Felix Salmon

The WSJ is making a very big deal of its latest investigation into when and how executives trade stock in their own companies. But I’m not particularly impressed: it seems like much more of a fishing expedition than a wide-ranging scandal.

Certainly the WSJ contrives to be shocked at stuff which really isn’t shocking at all:

Douglas Bergeron, CEO of VeriFone Systems Inc., set up a trading plan in January 2011 and then in late March sold nearly $14 million of VeriFone stock. In trades from March 28 to March 30, 2011, he received between $55 and $57 a share.

On April 5, VeriFone’s stock began a long slide—exacerbated by a May 12 Justice Department lawsuit to block a VeriFone acquisition—that left the shares just above $30 in August.

There’s no way that the Bergeron would have known about the Justice Department lawsuit in March, when the suit didn’t appear until mid-May; what’s more, VeriFone is on the record as saying that he didn’t know about it. So it’s hard to see what the WSJ thinks it’s doing, here.

More generally, the WSJ’s methodology seems designed to produce exactly the results that it came up with:

The Journal examined regulatory records on thousands of instances since 2004 when corporate executives made trades in their own company’s stock during the five trading days before the company released material, potentially market-moving news.

Among 20,237 executives who traded their own company’s stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much.

It’s not obvious what the WSJ considers to be “material, potentially market-moving news”, but I think that two assumptions are probably fair here. Firstly, stocks tend to take the stairs up and the elevator down: if there’s a sharp move in a stock, it’s much more likely to be a fall than a rise. Secondly, executives trading in their own stock are much more likely to be sellers than buyers. They get awarded stock as part of their compensation package: that’s not trading. And once they’re awarded it, they have every right to sell it — and selling it makes perfect sense, in terms of portfolio diversification if nothing else.

Put those two assumptions together, however, and you get exactly the result that the WSJ is so shocked by. Let’s assume that nothing untoward is going on at all, and executives are trading their stock all year long. Assume too that most of those trades are sales. Then assume that the WSJ looks only at the trades which happen before sharp moves in a stock. Since most of those trades are going to be sales, and most of the sharp moves are going to be downwards rather than upwards, it stands to reason that the executives are going to look like they were avoiding losses, rather than seeing the stock move against them.

On top of that, the WSJ seems to deliberately elide key information at points. For instance:

Mr. Zinn bought about $800,000 of Micrel stock in the four days before Micrel put out an earnings news release saying the company hadn’t been significantly affected by the slowing economy—and announcing that it would begin paying a dividend. Within a month, the shares Mr. Zinn purchased just ahead of this news were up 27%.

Mr. Zinn’s timing was good again in early 2010. He bought about $295,000 of Micrel stock during the two trading days before Micrel executives made news at an investor conference by saying the company’s business was improving. Within a month, the stock rose 36%.

The WSJ doesn’t provide dates or stock charts here, and it’s far from clear what “made news” means in the context of executives saying upbeat things about their own company. But what is clear is that the WSJ tells us only what happened to the stock “within a month”, rather than between the trades and the news. If the stock moved after the news was public, that should be neither here nor there.

Not all of the WSJ’s examples are this dubious. But by its own admission, the paper examined thousands of trades, all of which took place in the run-up to potentially market-making news. Even if they were all perfectly innocent, statistically speaking some of them would end up looking suspicious. If you suspect bad-faith dealing, and then you look for it in a certain place and then you find it there, that’s a bright-red flag. But if you had no reason to be suspicious in the first place, then you need a lot more evidence. It’s a bit like discovering that two of your friends share a birthday: it’s a coincidence, but it’s not particularly noteworthy, because statistically speaking it’s pretty much certain that two of your friends share a birthday.

In order for the WSJ’s findings to be newsworthy, then, we’d need a pretty solid analysis of how many cases like this you’d expect just from random chance — and that analysis seems to be missing. The closest we get is this:

“We’ve found a lot of evidence that these insiders do statistically much better than we’d expect,” said Lauren Cohen, an associate professor of business administration at Harvard University who co-wrote a study published this year about the performance of insiders who time their trades. “The perch that they have—they not only have proximity to this private information, but they can actually affect the outcomes.”

There’s no link to the study, but I assume the paper in question is this one. It’s an interesting paper, but it doesn’t use the WSJ dataset, and it doesn’t look for “potentially market-moving news”: it just takes the results of executives with a regular and predictable share-trading pattern, and compares them to the rest.

Altogether, then, I think there’s less here than meets the eye. There might be future shoes to drop, and some of the trades they have found could turn out to be illegal. But I would have preferred less tarring of possibly-innocent executives, and more substantive discussion of what could actually be done to improve the system. The WSJ makes the case that the current system of 10b5-1 plans, where executives pre-plan stock sales, is flawed. But how could it be fixed? You could ask executives to commit to a fixed schedule of purchases or sales long in advance, but all such schedules have to be editable somehow, and in any executive’s life things happen which can drastically change that person’s need for liquidity.

And then more conceptually there’s the whole problem with the idea that executives can’t trade when they have material nonpublic information about a stock — which is just silly at its heart, because executives always have nonpublic information about a stock, and that information would nearly always be considered material for, say, a third-party hedge fund.

The SEC’s rules, as a result, are always going to be a bit unsatisfying, because they need to reconcile two irreconcilable facts: that executives have material nonpublic information, and yet at the same time they have to be able to sell their stock somehow. Lauren Cohen’s paper demonstrates that nothing untoward takes place if the stock sales are scheduled long in advance, taking place on a regular and predictable schedule. But life doesn’t always happen according to regular and predictable schedules, and it’s very far from clear that the problem here is big enough to justify a sweeping new regulation, just to try and prevent an unknown but possibly very small amount of insider trading.

Yesterday, ZeroHedge published this chart:

Which reminded me of this chart, which Cardiff Garcia found in August:

Both of them are telling the same story: that equity volumes, far from showing any kind of post-crisis rebound, are continuing to fall fast.

It turns out that this is not a purely US phenomenon. Indeed, the global picture is pretty much exactly the same as the US picture. Here’s data from the World Federation of Exchanges:

What all of these charts shows is that volumes are were on a secular uptrend until the crisis, they had a crisis-related spike, and then they’ve been on a secular downtrend ever since. The question is why.

The uptrend bit is easy: volumes, at least until 2009, always went up over time, especially when they were helped along by things like decimalization and high-frequency trading. But what explains the downtrend? It’s not the decreasing number of stocks: that might explain a bit of what’s going on in the US, but it wouldn’t explain the rest of the world.

Instead, I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise. During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.

Nowadays, however, the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.

The fact is that volume, in and of itself, is not a particularly useful phenomenon: it’s the shallowest and most useless form of liquidity. If the primary purpose of the stock market is to allocate capital to companies which need it, then you could happily lose 90% of the volume in the market without a noticeable decrease in utility.

I’ve got a post coming up about stock-picking as upper-middle-class hobby, but it does seem to me that it’s a hobby which is declining in popularity. That’s bad news for stock volumes, bad news for stockbrokers, and bad news for much of the financial media. But it’s good news for upper-middle class household finances.

Charles Forelle has a very wonky post today under the headline “Greek Deal Could Weaken Private Bondholders”, which sounds a bit scary. Basically, there was a Clever Idea which got inserted into the documentation governing Greece’s new bonds, but now it seems clever only in retrospect.

The Clever Idea in this case was that when Greece made interest payments on its bonds and on its EFSF obligations, it wouldn’t pay those creditors directly. Instead, it would pay an intermediary, which takes the money and divvies it up between the private-sector bondholders and the EFSF. The effect was meant to be that Greece couldn’t default on its bondholders without also defaulting on the EFSF.

But as we saw in January, Clever Ideas almost never actually help on a substantive level. My favorite example here is the Rolling Reinstatable Guarantee, which was dreamed up in 1999 as a way of ensuring that bond issues by Thailand, Argentina and Colombia would get paid just so long as those countries were current on their obligations to the World Bank. And yet, when Argentina defaulted, the bonds with the RRG defaulted along with all of the other bonds — even as Argentina remained current on its World Bank obligations.

In this case, the problem isn’t that Greece defaulted on its bonds without defaulting to the EFSF. If anything, it’s the exact opposite. The EFSF has basically restructured Greece’s debt, in a manner which would certainly constitute an event of default were it to take place in the private sector. As a result, all those expected EFSF payments have basically evaporated, and Greece needs to pay only its private-sector bondholders.

At the margin, this is a good thing, not a bad thing, for bondholders. It means that Greece only needs to pay them; it doesn’t need to make payments to the EFSF at the same time. So any protection they lose from their Clever Idea is more than offset by the real world cashflow relief that the EFSF has just granted Greece.

On top of that, the stock of Greek bonds is being cut, too, with a €9.6 billion buyback operation which is designed to cut Greece’s outstanding private-sector debt significantly. Once again, that means that Greece needs to find less money to pay off its remaining bondholders — and that’s good news for those who don’t sell their bonds into the buyback operation.

All of which is to say that if you’re looking at debt issues, the important things — who’s going to fund the deficit, how much debt a country has, how much the debt service will cost — will always outweigh any Clever Ideas. In this case, the “co-financing agreement” is now pretty much worthless — but the fact is that it was pretty much worthless all along. If Greece really wanted to find a way of defaulting on its bondholders while remaining current on its EFSF obligations, it could always come up with with such a way. Now, happily, it doesn’t need to worry about such things. Because its EFSF obligations are to all intents and purposes zero, at least for the foreseeable future.

So the Greece deal is done, and it has ended up looking much like Lee Buchheit said it would look, especially as regards the way that the official sector is dealing with the enormous amount of Greek debt it holds:

What do I think will happen in the end? There will be some form of rearrangement of the official sector debt. If you asked me to predict, I would say it will not be a principal haircut. There is an alternative. The alternative is to stretch out those liabilities for a very long period of time at a very nominal interest rate.

Now check out the official Eurogroup statement, which, crucially, includes this:

An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years.

This happened faster than most people thought it would: even Buchheit thought that the deal would have to wait until after the 2013 elections in Germany. But the point is that this kind of deal was inevitable, and sets a very important precedent.

This deal isn’t just the latest chassé in the long dance between Greece and its creditors; it’s a blueprint for every other European country with unsustainable official-sector debts as well. Including Greece itself, which will surely require another deal like this down the road. And it encapsulates the big difference between the way the private sector likes to deal with big debts, in contrast to the way the official sector does it.

The private sector likes a big one-and-done deal, where you start with a massive debt stock, and then you swap it for something smaller. The key number is the “NPV haircut”: the value of a bond is the net present value of its future cashflows, and so a big cut in coupons, or a terming out of interest payments, can be just as drastic, from a bondholder’s point of view, as a cut in principal. There’s nothing sacred about principal: what matters is the mark-to-market value of the bond.

The official sector, by contrast, holds principal highly sacred. That allows the Germans and others to say that they aren’t forgiving any debt; it also means that no national parliament needs to ratify a bill writing off any Greek debt. On the other hand, the official sector is happy to term out maturities until, as Buchheit puts it, the 12th of never, and also cut coupon payments at the same time.

I don’t know if anybody’s done the math to work out what the effective NPV haircut is here, especially if you also add in things like the way that Greek interest payments are going to get recirculated back to Greece in a weird kind of rebate program. In a way, it doesn’t matter, because the lesson here is that when push comes to shove, the official sector will always agree to let Greece (or any other troubled Eurozone country) term out its obligations instead of risking a default.

This is the big difference between the private sector and the official sector. The private sector, if it’s owed $1 billion on April 15, expects $1 billion on April 15, whether the debtor can really afford it or not. Failure to make that payment is a default, and if default is a real possibility, then there’s certainly no way the private sector will lend the country new money to make the payment.

The official sector, in contrast, if it sees a big $1 billion payment due on April 15, will simply term it out for a few years. That doesn’t impair the value of the asset on any official-sector balance sheet: it was $1 billion before, and it’s still $1 billion. And so it doesn’t really help with respect to anybody calculating Greece’s debt-to-GDP ratio, since the nominal amount of debt outstanding never actually does down. But in reality, Greece’s ability to manage those debts is much greater than it would be if the debts were mostly private. Because the official sector, deep down, in its heart of hearts, doesn’t actually expect to ever be repaid.

Eric Hunsader, at Nanex, has managed to put together some fantastic charts of what exactly happened in Elan, the stock at the center of the latest big insider-trading case.

First, here’s the big picture:

The red arrow shows the period “throughout 2007 and up to July 2008″ during which SAC “established a substantial long position” in Elan. The blue arrow points to the frantic week during which SAC sold off more than its entire holding, ending up with a significant short position, just before the stock plunged.

When Elan opened for trade on Monday July 21, 2008, it was at a multi-year high of more than $35 per share, and SAC’s long position was massively in the money — after all, they had been buying since it was less than $15. And then SAC started selling, aggressively.

Over a four-day period, SAC sold its entire position of 10.5 million shares between Monday and Thursday, at a super-high average price of $34.21 per share. The head trader, who said that he sold the stock “quietly and efficiently through algos and darkpools”, continued to sell. By the end of the trading session on the 29th, he had sold more than 15 million shares for more than $500 million. The complaint notes that the SAC trading “constituted over 20% of the reported trading volume in the seven days prior to the July 29 Announcement.”

What does that kind of massively one-sided selling do to a stock price? This:

Basically, Elan moved sideways for most of the time that the stock was being sold. Day 1 was great, Day 2 was decent until the end of the day, Day 3 started off well but then deteriorated, Day 4 was horrible, Day 5 was much better, Day 6 had a good morning and a gruesome afternoon, and Day 7 was pretty good.

And by the end, in the wake of $500 million of concerted selling in a pretty illiquid stock, the share price was about $33.50 — pretty much exactly where it was on the Friday before the selling started.

Eric’s detailed day-by-day charts are well worth looking at, but for me there are two big-picture lessons here. The first is that SAC is an amazingly good trading shop; we probably already knew that. And the second is that any time you see a market reporter blaming “selling” for the fact that a stock went down, you can take that with a pinch of salt. Because the lesson here is that an absolutely enormous amount of very real selling can have a surprisingly small effect on a stock’s price.

Today’s rapturously-received news that Mark Carney, a Canadian, will be the next governor of the Bank of England reminded me of this tweet from Charles Kenny:

One day we’ll see legal discrimination by *place* of birth as evil as discrim. by other features of birth –gender, orientation, color.

— Charles Kenny (@charlesjkenny) June 25, 2011

As far as I can tell, absolutely everybody thinks that Carney is the best possible person for the Bank of England job, and that it’s an absolute triumph for UK chancellor George Osborne that he managed to persuade Carney to change his mind and accept it.

Much the same can be said of Stanley Fischer, who’s done a fantastic job running the Bank of Israel. Indeed, in general, high-profile public-sector jobs tend to be done better when they’re done by foreign nationals. The logic is simple: if you’re choosing from a global pool of candidates rather than simply a national pool of candidates, you’ll end up with a better person at the end.

Which raises the obvious question: why is such a move still unthinkable in the US? There are lots of big jobs coming up here: Treasury secretary, SEC chairman, Fed chairman — and all of them are going to go, automatically, to US nationals. Think about it this way: Mark Carney is the best central banker in the world, and he would be an amazing replacement for Ben Bernanke. What’s more, given the choice, he would surely plump for the Fed over the Bank of England. So it’s reasonable to assume that if the US wanted him, they could have had him.

In England, everybody has cheered the choice of Carney as inspired — but if the same announcement had happened in the US, there would be an immediate chorus of boos. Apparently US exceptionalism is so deeply ingrained in the national psyche that not only must everybody always believe that the US is the greatest nation on the planet, it is also necessary to believe that all the greatest people on the planet were born here too. (Except Jesus, maybe.)

It’s obvious that the leadership of the world’s most important international financial institutions — the World Bank and the IMF — should go to the best-qualified candidate, rather than whomever happens to have been chosen for the job by the US and Europe respectively. But the fact is that the same is true for the world’s most important national financial institutions as well. If England can have a Canadian central bank chief, why can’t the US pick a Brazilian? Arminio Fraga for the Fed! It would be inspired.

The FT — which has been excellent covering the case of Elliott vs Argentina — has now weighed in from its editorial page:

The original bonds could have prevented this outcome. But they did not include collective action clauses, which allow a large majority of creditors to bind holdouts to a restructuring…

Many countries have issued debt under foreign law without CACs. Should their debt be unpayable, only an orderly restructuring will enable them to move on. If Mr Griesa’s ruling sets a precedent, a single holdout creditor will be able to exclude a sovereign debtor from international markets indefinitely…

So sovereign creditors should learn the importance of CACs, which should be standard in all new bonds – as the eurozone has done.

This has elicited a short but heartfelt cry from from Anna Gelpern, which is worth translating into English, because the FT has gone and made exactly the same mistake that the Second Circuit made. Let’s be clear about this: if the current mess between Elliott and Argentina is a problem, then CACs are not the solution. Collective Action Clauses may or may not be a good idea, at the margin (they probably are). But unless you’re a country like Belize, which only has one bond outstanding, they don’t really solve the problem of holdouts.

That’s because CACs live within bonds, rather than across them. Any decently-respectable sovereign will have put a good amount of effort into building up a yield curve — something very valuable for any domestic companies looking to borrow on the international markets. A yield curve is a line joining up a long series of dots, and each dot in that line represents a bond issue. A couple of those bond issues will be big, liquid benchmark issues; others will be much smaller, and some will be relatively tiny, the opportunistic result of what’s known as “reverse inquiry” bids from investors wanting to lend the country money on certain terms.

Even if all of those dots have CACs, many of them will be small, on the order of say $100 million or so face value; these are known in the market as “orphans”, and they tend to trade at a discount because they’re illiquid. So when a sovereign credit is trading at distressed levels, orphan bonds will be even cheaper. If the sovereign’s benchmark bonds are trading at 25 cents on the dollar, the orphans might trade at 20 cents. As a result, a vulture fund could buy up 25% of a $100 million bond issue for just $5 million.

At that point, the CAC will do the issuer no good at all. If the CAC needs 75% of bondholders to accept a deal, then a carefully-picked $5 million purchase can effectively veto the deal, and turn the entire bond issue into a holdout.

With old bond exchanges, a country would put an offer on the table, and would go ahead with the offer if a certain percentage of bondholders agreed to it. At that point, everybody who didn’t agree to the offer would become a holdout. The FT and the Second Circuit seem to think there’s a better way of doing things: that instead of swapping out old bonds for new bonds, sovereigns should just ask bondholders to vote to accept a change in payments on their existing bonds. If the percentage voting in favor is higher than the CAC threshhold, then, presto, no exchange is needed: the old bonds just change their payment terms, and magically transmogrify into new bonds.

The problem is that there’s no way a country can realistically do that for all of its outstanding bonds simultaneously. While it will reach the CAC threshhold for most of its bonds, there will always be a few holdouts — and at that point, we’re back to exactly the same situation we’re seeing in Elliott vs Argentina.

All of which is to say that whenever there’s a sovereign restructuring, there will be holdouts. They’re something of a fact of life — but so long as countries like Argentina can credibly threaten not to pay them, restructurings can still happen, either with or without CACs.

The problem with the Elliott vs Argentina precedent, if it ends up with Elliott getting paid, is that it eviscerates the credibility of that threat. If holdouts have a powerful tool which ensures that they will get paid after a restructuring, then restructurings will never get off the ground: no bondholder will have any incentive to accept a haircut if they can instead holdout and get paid in full.

The FT is right, then, that the courts need to urgently deal with the can of worms that has been opened by Judge Griesa. The consequences of his decision, if it’s allowed to stand, are unknowable, but they will certainly be huge. What would happen to Argentina’s judgment creditors, for instance, who held bonds but then reduced them to a judgment against Argentina? No one knows. What about creditors bearing other judgments against the country, like those who have won cases at ICSID? What would happen to the preferred creditor status of the IMF and the World Bank? Could vultures start attacking payments to those institutions, too? And never mind emerging-market sovereigns: what would happen to standard US contracts, where a company might choose to pay one creditor while stiff-arming another? Would all such choices end up with creditors fighting each other in the courts, so long as they had a precious pari passu clause?

I’m not convinced that the Supreme Court is the right place for these decisions to be made: the issues are basically those surrounding the smooth functioning of markets, rather than being Constitutional in nature. And as such, the Second Circuit, probably sitting en banc, is best placed to ensure that New York remains a place where contract law works in predicable, rather than highly unpredictable, ways.

But what’s certain is that the legal issues here are enormous — much bigger than Argentina — and need to be dealt with deliberately, rather than in a rushed manner. As a result, it’s very important that the Second Circuit reinstate the stay which Judge Griesa so aggressively withheld when he handed down his most recent opinion.

Interestingly, former Argentine central bank governor Mario Blejer has also weighed in, saying that “the preservation of the integrity of judicial rulings is paramount” and that as a result it’s more important than ever that Griesa be overturned. Investors should not for one minute, however, believe that the implication of Blejer’s op-ed is that Argentina will follow Griesa’s ruling if it’s not overturned. Griesa has done the impossible, here: he’s managed to unite the Argentine government and opposition, against a common enemy. (Himself.)

No one in Argentina thinks that Elliott should be paid. And although no one thinks that Argentina should default, either, there might need to be a period of technical default just in order to ensure Elliott doesn’t get its $1.3 billion. Alternatively, Argentina could just make the scheduled coupon payment to Bank of New York, and let creditors work out for themselves how to get their hands on their money. They would certainly sue Bank of New York for the money that BoNY was holding in trust for them, and it’s not at all clear, if Argentina actually made the payment, that the CDS would get triggered.

So the way I see it, there are basically four possibilities here. The first is that Argentina gets its stay back, and ultimately the courts overturn Griesa. In that case, we’re back to the status quo ante. But what happens if Griesa’s ruling is upheld? It’s possible, but highly unlikely, that Argentina will just give up and pay Elliott the $1.3 billion. It’s also possible that it will default on everybody, and begin the process of paying exchange bondholders in some new manner in Buenos Aires.

Finally, Argentina can make the payment to BoNY, and let its various creditors and agents fight it out among themselves. If it chose that option, it would be fascinating to see what happened to the price of Argentine bonds. How much is a bond worth, when all coupon and principal payments belong to you, the bondholder, but are being held irretrievably at BoNY? It’s an interesting existential question.

If you want to follow all the ins and outs of Elliott vs Argentina in the mainstream press, you’ll soon find something very interesting. It’s a US case, in a US court, which is very likely to have profound consequences for both US markets in general and for one of America’s most diplomatically important laws, the Foreign Sovereign Immunities Act. But to a first approximation, the US press simply hasn’t noticed.

Most US outlets have carried a single dry and dutiful report, buried on an inside page, somewhere; the NYT didn’t even manage that, relying instead on a wire report from the AP in Buenos Aires. The WSJ has not been much better, although its report is notable for getting notoriously reclusive fund manager David Martinez* on the record — a sign that if they put their mind to it, US journalists could really add some value here.

By contrast, the FT has been all over the story, in detail, from the very beginning, out of London and Buenos Aires. Alphaville’s Joseph Cotterill has created the invaluable Pari Passu Saga Series, the newspaper splashed the news all over its front page this morning, and the combination of Jude Webber in Buenos Aires and Robin Wigglesworth in London has proved to be incredibly powerful and astute. Even accounting for the Thanksgiving holiday in the US, the disparity is striking. The best US newspaper coverage — which has come, singlehandedly, from Michelle Celarier at the New York Post — doesn’t even come close to competing. (Michelle and I share more than an interest in sovereign debt: we’re both former correspondents for the UK’s Euromoney.)

But by far the most detailed and voluminous coverage has come from the Argentine press, which has been covering the New York court case in extreme detail. Every time that Judge Griesa releases an opinion, it’s immediately uploaded to a multitude of Argentine news sites, and thousands of Anglophone readers flock to download everything he has said, and argue about what it means. This story is huge in Argentina — and unlike the last time that Argentina defaulted, in 2001, everybody has the internet and is following what’s going on, in extreme detail, online.

Which makes the AP report that the NYT ran with particularly fascinating. Most of the time news stories are interesting when they tell you something you don’t know; in this case, we have a news story which is interesting because it tells us something which isn’t actually true at all.

As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976 to 1983. The military junta more than tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.

Sovereign debt is supposed to be paid no matter who runs a country, but President Fernández has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor, Néstor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.

In fact, Argentina’s world record was broken by Greece, but never mind that. Much more interesting is the way in which the AP’s Buenos Aires reporter, Michael Warren, is reflecting a very common view of things in Argentina — that Elliott’s debt is odious and illegitimate.

Note that Argentina itself, in Griesa’s courtroom, has never made this argument. Quite the opposite: Argentina has always held, at least in New York court, that Elliott’s debt is entirely legitimate, and indeed is just as legitimate as the debt held by exchange bondholders. It’s up to Argentina, as a sovereign nation, which creditors it pays and which it doesn’t — but Argentina, at least as a matter of law, has never denied that it owes Elliott the full amount it’s being asked to pay.

What’s more, the debt that Elliott holds was not, in any real sense, “forced onto the Argentines by dictators”, and the case is not “rooted in the bloody dictatorship that ruled from 1976 to 1983″. Yes, the junta ran up a lot of debts — and Argentina restructured those debts in its big Brady deal of 1992. By the time the junta-era debts had been restructured, Argentina’s debt was an entirely manageable 30% of GDP; even two years later, in 1994, it was just 31.4% of GDP. It was only in the late 1990s that the democratically-elected Argentine government of Carlos Menem started running up the country’s debts to unsustainable levels.

Menem, of course, was a Peronist, just like Cristina Fernández and her late husband — and so it would be hard for her to blame Argentina’s current predicament on him. Somehow, she has managed to persuade the Argentine public — and even AP reporters — that paying off Elliott would be tantamount to ratifying the actions of the military junta which lost power before most Argentines were even born.

All of which helps explain why absolutely everybody is convinced that given the choice between paying all of its creditors and paying none of them — the choice which Griesa is giving Argentina — Cristina will choose the latter. Even Mitu Gulati tells Christopher Spink that “Argentina is likely to default on the exchange bonds” — and Gulati is the frequent co-author of Lee Buchheit, of Cleary Gottlieb, which represents Argentina.

Essentially, there are two choices here. Argentina can somehow win its appeals; or it will end up defaulting on its exchange bonds. The outcome Griesa is trying to order — where Argentina pays its exchange bondholders and its holdouts, in full — is simply politically impossible in Argentina.

Of course, another Argentine default wouldn’t be the end of the story. It’s hard to pay bond coupons in dollars, even if the bonds are issued under Argentine law, without going through some US-based intermediaries — and Griesa could always try and intercept those payments if Argentina thumbs its nose at him and simply ignores his order. What’s more, Elliott Associates will, everybody believes, make a large amount of money in the CDS market if Argentina does default, and the Argentine government would love to stop that from happening, somehow. (They can’t prevent the fact that Elliott has already made a large sum in the CDS market, on a mark-to-market basis.)

And there’s a decent case to be made that Argentina’s debt is undervalued right now even if it does end up defaulting. So long as exchange bondholders are happy getting paid out of Argentina rather than New York, they will probably end up with every penny they’re owed — in dollars. There might well be an uncomfortable interregnum, but ultimately they’re more likely than not to get their money. So if you have a strong stomach, maybe the exchange bonds are a buy right here — precisely because many institutional investors don’t have strong stomachs, and have no desire to be holding onto defaulted sovereign debt.

In any case, in order to really understand what’s going on with Argentina’s bonds, you need to be at least as well versed in Argentine politics as you are in the intricacies of New York law and pari passu clauses. Judge Griesa might have a surprising amount of power. But Cristina Fernández has more.

*Martinez, one of the world’s most successful distressed debt investors, is siding against Elliott Associates in this case. Similarly, David Boies is siding with the exchange bondholders against Elliott, despite the fact that his son, also called David Boies, founded Straus & Boies with Michael Straus, who represented Elliott in its last major sovereign battle, against Peru. Boies is representing Gramercy Advisors, who also made their name as a vulture fund. This is a case where everybody is pretending to be highly principled — but ultimately, as ever, it’s all about financial self-interest.

Steve Cohen has never appreciated the implication that his hedge fund, SAC Capital, made some part of its stellar returns from inside information. Now that the SEC has brought what it says is the largest insider trading case in history against one of Cohen’s former employees, that reputation is becoming harder to shake. The NYT’s Peter Lattman and Peter Henning write that Cohen is in a precarious legal position:

For the first time, the evidence suggests that Mr. Cohen participated in trades that the government says illegally used insider information — though prosecutors have not said that Mr. Cohen himself knew the information was confidential.

Any prosecution of Mr. Cohen would most likely hinge on the cooperation of Mathew Martoma, the former SAC employee charged in the case.

The WSJ’s Michael Rothfeld and Chad Bray report that the FBI tried unsuccessfully to flip Martoma against Cohen a year ago. It may have been fruitless thus far with respect to Cohen, but the same tactic does appear to have worked in building the case against Martoma (aka “the Elan guy”). Bess Levin points out that the doctor who divulged Elan’s trial results, Sid Gilman, is prepared to testify and has a non-prosecution agreement.

Martoma’s position at SAC was well within Cohen’s orbit. He worked for the CR Intrinsic fund, which Reuters’ Svea Herbst-Bayliss and Katya Wachtel note is the unit that manages most of Cohen’s billions in wealth. The FT’s Kara Scannell and Sam Jones add further color to SAC’s structure, highlighting how Cohen puts himself at the center of a complex constellation of individual traders and separate funds.

This is the sixth time an SAC employee has been linked to insider trading — but Cohen still has his defenders. On CNBC, Anthony Scaramucci offered this analogy about why Cohen shouldn’t be on the hook for his employee’s alleged scheme: “OK, so there’s a Teamster employee driving drunk on an interstate highway, we’re going to take down the president of the Teamsters union?” — Ben Walsh

On to today’s links:

HP
An equity analyst’s take on the “reasonable doubt” over Autonomy’s numbers – Uneasy Empires

Beefs
Nassim Taleb’s Twitter fight with FT Alphaville – FT Alphaville

Housing
Inside the Obama administration’s paralysis on housing policy – Zachary Goldfarb

Attention Walmart Shoppers
Black Friday deals are often available at other times during the year – WSJ

Long Reads
Why can’t India feed its people? – Businessweek

EU Crisis
The never-ending EU crisis in one chart – David Einhorn

Sad Declines
Japan is running out of Ninjas – BBC

Defenestrations
Chinese official fired after giving new meaning to the term ‘party boss’ – Reuters

Yikes
A modular nuclear power plant you can order pre-built – WSJ

#Sandy
Sandy rebuilding could boost GDP by 0.5% next year – Bloomberg

Wonks
“Pigeon code baffles British cryptographers” – NYT

Says Science
“Sandy Island” proven not to exist – BBC

Legalese
Twitter and libel law – Economist

Stuff We Are Not Linking To
10 ways to make Black Friday a workout – Huffington Post Healthy Living

Judge Thomas Griesa, of the Southern District court in Manhattan, is mad as hell, and he’s not going to take it any more. Yesterday he unleashed three different orders and declarations on Argentina, all of which might as well have been dictated to him by Elliott Associates, the plaintiff suing Argentina for some $1.3 billion.

You’ll remember that last month, the Second Circuit, upholding one of Griesa’s orders, asked Griesa to clarify a couple of matters before the order could be fully enforced. In April, after Griesa’s orders first came out, I said that they were “notable for their lack of legal reasoning”, and added that “Griesa is throwing his hands in the air, here, and basically punting the whole issue up to the appeals court.”

Well, the appeals court agreed: while upholding Griesa’s orders, it also asked him for something much more detailed. Which is exactly what he has now delivered.

Three different orders from Griesa arrived yesterday, all related. The meatiest is this one; the other two are here and here. In them, Griesa answers the questions put to him by the Second Circuit: firstly, what exactly does Argentina need to do, in order to comply with his order? And secondly, how broad are the orders, in terms of including intermediary banks and the clearing system more generally? Specifically, does Bank of New York risk being punished for the actions of a Latin American sovereign state over which it has no control?

Griesa answered those questions as aggressively as he possibly could. The answer to the first: if Argentina’s going to make any coupon payment, in full, to the holders of its exchange bonds, then Argentina must also, at the same time, pay out Elliott Associates in full: all the principal and interest owed, which comes to some $1.3 billion. And the answer to the second: yes, Bank of New York is absolutely covered by the order, that’s the whole point. Argentina simply ignores orders from New York which it finds inconvenient; Bank of New York can’t. As Griesa puts it:

It goes without saying that if Argentina is able to make the payments on the Exchange Bonds without making the payments to plaintiffs, the District Court and Court of Appeals’ rulings and the Injunctions will be entirely for naught. To avoid this, it is necessary that the process for making payments on the Exchange Bonds be covered by the Injunctions, and that the parties participating in that process be so covered.

Griesa, here, is essentially ignoring Bank of New York’s heartfelt “please leave us out of this” plea. BoNY makes some very strong points in its brief, but they come down to a very simple concept: Griesa is basically asking BoNY to do the impossible. BoNY acts on behalf of Argentina’s exchange bondholders, and as such, if Argentina sends BoNY a coupon payment, then BoNY, in turn, has a legal obligation to remit that money to those bondholders. At the same time, however, Griesa’s new order gives BoNY a legal obligation not to remit the money to the exchange bondholders, unless and until Argentina has paid off Elliott Associates at the same time.

BoNY, then, asked Griesa a simple question: “Are you asking us to break the law?”:

BNY Mellon should not be forced by Argentina’s independent violation of the Injunction to choose between exposing itself to the risk of contempt, on the one hand, or the risk of claims from Exchange Holders for breach of the Indenture, on the other.

The implication of the BoNY brief is that if Griesa’s order is upheld, then it won’t pay the exchange bondholders, since there’s a clause in the indenture saying that in no event will BoNY be expected “to do anything which may be illegal or contrary to applicable law or regulation”. But, BoNY very much wanted Griesa to give an explicit order to that effect, saying that BoNY should not consider itself bound by its agreement with the exchange bondholders to actually pay those bondholders.

But Griesa disappointed BoNY: he says simply that if Argentina doesn’t pay off Elliott Associates as ordered, then BoNY would “properly be held responsible for making sure that their actions are not steps to carry out a law violation, and they should avoid taking such steps.”

Now the Second Circuit, in asking Griesa to clarify these matters, was clearly worried about orders which bind third parties too tightly. BoNY cites Learned Hand (and many others) in its brief:

No court can make a decree which will bind anyone but a party… If it assumes to do so, the decree is pro tanto brutum fulmen, and the persons enjoined are free to ignore it… The only occasion when a person not a party may be punished, is when he has helped to bring about, not merely what the decree has forbidden, because it may have gone too far, but what it has power to forbid.

Clearly, BoNY has no “power to forbid” Argentina from doing whatever Argentina wants, in terms of paying or not paying Elliott Associates. BoNY doesn’t even represent Argentina: it works for the bondholders. And so BoNY raises the prospect of this case going all the way to the Supreme Court:

To threaten BNY Mellon with contempt in this instance would unhinge this extraordinary power from its Constitutional moorings.

Personally, I don’t think that the Supreme Court will show much interest. This is a civil case, different circuits haven’t come to differing decisions on the matter, and, when it comes to matters of finance, the Second Circuit has all the expertise. Still, it’s worth noting that one of the largest holders of exchange bonds, Gramercy Advisors, has hired David Boies to represent it and to fight Griesa’s rulings. Boies is up against his old adversary (and occasional ally) Ted Olson, here: Olson is representing Elliott.

But it might be too late for Boies to get stuck in, at this point. When Griesa made his original ruling, he also put a stay on it, pending appeal to the Second Circuit. And these new rulings, too, are being automatically kicked back up to the Second Circuit for reconsideration. But there’s a big difference: this time, there’s no stay. Earlier this year, the Second Circuit could (and did) take lots of time to consider the matter at hand, and all the various briefs from interested parties like Gramercy. (Which, ironically, made its name on the other side, as a quasi-vulture investor suing Ecuador, but that’s another story.)

This time around, the Second Circuit doesn’t have the luxury of time. Griesa has lifted the stay and says that Argentina has to comply with his order when its next big $3 billion payment is due on December 15. The case will surely still be in some kind of appeals limbo at that point, and Griesa says that therefore it’s OK for Argentina to take the $1.3 billion it owes Elliott and pay it into escrow. But Argentina surely knows that once the $1.3 billion has gone into an American escrow account, it will never see that money again — while some combination of holdout creditors will ultimately get their hands on it. Paying the money into escrow is tantamount to paying the holdouts, and that’s something Argentine president Cristina Kirchner has vowed never to do.

All of which means that there is now a very, very real risk that thanks to Griesa’s rulings, Argentina is going to end up defaulting to its exchange bondholders. If Argentina transfers the December 15 payments to Bank of New York and doesn’t at the same time pay $1.3 billion into escrow, it’s not at all clear what BoNY is supposed to do. The money will rightfully belong to the exchange bondholders, but BoNY will be enjoined from actually paying them. And if the bondholders don’t get their money, that’s a default.

This affects the CDS market, of course: there’s disagreement on whether a missed payment on December 15 would trigger Argentine CDS, since that payment is actually a payment on GDP warrants rather than on debt. But there’s a proper coupon payment due on December 31, and if that money didn’t arrive, then the CDS would almost certainly be triggered. As a result, the spreads on Argentine CDS are somewhere over 2,000bp, and we’ve now reached the point at which Argentine-law domestic debt is now considered safer than Argentina’s New York law foreign debt. Here’s the chart, from JP Morgan:

It all adds up to an unholy mess, really. After all, this case is much bigger than just Elliott Associates vs Argentina. If Elliott gets its money, or even comes close, then lots of other holdout creditors will pull the same legal move, with the same legal results; it’s possible that some of them will even try to get their hands on the money going to Elliott, since they’re equally entitled to it. Then there’s the whole question of whether holdouts who reduced their claims to court judgments can also follow the Elliott path. No one knows the answer to that one.

There are holdout creditors holding bonds from other countries, too; they’ll probably follow Elliott’s lead as well. Every pari passu clause is a little bit different, but Griesa at least is very clear in his reasoning: he’s not trying to narrowly enforce the meaning of the pari passu clause, so much as he’s broadly trying to ensure that justice is served and Argentina’s long-suffering holdout creditors get paid.

And then there’s the biggest question of all: how on earth are countries ever meant to be able to restructure their debts, if orders like this allow holdout creditors to get paid in full? The Second Circuit seems to think that collective action clauses can do the trick, but nobody else thinks that way; Anna Gelpern explains why.

All eyes are now on the Second Circuit. Argentina’s best hope is that the Second Circuit will be swayed by the arguments from BoNY, the New York Fed, the Depository Trust Company, the Clearing House Association, and just about everybody else with a stake in the smooth functioning of New York markets. They upheld Griesa’s initial order, but maybe they’ll tack back the other way this time around, and overturn him.

It’s possible, but frankly I don’t know anybody who thinks it’s particularly likely. And Griesa, by refusing to extend the stay on his order, has deliberately made a protracted Second Circuit deliberation very difficult. If the Second Circuit wants to protect the New York markets by freeing BoNY and others from Griesa’s order, it’ll have to do so before December 15. Which is possible, but given how slowly the judges moved last time, doesn’t seem particularly likely.

If I had to make a prediction in this case, I’d say that the Second Circuit is not going to come to the exchange bondholders’ protection (and, for that matter, neither will the Supreme Court) — and that Argentina is not going to pay the $1.3 billion into escrow. It might make the $3 billion payment that is due to BoNY, but if it does, BoNY will heed Griesa’s order and will not send that payment on to bondholders. Alternatively, Argentina might try to make the payment some other way, via some new paying agent in Argentina, but that would be very messy indeed, and a lot of bondholders would still end up unpaid.

All of which means that in a weird way, the obvious thing for Argentina to do is to simply default on all its foreign obligations. It could then launch another exchange offer, saying that anybody holding the exchange bonds could swap them into domestic Argentine bonds with exactly the same terms; at that point, Argentina would happily make up any arrears.

Such a move would certainly trigger Argentina’s credit default swaps; in doing so, it would deliver a tidy sum to Elliott Associates, which is rumored to hold a large quantity of Argentine CDS. But at least Elliott wouldn’t get paid directly by Argentina, and Cristina could stay true to her promises.

Argentina might have been paying holders of its New York law bonds for years now, but it has never had access to New York markets; in that sense, by abandoning the foreign markets, it would only be abandoning markets which have served it no real purpose. Hundreds of foreign creditors already own domestic Argentine debt, denominated both in pesos and dollars; that system has been proven to work reasonably well. So it makes a certain amount of sense for Argentina to behave as aggressively towards Griesa as Griesa has behaved towards Argentina. If you want to get paid, it can tell its bondholders, you’re going to have to get paid in Argentina, since the New York courts won’t let us pay you in New York. The bondholders won’t like it one bit, but they’d ultimately go along. Really, they wouldn’t have much choice.

Update: JPMorgan’s Vladimir Werning has a great note with the title “Argentina: Set to appeal until it becomes necessary to offer investors (the now NPV positive!) off-shore payment option”. Basically, Argentina will appeal to the Second Circuit (the case is already there) and hope that the Second Circuit reinstates the stay. If that happens, and if it loses, then it will appeal to the full en banc Second Circuit, and even ultimately to the Supreme Court. But first it needs that stay — and if it doesn’t get the stay, then that’s going to force its hand. The clock is ticking: unless the Second Circuit overrules Griesa by reinstating the stay, then Argentina will start telling its bondholders that if they want to get paid, they’re going to have to get paid in Argentina.

Would you like to take a free online university course which teaches you the basics of quantitative analysis and also helps you manage your money so that you get high returns with low risk? Of course you would. Let me introduce you to Computational Investing, Part I, taught by Tucker Balch, Ph.D., on the Coursera website.

Under “Recommended Background” we’re told that “the primary prerequisite is an excitement about the stock market”. And there are two recommendations under “Suggested Readings”, including All About Hedge Funds : The Easy Way to Get Started, by Robert Jaeger. (Apparently it “explains how any investor can take advantage of the high-potential returns of hedge funds while incorporating safeguards to limit their volatility and risk”.)

This is a genuine university course: it’s the same one that Balch teaches at Georgia Tech. And so you’d expect a few disclaimers, at least, along the lines of “this is an introductory course, it’ll help you understand a few concepts, and maybe be the first step on the road to becoming a quantitative analyst yourself one day, but please, kids, don’t try this at home”.

You might expect such a thing, but you’d be disappointed. Instead, you get the exact opposite. Check out Week 4 (you might have to register; it’s easy and free) and then “Lecture Video 1.2: Response to Questions from Students”. According to Balch, the “number one most popular question” he gets asked is “Do I use these techniques to manage my own funds?”. He responds as forthrightly as he can:

The answer is yes.

Balch continues:

I have a number of different investments that I use these approaches for. With regard to my company, Lucena Research, we manage a few small funds as a way to test our techniques and validate them. One of them in particular I’ll show you in just a moment.

It’s far from clear how a student who has merely taken an online course might ever hope to replicate the returns that Balch manages to generate at Lucena (“Hedge Fund Technology for the Strategic Investor”). But in any case Balch does share with us a Lucena portfolio which “was developed specifically to be low risk”. It looks like this:

I look at this and I immediately get suspicious: there’s something quite Madoff-like about the way in which Balch’s returns go steadily up and to the right regardless of what the stock market is doing. Here’s how Balch explains what’s going on in there:

This approach was developed specifically to be low risk. It includes a basket of less than 20 equities that are traded about every 2 weeks. It’s 2X leveraged, meaning that half of the money is borrowed investment.

So this approach is a 2X levered fund with less than 20 stocks? Sounds very risky to me. But Balch shows us the numbers to prove that it isn’t:

The first thing to note here is that although Balch told us he was going to show us one of the “small funds” that he uses “to test our techniques and validate them”, this does not look like a real-money fund. There’s no indication, for starters, of what the borrowing costs are: if the fund is indeed 2X leveraged, how much does it cost to borrow $10 million on an ongoing basis?

Maybe those numbers are somehow incorporated into the returns — but then there’s the very odd section on “Transaction Costs”. The commissions bit makes sense: if you trade 10 times a week on average for 20 months, then that’s about 860 trades in all, and the commissions add up to about $20 per trade.

But then there’s the “slippage”, which doesn’t make sense. Commissions are real costs: they’re the amount of money you have to pay your broker to execute your trades. Slippage, on the other hand, is not a real cost, but rather a theoretical cost: it’s the difference between the official market price of a security, and the price you actually end up paying. It’s a way of taking a theoretical portfolio, which always trades at the market price, and adjusting the returns to make them more realistic. If you have a real portfolio, as Balch suggests that he does, then there’s no “slippage”: the slippage is built in to your actual returns.

So it seems that Balch, after promising to show us the returns that one of his “small funds” has generated, ends up doing no such thing. (And also, I don’t think that a $20 million fund would count as “small” for a college professor who tells us that most of his money is in his TIAA-CREF retirement account.) Still, he says:

This is a conservative approach which nets about 15%-20% per year. You can absolutely follow more risky approaches that’ll provide higher returns. This is the kind of approach I follow.

In other words, if you take what Balch is saying at face value, he’s managed to come up with a conservative investment strategy, which is levered 2-to-1, which generates returns of more than 15% per year, which he follows himself. And he encourages his students to try to do the exact same thing.

There are lots of courses on Coursera, and most of them aren’t as sketchy as this. But I do think that what we’re seeing here is the beginning of a serious problem with online universities like Coursera: you can never be sure about their quality control. And in general, if you’re taking a college course where the professor encourages you to lever up a small number of stock-market investments in the hope of getting low-volatility 20% returns, I’d advise thinking twice about that professor, and that course. Because it just doesn’t pass the smell test.

The fiscal debate which is just beginning in Washington is the political equivalent of trench warfare: the two sides have strongly-held positions, and the confrontations are going to be held on a thousand different fronts. In the end, there will be some tax-code changes here, some spending cuts there — but the baseline is the status quo, and the further that a plan deviates from the status quo, the less likely it is to get adopted.

Fiscal policy, in other words, is like healthcare policy: it’s path-dependent. There are lots of things that in an ideal world virtually everybody would like to see the end of; the mortgage-interest tax deduction is only the most obvious. But you can’t get there from here. What’s more, it’s incredibly difficult to get anything brand-new into the mix. I would love to see a carbon tax, and a financial-transactions tax, and a wealth tax — all of them are more attractive than an income tax, and some combination of them would be much better. But the point is that we’re not starting from scratch, which means that according to the rules of politics, we basically have to go to work only with the tools we have.

And yet, every time there’s a big problem, thinkers start coming out with big solutions. Bloomberg View, for instance, has a classic QTWTAIN headline: “Could 18th Century’s ‘Sinking Fund’ Solve Fiscal Cliff?” And at the NYT, Daniel Altman proposes this:

American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

In other words, don’t simply add a wealth tax into the mix, but abolish the heart of the tax code at the same time, and use only a wealth tax to try to replace all that lost revenue. He starts with those tax revenues, divides them into an estimate for household wealth, and presto — out the other side comes a solution to all our problems, which would slow the rise of inequality, deliver a tax cut to the majority of American families, and probably improve motherhood and apple pie at the same time.

As I say, I like the idea of a wealth tax. (My proposal: 1% of all wealth over $5 million, each year.) It would diversify the tax base, it would give the rich an incentive to take more risks with their investments, and by definition it would only be paid by people who can afford it. But administering such a thing would be a nightmare, and it’s always best to lower oneself into such waters gently. After all, the IRS has had decades to learn how people avoid income tax; it hasn’t even started to imagine all the different ways they could avoid a wealth tax.

Jill Lepore, in the latest issue of the New Yorker (although sadly not online), has an interesting history of the US tax code, explaining how the antitax tradition, which is rooted in slavery, has weirdly and yet consistently failed to really gain traction in practice. She concludes:

What’s surprising, given how much money and passion have been spent to defeat a broad-based, progressive income tax over the past century, and how poorly it has been defended, is that it has endured—testimony, perhaps, to Americans’ abiding sense of fairness.

The US tax code is already progressive. It could do with higher rates at the top end and lower marginal rates at the bottom end, but in terms of broad architecture it works pretty well — especially in the way that Americans have to pay tax on their global income. America’s fiscal problems come just from the fact that we raise too little money in taxes, rather from the fact that the taxes we do have are in any fundamental way ill-conceived.

Altman’s idea, much like Herman Cain’s 9-9-9 plan, is more than just unrealistic: it deliberately jettisons the one upside we have, which is a decades-long tradition whereby Americans pay income taxes in payment, as Oliver Wendell Holmes put it, “for civilized society”. Income taxes are easy to collect, and for most of us on payroll they’re collected automatically and largely invisibly — by the time we get our paychecks, the taxes have already been paid. We have a smoothly-functioning machine, with tax rates which can be adjusted quite easily. Adding new gears to the machine — a carbon tax, for instance — might make sense in theory, although it’s hard. But dismantling the machine entirely and rebuilding something brand new? That is a very bad idea indeed.

In the art world, the courtiers are revolting:

Dave Hickey, a curator, professor and author known for a passionate defence of beauty in his collection of essays The Invisible Dragon and his wide-ranging cultural criticism, is walking away from a world he says is calcified, self-reverential and a hostage to rich collectors who have no respect for what they are doing.

“They’re in the hedge fund business, so they drop their windfall profits into art. It’s just not serious,” he told the Observer. “Art editors and critics – people like me – have become a courtier class. All we do is wander around the palace and advise very rich people. It’s not worth my time.” …

Hickey is adamant he wants out of the business. “What can I tell you? It’s nasty and it’s stupid. I’m an intellectual and I don’t care if I’m not invited to the party. I quit.”

Hickey is only the highest-profile member of a pretty large group: people who are sick of playing bit parts in a game which has become entirely about money and ego, with the beauty and power of art having become just another commodity to be bought and sold. Art critic Jerry Saltz is another:

I still can’t stand it. How a handful of very very rich people with penises likes buying the work of a handful of artists with penises for very very high prices in public, in front of other people with penises and some very tall thin blond people with great shoes and no penises. Really.

The doyenne of art-market reporters, Sarah Thornton, has quit writing about the economics of art. She says there are a hundred reasons for doing so, including the fact that “tightknit cabals of dealers and speculative collectors count on the fact that you will report record prices without being able to reveal the collusion behind how they were achieved”, and that “it implies that money is the most important thing about art.”

Charlie Finch, too, smells the irrelevance of a world which has become irredeemably decadent in all the worst meanings of the word — to the point, this summer, at which he convinced himself that even the plutocrats would notice, and that the art market would be crashing hard, right about now. Obviously, that didn’t happen: it’s almost impossible to underestimate the obliviousness of the art-collecting elite, who are of course constantly surrounded by precisely the kind of courtiers — consultants, gallerists, even artists — who constantly tell them how perspicacious and important they are. Look no further than former commodity broker Jeff Koons, whose Tulips just sold for $33,682,500 at Christie’s: the last time I saw him he was in Davos, palling around with a Ukrainian oligarch, and generally solidifying his reputation among the people who really matter. Insofar, of course, that the people who really matter are the people you want to continue to funnel millions of dollars in your direction.

No, Charlie, the art market oligopoly system isn’t going anywhere: if anything, it’s more entrenched than ever. But the people without millions of dollars, the people who try to talk about art but find all conversations ultimately being about money — those people are, finally, getting fed up.

There’s long been a disconnect between critical acclaim and high prices, but so long as the art market pumped money into the broader art ecosystem, no one really minded that. Rather, what seems to have changed is that art — art itself, divorced from commerce — has been drowned in the flood of money. Even the most highbrow museums, these days, only devote major shows to artists who have proved themselves winners in the great game of selling to plutocrats.

This critique, of course, is not a new one, and the Occupy Museums website puts it well:

Museums must be held accountable to the public. They help create our historical narratives and common symbols. They wield enormous power within our culture and over the entire art market. We occupy museums because museums have failed us. Like our government, which no longer represents the people, museums have sold out to the highest bidder.

What’s new, I think, is the way in which such sentiments have started infecting much of the public face of the art world. Not everywhere, to be sure. Where there are markets, there will always be cheerleaders and outlets like Art Market Monitor serve the auction houses in much the same way that CNBC serves the NYSE. But now we have Jerry Saltz half-seriously proposing that all art just be sold at a flat price, and we have Sarah Thornton complaining about how tax evasion has become endemic in the market, and we have Larry Gagosian, in his latest court deposition, squirming when asked how a painting which was consigned to a New York gallery, and which was sold to a US resident, somehow managed to get sold out of London. How did the London gallery manage to acquire the work? “I don’t know the answer to that,” replies Gagosian.

Or to put it another way, the art market has stopped being a source of fascination and crazy numbers, and has started to be a source of sheer disgust. The auction records will probably continue to fall: the small group of ultra-high-end art collectors cannot easily be chastened. But I’m beginning to see the stirrings of something else: a more supportive and democratic art world, taken seriously by respected gatekeepers, which increasingly views the twice-yearly shenanigans at Sotheby’s and Christie’s as an obscene sideshow rather than as a true gauge of value. The shiny art selling for tens of millions of dollars is so dumb, and the caricatures who would emulate its success are so debased, that a lot of really talented artists and critics and curators and even collectors don’t even want in any more.

If you look back and forth between art collectors and rapacious venture capitalists, you rapidly come to the conclusion that if you compare the two groups, the art collectors come out so much worse. They’re similar in many ways: you have the “angel” early-stage investors who go bargain-shopping among the unknowns, all the way through to the big-money late-stage investors who make a fortune by investing in established names. And of course you have the majority of investors who don’t actually make any money at all. But at least there’s something honest about the VCs, and at least you can say that they sometimes create value.

The world of high-end art collectors, by contrast, has reached a level of obscenity that the art world more generally can no longer ignore. It’s been clear to the more politically-minded for a while, but now we’re seeing the mainstreaming of attitudes which used to be found only on the far left. Enough of living in a world where an artwork without resale value is worthless. Enough of feeling jealous when some idiot starts selling for ridiculous sums. Enough of a world where the levels of inequality make Nigeria seem positively egalitarian. Yes, artists need to make money, and yes, big collectors shower ridiculous sums onto the art world. But that money isn’t trickling down, and it certainly isn’t respectable. Here’s Thornton:

I have no problem with rich people. (Some of my best friends are high net worth individuals!) But amongst the biggest spenders in the art market right now are people who have made their money in non-democracies with horrendous human rights records. Their expertise in rising to the top of a corrupt system gives punch to the term “filthy lucre.”

Remember, this is no bedraggled Occupy activist writing these words; this is Sarah Thornton, who spent an entire chapter of her art-world book swimming laps at the Hotel Cipriani in Venice. Similarly, Dave Hickey was an art dealer himself, once, and has devoted his entire career to helping young artists become commercially successful. These people made their peace with the art market decades ago — but now, they are saying, it has gone too far.

One of the reasons why auctions attract so much fascination is that they’re pretty much the only place where you can see millionaires and billionaires competing, in real time, to see who can spend the most money on a given object. It’s quite a spectacle — but it has very little to do with art. Or at least, it has very little to do with whatever it is that most art lovers love. It’s fine to commercialize art, to sell it, to make money off it. Indeed, I wish that many more fine artists could do so. But let’s do so on a human scale. Because today’s art market is so much less than that.

It’s always illuminating to sit down with Lee Buchheit. He’s the dean of sovereign debt restructuring, he’s living through by far the most interesting period of his career right now, and this week I got the rare opportunity to ask him a bunch of questions on the record. Argentina, sadly, was ruled off-limits, but that just meant we had more time for Europe, where Buchheit was very, very interesting.

The Reuters TV crew has put the headline “Sovereign debt 101 with Lee C. Buchheit” on this one, which suffers a bit on the truth-in-advertising front: it’s a high-level discussion, and it helps to have a pretty sophisticated understanding of what has happened in Greece, Portugal and Ireland; and also to have read Buchheit’s recent paper with Mitu Gulati, “The Eurozone Debt Crisis — The Options Now”.

In that paper, Buchheit puts forward a novel idea for what Spain and Italy should do if they lose market access at acceptable yields: they should basically do the mother of all can-kickings, and restructure their debt by pushing every bond’s maturities out by five years.

But before we talked about that idea, we talked about Greece, which Buchheit said was pretty much unique in the annals of sovereign debt restructurings in that it was not designed to get the country’s debt load onto a sustainable footing. And as in many ways the primary architect of that deal, he should know.

Buchheit’s point, and it’s a good one, is that Greece was never in control: it basically just always did whatever it was told to do by the official sector. For a good two years after the country lost market access, the official sector told Greece that it must not default on its debts, and instead provided all the money to repay those debts in full and on time — on top of all the money needed to finance Greece’s fiscal deficit. Then, suddenly, the official sector changed its mind, and demanded a private-sector haircut. So, that’s what Greece did. But even after a steep haircut, Greece’s debt is still unsustainable. Which raises the question: what is the official sector going to do about that, and when is it going to do it?

Buchheit’s answer — and I think he’s right about this, at least so long as Greece remains in the euro — is that eventually the official sector will be forced to do a reprofiling, or “treatment”. They’ll avoid taking a nominal haircut: they’ll keep the principal amounts intact, which won’t do any favors to Greece’s debt-to-GDP ratio. But they’ll push maturities out very far indeed, and attach extremely low coupons to them, to minimize the debt-service burden on Greece.

There are massive problems with this, however, not least the fact that I can’t imagine how Greece could ever regain market access under such a regime. Buchheit thinks the same thing: “Greece could not, I think, return to the voluntary markets even if you did stretch out the official sector debt until the 12th of never.”* If it stays in the euro and doesn’t reduce the face value of its official-sector debt, private-sector participants will have no real interest in funding the deficit. What Buchheit is talking about here isn’t a strategy, so much as it’s the absence of a strategy: it’s almost literally the least that the official sector can do. And even then it’s not going to happen until after the German elections in September 2013.

And there’s another problem too. If Greece gets its official-sector debts reprofiled, then Ireland and Portugal are going to want exactly the same thing. Private-sector debt defaults have large costs; official-sector debt reprofilings do not. And so if the official sector does do this for Greece, they’re going to have to find the wherewithal to do exactly the same thing in Portugal and Ireland. Which won’t be cheap or easy.

If reprofilings are unattractive things to the official sector, they’re much more unattractive to the private sector, which considers them to be a default. So why would Italy and Spain ever consider such a thing with their private bonds?

Buchheit’s answer is that Spain and Italy can’t do a Greek-style restructuring of their domestic debts, with a principal haircut, because that would just render their entire domestic financial systems massively insolvent at a stroke. The resulting bank bailout would cost more than the amount saved on the national debt, making the whole exercise a false economy.

What’s more, such an exercise would put a lot of foam on the runway, as the crisis-management types like to say. As we saw with Argentina, a default which everybody sees coming is actually a lot less damaging, from a systemic perspective, than a default which happens suddenly. (Argentina’s slow train-wreck had much less impact on the markets generally than did Russia’s smaller, but much more unexpected, default, and one of the big problems with the Lehman bankruptcy was the fact that it was unforeseen by the markets.) The exercise of reprofiling Spain and Italy’s debts would give the markets notice that something a bit more drastic might have to happen in five years’ time — and with that kind of advance notice, both the official and the private sectors would have a lot of time to prepare for such a thing.

Finally, Buchheit points out that when it comes to the eurozone, countries always end up doing what the official sector wants, rather than what private-sector bondholders want. And there are lots of reasons why the official sector would like a reprofiling — the biggest of which is that it doesn’t involve the official sector being forced to bail out the private sector. The official sector would still need to fund the countries’ deficits, but at least it wouldn’t need to fund their private-sector principal repayments as well.

There is one more possibility, which Buchheit largely dismisses — and that’s the break-up of the euro. He says, quite rightly, that the euro has brought many benefits to the peripheral countries — but it seems to me that the era of those benefits is largely over, and that we’re now entering an era where the costs are becoming unbearable.

The problem with Buchheit’s reprofiling idea, whether it happens to official-sector debt in Greece and Portugal and Ireland or to private-sector debt in Spain and Italy, is the same as the problem with the Greek debt restructuring: it doesn’t address any of the big problems of a heavily-indebted uncompetitive country with sky-high unemployment. The technocrat’s answer to such problems is always the vague-sounding “structural reforms”, but in most of these countries, I don’t think that “structural reforms” are either politically or practically feasible. Sometimes, huge problems require drastic solutions. And the most drastic solution for a troubled eurozone country is, clearly, a default and devaluation. Which could be quite attractive, if it came with some one-off official-sector financing (to protect depositors), as well as continued membership in the European Union.

*Update: Buchheit emails to clarify that “if indeed the official sector were to stretch out their claims against these countries to the 12th of Never at a very low coupon, I suspect that the markets would be prepared to resume lending. In effect, by virtue of the maturity dates, the official sector will have subordinated itself to new (short and medium term) private sector lending.”

Eduardo Porter, today, has a great column about philanthropy, explaining that although Americans place trust in charity to help those in need, that trust is largely misguided. For one thing, he points out, “most philanthropists, generous as they may be, don’t usually see replacing government services as their job.” And more generally, human services charities receive less than 12% of all US charitable giving.

Which is why the Red Cross is exceptional: unlike any other charity, the government has given it the responsibility “to lead and coordinate efforts to provide mass care, housing, and human services after disasters that require federal assistance.” That, in turn, makes it accountable not only to its donors but to all taxpayers. And Ernie Scheyder’s article about the Red Cross today makes for very disturbing reading, on that front. Something, for instance, clearly went very wrong here:

As Sandy approached, the American Red Cross headquarters in Washington, D.C. arranged five staging areas in cities expected to be just outside the storm’s path, Lowe said. Supplies and staff were mo ved out of the New York region to avoid damage.

One of those cities was Harrisburg, Pennsylvania, where Lowe said response vehicles and other supplies were stored. When contacted after the storm, though, local Red Cross officials in Harrisburg said they had prepared primarily to serve local victims. Only after they made sure Pennsylvania residents were all right – a process that took three days – were resources sent on to New York City.

The problem is only partially that there were mixed signals, and that the Pennsylvania officials thought the resources were for them rather than for New York. It’s also that no one at the Red Cross wants to even admit that there was a mistake. Instead, they seem to blame mythical traffic jams which were so bad as to hold up traffic for three days:

The Red Cross said traffic delayed by three days its efforts to serve Staten Island, the Rockaways, Coney Island and other hard-hit communities in and around New York City. That was despite all main bridges to those communities being open the day after Sandy.

The Red Cross is the charity which people give to reflexively whenever there’s a disaster — but look at where the Red Cross’s money actually goes: in 2010-11, for instance, it spent $271 million on domestic relief, $340 million on international relief, and a whopping $2.21 billion on blood and plasma services. It’s basically a blood bank with a disaster-relief agency attached, and a constrained one at that: the Red Cross says that its primary mission in a disaster is to supply food and run shelters, not to provide transportation, arrange cleanup operations or coordinate last-minute volunteers. And boy do they stick to that mission: when one woman asked the Red Cross for help moving a 90-year-old bed bound woman from the Rockaways, she was told that there was nothing they could do, that wasn’t a service they provided.

That reveals a level of bureaucracy and rule-following which is never appropriate in a disaster situation, where experienced operatives learn to respond to needs rather than to directives.

To be fair, the Red Cross is also constrained by its donors. After 9/11, it made the sensible decision that a lot of the money it had been donated would be best used in future emergencies, but the public outcry forced it to reverse course. As a result, the Red Cross has to deal with seriously backwards accounting: it basically has to pay for its disaster-relief operations with money received after the disaster occurs, and can’t use those donations for any other purpose.

Still, the way to deal with this problem is simple: don’t give money to the Red Cross. Give unrestricted donations instead to organizations like Doctors Without Borders or Team Rubicon, who know what they’re doing and who respond to need rather than to orders and conventions. The Red Cross does do good work. But there’s absolutely no reason why it should always get the lion’s share of post-disaster donations.