Felix Salmon

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.

Back in mid-2010, the FT’s Money Supply blog disappeared behind the FT paywall, with promises that it wouldn’t be the last. From the top on down, the general attitude at the FT has been clear: the idea that the FT should publish information for free is “an absurd notion”, and given that the FT’s blogs are part of its high-value content, there’s no reason why they, too, should be free.

The problem was always that the FT’s best blog — representing a large chunk of its most valuable and highbrow content — was its Alphaville flagship, which consistently fought tooth and nail to remain free. Alphaville is incredibly good at reaching the leaders, especially in the US, that the FT desperately wants to reach even if it can’t persuade them to buy a subscription. And with Alphaville free, it was hard to put the FT’s other blogs behind the paywall.

So 2011 came without any new paywalled blogs, and then 2012. Finally, today, in a comment, Alphaville’s Lisa Pollack has announced the FT’s retreat from the whole idea. “The Powers hath spoken,” she writes: “Money Supply will be made consistent with the rest of FT blogs.” Which means that it will be free, at least in monetary terms.

There’s a quid pro quo, though: if you’re not paying in money, you’re going to pay in terms of personal information. From November 19, all FT blogs, including Alphaville, will reside behind the FT’s registration firewall: if you haven’t registered, you can’t get through. The idea is that if the FT knows who you are, it can target its ads better, and get more money for them.

The registration-wall compromise is an interesting one, and seems to be happening with much less fanfare than we heard in 2010, when the paywall went up. If the FT wanted, it could paint this as part of what you might call a ziggurat model: the first couple of articles you read each month are completely free, and then there’s a blog layer which is free with registration, and then there’s a newsier layer which costs a certain amount of money, and then there’s the Lex layer on top of that, which costs even more, all the way up through the high-dollar newsletters and even the subscriptions to services like Medley.

But it’s hard to square a rich free-with-registration layer with the FT’s stated philosophy that if its content is of value, then it should not be free. There are basically two choices here, both unpalatable to the FT. One is that the blog layer effectively institutionalizes the FT’s blogs as a kind of ghetto, and implies that the content on the FT’s blogs is somehow less valuable than the rest of the FT’s content. Alternatively, and more worryingly for the FT’s model, it implies that genuinely web-native content, with links and comments and interaction and everything else we’ve come to love over the past decade or so, is almost impossible to pull off behind a paywall, and that if and when all FT journalism starts embracing such methods, the newspaper’s model is going to run into serious difficulty.

My view is that both are true — at least so long as the FT refuses to follow the NYT and allow free access to people following links from social media or other websites. As long as millions of people hit the FT’s paywall every month, it’s basically turning away the very readers it should be attracting — including, incidentally, a lot of subscribers who get perennially annoyed when they too hit the paywall. The world of online information is becoming fragmented by social media, and people simply don’t read the FT the way that the FT wants them to read the FT: by navigating to the home page and then reading through stories which interest them. They want to talk about stories with their peer groups, and there are very, very few people out there who can comfortably assume that most of their peer group has an FT subscription.

So there’s a big long-term external problem with the way the FT’s paywall is set up — and it helps to create an internal problem, too. So long as the news side rather than the blog side is the part of the business which is bringing in subscription revenue, the FT will overvalue the news side and undervalue the blog side — no matter how important or valuable the journalism produced by the blog side. The result is bloggers who feel underappreciated, and who get the clear message that they should move over to the less web-native news side if they want to climb the FT career ladder.

All that said, it’s still good news that the FT has finally decided to retreat from its decision to paywall its blogs — a decision which was always born more out of ideology than of practicality. I just wonder what’s going to happen if and when the rest of its news hole becomes bloggier, as is happening at all major news organizations.

What to make of Rolling Jubilee, the latest bright idea from Occupy? The idea is simple:

Banks sell debt for pennies on the dollar on a shadowy speculative market of debt buyers who then turn around and try to collect the full amount from debtors. The Rolling Jubilee intervenes by buying debt, keeping it out of the hands of collectors, and then abolishing it.

Rolling Jubilee has already raised $115,000 — which they say is enough money to buy and cancel more than $2.3 million of debt. After Thursday’s variety show and telethon, both sums will surely rise substantially.

The reaction from the financial press has been mixed. Tim Worstall somehow contrives to admire the idea while bashing everything else associated with Occupy at the same time; Nick Summers, on the other hand, thinks it’s fundamentally misguided.

A person’s debt can’t truly disappear with no consequences. The amount forgiven is technically income—“cancellation of debt income,” in Internal Revenue Service terms. It’s a dollar-for-dollar conversion, says Robert Willens, a tax expert based in New York. For example, a person with regular income of $50,000 who has $25,000 in credit-card debt discharged will be taxed on April 15 as if she earns $75,000.

“There’s not any doubt about the tax outcome at all,” says Willens. “That’s almost always the case with debt discharges—you wind up with this tax problem that almost always mitigates the benefit of the discharge.”

Summers didn’t speak to anybody at Strike Debt, which is organizing this jubilee, but he could at least have scrolled down to the Rolling Jubilee FAQ:

Will the Rolling Jubilee have to file a 1099-C Cancellation of Debt form with the IRS?

No. The Rolling Jubilee will earn no income from the lending of money and is therefore exempt from filing a Form 1099-C under the Internal Revenue Code Section 6050P.

In other words, there will not be any tax consequences to what Strike Debt is doing, on the perfectly legal grounds, as Worstall has found in the tax code, that “you do not have income from canceled debt if the cancellation or forgiveness of the debt is a gift”.

To put it another way, the debtors will no more have to pay income tax on the forgiven debt than they would have to pay income tax if I gave them a gift of that money. What’s more, Strike Debt won’t report the cancellation to the IRS, and the debtor will probably not know that their debt has been forgiven. Given all that, the chances of the IRS coming after the debtor for income tax on the forgiven debt are exactly zero.

Still, that raises Matt Yglesias‘s question. Let’s say there’s a family with $20,000 of debt which is so old and unrecoverable that it’s selling for a mere 5 cents on the dollar. What would make that family better off: forgiving that debt, or giving them a gift of $1,000 in cash?

The answer is that the question misses the point, rather. The point of Rolling Jubilee is that it’s doing secret random debt forgiveness, not because that’s the most effective way to help out struggling indebted Americans, but because it’s about time that ordinary Americans started getting help with their liabilities rather than just too-big-to-fail financial institutions. Strike Debt is trying to build what it calls “a growing collective resistance to the debt system” — and this exercise is part of what you might consider a broad politically-motivated deleveraging, a way of taking power back from the creditor classes (a/k/a the banks).

The scheme isn’t conceptually perfect: as Strike Debt themselves say, the very fact that they can buy up debt for pennies on the dollar in the first place is “part of the scandal that we are trying to highlight”, and yet it’s also something they are ratifying with their participation. And anybody who’s read Jeff Horwitz’s wonderful series on the debts which were sold by Chase will know that much of the time the “debts” which are being bought aren’t actually legitimate debts at all. For instance, it’s alleged that Chase systematically shredded incoming correspondence such as records of borrower payments and counter-judgments extinguishing debts, before selling those debts on to collectors. Horwitz reckons that at Chase alone, billions of dollars of outstanding claims have highly questionable legitimacy.

As a result, Strike Debt will probably, at some point, end up paying banks for debts which aren’t legitimate at all: indeed, if they’re looking for the debt which trades at the lowest levels on the pennies-per-dollar market, they’re likely to be buying the most dubious debts, on an “as is” basis.

So the symbolism here is in some ways more important than the actual results, which pretty much by definition are unknown and unknowable. Still, that’s one of the reasons I like this scheme. In a world where philanthropy is increasingly run by business professionals who want to measure results and return on investment, this is a refreshing throwback from a time where you would just do some good in the world and that was that. US households have too much debt; this reduces their debt burden; therefore it’s a good thing — especially seeing as how it also acts as a focal point and rallying cry for a much broader agenda.

That agenda is not represented in Washington: neither Democrats nor Republicans have any desire to touch Occupy with a 20-foot pole. But it’s an agenda which has real popular support all the same, from people who are fed up with seeing bankers get rich even as real median incomes stagnate for decades.

And that’s why I think the idea behind the Rolling Jubilee is so delicious. It’s a group of ordinary people who are perfectly happy to help banks lose 95 cents on the dollar by paying them the other 5 cents, and then forgiving the loan entirely. Of course, the banks know that some percentage of their loans will go bad, and, especially in the case of credit card debt, they will often have made a net profit on the account long before they sell off the dregs for 5 cents on the dollar. But even if the banks aren’t being hurt at all, it still feels great to have the opportunity to be an anti-bank for once. There’s something very good about forgiveness.

It’s amazing how much coverage a thinly-sourced press release can elicit:

If you look at the PDF with the numbers in it, there’s no indication at all of where the numbers being cited come from, or what exactly they’re measuring. The idea, here, is that we’re trying to measure “jobs in the wholesale financial service sector”, which will include some but not most lawyers and accountants, if that helps.

In any case, Ben Walsh helpfully turned the press release into a chart:

This of course says basically nothing about which city if any is the financial capital of the world. If there were more wholesale finance jobs in Tampa than there are in London, that wouldn’t make Tampa an international financial capital.

What’s more, we can basically ignore the forecasts and extrapolations — everything in light grey. You think Hong Kong is going to add 70,000 new wholesale finance jobs in the next five years? Well, it might, I suppose, depending on a multitude of factors including what happens to money and banking regulations in mainland China.

The one thing that’s clear from this chart is that the 2008 financial crisis hit the US hardest, in terms of financial job cuts, while the European crisis which began a couple of years later was the point at which European jobs started getting shed. To be honest I’m a little surprised at how few jobs were lost in London during the 2008-9 crisis, but that might be a function of the way in which the Europeans tended to support their banks rather than encouraging them to consolidate, merge, and generally shrink.

In any case, London will be the capital of international finance for many, many years to come, regardless of how many jobs are shown on this chart. This is not necessarily a good thing. The press release features dark language on the subject of “onerous regulation and taxation in the UK”, as though we still live in a world where jurisdictions are well advised to compete on how laissez-faire their economic and regulatory policies are. (We know, now, how that works out.) If London remains a financial center — and it will — then that just means it will be much riskier than is appropriate for the capital city of a decent-sized European nation, and that Londoners will continue to suffer from having to live in an obscenely expensive city.

In a way, I wish that the scaremongering in this report were true: it’s about time that London’s center of gravity moved away from the ultra-rich. In order to do that, however, the city (and the City) would have to be much less of a magnet for international capital. And I don’t see that happening. Such magnets are cultural, and based in longstanding institutions; once the plutocrats have decided to put their roots down in London, it’s going to take a lot before they leave.

And really it’s the plutocrats which matter, along with a handful of large money-center banks. London could be an international financial capital even if it had only 50,000 people working in wholesale finance, rather than 250,000. When you’re dealing with trillions of dollars of capital flows, it’s never headcount which matters. Follow the actual money, not the paychecks.

Paul Volcker famously says that the ATM was the only financial innovation he can think of that has improved society. Well, I can think of another one: the target-date fund. Virtually every honest personal-finance expert will agree that the best investment strategy, if you’re saving for retirement, is to buy up some index funds, hold on to them, and maybe rebalance occasionally. But doing that is non-trivial, which is where the target-date funds come in: they do it all for you, and if you choose a good vendor, like Vanguard, they do so at an astonishingly low cost.

So far so good — but the fact is that ATMs have improved steadily over time, and there’s no particular reason why automatically-rebalancing retirement investing shouldn’t improve over time as well. Because for all that target-date funds are wonderful things, there are a couple of weaknesses with them.

Firstly, despite the fact that target-date funds are designed to be increasingly risk-averse as the investor approaches retirement, they can still lose a lot money near that target retirement date. During the financial crisis, for instance, the Vanguard 2010 fund fell 26% in 12 months, and other funds fell much more. That’s partly because no one is agreed on how much stock-market exposure investors should have when they retire: in a world where retirement can last for decades, it’s surely substantial — but that also means a significant risk of large losses.

Secondly, target-date funds generally have only two components: stocks and bonds. In terms of maximizing risk-adjusted returns, that’s problematic: the more factors you get to choose from, the more likely you are to be able to reduce your risk without reducing your returns. And more to the point, we simply don’t live in a world any more where stocks are the risky things and bonds are the not-risky things. With interest rates where they are, and sovereign finances where they are, there’s a strong case to be made that at some point between now and your retirement, bonds are going to prove significantly more risky than stocks.

Recently I talked to a couple of people who reckon that they’ve managed to improve on what until now has been the gold standard — the Vanguard target-date fund. The first was Vineer Bhansali, who runs Pimco’s target-date funds, which it calls RealRetirement. The idea behind these funds is that they diversify according to risk, rather than according to asset class: they take a bunch of different asset classes, disaggregate the various risks, and then work from there. For instance, if you want exposure to commodities or real estate, and buy stock in mining or housing companies, then you’re getting equity exposure at the same time.

At the same time, the funds actively try to minimize what they call drawdown: the maximum amount that a fund is likely to fall, from peak to trough. Here’s a slightly scary chart from one of Bhansali’s papers:

The equity beta of the stock market is 1, so these lines all represent fractions of what you would see if you had all your money invested in the stock market. Take the olive-green line representing an equity beta of 0.6: that represents a portfolio with three-fifths the volatility of the stock market as a whole. If you follow a standard 60/40 strategy of 60% stocks and 40% bonds, you’re probably not far from there.

What the green line shows is that if you hold that kind of portfolio for 30 years, you can expect your maximum drawdown to be north of 40%. That is, at some point over the course of your investing years, your portfolio will fall by 40% from its highs.

Now we all just went through the financial crisis: we remember exactly what it feels like to lose 40% of your money. It’s not nice. And so Pimco spends some serious money — somewhere between 15bp and 50bp per year — on tail-risk hedging. As a result, says Bhansali, when stocks fall by 50%, his funds will only fall by 20% or 25%. Which is a key level, because research shows that when people lose more than 30% of their money, they tend to panic and sell. The Pimco funds are designed with the idea that you should never lose more money than you can afford to lose, even on a mark-to-market basis, and that your fund will never fall so much that you will end up doing that very human thing, selling at the bottom of the market. Pimco can’t force you not to sell, of course, but the tail-risk hedging will do its bit to help you stay the course during the crisis or two that will inevitably come along at some point.

The way that Pimco does that changes over time — just as the composition of the funds does. When short-term TIPS had a 1% real yield, they were a fantastic place to put risk-averse money: it was guaranteed to grow at more than the inflation rate over time. Now that the real yield on short-term TIPS is guaranteed to underperform inflation by more than 1%, however, they’re much less attractive, and the asset allocation has moved elsewhere.

I do like a lot of what Pimco is doing here. For one thing, it’s concentrating on risk rather than asset classes, which makes a lot of sense to me: as bonds become riskier, it’s silly to stick to an investment strategy which assumes they’re largely risk-free. And it also has a large dollop of behavioral economics: it knows where investors’ pain points are, and endeavors not to hit them. The point is to concentrate on investor returns rather than investment returns: there’s no point in embarking on a strategy which will give you a great payoff in 30 years’ time if you panic when a crisis hits at Year 20, and sell the whole thing at a multi-decade low.

The Pimco funds might not give you the very best returns, then: by cutting off the lower tail, they necessarily give up a certain amount of performance. But there’s more to investment than maximizing returns, and in fact the Pimco funds are looking pretty good right now, since they generally outperformed during the crisis.

The other company doing interesting things with passive investment strategies is Wealthfront, which today announced that Burton Malkiel (yes, that Burton Malkiel, and yes, he’s still going strong at 80) has joined as Chief Investment Officer.

Wealthfront doesn’t offer investible funds: instead it’s an investment manager, which puts your money into a mixture of six different asset classes, allocated according to all manner of wonky Modern Portfolio Theory algorithms. (They love nothing more, for instance, than to talk about the finer points of the Black-Litterman model, which they fully sign on to.) Their threshhold-based rebalancing is about as sophisticated as rebalancing gets, and the way they allocate your money is smart too: they know that people nearly always overestimate their own risk tolerance, and they adjust for that when investing.

Wealthfront is great for small portfolios, because it doesn’t charge any fees at all on your first $25,000; it’s great for larger ones, too, since it provides free tax-loss harvesting once your portfolio goes over $100,000. This is a sophisticated strategy which really can help your after-tax returns: the idea is that if your stocks, say, go down while the other bits of your portfolio go up, you can sell your stocks to claim a loss which offsets the gains you have elsewhere. What that means is that you sell the S&P 500 ETF you’re invested in, which you don’t really mind doing at all: because all index funds are much of a muchness, you just buy a different S&P 500 ETF instead.*

Wealthfront claims that by using six asset classes rather than two, it can boost returns by 45bp per year on average, and that by layering on tax-loss harvesting as well, you can add another 100bp to that. Both of which make Wealthfront’s maximum fee of 25bp look decidedly modest; it’s certainly lower than anything offered by traditional investment managers.

The Wealthfront service is mainly being targeted at young, male Silicon Valley geeks in the first instance.* These are people who, it turns out, tend not to be saving for retirement: their needs are more short-term, and they’re more interested in when they’ll be able to buy a house, or whether they have enough money to quit their job and take a year or two off. With those kind of risk profiles it’s very hard to pick a traditional target-date fund: after all, target-date funds are designed explicitly for retirement funds rather than for invested funds you might need long before retirement. And in general, an investment manager like Wealthfront is always going to be more personalized than a faceless fund from Pimco or Vanguard.

That said, Wealthfront is emphatically not an old-fashioned investment manager who will sit down with you and talk to you and build up a human friendship over time. There’s a good reason that when traditional brokers move from one company to another they tend to take their accounts with them: it’s that the investor’s relationship is with the individual broker, rather than with the broker’s employer. At Wealthfront, that’s not the case: they don’t have highly-paid brokers, and the relationship, insofar as it exists, is basically with a website. You can see why they’re starting in Silicon Valley.

Both Pimco and Wealthfront, then, are offering intriguing products which in some ways improve on the stripped-down simplicity of the Vanguard ETF. Complexity is never a good thing in and of itself, and both of them are using financial technologies which the end investor will almost certainly not understand. I don’t have a lot of faith in those technologies: when Wealthfront CEO Andy Rachleff launched into his spiel by telling me how deeply his firm’s philosophy was rooted in Modern Portfolio Theory, I didn’t exactly light up with enthusiasm.

But the fact is that individual investors are not very good at managing their risks, and that both Pimco and Wealthfront are likely to be better at it than they are. There’s nothing at all wrong with a Vanguard target-date fund: it’s a wonderful product. But no financial product is right for everybody. And I’m very glad that now we’re seeing the arrival of other financial services which can credibly claim to be just as good if not better.

Update: I had the tax-loss harvesting strategy a little bit wrong: you don’t swap from one ETF into another based on exactly the same index, since the IRS doesn’t consider that to really be selling your position. You just move into a similar-but-not-too-similar index for a month or so. As for the young males, I’m told that some 20% of Wealthfront’s customers are now female. Which is still low, but the number’s rising.

If you thought the official New York marathon statement about being cancelled was tone-deaf, just wait until you hear this — on video, no less:

Gail McGovern, chief executive officer and president of the Red Cross, told NBC News’ Lisa Myers late last week that the response has been timely and well-organized: “I think that we are near flawless so far in this operation.”

This is chutzpah of the highest order: at least in the first dreadful days after Hurricane Sandy hit, the best adjective to describe the Red Cross was “invisible”, rather than “flawless”. One of the best ways to judge charities is by the way in which they learn from their mistakes and constantly improve; by that standard, the Red Cross is positively ostrich-like in the way that it refuses to admit that there was even a problem at all, let alone that it might have reacted better.

It’s incredibly sad, because the Red Cross is the default charity that everybody gives to whenever there’s a tragedy. Even I did so, not that I’m any great fan of the organization: I bought the Sandy benefit print from 20×200, and the proceeds from that are going to the Red Cross. But at least in the early days, and even now, it’s hard to find a Sandy-relief drive which isn’t giving its money to the Red Cross: whether you’re donating money at Chase ATMs, or donating your Starwood points, or whether you’re giving in response to a telethon, the Red Cross always ends up being the beneficiary. And in the case of Sandy, the amount raised is truly enormous: $117 million and counting.

The Red Cross loves to talk about its massive efforts, with what it claims is a group of 5,700 volunteers — but frankly I don’t trust the Red Cross’s numbers, given the many reports where the Red Cross higher-ups have sworn that they’re in a certain location and helping, even as no one who’s actually there has seen any evidence of them.

And in any case, the Red Cross doesn’t seem particularly capable of actually putting those 5,700 volunteers to good use. The real heroes of Sandy have been the much smaller-scale organizations, often built on an ad hoc basis. Occupy Sandy is the main one, and it’s been doing an amazing job, as Glynnis MacNicol recounts in a fantastic dispatch for Capital New York:

Almost without fail, what is being done in the neighborhoods I visited is being done by local community organizers or organizations like the increasingly impressive Occupy Sandy group…

At the end of nearly two weeks, the majority of which was spent traveling to the most devastated areas of Brooklyn and Queens, I could not tell you, nor could very many people I met, what government agencies a person could expect to arrive to help them in this disaster because I saw so few on the ground who might know.

This kind of story has been told many times, but bears repeating:

It was difficult not to conclude based on our surroundings that the neighborhood had not been served at all. Within five minutes of us setting up our goods in the empty lot, and without any real outreach needed, crowds began to appear—batteries, flashlights, disinfectants, diapers and blankets were getting snatched up quickly. It’s at this point the need began to feel overwhelming, and the frightening suspicion that help, official help in the form of city officials or large established disaster-relief organizations, was not going to arrive, started to sneak up on us…

While I was unpacking a garbage bag full of blankets one woman arrived with her daughter, who appeared to have Down syndrome, and asked if she could take two blankets instead of one. The feeling that I, or any of the volunteers, were somehow believed to be in charge of dictating what rations these families struggling in the cold could get struck me suddenly, and was obscene. I told her to take what she wanted. We left before the sun went down.

The next day Ben told me he returned to the same location to find a army of volunteers had arrived and an impressive organization had been set up. We had simply been the first ones out there—six days after the storm.

The Red Cross isn’t technically a government agency, of course, but it does work very closely with the government, and is treated as a quasi-governmental agency by those in need, and it certainly has many orders of magnitude greater resources than anybody associated with Occupy Sandy.

But here’s the problem: Occupy Sandy doesn’t scale. MacNicol admits as much in her piece: if we’d all given money to Occupy Sandy instead of to the Red Cross, they wouldn’t have been able to do more good than they did. The now-famous Occupy Sandy wedding registry is a fantastic idea, and has worked very well, but in general items are being bought just as fast as they’re being added. (Maybe buy some of the stuff on Congregation Beth Elohim’s list instead; they too have been doing a fantastic job.)

MacNicol’s story is one of a single man, Ben Heemskerk, with significant non-profit experience, organizing a relatively small group of his friends. Everybody knew who was in charge, and Heemskerk knew what his limitations were: he actually turned away volunteers he didn’t know.

Similarly, read Matthew Power‘s excellent article on what Doctors Without Borders (MSF) managed to do after Sandy, and you’ll see a similar dynamic: a lean and experienced group of people who know exactly what they are doing, going out and trying to make as much of a difference as they can, where they’re needed most. The trick is to move fast, to abjure any kind of bureaucracy, and to deliver help where it’s needed most.

The Red Cross can’t do that: it’s simply too big. This passage, from MacNicol’s piece, is key:

On Tuesday, one week after Sandy, some of our group went out in cars, and I and a friend were split onto a larger bus that was carrying a number of different groups. It was the first time I came into contact with volunteers not picked and vetted by Ben. The result was somewhat more chaotic; there was no clear leader and everyone had a different idea where our priorities should lie. To say that organization is the key to any useful relief effort is to say that the sun is key to daytime.

Things started falling apart, in MacNicol’s experience, just when the number of volunteers exceeded the number of friends-of-Ben. Imagine what would happen when the number of volunteers starts growing into the quadruple digits. They actually behave in a predictable manner: the overwhelming majority of them have a tendency to stand around waiting to be told what to do, while a few others bicker about what ought to be done.

This is inevitable when the number of volunteers grows much into double digits, and it’s exacerbated when the volunteers are inexperienced. Here’s Power, tagging along with an MSF doctor:

Suter had recently returned from a nine-month MSF mission in the Congo, where she had worked with a local hospital and helped organize small health clinics spread out around the countryside. “This really isn’t all that different,” she said, headlamp on, scanning a printed spreadsheet filled with the names and addresses of a dozen patients.

Now that’s the kind of volunteer you want manning an impromptu health clinic in the Rockaways. Disaster relief is something which can be learned with experience, and MSF volunteers have disaster-relief experience in spades. Red Cross volunteers, on the other hand, don’t.

And yet, one of the first things that the Red Cross did after Sandy hit was to say that it was “stretched thin” and put out a call for more volunteers. It’s very hard to tell whether all those extra volunteers actually improved outcomes: after all, each one needs to be supported by the larger Red Cross organization, and all of that support is effort which would ideally be expended on the needy. It’s a bit like adding extra stories to extremely tall skyscrapers: the added support those floors need, in terms of columns and elevator banks and the like, means that they don’t actually end up increasing total square footage at all.

The real problem with the Red Cross was not that it was stretched thin, but rather that it was simply too big, and its people too inexperienced in disaster recovery, to be able to respond nimbly to Sandy. Eventually, after a week or two, it will lumber in to affected areas and take over from the ad-hoc groups who provided desperately-needed aid in the early days. It’s reasonably good at that. But that’s clearly not good enough, and it’s certainly nowhere near flawless.

Of course, the Red Cross is burdened with massive expectations. If you’re stuck in a remote part of Staten Island without power or communication for days on end, no one’s going to blame Doctors Without Borders or Occupy Wall Street if you get no help — but they are going to blame the Red Cross.

With $117 million in donations comes an expectation that the Red Cross can and should be everywhere it’s needed, when it’s needed, rather than in a handful of places, a week later, offering food but no shelter or blankets or power or lights. But probably those expectations are unrealistic. The US is fortunate in that it’s not a permanent disaster zone: it’s not a country where Red Cross volunteers are ever going to be experienced in responding to such things. And mobilizing thousands of volunteers and tens of millions of dollars to provide food and shelter in areas without electricity or pharmacies or heat — that’s a logistical nightmare.

The Red Cross, in the event, proved incapable of rising to the occasion. Other large organizations did amazing work: ConEd brought power back, and the MTA brought public transportation back, in much less time than virtually anybody had dared to hope. But those organizations had experienced and dedicated workers who knew exactly what to do and how to do it, rather than a rag-tag band of well-intentioned volunteers worrying about what they were authorized to spend, and a fleet of trucks located in unhelpful places up and down the Eastern seaboard.

In the end, the Red Cross will probably spend much if not most of that $117 million — but not in the immediate aftermath of the storm, when the need was greatest. And more to the point, inputs aren’t outputs. If the money gets wasted in logistical infrastructure, it helps no one.

The truth of the matter is that if you donated money pretty much anywhere, after Sandy hit, that money probably didn’t do a lot of immediate good: at that point, it was too late for money to be turned into first- or second-day response. Ask any of the people who were working on the front lines, whether they’re from Occupy Sandy or MSF or even the Red Cross: money was never the bottleneck, and there was never a point at which anybody felt that if they only had more money, they could do more good. People didn’t need money, they needed gas.

Which isn’t to say that donating money is a bad idea, when disasters hit. But it is to say that donating money to the Red Cross might not be the best use of your dollars. My advice is to give instead to MSF, or an organization like it, which is dealing with disasters every day of the year. That gave them the experience ability to respond quickly when disaster struck in the USA — and it also means that if your money would be put to more urgent use somewhere else, like Zimbabwe or Honduras or Chad, then that’s where it will go.

We should spend as much money as is needed here — but don’t force the matter and earmark $117 million for Sandy relief, when no one knows whether even the Red Cross thinks it can sensibly spend that much. The Red Cross didn’t need to promise to spend all that money on Sandy and Sandy alone, but it made that promise anyway: “the Red Cross promises,” said NBC’s Lisa Myers very explicitly in her piece, “that 91 cents of every dollar donated will be used to help victims of this storm”. That was the last straw, for me: not only was the organization MIA for nearly all of the first week, but it’s now promising to spend huge amounts of money in New York and New Jersey regardless of where that money could be put to best use.

The trick to being a disaster relief organization is that you need the money and the resources before disaster hits, so that you’re prepared when it happens. The Red Cross should have used its balance sheet to go to work as soon as Sandy arrived, should then spend whatever is necessary for as long as it is necessary, and then should use whatever’s left over from its latest $117 million windfall to be better prepared for the next disaster.

Instead, the Red Cross is promising to spend that whole $117 million down to nothing, leaving it just where it started this time around. Which was clearly inadequate.

And that’s why there are surely better places for you to send your money.

Last year, when Groupon went public, I entered into a “small wager” with Rocky Agrawal. We would check back on Groupon’s market valuation in one year’s time, and compare it to the valuation of Priceline. At the IPO, Groupon’s market capitalization was 72% that of Priceline; if that number fell below 30%, I would lose. Otherwise, I would win.

Well, here’s what happened to that ratio:

This actually understates how badly I lost the bet. Shortly after the bet expired, two things happened: Priceline announced that it was buying Kayak, and Groupon plunged on disappointing third-quarter earnings. Today, Groupon closed at $2.76 per share, giving it a market capitalization of $1.8 billion. Priceline, by contrast, closed at $625.87; if you add its capitalization to that of Kayak, you get a total of $32.74 billion. Which means that the Groupon:Priceline ratio is basically down to about 5.5%.

Obviously, something went horribly wrong at Groupon after the IPO. So, what was it? Did Groupon suffer a massive loss in revenues? Did it start racking up enormous losses? Well, here’s the chart.

The blue bars, here, are Groupon’s quarterly revenues, from the second quarter of 2010 onwards. The red bars are its net income. And the jagged line, of course, its its plunging share price.

The main thing to note is that Groupon’s results don’t seem particularly gruesome; they’re certainly better now than they were when the company went public. The share price didn’t fall because revenues were falling: it fell because revenues — and profits — weren’t rising fast enough.

This is why I’m generally so mistrustful of stocks: they just don’t behave in a remotely predictable manner. It’s impossible to know what kind of future growth rate is priced in to a stock, and it’s even more impossible to have a good grasp of what a company’s future growth will be. If you’re valuing fast-growing companies on some kind of discounted cash-flow model, then tiny tweaks to your growth assumptions or your discount rates can have an enormous effect on the share price which pops out the other end.

I knew this, of course, when I entered into my bet with Rocky. So what was I thinking? Three things.

Firstly, volatility cuts both ways. Groupon could fall precipitously — but it could rise very fast as well, in which case I’d be well in the money.

Secondly, I was already well in the money: Groupon stock could fall in half and I’d still win the bet. I don’t believe in the efficient market hypothesis, but I do believe that the markets are more efficient than any individual. Given the cushion that Rocky was offering me, I’ll take the side of the market against anybody.

Finally, the kind of things which hurt one bubbly tech stock tend to hurt them all. When we entered into the bet, Priceline had risen from just over $50 per share in the fall of 2008 to more than $500 per share in the fall of 2011. Rocky’s bet wasn’t just that the Groupon bubble would bust: it was that the Groupon bubble would burst and the Priceline bubble wouldn’t. Which, of course, turns out to have been exactly what happened: it wasn’t long before Priceline was trading at more than $750.

So, next time we’re in the same city, I’m buying Rocky dinner. At least I’m still winning the other bet, for the same stakes.

My favorite part of the Gagosian deposition starts on page 283.

A bit of background: Charles Cowles asked Larry Gagosian to sell a painting for him, Lichtenstein’s Girl in Mirror. They had an agreement that Cowles would receive $2.5 million of the proceeds, but then Gagosian discovered that the painting was damaged, and also the global financial crisis happened, and it became pretty obvious that the work wasn’t going to sell for anything like that much money any time soon. At the same time, Gagosian was in negotiations to buy another painting from Cowles, for $2 million. Cowles was hesitant to accept — but then Gagosian offered $3 million for the pair, and Cowles said yes.

What Gagosian knew but Cowles didn’t, at this point, was that another collector, Tom Dean, had offered $2 million for the Lichtenstein. What Cowles knew but Gagosian and Dean didn’t was that Cowles didn’t actually own either of the works: one belonged to his mother, and the other had been pledged to the Metropolitan Museum.

To the transcript:

Q. Once you received an offer from Tom Dean for $2 million, wasn’t it in your interest to offer Charles Cowles as little as possible for the painting so that you could maximize your profit?

A. I didn’t have confidence that Tom Dean’s deal would necessarily close, but it gave me what I felt a little more confidence to make an offer.

Q. You can answer my question now.

A. That’s my answer.

Q. Sir, it was in your interest in your dealings with Charles Cowles in July or August of 2009 regarding the ultimate purchase by you of the Lichtenstein?

A. Right.

Q. To pay Charles as little as possible, correct? Sir, it’s a yes-or-no answer.

A. I just don’t know how to answer that question, honestly.

Q. Okay.

A. I really just wanted to get him an offer that he would accept for both pictures because we were stuck with the Tansey, and I felt that this extra million would appeal to him because it was a larger sum, and it did. He certainly had the prerogative to reject it. He never asked me what anybody was paying. He never asked who the buyer was, what they were potentially going to pay. He just seemed to want to get an offer.

Q. Because he never asked, you felt absolutely no duty to tell him, correct?

A. I didn’t feel a duty to tell him, because there are many transactions where a seller will just accept a certain amount of money and they don’t care what you sell it for.

The Q here is David Baum, of SNR Denton, representing Jan Cowles, the true owner of the Lichtenstein. The A, of course, is Larry Gagosian. And boiled down, Baum is asking Gagosian whether his profit motive, in buying the painting, was to pay as little as possible. Gagosian’s answer is one for the ages: “I just don’t know how to answer that question, honestly.”

Gagosian actually doesn’t come off too badly in the transcript as a whole, but this is where he’s at his slipperiest. Baum says that it’s “blatantly unlawful under New York agency law” for the same person — in this case, Gagosian — to represent both the buyer and the seller in a transaction. I don’t know anything about New York agency law, but that seems bonkers to me. After all, Cowles asked Gagosian to sell the piece in the first place precisely because Gagosian represents a deep pool of sellers.

Gagosian is a broker-dealer, no less than Goldman Sachs is. (Well, maybe his balance sheet is a little bit smaller.) He matches buyers and sellers, and he has to deal with a large amount of counterparty risk. (One of the reasons why he says the Lichtenstein deal was fair is that he says he was worried about whether Dean would actually come through with the $2 million.) And of course he has to worry about lawsuits, too: there’s a revealing point in the deposition, on page 194, where Gagosian talks about the time “when this matter became a litigation”. I see him thinking of his business in various ways: there’s the gallery shows, there’s the fairs, there’s the secondary-market deals, and then there’s the litigations. They’re all just part of what it means to be a dealer, these days: sometimes a deal becomes a litigation, and that’s just an occupational hazard when you’re dealing with egos this big.

But at the same time, Gagosian really only ever has one business, and that’s keeping clients happy. As a result, you’ll never get him to admit that he views clients as counterparties, or is trying to maximize his take at the expense of theirs. After all, the real money, in this business, comes from relationships more than it does from deals: a healthy long-term income stream is always better than a one-off windfall. That’s the “long-term greedy” philosophy which defined Goldman, and it’s certainly the way to succeed in the art world.

Which is why it’s worth seeing how the transcript continues.

A. I didn’t feel a duty to tell him, because there are many transactions where a seller will just accept a certain amount of money and they don’t care what you sell it for.

Q. In this case, Charles had told you that the minimum he wanted was $2.5 million?

A. Right.

Q. Now, you were offering him $1 million, correct?

A. I was offering him $3 million for two paintings.

Q. $2 million for the Tansey?

A. Right.

Q. And $1 million for the Lichtenstein?

A. Right.

Q. And do you think Charles made a bad deal?

A. In Charles Cowles’ case, it’s hard to say because he didn’t seem to even own the paintings.

Q. Let’s assume he did own the paintings.

A. Maybe his indifference to the number reflected the fact that his mother owned the Lichtenstein, I guess, I don’t know. The guy was a train wreck, let’s face it.

Q. Did you know he was a train wreck at the time?

A. In retrospect, looking at the circumstances, yes, I see that he was a train wreck.

There’s no point in being long-term greedy if you’re dealing with a train wreck. The transcript continues with Baum asking Gagosian why he didn’t offer Cowles a $500,000 commission on the sale to Dean, rather than buying the painting for $1 million and selling it to Dean for $2 million. And once again, Gagosian says “I don’t really know how to answer that”. So let me guess what the answer is. The answer is that if Cowles were a valued client of the Gagosian gallery, one who could be expected to provide a lot of custom in years to come, then Larry probably would have given him the choice — would have asked whether he wanted to share in the counterparty risk, or whether he just wanted $1 million up front.

But Larry understood — since reading people is his business — that Cowles was a train wreck, and that he wasn’t building a relationship here, he was just trying to get Cowles to agree to a deal.

As we all know, Goldman Sachs isn’t nearly as long-term greedy as it used to be. Its business is mainly trading, rather than investment banking and advisory work; its counterparties go to wherever they can get the best price, rather than being at all loyal to one firm. As a result, transactions are characterized by greed on both sides, and Goldman’s highly-remunerated traders try at all times to maximize the profit they’re making. They would look at what Gagosian did in this situation and consider it the obvious thing to do: you make full use of your balance sheet, you maximize your profit, and you move on to the next trade.

Gagosian, on the other hand, wouldn’t necessarily agree with them. He’s a shark, but he’s a shark with a smile, and he doesn’t want his clients to be afraid that he’s ripping them off. I suspect that he’s going to win this case: I can’t see that he did anything illegal. But the money at stake here is tiny compared to the value of his reputation as an honest broker. And you can see why some collectors feel the need to hire high-priced art consultants whenever they deal with Gagosian — or any other art dealer, for that matter. The dealer always has the upper hand, and it behooves any client to take full advantage of any negotiation help they can get.

Now that the election is over, there’s a bit of time to revisit that very important CPDO decision I wrote about on Monday. There’s a lot of material to be mined here, and the Internet is slowly delving its way into it: I particularly love, for instance, the way that Daniel Davies started tweeting out noteworthy paragraphs.

But first there’s Paul Davies, who does a great job of explaining the revolving-door aspect to the case. You know how banks will hire regulators, at multiples of their former salary, and turn the former gamekeepers into poachers? Well, exactly the same thing happens to S&P: it pays better than the US government, but not nearly as well as the structured-credit department at ABN Amro. And thus a whole slew of S&P alumni ended up at the Dutch bank, putting together deals precisely designed to be the absolutely worst possible product in the world which could still, somehow, get a triple-A rating. In order to do that, you need people who know how the ratings sausage is made — and the easiest way to do that is to simply hire them.

S&P was well aware of what ABN Amro was doing, of course, but they had no incentive to frown on its behavior. For one thing it was good news for staffers that there was a healthy bid out there for their services; for another, ABN Amro paid S&P itself huge amounts of money to rate these deals. Everybody won — except the credulous investors who thought that ratings were honest, arm’s-length things.

Matt Levine points out that conceptually, the CPDO is “the perfect ratings arbitrage”, because the rating just tries to calculate the probability of default, without regard to the recovery value given default. As a result, the CPDO was specifically designed to have a recovery given default of very near zero, since that would increase the yield on the instrument without increasing the default rate. (This is exactly the same reason why it was S&P, rather than Moody’s, which downgraded the US from triple-A last year.)

Louise Bowman, meanwhile, finds this email exchange, between a couple of S&P quants:

Mr Venus: I am done with the whole CPDO – wish I was never involved in that whole mess that was made.

Mr Ding: What a wuss.

Mr Venus: That thing is done by 3 people: Cian, Sriram and you. I am not responsible, I just helped build an internal model. You are the wuss for bending over in front of bankers and taking it.

Mr Ding: primarily me and the banker…so what? I would not mind if they put my name on that article, grow up kid.

Mr Venus: You rate something AAA, when it is really A-? You proud of that little mistake? It’s nothing to do with growing up, it’s about doing your job to a high standard. If you want to talk about growing up, you should admit to Perry [Inglis] that you made a mistake with your analysis.

But the smartest lines, still, come from the judge, Jayne Jagot. For instance, she spends a lot of time demolishing the S&P argument that the investors didn’t understand what they were buying, and therefore that it was the investors’ fault, not S&P’s fault, that the investors lost money. Jagot demonstrates clearly that the investors knew full well that they didn’t understand the CPDOs, and that it wasn’t necessarily stupid of them to invest anyway:

The notion that it was necessarily imprudent of the councils to invest in a product they did not understand, on analysis, is specious. It is a superficially attractive catchphrase which does not withstand scrutiny. An investor who obtains expert advice and relies on an expert rating is not imprudent merely because the investor does not understand the investment. So in this case the councils’ lack of understanding and their knowledge of their own lack of capacity to understand was the reason for relying on the expert advice and recommendations of LGFS and the expert opinion of S&P embodied in the rating.

The fact is that in the fixed-income world, investors almost never understand what they are buying. A bond is a set of predictable cashflows, with a sting in the tail: it has some unknowable probability of default. Different analysts can try to calculate that probability by different means, but in reality bond investors simply don’t have the time or the expertise to do that for every bond they buy. That’s where ratings come in handy: they’re a way for bond investors to outsource a lot of the hard work they don’t have the time or the human capital to do themselves. And the ratings agencies know it: as Jagot says, “S&P is paid to assign a rating for a structured financial product for one purpose only.”

And then there’s the bigger picture: the fact that Jagot was able to deliver this magnum opus of an opinion at all. It’s clearly the product of vast amounts of work, and a positively enormous amount of lawyering on both sides. The victims, in this case, were relatively small Australian municipalities: how did they manage to afford to fight this court case this far?

The answer is, they didn’t: all of the legal fees were paid by a litigation funder called IMF (Australia), which will take a cut of any proceeds. They write:

Litigation finance is a critical mechanism to enable cases to be brought and litigated against large corporations, banks and other powerful institutions, often by small and mid-sized companies and entities.

The Australian Federal Court’s finding yesterday — in favor of local municipalities — that S&P’s AAA ratings were “misleading and deceptive” could never have been achieved without litigation funding support from IMF (Australia), Bentham’s parent.

I have no problem at all with companies like IMF funding these lawsuits. It’s incredibly hard for investors to successfully sue big financial-services companies like S&P, and litigation funders help to level the playing field. Even if they end up getting paid no money at all, they have at least caused Jagot’s wonderful opinion to see the light of day. And that alone is a massive public service.

The dominant narrative, the day after the presidential election, is the triumph of the quants. As Simon Jackman notes, essentially every single poll-averaging quant — Jackman himself, Drew Linzer, Sam Wang, you name it — managed to call every single state plus the presidential election: an astonishing 51/51 success rate.

That was part skill and part luck, as all such things are. Here’s the final electoral-vote probability distribution from Nate Silver, the most famous of the quants:

Obama ended up winning 332 electoral votes, assuming that he ends up winning Florida; that was the single most likely outcome in Silver’s model, with a probability of just over 20%. But the mode outcome isn’t the median outcome: the official Nate Silver forecast was that Obama would get 313 votes. Roughly 80% of the time, under Silver’s model, he would have ended up calling at least one state wrong. So Silver did get lucky.

Silver is the most visible of the quants, partly because of his perch at the NYT, partly because he has a new book out, and partly because he’s very good at taking his complex mathematical model and turning it into bite-sized English-language blog posts. If you think that the value of Nate Silver is in the model, you’re missing the most important part: there are lots of people with models, and most of those models are pretty similar to each other. The thing which sets Silver apart from the rest is that he can write: he can take a model and turn it into a narrative, walking his readers through to his conclusions.

Which brings me to Michael Scherer’s great story about the Obama-campaign quants: the people who A/B tested everything and who built an astonishingly formidable ground game. Rather than just blanketing the airwaves with ads they thought were good, the Obama campaign was constantly testing, quantifying, and targeting.

At heart, the campaign was marrying quantitative skills with storytelling, to unbeatable effect. Which stories should the campaign tell, to any given group of people? How should it tell those stories? And who should it get to deliver those stories? The database answered all those questions:

Cash raised online came through an intricate, metric-driven e-mail campaign in which dozens of fundraising appeals went out each day. Here again, data collection and analysis were paramount. Many of the e-mails sent to supporters were just tests, with different subject lines, senders and messages. Inside the campaign, there were office pools on which combination would raise the most money, and often the pools got it wrong…

In the final weeks of the campaign, people who had downloaded an app were sent messages with pictures of their friends in swing states. They were told to click a button to automatically urge those targeted voters to take certain actions, such as registering to vote, voting early or getting to the polls. The campaign found that roughly 1 in 5 people contacted by a Facebook pal acted on the request, in large part because the message came from someone they knew…

“We were able to put our target voters through some really complicated modeling, to say, O.K., if Miami-Dade women under 35 are the targets, [here is] how to reach them,” said one official. As a result, the campaign bought ads to air during unconventional programming, like Sons of Anarchy, The Walking Dead and Don’t Trust the B—- in Apt. 23, skirting the traditional route of buying ads next to local news programming. How much more efficient was the Obama campaign of 2012 than 2008 at ad buying? Chicago has a number for that: “On TV we were able to buy 14% more efficiently … to make sure we were talking to our persuadable voters,” the same official said.

The thing that Silver and the Obama campaign have in common, then, is that they used their databases to tell stories. Or, more to the point, their databases and models were used so that Americans could tell stories to each other. Silver’s site became a virtual watercooler, especially towards the end of the campaign — a place where people would gather to talk about what was possible and what was likely. Nate’s voice helped to guide the discussions, but the real reason that he got such astonishing traffic was not that people wanted to read what he was writing, so much as that people were using his model as a framework within which to hold their own idiosyncratic discussions.

Similarly, the Obama campaign put enormous effort into making sure that when phone calls were made, the right people were talking to each other. Scripts are bad; one-to-one human connections are good. This is the age of Facebook, where big data meets the social graph: I’m sure the Romney campaign had a big database too, but it lacked the same storytelling ability, and lacked the same degree of insight into the possible connections that could be drawn within the universe of supporters and potential supporters.

Here’s another important part of the Scherer article:

For all the praise Obama’s team won in 2008 for its high-tech wizardry, its success masked a huge weakness: too many databases. Back then, volunteers making phone calls through the Obama website were working off lists that differed from the lists used by callers in the campaign office. Get-out-the-vote lists were never reconciled with fundraising lists. It was like the FBI and the CIA before 9/11: the two camps never shared data. “We analyzed very early that the problem in Democratic politics was you had databases all over the place,” said one of the officials. “None of them talked to each other.” So over the first 18 months, the campaign started over, creating a single massive system that could merge the information collected from pollsters, fundraisers, field workers and consumer databases as well as social-media and mobile contacts with the main Democratic voter files in the swing states.

This gave the Obama campaign a massive advantage over the Romney campaign. The Obama campaigns data was centralized and coordinated, while the Romney campaign relied in large part on SuperPACs which by law could not have access to the central database and could not be coordinated.

SuperPACs are dumb money. Their cash can almost never be effectively spent, because they’re not on the inside of the campaign. What’s more, because they’re not official campaigns, they always pay top dollar for their TV ad spots, rather than the discounted rates that stations are forced to offer to candidates. The Obama campaign determined, at various points, that if they approached potential donors with the message that Romney had a fundraising lead, that would help Obama raise more money for his own campaign. But the truth was that Romney’s fundraising lead was never particularly useful, because it wasn’t married to a coherent strategy and database. If anything, it just helped Obama raise more cash.

Obama is never going to run another campaign, so the advantage that Obama had over Romney does not necessarily mean that in the 2016 race the Democratic candidate is going to have a similar advantage. But we do know that the Democrats have the technology. And, at least for the time being, the Republicans don’t.

This will come as a surprise to absolutely no one, but the Financial Times is going up for sale, according to Bloomberg, with an asking price of £1 billion. (Pearson has denied the story, in less than convincing terms.)

That’s big number. Here’s the back-of-the-envelope: the FT Group made £22 million in the first half of this year, so £1 billion would be roughly 23 times earnings. But the FT Group includes 50% of the Economist, which is highly profitable, as well as Medley Global Advisors, Mergermarket, and sundry other bits and pieces. I’m not entirely sure why Pearson would want to hold on to those things after selling off the FT, but the report is that it’s the newspaper, rather than the Group, which is for sale. (Maybe Pearson reckons it can fetch more by selling the Group off in parts than it could selling the whole.)

Pearson hasn’t said whether the FT is profitable on a standalone basis, but if it does make money, it doesn’t make much. There is lots of value in the FT brand, but it’s not the kind of value you can compute with a DCF analysis. Whoever buys the FT will not be doing so in the expectation that it will pay for itself through profits: to the contrary, I fully expect any acquirer to spend a substantial amount of money investing in the FT over and above the purchase price.

Up until now, Pearson has had a strategy of trying to maximize cashflow from the FT: it charges enormous sums for subscriptions, and generally behaves as though it wants to extract the maximum amount of money from the newspaper before the franchise dies. The strategy was once explained to me in very simple terms: that it would be downright embarrassing for a newspaper called the “Financial Times” to be a money-losing operation. As a result, the FT does everything it can to maximize profits, even if that means reducing the value it provides to subscribers. (Everything from Lex to China Confidential, for instance, gets its own surcharge, making a lot of FT content off-limits to people spending $350 per year or more.)

It is unlikely that the FT’s new owner, if and when the paper is sold, will take the same approach. After all, the current strategy will never generate $1 billion of value: that’s why Pearson is being sensible by selling rather than holding. Here’s how Michael Lewis explains it:

The right price to pay for a newspaper is a bit like the right price for a sports team or a work of art: whatever some rich person is willing to pay. And as profits dwindle, that rich person is paying less and less for the cash flows, and more and more for the cachet…

There’s a word for an investor who clings to an asset whose chief value, its cachet, is of virtually no value to them: insane.

Pearson loves to repeat that “the FT is a valued and valuable part” of the company, but there’s a good reason why public, listed companies tend not to own things like sports teams or works of art. For that matter, Pearson is one of very, very few public companies which own newspapers and which don’t have a dual-class share structure giving control of the company to some mogul or family. The buyers might not be doing DCF math, but the sellers do it all the time, and the value of $1 billion to Pearson is vastly greater than the present value of the FT’s future cashflows would ever be.

The new owner, of course, will want to get $1 billion of value out of his investment, but he won’t be trying to get there by using the FT’s current playbook of constantly raising subscription rates. That, along with its paywall paranoia — the determination with which it attempts to prevent non-subscribers from reading all but the tiniest amount of FT content — means that it is actively repelling the population which is its best chance at future growth and relevance.

The FT loves to tell advertisers that it reaches lots of very rich and important high-level executives, which is true. Newspapers sell readers to advertisers, and those executives are where the money is right now. But they’re not where the money will be, in say a decade’s time. When Rupert Murdoch bought the WSJ, I expected him to turn it into a formidable global brand, especially in China; instead, he invested millions in a new section devoted to New York City. It turns out that Murdoch’s desire to compete with and beat the NYT is greater than his desire to invest in an ultra-long-term project which would probably only pay off after he was dead.

But there are two huge global news companies which are desperate to make inroads in China and other fast-growing countries: they have an enormous strategic interest in reaching the next generation of global technocrats, and they know they can’t do that with terminals alone. They need something which can travel more easily, something with a first-rate reputation: a foot in the door, if you will. To Bloomberg and Thomson Reuters, the value of the FT is not in its profitability, but rather in its reach and its reputation. It’s one of the very few possible ways of reaching the people who will be running the world in 10 or 20 or 30 years’ time — no matter what country they currently live in.

The FT isn’t there yet: it’s still far too reliant on its UK business-news monopoly. Articles like “Foreign demand in London boosts Telford” only really make sense in a physical newspaper read on commuter trains into the UK capital, but we’ll keep on seeing them, so long as that physical newspaper is attractive to a lot of UK advertisers. For all that media executives love to talk about globalization, the fact is that for the time being there’s precious little genuinely global advertising, and there’s still more money in UK print ads than there is in glossy B2B online-branding campaigns aimed at international business executives.

And there’s another inconvenient fact for would-be acquirers of the FT: journalism doesn’t have economies of scale. The bigger that journalistic organizations become, the less efficient they get: salaries rise, new layers of editors and managers appear, and per-person budgets grow all everywhere, for everything from IT to travel expenses. Journalism is a world of diminishing returns: size matters, but it’s also very expensive. If the FT was absorbed into a much larger organization, its editorial budgets would end up rising even before the new owners started investing money in putting reporters all over the world, building the foundations for future relevance.

The Bloomberg story does mull the prospect that the FT could end up being a vanity purchase for a billionaire “from Russia, the Middle East or Asia”; this is possible, but my guess is that it’s unlikely. For one thing, Michael Bloomberg and David Thomson are just as rich as anybody who might think about putting themselves on the list, and they actually know how to make money out of news. And on top of that, Pearson wouldn’t just sell to the highest bidder: they might be a public corporation, but that doesn’t mean they’re completely insensitive to the optics of these things.

The most intriguing part of the Bloomberg story, for me, is the bit where it says that Thomson Reuters may decide not to make an offer. That would be sad: I would love to have the FT’s amazing roster of journalists in-house here at Reuters, although of course all such decisions are vastly above my pay grade. (It should go without saying, but I’ll say it anyway: no one here ever tells me anything, and you should probably believe the opposite of what I say.) If Thomson Reuters decides not to get into a bidding war, that would surely have a huge effect on the dynamics of any negotiations. But ultimately, the FT belongs in a media company, not at Pearson. And although it might take a while to get there, that will almost certainly happen at some point during the tenure of Pearson’s incoming CEO, John Fallon.