at number 2 — let’s assume that all the extra costs are borne by students. In that case, we have 20.4 million students paying an extra $5.6 billion per year in interest, which comes to an annual cost of $274 per student.

Remember that $274 is a deliberate over-estimate, since a lot of the extra borrowing that Martin is writing about will get paid out of state budgets rather than out of students’ tuition fees. What’s more, the rise in interest payments coincides with a lot of universities shifting floating-rate debt to fixed-rate debt, which increases the interest payments but makes it them much less prone to rising unexpectedly.

Obviously, the increased costs will be higher at the universities with the most construction activity, and lower at more frugal colleges: the $274 is just an average. And I’m no fan of what Martin calls the Edifice Complex: I’ve been highly critical of capital projects at Harvard and NYU. But if it wants to make the case that students are paying “often substantial” sums as a result, the NYT is going to have to do better than this.

Indeed, if you want to criticize big capital projects, then “students end up paying a large part of the interest expense” is way down the list of good ways to do so. Interest expenses are generally small as a percentage of capital costs, because interest rates are low; what’s more, when you divide them between tens of thousands of students, the per-student cost becomes entirely manageable. The problem is more in the way that these projects force universities to lose a lot of flexibility in terms of their optimal size: it’s much easier to grow than to shrink, even as it’s hard to maintain quality when you’re growing too fast. The result, all too often, is shiny facilities, and a lower-quality education.

There’s a bigger lesson here, too, for the NYT. Martin says that the data underpinning this article was compiled for the NYT by Moody’s, which means that the NYT has access to a full and rich database. So why doesn’t it publish that data? Good data-driven journalism both publishes as much data as possible, and uses the data to drive conclusions, rather than simply dropping numbers into a foreordained article.

What should have happened here was for Martin to take a deep dive into Moody’s data, to try to work out which colleges saw the largest debt-service increase and whether there was any correlation between debt-service increases and tuition increases. Even if he didn’t have the appetite to do that work himself, at least if he published the data then the rest of us could do it. Instead, we just get an article which is very long on anecdote and very short on useful data. It’s a shame.

Margaret Sullivan, the NYT public editor, has mixed feelings about the first DealBook conference, which took place on Wednesday. Her job is to worry about such things, but it’s worth taking her post seriously, because conferences and other live events are one of the few bright spots in the media business-model world right now.

The DealBook conference was in some ways the platonic ideal of the form. It had a banal and meaningless title (Opportunities For Tomorrow), it had a bunch of CEOs (Jamie Dimon, Lloyd Blankfein, Eric Schmidt, Dick Costolo, Indra Nooyi), a series of celebugeeks (Marc Andreessen, Jared Bernstein, Glenn Hubbard, Paul Krugman), and a passel of famous-for-being-rich types (Ray Dalio, David Rubenstein, Stephen Schwarzman). It even had a 15-minute stump speech from Charles Duhigg about his bestselling book. Something for everyone!

Of course, the real reason that conferences succeed or fail isn’t in their programming but rather in their audience: the trick is to get enough boldface names on stage that a lot of important people want to come and mingle with each other. I didn’t go to this conference, but I have colleagues who did, and they were impressed by the quality of the audience. If conferences develop a reputation as a place full of people you want to meet, it pretty much doesn’t matter any more what happens in the panels.

The NYT put a lot of effort into curating the audience for this invitation-only conference: like Davos, you needed an invitation and money before you were allowed in. (Because the Times Center is relatively small, filling it up is the easy bit.) It’s especially important to get a high-quality audience when your conference takes place in New York City, because the on-stage headliners are likely to stay only for their own sessions, rather than mingling with everybody else. And of course, as at all conferences, it gave the audience every opportunity to mingle and network and gossip: having real conversations with interesting people is nearly always better than listening to the interesting conversations of others.

The one thing the audience didn’t particularly come for was for anybody on stage to commit journalism. Conferences can be lucrative brand extensions, for news organizations — the D conferences, in particular, are by all accounts insanely profitable — but it’s rare for them to be particularly newsworthy in and of themselves. For journalists, they’re more of an opportunity to meet a lot of potential sources, and also to get to know those sources a little bit outside the context of formal news interviews. And there’s nothing wrong with that, especially if you think that access journalism has any value at all.

DealBook in general, and Andrew Ross Sorkin in particular, is a prime example of how access journalism can have real value. His crisis book, for instance, is a genuinely important historical document, and could probably have been written by no one else. The rich and important have power and influence, and if you want to understand that power, and document it, you need access to those people. The conversations that Sorkin has on stage with the likes of Dimon and Blankfein are not exactly the same as the conversations he has with them off the record, for obvious reasons. But they do have value, especially because it can be hard to duck a direct question if you know you’re being live-streamed across the internet.

So what were Sullivan’s problems with this event? Firstly, she doesn’t seem to like access journalism at all:

Here is what the conference did not have going for it: A great deal of distance between sources and those who cover them — something traditionally thought to be a bedrock journalistic idea.

This is far too facile. Carol Loomis has been covering Warren Buffett for half a century, and by Buffett’s own admission they talk pretty much every day. He’s friends with her family, and she with his: there is essentially no distance at all between Loomis and Buffett. But Loomis is a first-rate journalist all the same. Or, if Sullivan wants to stay within the NYT, she need look no further than Gretchen Morgenson, who became so close to her source Josh Rosner that they ended up writing a book together.

I think that Sullivan thinks that the DealBook conference, far from being a smart way of monetizing the NYT brand, was meant to be some kind of public grilling: a live Meet The Press for the Wall Street set. Such an event would certainly be interesting, although it’s hard to see why any potential interviewee would say yes to such a format: while politicians have to be out in front of the public, CEOs do not. And in any case, it’s far from certain that anybody would actually get more value out of watching hard questions than they currently do out of watching relative softballs. Last year, for instance, I moderated a panel where I asked a pretty tough question of NYSE CEO Duncan Niederauer; he got a bit flustered and angry, but didn’t really say much of substance, and I can’t say that the audience was particularly well served by that question.

Sullivan’s next beef is even less comprehensible:

More than anything, DealBook is one of those creatures of 21st-century journalism – as much about “brand” as anything else.

Sullivan never explains how this distinguishes 21st-century journalism from 20th-century journalism or even 19th-century journalism; it seems to me that journalism has always been about building brands, and probably always will be. But Sullivan, with her creatures and her scare quotes, clearly thinks there’s something newfangled and distasteful going on here: I would love to see a future post where she explains exactly what that might be. In this post, she just counts logos, which tells us exactly nothing about anything. But she did worry about the fact that the conference was sponsored:

Such sponsorships are another creature of 21st-century newspapering, eroding the sharp line between advertising and editorial content.

Huh? This I just don’t get at all. The editorial content surrounding the conference was clear: there was a DealBook newspaper supplement, and a live blog, and I daresay there might even be a separate article or two somewhere on the NYT website. But all of that content had exactly the same line between editorial and advertising that any other NYT editorial content has. Yes, some of the ads were for BlackBerry, which sponsored the conference and I’m sure got a big package deal. But I don’t see BlackBerry infesting the editorial content anywhere; the BlackBerry product demonstration, for instance, didn’t even get a mention in the live blog.

I suspect that what Sullivan is implying here is that the conference itself is editorial content, and that since Blackberry was on stage during the conference, that makes it seem editorially-endorsed, somehow. That’s a stretch: it’s exactly the same adjacency tactic which drives the age-old model of having advertisements in the newspaper. When the BlackBerry presentation is introduced by the Chief Advertising Officer of nytimes.com, it’s pretty clear which side of the editorial/advertising divide it lies.

Sullivan wraps up her complaints — the things she says “can’t help but make me a little queasy” — thusly:

Given the lunchtime rollout of a new Blackberry device, the overall friendly questioning of prominent newsmakers, the reception afterward – featuring wine, hors d’oeuvres and the incessant rubbing of journalistic and corporate elbows — the word “adversarial” did not come to mind. Nor did the word “watchdog.”

The fact is that Sullivan could pick any NYT story at random, and the chances that she would consider it “adversarial”, or performing any kind of “watchdog” role, would be very low indeed. There are always some stories which fall into that category, of course, but very few. On the front page of the website right now, for instance, is an assiduously-reported piece by Annie Lowrey, one of the presenters at the DealBook conference, headlined “High-Tech Factories Built to Be Engines of Innovation”. There’s not a hint of the adversarial or the watchdog about it, but that doesn’t make it any less valuable, and I’m sure that Sullivan doesn’t feel queasy when she reads it. So why is she holding the DealBook conference to a different standard?

And is Sullivan really going to complain about the fact that a conference, where some attendees paid $1,500 apiece, dared to feature wine and hors d’oeuvres at its reception? Journalists rub elbows with this crowd every day — that’s their job — and it’s utterly commonplace for there to be some kind of wine and food in the vicinity.

Sullivan thinks that the conference debases the NYT’s editorial independence: given that you can’t run a conference without boldface names, she says, “the Times’s indebtedness to these sources lurks in the shadows”. To which I would say: quite the opposite. When you’re running a conference and your sources are right out there, in the open, on stage with you, that’s the limelight, not the shadows. The shadows is what we’re given the other 364 days of the year, when innumerable stories are written on the basis of off-the-record conversations with these exact same sources.

Very few readers suspect, I think, just how much senior executives talk to the press. There’s an ultra-sophisticated way of reading the business press, which generally starts with the dual questions “who is the main source for this story” and “what is that person trying to achieve”. But the overwhelming majority of readers don’t read that way.

Which means that public conferences like this one, where everything is live-streamed and on the record, actually constitute much more transparent journalism than the vast majority of what you read in the paper. Sullivan might not like the fact that if you want senior executive sources to talk to you, it generally helps to be reasonably polite and respectful. But at least at this kind of conference that kind of thing is out in the open, rather than being hidden in the back channels.

Mark Gongloff is not a fan of the idea that corporations are people. Except, that is, when the corporation in question is HSBC: he’s extremely angry at the fact that the UK bank won’t face criminal prosecution as a result of its money-laundering shenanigans.

Gongloff’s take is pretty mainstream: the NYT editorial page said that the decision is “a dark day for the rule of law”, adding that “clearly, the government has bought into the notion that too big to fail is too big to jail”.

But here’s the thing: you can’t jail a bank, or any corporation; a criminal indictment of a corporation is a bit of a peculiar fish at the best of times. Even if the bank survived, which Gongloff thinks is possible but no one knows for sure, there would certainly be massive job losses — and we can be sure that somewhere between 99% and 100% of those job losses would fall on people who had absolutely nothing at all to do with the money laundering that HSBC was getting up to.

What’s more, it’s important to put HSBC’s crimes in context. The United States, in its role as global hegemon and guardian of the world’s only real reserve currency, has unapologetically taken the opportunity to use its economic power to push its geopolitical agenda. For instance, if you’re an Iranian business and you want to do business in dollars, the US is determined to make your life as difficult as possible. The US might have no jurisdiction over Iranian businesses, but it does have jurisdiction over nearly all the important banks in the world, since it’s impossible to be a global bank without having some kind of presence in the US. And — as Argentina is finding out right now in its court case against Elliott Associates — if you want to send dollars around the world, you basically have to send them through the USA.

To put it another way, the laws that HSBC broke were laws designed to bolster the international standing of the US relative to Iran and other countries: they were geopolitically motivated, and the intended target was not the international banking system, with which the State Department has no particular beef, but rather countries the State Department doesn’t like.

In general, the laws have had their intended effect: they have depressed commerce in the relevant countries. But after HSBC has been caught breaking the laws, is there really any point in then pursuing a scorched-earth criminal prosecution against the bank? Remember, the bank was not the real target of the laws in the first place — and what HSBC did was perfectly legal in, say, the UK.

The US certainly has the ability to criminally prosecute HSBC. But doing so would not particularly hurt Iran or any of America’s other state enemies. And the laws which HSBC broke were not laws against bad banking, they were laws against bad states.

Or, to put it another way: the US is the most powerful sovereign nation on the planet. With a flick of its Justice Department finger, it could wipe a globe-spanning bank off the face of the financial system. It has truly awesome power. And every single bank in America is well aware of just how much power the US has in this regard. The question isn’t whether to use that power, it’s why. To do so would be bullying, and capricious, and would punish thousands of innocent individuals, and would destroy hundreds of billions of dollars of value, all for the purpose of nothing much in particular. Just because the US can prosecute HSBC doesn’t mean that it should prosecute HSBC. And sometimes, forbearance isn’t a sign of weakness, it’s a sign of maturity.

Update: Contra EJ Fagan, this is not an argument against prosecuting individuals at HSBC who broke the law. And in the comments, a lot of people are making the point that HSBC’s crimes centered not on Iran but rather on Mexican drug cartels; again, the laws broken are all part of the US war on drugs. The question here is: do you destroy a bank as collateral damage in that war?

The main problem with trying to explain the fiscal cliff, as I see it, is that people get far too caught up in the details — tax deductions, tax hikes, spending cuts, debt ceilings, and the like. Which are all important, but they’re not fundamentally what the austerity bomb is about. Rather, the reason that everybody’s worried about the effects of the fiscal cliff is simple Keynsian mathematics: if we cut spending and raise taxes, that means less economic activity — and a nasty recession, just when we can least afford it.

So this video is my attempt — with a big red dog, and Superman, and Batman — to get back to what really matters, and to try to underscore something quite interesting, which has been lost in the politics, which is that in terms of the deficit, both Obama and Boehner want something very similar. The deficit is big now — about $1.1 trillion — and they both want it to come down by roughly $200 billion, which is much less than what will happen automatically if they do nothing. In that case, the deficit would plunge by a disastrous $500 billion or so.

Deficits are a good thing, in terms of economic stimulus, and taking away a large deficit too quickly is a great way of causing a recession. I do understand that at some point deficits become a bad thing, especially if the bond markets decide that there’s a real question mark over whether all that borrowing can ever be repaid. But we’re not at that point yet. So it falls to Barack Obama and John Boehner to come together to prevent an entirely avoidable recession. They can do it, and they will do it. But we’ll have to suffer a lot of sturm und drang — not to mention gimmicky YouTube videos — before we get there.

There are a lot of very weird aspects to today’s announcement that Berkshire Hathaway has bought back $1.2 billion in stock.

Firstly, the way that the announcement came out seems incredibly shambolic. The stock market opened, and then just a few minutes later trading in Berkshire was halted, pending a news announcement. The announcement was made, and trading resumed, but there’s really no reason why the announcement couldn’t have been made ten minutes earlier, before the market opened.

Secondly, the buyback took long enough: Berkshire first announced that it was thinking of doing such things back in September 2011, saying that it would buy back stock “at prices no higher than a 10% premium over the then-current book value of the shares”. After that there was nothing, until today — when Berkshire, with its very first first significant buyback, managed to break its own self-imposed constraint:

Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value. Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value.

This smells. “The estate of a long-time shareholder” is clearly code for “an old friend of Warren’s”. When that person died, the estate clearly took the decision to liquidate the entire holding, possibly for fiscal-cliff-related reasons. (There’s a good chance that the taxes on estates and capital gains will rise substantially in 2013.) It’s possible that Berkshire was a little bit worried about the effect that the sale would have on the share price, but it’s unlikely: average volume in the stock is more than 56,000 shares per day, so selling 9,200 shares without moving the market much is pretty easy.

So there’s no particularly good reason why Berkshire should step in and make this purchase just to keep the market price smooth, especially when Buffett says he doesn’t pay much attention to short-term stock-price fluctuations anyway. And there’s definitely no good reason why this particular estate sale should be the catalyst for the Berkshire board breaking its own rules, and buying back its stock at levels far in excess of 110% of book value. (Book value is $111,718 per share, which means that the buyback price was just over 117% of book value.)

Finally, there’s no good reason why the buyback should have been done in this highly undemocratic manner. As we have seen, some $7.5 billion in Berkshire A shares change hands every day: Berkshire Hathaway, as a public company, made the decision many years ago that the stock market was the best place for its shares to trade. And yet, when it came to its first-ever stock buyback, Berkshire decided that it didn’t want to go to the stock market after all, and instead just did a bilateral side deal with the estate of a long-time shareholder.

Buybacks are considered a good thing, on the stock market, for three reasons. Firstly, they reduce the number of shares outstanding, which means that the value of the remaining shares goes up: the company is worth the same amount, so the value per share is higher. Secondly, they provide an extra bid in the market, which helps support and drive up the share price. And thirdly, they give shareholders the opportunity to sell their shares back to the company: if they want to sell where the company is buying, they have that option. And options are worth money.

Berkshire, with this buyback, achieved the first of those three reasons, but punted on the other two. It didn’t provide a bid in the market, and it didn’t give its shareholders that lovely marginal option of selling their shares to the company rather than to the traders who are in and out of the market every day. Instead, it decided to give special treatment to a single long-term shareholder.

The whole point of the stock market is that shares are fungible, and that all shareholders are equal. Berkshire has violated that principle today, for no good reason — while also breaking its self-imposed discipline of only buying back shares if the price is below 110% of book value. If you’re going to do a buyback, this is pretty much the worst way to do it.

Update: Apparently I shouldn’t trust Yahoo Finance, and when it reports volumes in BRK-A, it’s actually overstating them by a factor of 100. i.e., when it says 90,800 shares were traded yesterday, in fact that means that 908 shares were traded yesterday. Sorry.

Update 2: Ben Berkowitz correctly points out that this is Berkshire’s second buyback. It previously bought back $67.5 million of its shares from September 2011-December 2011 and disclosed the repurchase in its 10-K.

Blake Gopnik has an excellent piece on the art bubble in the latest Newsweek (where he was sadly laid off last week), which has been met by a predictable rubbishing from Marion Maneker. Both men agree on the symptoms: prices unrelated to quality, and artists who can go from hot to not in a very short amount of time. But they disagree on what those symptoms mean: Gopnik thinks that they mean “today’s contemporary market is due to deflate”, while Maneker sees art-market ups and downs as just part of what happens in any healthily-functioning market, and nothing to get particularly excited about.

The point that I think Maneker misses — and that he consistently misses in his attacks on people who are “complaining about the art market” — is that this particular market is qualitatively different from what you would consider a healthy market to be, not least because the prices are quantitatively completely bonkers. That was the main thrust of my Occupy Art post, and of the pieces by Dave Hickey and Sarah Thornton and Jerry Saltz and Charlie Finch that I linked to: markets, in general, are good and useful things. But sometimes they go crazy, and this is one of those times, and that’s a bad thing, not a good thing.

Collectively, we have managed to spark at least the hint of a debate — or, as Patricia Cohen describes it while quoting a slew of dealers and collectors at Art Basel Miami Beach, a “backlash against the backlash”. (One hint to people talking to the New York Times: saying things like “I’m grateful to Bugatti” is not likely to attract readers to your cause.) Debate is good! But I do still feel that everybody’s talking past each other. For instance: if the critics complain about the prices that some contemporary art is selling for, responding by saying “but other art is cheap”, as gazillionaires Don Rubell and Marc Glimcher do in Cohen’s article, does seem to miss the point.

Similarly, saying “look, some art is going down in value”, as Maneker gleefully did in November, also misses the point. Yes, Damien Hirsts are worth less today than they were in 2008. That was entirely predictable (I called the top of the Hirst market exactly when it happened), and it’s entirely in line with the way in which Hirst has graduated himself out of the art market and into the luxury-goods market. As I said in March, Hirsts have not been a speculative investment since 2008, and the fact that Hirsts are dropping in value does not, to use Maneker’s word, “confound” those of us who have a beef with the upper levels of the contemporary-art market.

Rather, what is uniquely troubling about today’s contemporary art market are two things: absolute values and relative values. Gopnik runs down a list which could have dozens of different names:

A Richard Prince “nurse,” hung amid Picassos and Miros, selling for $6.5 million; a Damien Hirst “medicine cabinet” priced at $4 million; Julie Mehretu squiggles, barely a decade old, for $2.6 million—all for sale at Art Basel, and all with prices so high they are bound to crash-land…

An unproven artist such as Wade Guyton, now showing at the Whitney Museum in New York, can fetch more than a legend of pop art like Richard Artschwager, on view downstairs from Guyton’s work.

These numbers are scarily high in absolute terms, and relative to anything you might want to name: Old Masters, vintage cars, four-bedroom houses. And there’s real delusion behind them. In a passage which didn’t make it into the final version of Gopnik’s article, he writes:

The market for art is unlike any other, because it’s built on some notion of true, underlying value ­­- on the idea that you buy art not because of its price (because of how much others might want to pay for it) but because of some real cultural worth that it represents. “We would not be mistaken for taking Richter’s abstractions as retroactively analogous with Mark Rothko, Barnett Newman, or Yves Klein,” says the auction text for a glitzy, record-setting abstraction by Gerhard Richter ­- a genius figurative painter whose abstract work could be mistaken for mall-gallery schlock. The auction copy for Koons’s $34 million “Tulips” compares the sculpture to a Brancusi and says that Koons has “tapped into the canon of the history of art by taking flowers as his subject for this still life colossus, introducing ideas of the memento mori as well as romance and beauty.” Yet if these judgments about cultural worth turn out to be wrong, then so is any big price they bolster.

The real forces driving the seven- and eight-figure prices in the contemporary market are not art-historical importance, so much as what Gopnik characterizes as the souk-like atmosphere surrounding both fairs and auction houses — the places where most big-ticket contemporary art is now sold, and places where the act of spending money is more important than the art it’s being spent on. Maneker is absolutely right about this: “Of course it’s not about the art,” he writes. “An auction is an event about the buyers, not the art.” And exactly the same thing can be said about an event like Art Basel Miami Beach — an event where Kelly Crow’s curtain-raiser can include this photo caption:

New York artist Wade Guyton earned a reputation for using a large inkjet printer to create images of the letter ‘U.’

Those “U” panels now sell for upwards of $200,000 apiece, brand new, and one early X painting recently sold for $782,500.

Without art-historical importance, there’s no way that these artworks are going to hold their value for more than a few years. And even with art-historical importance, there’s no reason why they should cost orders of magnitude more than art which genuinely has stood the test of time. As Sean Kelly tells Gopnik, you can buy 10 or 20 Marcel Duchamps for the price of one Jeff Koons, which just doesn’t make any sense at all.

To quote Herb Stein, if something can’t go on forever, it won’t. And as Gopnik says, “someone, someday, will be left holding the bag”. Narrowly, that group of people will be the collectors who are currently spending obscene sums on churned-out artwork: it just doesn’t make sense to drop millions of dollars on a Christopher Wool, say, when no one has a clue how many thousands of the things there are in existence. More broadly, however, the bursting of the bubble is likely to mean a very nasty recession across the whole of the art world, causing serious damage to a slew of curators, gallerists, artists, museum professionals, and other non-rich people. Spectacular busts are born of overconfidence, of the idea that this time is different. And the signs of overconfidence are hard to miss:

Every time you thought the world was ending,” Kelly says, “this market has confounded that prediction.” After 9/11, he asked himself, “Who’s ever going to buy art again?” only to discover that his clients were more eager than ever to nest at home with precious things.

A crash of the market’s biggest players might still bring everyone down, but Kelly feels that today’s art world has probably—probably—become such a broad river, as he puts it, that a whirlpool in one place might not disturb currents elsewhere. (Every gallerist I spoke to insisted that the market for their particular, singularly talented artists was bound to be stable, even if their colleagues were clearly at risk—precisely the kind of bulletproof thinking that’s typical of boom times.) This fall, Kelly almost quadrupled the size of his gallery; our interview ended so he could vet yet another applicant to his growing staff.

Sean Kelly has for decades been one of the most respected gallerists in New York, with a small space showing beautiful, austere work at high-but-not-bonkers prices. His shows are often curated better than those at major museums, and he has neatly sidestepped the trendy in favor of the timeless. Until now. Kelly clearly can’t sustain that modest practice any more: the art market has become a world of “go big or go home”, and Kelly now represents glitzy and trendy artists like Terence Koh and Kehinde Wiley. When even Sean Kelly can no longer resist the gravitational pull exerted by the weight of money chasing shiny objects, and instead sounds like Ben Bernanke circa March 2007, then that’s a sign that the whole art market has become hollow at the core, in a way it never used to be. Like all hollow things, bubbles included, it’s liable to implode at any time.