Felix Salmon

Restaurants are the natural home of impulse purchases. Would you like a third bottle of that wine? Would you like to see the dessert menu? What the hell, why not. All you need to do is say the word, and it all just appears, fresh and delectable for your consumption, before you’ve so much as paid a penny. Eventually, of course, the bill comes — essentially, it’s an invoice listing everything that you’ve already consumed. Then you pay that invoice, and leave.

This is a very sensible way for restaurants to operate. They don’t all work that way: at fast-food joints, for instance, or coffee shops, you tend to pay for what you’re consuming before you consume it. At that point, if you want more, you have to pay again. Which is just one reason why you rarely see people doing that. But generally, the extra amount that people order before the bill arrives more than makes up for the fact that some tiny percentage of them might try to dine-and-dash. Paying is never very pleasant, and if you force people to do it before they’re get what they want, that’s going to reduce both the number of people who buy things and the number of things that they buy.

When we order food in a restaurant, we know that we’re going to be paying for it, literally, in the future — but thanks in part to hyperbolic discounting, even pushing the moment of truth back half an hour or so makes us more prone to running up a tab right now. Similarly, we spend more on credit cards than we do on debit cards: it’s always easier to spend money in the future than it is to spend money in the present.

Online merchants, especially ones who have a lot of mobile shoppers, face a similar problem to restaurants. They want to encourage impulse purchases, but it’s hard to make an impulse purchase when you’re laboriously typing in your name and address and credit card number. The ideal solution would be for would-be purchasers to be able to just press a button, and presto, the item is ordered: the buyer can worry about exactly how to pay for it tomorrow.

That’s the promise behind Klarna, in Europe, and Affirm, which launched today. You click a button, and the item is ordered and on its way to you; the merchant is actually paid by Klarna or Affirm, and not by the purchaser. It then becomes the job of the intermediary — Klarna, or Affirm — to invoice the buyer and chase down the payment, long after the actual purchase has been made.

The two companies work on slightly different models. Klarna uses credit: it’s essentially lending money to the purchaser, and charging interest. Affirm, by contrast, charges the merchant, rather than the customer. Merchants already pay an interchange fee so that they can accept credit cards as payment; paying a similar fee to Affirm will surely be worth it, if they can convert a greater percentage of shopping carts into actual purchases. Also, Affirm seems to be a lot more mobile-native than Klarna.

At heart, however, the two shops are selling much the same product: a way of making online shopping as painless as possible, with payment pushed off until tomorrow. It’s a pretty good idea. But what’s interesting to me is the way that Affirm founder Max Levchin is touting Affirm’s know-your-customer algorithms: the site will identify who you are using Facebook, pull in lots of other data including your Zip code and your mobile device ID, and use all of that information to predict how likely you are to pay the bill once you receive it.

Levchin’s a big fan of such predictive usage of data:

At PayPal, where I was the CTO, we succeeded because we gained deep understanding of the immense quantities of behavioral data that we captured in processing millions of transactions per day. We learned so much about our customers, that we could predict their intentions, and prevent vast majority of intentional fraud.

This is clever, but it can also be a weakness. The reason why so many fintech startups are aiming at PayPal is that people don’t like PayPal; and the one of the main reasons that people don’t like PayPal is precisely its sophisticated fraud-detection algorithms, which tend to throw up a lot of very annoying false positives.

Obviously, Affirm needs to know who you are, and where to find you, so that it can invoice you for the stuff that you’ve bought online. And if you do end up being rejected when you try paying with the Affirm button, then the worst-case scenario is that you’re just back to the status quo ante, forced to pay with a credit card or similar. Still, people don’t like being instantly profiled as untrustworthy; the problem, of course, is that it’s precisely the untrustworthy people with no intention of paying who are likely to be flocking to Affirm in an attempt to order free stuff.

Affirm is trying to make buying stuff on your phone as easy as two taps, without being sunk by massive coordinated fraud. If it works, merchants will surely love it — and won’t much care about the fees it charges. Also, if it works, it will probably end up being bought by Facebook. Which would only exacerbate the worries that people already have about multi-billion-dollar corporations monetizing their personal data. Buying stuff online might become a lot easier. But there’s bound to be a privacy cost, somewhere.

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Right now is a lucrative time to be a banker. Profits at US banks rose almost 20% in 2012, to a post financial-crisis high of $141.3 billion*. The securities industry, while still unable to match its record-setting 2009 profits, is also doing well, earning $23.9 billion last year, up from $7.7 billion in 2011.

Despite America’s persistently high unemployment and tepid growth, its financial employees are doing well. New York State’s Comptroller Thomas DiNapoli, in his annual report on the state’s financial industry, reports that securities firms increased cash bonuses 8% to $20 billion in this bonus cycle. As the WSJ’s Brett Philbin notes, that’s down 42% from the lofty levels of 2006 — but it still comes to more than $122,000 per banker. What’s more, the comptroller’s annual estimate is conservative: it fails to capture many types of deferred pay. For instance, $6.3 million of Citigroup CEO Michael Corbat’s $11.5 million 2012 pay is deferred.

Not only have America’s bankers had a good year, they’ve had an excellent two decades. As the Atlantic Wire’s Philip Bump points out, the “last time bankers took home bonuses that were less than the median household income was 1991″.

All is only well, as Susanne Craig points out, if you’re still employed. The financial industry continues to cut jobs: Goldman Sachs will go slightly beyond its annual routine of firing the bottom 5% of its workforce, and JP Morgan announced today that it will cut 19,000 jobs, primarily in its mortgage arm and its retail Chase branches. Those employees’ jobs and pay levels tend to be more Duluth than Darien. — Ben Walsh

*UPDATE: I initially wrote that total US bank profits were for 2012 were $22.9 billion. That number is the increase over 2011, not total profits for 2012, which was the much larger $141.3 billion.

On to today’s links:

Alpha
“Shareholder democracy” basically now just a way for billionaires to sue each other – Andrew Ross Sorkin

Housing
Home prices rose 7.3% last year, per Case-Shiller – S&P

Assets/Liabilities
Low rates and longer life spans are killing corporate pensions – WSJ

TBTF
How to (maybe) end Too Big to Fail – Mark Thoma

EU Mess
Italy’s election in one headline: “The Winner is Ingovernability” – Reuters
“This is the way the euro ends: not with the banks but with bunga-bunga” – Paul Krugman
The ECB should pledge not to do anything stupid – Tim Duy

Awesome
Nate Silver analyzes your failing relationship – McSweeney’s
Inside the making of Pulp Fiction – Vanity Fair

New Normal
Budget cuts are already forcing the government to release detained immigrants – Suzy Khimm

Oxpeckers
How to fix the financial media: forget trading and cover investing – Josh Brown
Thom Yorke on content: it’s “just a filling of time and space with stuff, emotion, so you can sell it” – Guardian

Semantics
“Roman Pontiff emeritus Bendict XVI” – Reuters

The Fed
“A slower recovery would lead to less actual deficit reduction” – Ben Bernanke

Bad Metaphors
Poker is America because it involves money and luck and diversity and stuff – Charles Murray

Big Qustions
How long would it take to run out of original tweets? – What If

Remember the force-placed insurance scandal, which first came to light back in 2010? Well, despite being addressed in Dodd-Frank, the problem is still there: loan servicers are buying massively overpriced home insurance on behalf of homeowners, and getting enormous kickbacks from the insurers — if they don’t own the insurers themselves. The victims, here, are usually the investors who own the mortgages in question — which means that the biggest victims of all are Fannie Mae and Freddie Mac.

Fannie alone has seen its hazard insurance costs rise from around $25 million a year before the financial crisis to $631 million in 2012. That’s real money, and so Fannie came up with a plan to save hundreds of millions of dollars. Rather than paying through the nose for the most expensive insurance the servicers could find, Fannie decided to buy the insurance itself.

Fannie ran this idea past its regulator, FHFA, on February 17, 2012, reports Jeff Horwitz in another one of his fantastic articles on this issue today. Back then, the FHFA had no objections. So Fannie put out an RFP, asking 12 insurers for their ideas. The results can be seen here: the winner was a proposal from Overby-Seawell Company, which proposed a system anybody could join.

OSC excelled at program design, Fannie concluded. It had also pulled off a coup by partnering with Zurich Insurance, a Swiss reinsurer with a $400 billion balance sheet, a superior A+ rating from insurance rating company AM Best and historical experience in the force-placed market.

Zurich stood ready to take on all of Fannie’s business if necessary, but under OSC’s model any qualified insurer could take a piece of the GSE’s business by joining a consortium of carriers willing to divide Fannie’s risk. Among the proposal’s attractions were “market driven pricing,” and “one entity fully accountable to Fannie Mae and servicers,” Fannie documents state.

Fannie put thought into preventing excessive market disruption as well, the documents show. Incumbent insurers willing to match Zurich’s prices would be permitted to retain existing business. If they didn’t, banks could still hire them to administer force-placed programs. Insurers were also welcome to join the Zurich consortium.

Fannie showed OSC’s proposal to the FHFA on May 9, and again faced no objections. The “final project recommendations” were then run by the regulator on September 28, as well as on follow-up calls on October 12 and October 22. Everything was in place: the only thing left was formal FHFA approval.

Which never arrived.

Instead, faced with lobbying from the American Bankers Association and others, the FHFA vetoed the whole plan on February 8; once the news was made public, shares in the largest force-placed insurer, Assurant, immediately surged. At this point, Fannie’s plan seems to be definitively dead — replaced with a group of committees whose objective isn’t obvious and which have every incentive to drag things out.

The result is that Fannie has seen at least $150 million of savings evaporate — and homeowners are going to wind up overpaying even more, for insurance their servicers have chosen for them.

So, what does the FHFA think it’s playing at, here? It’s not exactly being forthcoming on the subject: a spokeswoman said only that “FHFA will work with Fannie Mae, Freddie Mac and key stakeholders… to address issues associated with force placed insurance,” although the FHFA’s Meg Burns has said that the regulator has no timeframe and no particular idea what approach it’s going to take on these issues.

I’ve heard of regulators being captured by the organizations they’re supposed to be regulating — that happens all too frequently. But the situation at the FHFA seems to be even worse: it looks as though it has been captured by the banks which are extracting rents from the regulated organizations.

Indeed, it’s hard to think of a single good reason why the FHFA should exist at all. By all means regulate Fannie and Freddie — but give that job to the same regulators who are in charge of overseeing all the other major financial institutions in the country. The FHFA has been useless and obstructive pretty much from day one, and this latest decision only serves to underscore how counterproductive it’s being. If the Obama administration can’t get rid of its head, Ed DeMarco, maybe it should just abolish the entire thing.

Following a recommendation from Bond Girl on Twitter, I spent a 95-minute chunk of Saturday night on YouTube, watching the first of five Leonard Susskind lectures on cosmology and very much looking forward to the rest. By coincidence, it’s targeted pretty much at exactly my level: you need a decent grounding in Newtonian mechanics and basic calculus, but nothing too sophisticated.

It turns out there are a lot of people like Bond Girl and me out there: a slightly different version of the same lecture already has well over 200,000 views on YouTube. Give people the opportunity to learn interesting material by watching lectures by the best professors in the world, and it turns out they’ll do just that. This is fantastic for the Stanford brand: it gets it out into the world in the best possible way, and will surely, at the margin, drive up demand in terms of the number of people wanting to attend the university. And it’s also fantastic for the hundreds of thousands of people who are learning new and fascinating things by watching these lectures.

The free YouTube content can be considered to be an extra column on the far left side of this chart, which Barry Nolan put together after watching a Fred Wilson video:

YouTube is even more democratic than MOOCs: there’s basically no structure at all, you can drop in and drop out as you please, and the yield is effectively zero, since no one ever “graduates” with any kind of credential from watching videos online. It’s 100% education, 0% credentialing.

This is an important point: even if 99% of the people who enroll in MOOCs never graduate, that doesn’t mean they never learned anything along the way. What you get when you move from left to right, in this chart, is an increase in structure: some kind of organized, disciplined way of getting a group of people to basically experience the same thing at the same time. It’s not so much that the content gets better (although it might); it’s more that the formal architecture surrounding the content becomes increasingly elaborate and expensive.

This phenomenon is not confined to education, of course. Think about the Metropolitan Opera. There’s the real deal, on the far right, where you pay hundreds of dollars for a ticket, sit in a darkened hall with a few thousand other opera-goers, and experience a full-on live performance. Then, one step over to the left, you have the Live in HD performances — you spend a couple of dozen dollars, sit in a darkened cinema with many others, and experience the performance on screen, over an excellent sound system. It’s not exactly the same experience, of course, but in some ways it’s better, especially when compared to the view from the cheaper seats at the Met. Take another step to the left, and you have the storied Metropolitan Opera radio broadcasts — they’re still live, but you lose the visuals, and the physical architecture of the opera house or cinema.

If you’re willing to break the operas up into tiny chunks, you can head over to the Met’s YouTube channel, which has over 1.5 million views already, and allows people to dip in and out at their pleasure — just like they can fire up a DVD they’ve bought or rented, watching it at home. (Netflix, sadly, doesn’t have a lot of opera available for streaming yet, although it does have Zeffirelli’s much-disliked Otello.)

Fred Wilson’s advice to Wharton, then, is basically to be more like the Met: take what you do, and put it out there with varying degrees of structure and architecture, at various price points from $0 to $133,600. The more discoverable you are, the richer your brand will become — and, just like TED discovered when it started putting its talks online for free, the more you give such things away, the more demand there is for the very expensive live product.

In education, the worry isn’t really about the future of schools like Stanford and Wharton, but rather about the future of smaller universities: could their full-price offerings be pushed out of the market by the cheaper versions from elite colleges? It’s possible, but it hasn’t happened yet, and it might not happen at all. After all, my intuition is that people are more likely to want to go see a performance at their local opera house after seeing a Live in HD performance from the Met. And the more Leonard Susskind lectures you watch online, the more you might want to take a proper course at your local college.

It seems to me that the rise of what you might call these “diffusion lines” is the rise of a brand-new marketing platform for the asset class as a whole, be it education or opera or anything else. Up until now, it’s been hard to get many people interested in opera, because the barriers are so high, and because most of us need a bit of structure in order to be able to sit through it and appreciate it. (I love going to see live opera, for instance, but never listen to it on the stereo at home, because I’ll end up getting distracted almost immediately.) Similarly, the arguments for going to college tend to center on the value of the credential, rather than the inherent value of the education itself. Once we bring first-rate educational experiences to everybody, then the proportion of those people who want to go to college can only go up. And that, in turn, will be great for everybody, and for the economy as a whole.

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The votes in the Italian election are in — and it’s not likely that Italy will be able to form a government.

The FT writes that Italy is facing a second election, after voters delivered a “resounding rebuff to austerity policies.” Fabrizio Goria, who’s been tweeting up a storm throughout the election, put it this way: “So, Italians said FU to Merkel, isn’t it?” Joe Weisenthal thinks Monti’s demise is emblematic of Italy’s turn against “elite Europe”.

This has been an election which featured an ex-prime minister who’s about to face trial for allegedly having sex with an underage night-club dancer and who was sentenced to four years in prison for tax evasion; a comedian running on an “antisystem” message; and Mario Monti, the country’s current prime minister, whose campaign a rival compared to a coma, and whose alliance is set to finish in fourth place.

Polls showed Silvio Berlusconi’s center-right party leading in the Senate vote over Pier Luigi Bersani’s center-left coalition. (Bersani’s party was ahead in the house). Comedian-turned-politico Beppe Grillo, beloved by Italy’s 40-somethings, was expected to win 64 seats in the Senate — the largest vote haul of any individual party. The Bersani and Berlusconi coalitions, by contrast, will both get only 116 or so seats each — nowhere near the 158 seats needed for a majority. Because a government needs to have a majority in both houses to pass laws, the split Senate vote could make the country ungovernable and lead to another election.

If you’re confused already, Reuters has a quick explainer on how the Italian election works. In short, it’s just as dysfunctional as we saw in Greece last summer.

Markets, not surprisingly, hate the whole “ungovernable” thing. Nicholas Spiro of Spiro Sovereign Strategy warned the FT of the consequences of a Berlusconi win: “financial markets are facing the worst of both worlds in Italy: a full-blown political crisis in the eurozone’s third-largest economy and a severe setback for the liberal economic agenda championed by Mr. Monti.”

Late last year, Monti said that his economic agenda may have saved the Eurozone. But his $43 billion austerity project, which included budget cuts, higher taxes, and raising the retirement age, certainly seems to have cost his party the election. Paul Krugman, probably austerity’s most prominent critic, agrees that Monti had placated the debt markets. But unless austerity is rolled back, he writes, Italy’s populist turn will be just a ”foretaste of the dangerous radicalization to come” in Europe. — Ryan McCarthy

On to today’s links:

Ugh
What the sequester will do: Furloughs, layoffs & benefit cuts for nearly two million long-term unemployed – NYT

Housing
America may now have a housing shortage – Sober Look

Crisis Retro
Saying CDOs “could be structured by cows and we would rate it” apparently won’t get you fired at S&P – WSJ

Deals
“You always see a lot of M&A activity when the market is overvalued” – James Stewart

TBTF
Massively subsidized banks are tired of the handouts minimally subsidized credit unions are getting – American Bankers Association

EU Mess
The eurozone never followed its own rules in the past and will break them in the future – Quartz

Awesome
Healthcare, shame and why “our problem is not a matter of shitty policy arrangements” – Steve Waldman

Yikes
Fat, sterile, and depressed: the effects of increasing light pollution – Mother Jones

For Sale
The Japanese government is selling part of its stake in the world’s third largest tobacco company – Dealbook

Alpha
Inside a NYC brokerage firm that ex-employees describe as a Red Bull-fueled boiler room – Bloomberg
Banks are dumping their crisis-era CDO books, and hedge funds are buying – IFRE
The top 50 companies that hedge funds are shorting – Business Insider

Awful
British court bans the use of Bayesian probability – Understanding Uncertainty

Facebook
Facebook is a bad Tupperware party – Douglas Rushkoff

Oxpeckers
“People who don’t inhale news simply don’t notice bylines” – Kevin Drum

Totally Unsurprising
Dave Eggers thinks we need more handmade things – FT

There’s a very simple and cost-free thing that all news organizations can do to make their news better: every time you write about a court filing or judgment, link to it. (And, ideally, make sure it’s been uploaded to Recap, too.) For instance, consider Patricia Cohen’s NYT article about David Mirvish’s lawsuit against the Knoedler gallery. (See what I did there? You’re welcome.)

Cohen’s article is a very interesting view of the lawsuit and its context, but it doesn’t come close to capturing the barminess of the complaint. And because Cohen understands the bigger picture, she actually ends up misrepresenting the suit itself, in which Mirvish is seeking to take possession of two paintings on the grounds that Knoedler, which has now closed, isn’t selling them. Here’s Cohen:

While most of the suits have argued that the paintings Ms. Rosales brought to market were fakes, Mr. Mirvish says his are Modernist masterpieces and that he lost out on millions of dollars in profits when Knoedler failed to sell them.

In reality, Mirvish isn’t suing for “millions of dollars in profits”: he just wants the paintings, is all. Which is pretty aggressive, seeing as how he’s only paid for a 50% share in them.

The case is fascinating because Mirvish was acting as an unabashed speculator in this case: he bought the Pollocks low, knowing that they had dubious provenance, and hoped, with Knoedler’s help, to be able to sell them high and make a tidy profit. Call it provenance arbitrage: Knoedler was a storied and highly-respected gallery, and a painting being represented as genuine Pollock by Knoedler is worth a lot more than a painting being represented as genuine Pollock by a sketchy Long Island dealer by the name of Glafira Rosales.

In the beginning, everything worked out great for both Knoedler and Mirvish, even if Mirvish’s lawyer, Nicholas Gravante, seems to find it incredibly difficult to explain what actually happened. For instance, he writes:

Knoedler purchased the Silver Pollock from Rosales for $950,000 in 2002.

Knoedler paid $475,000 to Rosales from its own funds and contemporaneously sold Mirvish a 50% investment interest in the Silver Pollock for $1.6 million. Thus, the end result of the transaction was that Knoedler held title to the Silver Pollock, and Knoedler recorded a profit of $1.125 million.

This is not easy to understand. On a cashflow basis, if Knoedler buys the painting for $950,000 and then sells a 50% stake in the painting for $1.6 million, then the profit to the gallery is $650,000, not $1.125 million. And on a mark-to-market basis, if the Mirvish deal ratifies a $3.2 million valuation on the painting, then Knoedler has made $650,000 in cash, plus $1.6 million for the value of its own 50% stake, for a total profit of $2.25 million. The only way to get to $1.125 million is to think of the painting in two halves. Knoedler bought both halves for $475,000 apiece, and then sold one of the halves for a profit of $1.125 million, while holding on to the other half for itself.

Now this may or may not be the way that Knoedler thought about the deal; the whole thing is massively complicated by the fact that, as Cohen reports, Gravante also represents Knoedler’s former president, Ann Freedman. Why on earth would Mirvish hire the lawyer who represents the president of the gallery he’s suing?

What’s more, the public version of the lawsuit omits what happened next to the Silver Pollock: Freedman sold it to a London hedge fund manager, Pierre Lagrange, for $17 million, and, according to Cohen, “for four years, the sellers, including Mr. Mirvish, enjoyed the gains from their commercial coup”. Presumably, Mirvish received half of that $17 million, and made a personal profit of $6.9 million; Knoedler also made $6.9 million, plus the $1.125 million it had already made on the Mirvish deal, for a total of $8.025 million.

There is one short paragraph of the lawsuit which has been redacted, which may or may not explain some of what happened after Lagrange declared the painting to be a fake and asked for his money back; it certainly doesn’t seem long enough to explain the whole story. Still, the upshot, at least in Mirvish’s mind, seems to be that Knoedler now possesses the painting; that it’s not attempting to sell the painting; and that if Knoedler isn’t going to try to sell the painting, then Mirvish wants his $1.6 million back.

All of this seems to hinge on a “contract” between Mirvish and Knoedler, under which Mirvish’s payment of $1.6 million was not a once-and-for all purchase of 50% of the painting, but was rather a revocable deal, under which Knoedler had the right to retain the $1.6 million only if it was “marketing and attempting to sell” the painting. Naturally, Mirvish can’t produce a copy of this “contract”. But never mind that: it’s just not fair, what Knoedler did. In probably the most astonishing sentence in the entire complaint, we’re told that

Mirvish’s investment in the Silver Pollock was worthless absent Knoedler’s agreement to market and sell the painting.

Worthless! Remember, here, that Mirvish still believes the Silver Pollock to be a timeless masterpiece. But he, like the White Queen, is clearly one of those people capable of believing six impossible things before breakfast, since he also seems to think that a 50% ownership stake in a significant Pollock painting is worthless — unless, that is, an Upper East Side art gallery is attempting to sell the thing.

Now Mirvish used to be an art dealer in his own right, and I’m sure he never told people buying a painting that their painting would be worthless unless it was consigned for sale somewhere. But for the purposes of this complaint, the money that Mirvish spent on his 50% of the painting amounts to “unjust enrichment” of Knoedler, just because Knoedler (which is no longer operating) isn’t actively trying to sell the thing.

All of which is to say that in this lawsuit, Mirvish has taken the idea of art-as-an-investment to a particularly bonkers extreme. In Mirvish’s world, it seems, artworks have no inherent value, just by dint of being beautiful or genuine or unique. Instead, an artwork is only an investment if it’s being shopped around — if someone’s trying to make a profit on it, by selling it.

Similarly, in Mirvish’s world, if a gallery has a claim to 50% of the value of a painting, but again isn’t actively shopping that painting around, then the gallery’s claim is worthless. That’s basically what Mirvish is saying with respect to the other two Rosales Pollocks he took a 50% stake in.

The deal with these two Pollocks — which are rather hilariously referred to in the complaint as “the Greenish Pollock” and “the Square Pollock” — was slightly different than the deal with the Silver Pollock. The basic facts are similar: Knoedler bought the Greenish Pollock from Rosales for $750,000, and then sold a 50% stake in it to Mirvish for $1.25 million. And after buying the Square Pollock from Rosales for $2.25 million, Knoedler sold a 50% stake in that painting to Mirvish for $2 million.

But these two paintings weren’t split into conceptual halves, in the way that the Silver Pollock was. Instead, a rather complicated arrangement was worked out. Mirvish contracted to buy both paintings in full, outright — but he only paid half of the total purchase price. The other half of the purchase price was lent to Mirvish by Knoedler, in the form of “a non-recourse, non-interest bearing loan”. And just as with the Silver Pollock, Knoedler kept physical possession of the painting, with an eye to flipping it for a profit. Under the terms of the loan, 50% of the sale proceeds would go to Knoedler, and 50% to Mirvish; if all went according to plan, Knoedler’s 50% would be more than enough to pay off the loan and to keep a healthy profit for itself.

This is not easy to follow, but the key word here is “non-recourse”. What it means is that although Knoedler had technically lent Mirvish $3.25 million, Mirvish personally has no legal obligation to ever pay Knoedler that money. If Mirvish ever gets possession of the paintings, then he has title to them already, and never needs to pay the $3.25 million that Knoedler is owed. Economically, the deal is the same as with the Silver Pollock: Mirvish paid a certain amount of money for a 50% economic stake in the artwork, on the understanding that he would receive 50% of the eventual sale proceeds. But legally, at least according to this complaint, Mirvish owns these artworks outright — he has title to both of the paintings in full, rather than just to some kind of 50% investment stake.

In a weird way, the tables are turned, with the Greenish and Square Pollocks: it’s Knoedler, rather than Mirvish, which has the speculative investment interest. And so by the logic of the Silver Pollock, now that the works aren’t being actively shopped any more, Knoedler should be able to retrieve from Mirvish the $3.25 million it lent him, and zero out the whole deal. Except, of course, Mirvish doesn’t see it that way: he has no interest at all in repaying those loans. In fact, he wants to take possession of both paintings without repaying the loans.

Once again, Mirvish conjures up an invisible contract, under which Knoedler was obliged to hand over the paintings to Mirvish if it ever stopped trying to sell the paintings. It’s hard to see why Knoedler would ever enter into such a contract while also being owed $3.25 million in non-recourse loans: after all, the minute it gives Mirvish the paintings, it can basically kiss that $3.25 million goodbye.

Indeed, if there was some kind of implied contract between Mirvish and Knoedler, it was surely that Knoedler would never just hand the paintings over to Mirvish and receive nothing in return for its 50% economic stake in the works. Both parties entered into this deal in a spirit of financial speculation, and both parties thought of themselves as having an equal share in the works. The complaint says that “equity and good conscience require that Knoedler deliver the Greenish Pollock and Square Pollock to Mirvish” — but there’s nothing equitable about that outcome whatsoever, where Mirvish ends up with 100% of the paintings, and Knoedler ends up in the hole to the tune of $3.25 million.

Knoedler is bust, now; it will never reopen. Its liabilities exceed its assets, but among those assets is a 50% economic stake in two Mirvish Pollocks. Those Pollocks are basically unsellable at this point, given their Rosales provenance, and in Mirvish’s eyes, that means the 50% economic stake is worth zero, even though (he says that ) he’s convinced the paintings are genuine.

The whole thing would stink of Mirvish trying to kick Knoedler and Freedman while they’re down — an investor trying to take advantage of their misfortunes by getting 50% of two (alleged) Pollocks for free. Except, that is, for the fact that Mirvish is using Freedman’s lawyer. Which means that the real story is more complicated still.

In any event, this lawsuit is a rare glimpse into a side of the art world which is very rarely seen — a purely mercenary world of co-investments and speculative bets, where stakes in artworks are bought and sold with an eye to making many millions of dollars in profit should a convenient hedge-fund manager turn up brandishing a $17 million check. It’s a world which is deliberately kept very secret from the buyers of the art: if you’re a gallery trying to sell a painting for $17 million, you’re not exactly going to advertise the fact that you bought it for $950,000 just five years earlier. But that’s the thing about the art world: there is literally no limit to how big the mark-ups can get. And it’s a world where the most successful dealers are the ones who can deal in established names like Pollock, and still try to lock in a sale price at a double-digit multiple of what they paid.

Sarah Kliff and Matt Yglesias both have good summaries of Steve Brill’s monster Time article on healthcare costs. Both of them correctly point out that the heart of the piece is about negotiating power: who has it (Medicare); who doesn’t have it (the uninsured); and how the lack of negotiating power on the healthcare-consumer side inevitably leads to sky-high costs.

Yglesias says that the natural conclusion from this is that either Medicare should cover everybody — which would massively increase Medicare costs while massively decreasing overall healthcare costs — or else that rates should be set by the government, even if the bills are paid privately. He also says that Brill “rejects both of these ideas”.

Weirdly, Brill’s rejection of these ideas comes not in his conclusion, but higher up in the piece — a mere 22,000 words in — when he explains that if we reduced the age that people were eligible for Medicare, then that would save a lot of money. He then continues:

If that logic applies to 64-year-olds, then it would seem to apply even more readily to healthier 40-year-olds or 18-year-olds. This is the single-payer approach favored by liberals and used by most developed countries.

Then again, however much hospitals might survive or struggle under that scenario, no doctor could hope for anything approaching the income he or she deserves (and that will make future doctors want to practice) if 100% of their patients yielded anything close to the low rates Medicare pays.

Weirdly, in 24,000 words which include a lot of railing against the large salaries enjoyed by hospital executives, Brill never supports or clarifies this assertion: he never says how much money doctors deserve, how much they actually make, or how high physician salaries would need to be in order to make future doctors want to practice. That last one, in particular, seems very unconvincing to me: the world is full of highly-qualified doctors who would love to be able to practice in the U.S. for much less than the current going rate.

In his conclusion, Brill says — again, without adducing any evidence whatsoever — that “we’ve squeezed the doctors who don’t own their own clinics, don’t work as drug or device consultants or don’t otherwise game a system that is so game able”. It’s a bit weird, the degree to which Brill cares so greatly about keeping doctors’ salaries high: he certainly doesn’t think the same way about teachers.

If the only thing preventing Brill from embracing sensible reform is a worry about doctors’ salaries, then surely the obvious solution is to address doctors’ salaries as part of a broader healthcare-cost reform. Given the path-dependency of such things, my idea — and I’m coming at this from a very naive position, I’m no healthcare wonk — is that we should simply allow insurers to outsource their cost negotiations to Medicare.

For any given medical procedure, Medicare pays the least amount of money, and rich foreigners pay the most, with insurers being somewhere in the middle. Here’s my idea: any healthcare insurer should be allowed to get rid of its cost negotiators, and instead be able to get Medicare to pay for all procedures on its behalf. Medicare would then bill the insurer, which would pay the Medicare-negotiated rate plus a small premium for Medicare’s time and effort, maybe 2% or 3%. (If insurers start defaulting on the amount they owe Medicare, then the premium would have to rise, to cover credit risk.)

The basic idea here is that all Americans should have access to Medicare’s discounted rates — either by being eligible for Medicare, or else by signing up for health insurance with an insurer who allows Medicare to negotiate on its behalf. All of this would be voluntary, of course. If you want your insurance to cover the kind of things that Medicare won’t pay for, then you can do that. But if you think that Medicare-quality coverage is good enough, then you should be able to get it, at only a modest premium to what Medicare itself pays.

Would doctors be paid less, under such as system? Possibly. But that shouldn’t prevent the change from happening, and maybe the government should simply step in to top up doctors’ salaries where necessary. At the very least, I think it’s incumbent upon people like Steve Brill to say exactly how much they think doctors should be paid, and how much is too little. Because of all the problems with U.S. healthcare costs, the problem of underpaid doctors is never likely to be anywhere near the top of the list.

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How long is Europe going to stay in recession, despite its experiment with austerity coming to an end some eight months ago? The European Commission today projected that the continent’s economy will shrink by 0.3% in 2013, its second straight year of contraction. In Spain and Greece unemployment will remain around 27% in 2013, with unemployment in the Eurozone as a whole rising to 12.2% from 11.4%.

Hale Stewart, diving into Europe’s dreadful manufacturing data, finds only one bright spot: Germany. “The bottom line is that all the ‘good news’ coming out of Europe right now is projection”, he writes.

Things are no sunnier in Italy, whose presidential election this weekend takes place against a backdrop of “stagnating economy, corruption, organised crime, political apathy, misogyny, youth unemployment”. Intrade gives current prime minister Mario Monti just 2.2% odds of holding onto his job. Joe Weisenthal notes another problem: Beppe Grillo, a comedian-turned-politician who wants to give every Italian an iPad, may get enough votes to prevent Italy from forming a coalition. “It’s hard to see Grillo’s movement as a source of stability,” one unnamed diplomat told Reuters.

So how did we get here? Paul Krugman spots a new paper from Paul De Grauwe and Yumei Ji that’s worth unpacking. Europe’s austerity movement started, in large part, because of worries around widening credit spreads in countries like Greece. Those worries, in some cases, were exaggerated: “Market sentiments of fear and panic first drove the spreads away from their fundamentals.” (The opposite effect happened when the ECB announced it’d do anything to save the Euro).

The sovereign debt market, it turns out, can be just as irrational and panic-driven as the stock market. This, the authors write, led to unnecessarily harsh budget cuts from Europe’s policymakers. Which of course only made matters worse. “The more intense the austerity, the larger is the subsequent increase in the debt-to-GDP ratio,” the authors find. — Ryan McCarthy

On to today’s links:

MF Doom
Financial industry group tries to ban Jon Corzine for life — only to find out he’s not a member – Dealbook

China
Chinese regulators think it’s better if fraud-riddled companies don’t have successful IPOs – WSJ

EU Mess
“Free trade is the closest thing economics has to magic, but it won’t save Europe” – Matt O’Brien

Housing
The national mortgage settlement lets banks fix second mortgages — but ignore first mortgages – NYT

The Fed
It’s time for the Fed to realize that “there are worse things in life than moderate inflation” – Bloomberg
The world’s central banks have brave new words (if not brave new policy) – Economist

Aggregation
The logical conclusion to Steve Brill’s healthcare article is the one he doesn’t propose – Matt Yglesias

Remunration
Jack Lew’s contract with Citi seems to have included a payout for leaving for a government job – Jonathan Weil

Stimulus
Can Japan spend $100 billion in 15 months? It’s harder than you think – Reuters

Investigations
A Goldman private wealth client is at the center of an investigation into Heinz insider trading – Reuters

The Oracle
Warren Buffett is transforming Heinz into the most-leveraged food company in America – Bloomberg

Syntax
To boldly decry the grammar lies up with which we will not put – Smithsonian

Wonks
Efficiency, not growth, is the basis of capitalism – Noah Smith

I like index funds, and I believe that the best way to maximize your retirement savings is, simply, to save more money. So I was intrigued to see a press release from Charles Schwab this week, touting its new 401(k) product, which combines index funds with opt-out advice services. The results, according to Schwab, are impressive: investors save 77% on operating expenses, and also tend to put more money into their plans:

Nearly 90 percent of workers in Schwab Index Advantage plans are receiving low-cost, professional, third-party advice to help manage their 401(k) investments. Prior to the transition, only about four percent of these same workers elected to receive advice…

Schwab data shows that employees who have chosen to use independent, professional, point-in-time 401(k) advice services in the past have tended to save twice as much, were better diversified and stuck to their long-term plan, even in the most volatile market environments.

Sounds good! But it really isn’t. The headline of the press release says that “Schwab’s Index-Based 401(k) Offering Cuts Investment Costs by 77%, Delivering on Low-Cost Goal” — but that’s incredibly misleading, precisely because the overwhelming majority of plan participants wind up paying for that “low-cost, professional, third-party advice”.

Here are the numbers: the weighted average operating expense ratio for the new index-fund product is 14.78bp, down from 65.11bp in Schwab’s old actively-managed plans. That’s a handy savings of just over 50bp. But as part of the deal, all the participants in the new plans automatically get enrolled in a plan which gives them something called “independent point-in-time advice”. How much does that advice cost? Turns out, it’s about 45bp. Which means that far from seeing their expenses fall by 50bp, the new savers are actually only saving about 5bp, all-in. (Under the old system, the advice came free, although it did so on an opt-in basis rather than an opt-out basis.)

Still, it might be worth paying 45bp for advice, if doing so led plan participants to double the amount they are saving. The problem is, there’s no real evidence that it does. The “Schwab data” cited here is based not on the activity of people in Schwab’s new index-fund plan, but rather on the activity of people who took advantage of the old, opt-in plan. And it’s well worth parsing the exact wording of the results of that study:

Approximately 70% of participants that receive and implement 401(k) advice make a change to their deferral rates, and those savings rates nearly double on average as a result, jumping from approximately 5% to 10% of pay.

To recap: when given the opportunity to opt in to advice-giving services, even when they’re free, only a tiny minority of plan participants — about 4% — actually did so. It’s reasonable to assume that most of that 4% of people were thinking about significantly increasing the amount they save, and wanted advice on how best to do that. Now Schwab doesn’t tell us how many people received advice but didn’t ultimately end up implementing it. It does say that of the people who both received and implemented advice, 70% changed their deferral rates. And within that 70%, deferral rates roughly doubled. But at a maximum, we’re still only talking about 70% of 4%, here, which is a by-definition highly unrepresentative 2.8% of participants.

In other words, Schwab has given us no evidence at all that the people enrolled in its new index-based 401(k) plan are saving more money as a result of paying 45bp a year for advice. I’m sure that a small minority of people who want to save more will ask for advice on how to do so — but that doesn’t mean that the advice causes them to save more. Indeed, the causality probably runs exactly in the opposite direction.

It seems to me that Schwab is looking a bit desperate here. It used to be able to make lots of money by charging high amounts for its 401(k) plans, but now that everybody understands the superiority of index funds, Schwab is being forced to offer its own index-based service. Obviously, the only way to sell such a service is to talk about how much participants will save on fees. But Schwab doesn’t want lower fees, it wants higher fees. So while removing management fees with one hand, it simultaneously inserts huge new advice fees with the other — and the advice fees probably have even bigger margins than the management fees did.

What’s more, Schwab’s messaging around this product has always been less than fully honest. Here’s the launch press release:

“Fund operating expenses for index mutual funds and ETFs are typically lower than those associated with most actively managed mutual funds offered in 401(k) plans today. We believe index funds can provide employees with a better opportunity to accumulate more savings for retirement,” said Steve Anderson, head of retirement plan services at Charles Schwab. “Through such low-cost investments, fund operating expenses could be cut significantly. For the average worker in a 401(k) plan, that can mean nearly $115,000 more at retirement.”

The irony here is deeply hidden: in order to end up with $115,000 more at retirement, you would have to opt out of the advice plan that the Schwab index-fund offering automatically enrolls you into. But actually, “the average worker in a 401(k) plan” is never going to wind up with an extra $115,000 at retirement just by switching to index funds.

If you look at the assumptions behind that $115,000 figure, you’ll find that our “average worker” is, in fact, very far from average. For one thing, she starts saving money at age 25, when she’s already earning $50,000 per year. That’s pretty much the median income for a US household, within just a couple of years of entering the workforce. Well done, that person! She then gets a 3% raise every year for the next 30 years — and once she’s in her 30s, she manages to sock away a full 10% of her income into her 401(k) account every year until retirement. Oh, and she managed to save 66bp by switching to index funds: that’s significantly larger than the real-world 50bp that we saw with the Schwab participants. And all the while her investments are growing by 7.5% per year, even when she’s near retirement and ought by rights to have switched largely to bonds.

But all of these assumptions are deeply buried and hard to find. As far as Schwab is concerned, the main thing to do is to come up with a large headline figure, something which will make it easier to sell the new index-fund retirement service to the less-sophisticated end of the HR spectrum. Schwab is pretty well positioned in this market: it’s known mainly as a discount broker, which means that the brand comes with connotations of low fees and low margins. But if you want to sign your employees up for an index-based 401(k) plan, which is a good idea, then the Schwab plan is not the right way to go, since it’s quite possibly the highest-fee index-fund plan out there, once all those advice fees are taken into consideration.

I work for an enormous company with a very financially-literate HR department; they’re not going to fall for this kind of pitch. But we shouldn’t live in a world where every medium-sized company needs to have people who can navigate the hard sell from people like Schwab offering fabulous new 401(k) plans. Right now, it’s incredibly difficult and time-consuming to choose between them, and it’s easy to see why plan administrators might easily just plump for a known name like Schwab. There really should be some reliable and impartial resource for those administrators. But I’m not holding my breath.

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America’s cranky, debt-scolding grandpas have missed the mark. We’re not the first to say it, but to the extent that the national debt is even a problem, it’s a health care spending problem.

The good news is that health care inflation is slowing. Recent data show that US health care costs grew 3.9% in 2011, matching 2010 and 2009 for the lowest rate on record. (Even Alka-Seltzer is getting cheaper).

The slowdown is particularly acute for government-run Medicare and Medicaid, where the Congressional Budget Office’s cost estimate for 2020 is now $200 billion lower than it was a couple of weeks ago. That’s a savings of about 15%. It’s unclear exactly why, but David Cutler and Nikhil Sahn write in the Journal of the American Medical Association that slower price increases and falling administrative costs — remember the hyped electronic medical records movement? — are likely drivers.

The bad news comes in the form of a 24,000-word article by Steve Brill, examining how medical treatment is priced in America, particularly for the uninsured. Brill exhaustively catalogues incidents like a $21,000 emergency room bill for heartburn, and diabetes testing strips with a 3,330% markup. No one writes smart responses to an article of this length in a matter of hours, but for the time being, here are three things to remember as you make your way through Brill’s article.

Firstly, Americans pay a lot more for healthcare than comparable countries. This spending accounts for 18% of US GDP — a number so large that it’s been called the equivalent of an 8% VAT. Secondly, anecdotal discussion of consumer pricing in industries with large and complex cost structures can be misleading. The cost of the aspirin a doctor hands out in the ER includes not just the cost of a single pill, but also the operating costs of the institution that delivers it, and that cost may be partially or fully covered by insurance — or the hospital itself. Thirdly, if we all knew the markup of every product we purchase on a daily basis, the percentage of Americans living on communes would increase drastically.

The much-discussed healthcare cost curve does seem to be bending in the right direction. The question is whether it’s bending enough — and whether the private healthcare industry can replicate the public sector’s savings, while improving care and extending it to more people. — Ben Walsh

On to today’s links:

Politicking
Congress is about to do what it does best: hurt the economy by failing to do its job – NYT
The sequester is “another manufactured, self-inflicted, completely preventable crisis” – Charles Blow

Charts
America’s awful market for young scientists – Atlantic

Awesome
“Culture” is just a lie of “the monied, celebrated, nuevo-social, 1% poster children of the startup life” – Shanley Kane

Ugh
The Fed is back to disagreeing about whether it should do anything to lower unemployment – Binyamin Appelbaum

TBTF
Why should taxpayers give banks $83 billion per year? – Bloomberg
You can’t just make up a number for the TBTF subsidy – Matt Levine

Alpha
The new top stock for hedge funds is none other than AIG – Business Insider

Oxpeckers
“Guess Which BuzzFeed Piece is An Ad” (A post sponsored by Andrew Sullivan subscribers) – Andrew Sullivan

New Normal
Walmart blames its lack of customers of Americans waiting for delayed tax returns – WaPo

Servicey
7 reasons to ignore annoying people who say coffee is bad for you – Popular Science

Leaders
Jamie Dimon is confident that his head is big enough to wear two crowns – NY Post
Hank Greenberg is… the most interesting man in the world (according to Hank Greenberg) – John Gapper

Shocking
Citi chairman against breaking up Citi – WSJ

Bubbly
Pinterest just raised $200 million at a $2.5 billion valuation – All Things D
The fight over what happened in Living Social’s $110 million down round – Dan Primack

Right On
There is nothing intelligent to be said about gold – Cullen Roche

Housing
Ex-Morgan Stanley CEO John Mack is selling his NYC apartment for $22 million – Curbed

Back in December, Peter Kafka summed up the most important question with regards to the future of online advertising. Do advertising dollars ultimately end up where people spend their time, he asked, echoing Kleiner Perkins’ Mary Meeker says, or, pace Bernstein Research’s Todd Juenger, is that a “fallacy”?

I’m with Juenger on this one. As he says, “time spent is supply, advertising spend is demand… Just because there is a large and growing supply of Internet inventory doesn’t mean advertisers have a correspondingly large desire to deliver more Internet impressions.” Indeed, as the price of online inventory continues to fall, it seems just as likely that online ad spend will go down (because the ads being bought are getting cheaper) as that it will go up.

According to Meeker, some 67% of all ad dollars are spent either on TV or in print. And according to Juenger, ad spend on TV actually went up, between 2009 and 2012, even as Americans’ attention moved away from TV and towards other screens. That makes sense to me, mainly because of the point I was making back in 2009, drawing the distinction between brand advertising, on the one hand, and direct marketing, on the other. TV is brand advertising; online ads, by contrast, are closer to direct marketing.

When people like Meeker look at ad spend, they’re looking mainly at brand advertising. Brands are valuable things, and billions of dollars are spent every year to keep them that way, mostly on TV and in print. And if you have a big national brand, there’s really only one way to reach a big national audience: you need to buy ads on TV. Doing so is expensive, but it’s necessary, and it works, which explains the huge sums of money which still flow into TV every year.

As Juenger explains, the audience for network TV has been shrinking by 1.8% per year for the past 20 years — but at the same time, the audience for every other TV channel  has been “atomized into increasingly tinier fragments”, leaving the networks the only game in town for advertisers wanting scale. The result is that network-TV ads have been increasing in price by 4.9% per year on a per-person-reached basis, resulting in total revenues growing, by 3% a year, in a market which is actually shrinking.

The corollary to the continued success of network TV is the utter irrelevance of online ads. Here’s a handy chart from Nielsen, breaking down the amount of time we spend in front of various screens each month:

TV is still the monster, the elephant: for all the talk of cord-cutting, Americans have clearly voted that, given the choice, they’d much rather have cable TV than broadband internet.

And for web-based publishers, the situation is much, much worse even than this chart makes it look. Consider: the number of websites out there is many orders of magnitude greater than the number of TV channels, which means that even as network TV is winning over small cable channels, small cable channels are still in a much better position than just about any website which isn’t called Facebook or Google or Yahoo. Moreover, if you’re running a news site, you’ll be even more sobered to learn that just 2.7% of the time that people spend on the internet is spent on news sites. You think you’re competing against a lot of other news sites to attract advertisers? You don’t know the half of it. In reality, you’re competing against the other 97.3% of websites, and they are competing against TV. It’s a fight you can’t hope to win, especially since non-news websites are so much better at delivering people primed to buy stuff (search) or delivering large numbers of people in narrowly-targeted demographics (Facebook).

The key concept at the heart of Juenger’s fallacy — the thing which Meeker doesn’t seem to understand — is the fact that internet advertising in no way substitutes for TV or print advertising, no matter how often digital ad-sales people bring out their metrics of comparative CPMs.

In 2011, I gave a talk to a group of online ad-sales people who were so full of the multitude of different ways that they could target and quantify their product, they literally no longer understood what brand advertising is, or why it exists, or why brands would be so foolish as to spend so much money on it. They’re quants, living in a world where something only has value insofar as it can be quantified, and where the unquantifiable therefore is perceived to have no value at all. In other words, they’re basically in the direct-marketing business: they’re the digital version of junk mail. As a result, just about every website in the world is in the business of delivering that digital junk mail to our computers and iPhones and iPads.

This, then, is the biggest reason why TV ad dollars are not going to become online ad dollars: online ads simply don’t do what TV ads do. TV ads are large and beautifully produced and expensive, and they’re presented on a beautiful screen without distractions: they fill up the screen, and 30 seconds of time, and they appear often enough that they become part of the world of the people watching 145 hours of TV every month. Online ads don’t behave like that at all: they’re easy to ignore, there’s nothing inherently interesting about them, and insofar as they grab your attention, they tend to do so in a very annoying way, by preventing you from reading or watching the thing you were looking for.

Hence the rise of so-called native ads: things you want to read and look at and click on. There’s a certain amount of promise there, and the native-ad industry is certainly going to grow from its present size. But it’s tough: building these things is a huge amount of work for the advertiser, with no guaranteed payoff. And selling them is even more work for any publisher.

And here’s the next big problem with selling online advertising, especially native advertising: it’s really expensive to do so. While online journalism is still cheap, online ad-sales staffers tend to cost a fortune, especially if they have a clue what they’re doing. This is something the Meekers of the world would do well to remember: the ad dollars spent online are spread across so many sites that a massive proportion of them end up just going straight into the pockets of the people selling those units, or else to the various ad networks and other intermediaries which have popped up in a very busy and messy space.

This kind of thing just doesn’t exist in TV or even in brand advertising more generally — areas which are much simpler, much easier to navigate, and which sit much more comfortably within consumers’ comfort zone. And it’s not going away. I was told this evening that Buzzfeed alone has no fewer than sixty ad-sales people, all of whom are out there, knocking on doors, taking potential clients out to lunch, and generating income one hard-won deal at a time. That doesn’t scale. (Update: BuzzFeed CEO Jonah Peretti says that the actual number is 19.)

Indeed, if you want to get your brand out there on the internet, you can try buying ads on websites, or you can try going native on a site like Buzzfeed, but the fact is that the whole point of the internet is that it disintermediates: it’s great at drawing direct connections. Hence the rise of what’s known as “content marketing”: why buy ad space from a publisher, when you can be the publisher instead? We’re still in the early days of this, but already musicians are discovering that brands are much friendlier — and pay much higher rates — than record labels, while American Express has been employing extremely good journalists for years.

On top of that, as Liz Gannes and Noah Brier note, nobody “goes online” any more: the internet is becoming an ambient background thing-that’s-always-there, rather than a mass communications medium that people consciously think of themselves as paying attention to. When you pick up a magazine, you do so because you want to read it; similarly, when you turn on the TV. But the internet is different: your phone is always just sitting there, and sometimes it beeps at you; your computer is always on your desk at work, and it’s never not online. In a mobile world, the distinction between being online and not being online is an increasingly silly one to draw. And as a result, the idea of using “time spent online” as a useful metric of anything, really, is equally silly.

So if the internet is not going to displace TV as a medium for mass-market brand advertising, might it at least be good at direct marketing? Can publishers not deliver certain readers, in certain demographics, to marketers who want to reach them? To a certain extent, yes. But the fact is that Google and Facebook, between them, are extremely good at delivering as many of those readers as any advertiser could ever want: all that Facebook needs to do is turn a dial, and billions of new impressions get added to the stock of global inventory, targeted at any demographic that any advertiser could want. Google, similarly, owns search, especially mobile search. It’s conceivable that some marketers might prefer to reach an audience some other way — but this is a race to the bottom, with a finite amount of demand chasing an essentially infinite amount of supply. That’s a buyer’s world, where the sellers have no real leverage at all.

Some very large proportion of the websites on the internet have a pretty basic business model: “we will publish great content; millions of people will want to read or view that content; advertisers will want to reach those people; and so we’ll be able to sell our audience to advertisers and make lots of money”. There are people out there who have succeeded with that model, but the number of successes is dwarfed by the number of failures, and the amount of scale you need to even get your foot in any media buyer’s door has been rising dramatically for years. By the time you’ve paid for your content and for your ad-sales infrastructure, the chances that you’ll have any money at all left over for your shareholders are slim indeed, and getting slimmer year by year.

All of which means that smart online publishers are looking beyond advertising, to other forms of generating revenues. But that story will have to wait for part 2.

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What if boring banking is actually dangerous? James Surowiecki, citing research by Christian Laux and Christian Leuz, argues that it wasn’t high finance that pushed banks to fail during the financial crisis. Instead, banks simply “lent themselves right into insolvency”. Anat Admati and Martin Hellwig make the case in their book, “The Banker’s New Clothes”, that traditional lending can be just as risky as more as complex trading strategies — it also didn’t help that banks borrowed excessively. Their solution: banks should fund themselves with more equity and less debt.

Tom Braithwaite thinks that’s already happened and that the desire to increase return on equity, which is well below its pre-crisis peak, will make banks safer. “They are channelled away from [riskier activities] because Basel III puts tough ‘risk weights’ on riskier businesses… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’”. That placid view, however, is countered by the role that reducing risk-weighted assets seems to have had in spurring JP Morgan’s London Whale debacle.

Will the increased capital requirements of Basel III lead to less lending? Admati and Hellwig’s emphatic answer is that they won’t. In the short-term, the question’s moot: bankers, aside from a uptick in industrial and commercial loans, can’t seem to find anyone to to lend to. Elizabeth Dexheimer writes that new data from Credit Suisse shows the average loan-to-deposit ratio for the top eight commercial banks in the US fell to the lowest level in five years. That glut of deposits, Dexheimer reports, is the result of fewer customers wanting to take on loans and banks adopting more stringent lending standards. — Ben Walsh

On to today’s links:

Increments
China will tax carbon – at least a little bit, in a few years – Quartz

New Normal
Florida Atlantic’s University’s new football stadium sponsor: a private prison company – Chris Kirkham
Using Twitter to plagiarize a fake menu for a terrible celebrity chef’s restaurant – Gawker

Confessions
Erskine Bowles’ “Grand Bargain” formula: whatever is halfway between Democrats and Republicans – Ezra Klein

Nothing To See Here
DC’s less noticed revolving door: From regulator to influence peddler to staffer, and back again – Jesse Eisinger

EU Mess
French austerity is holding back growth – Sober Look

Investigations
Someone placed a very profitable $90,000 bet on Heinz just before it was acquired – Dealbook
Why the SEC may be overreaching – John Carney

Politicking
“There is no possible sequester deal to be made” – Kevin Drum
Sequester blame game in full swing – WaPo

Right On
What NYC can do to actually help startups (healthcare, tax credits, banks that don’t suck) – Choire Sicha

MF Doom
Regulators leaning towards the conclusion that Jon Corzine shouldn’t trade futures – NY Post

Hoarders
Americans are sitting on $9 billion in old, unused iPhones – MarketWatch

Says Science
We think, therefore we are selfish – Science

Is Google becoming a key arm of the law-enforcement complex? It certainly seems to be so with respect to art thefts. I first came across this idea back in November, when Bloomberg Markets profiled Jeff Gundlach, who was hit by art thieves in September:

The cerebral Gundlach also gave investigators a tip for solving the crime. He says that while he was at home in his family room, it dawned on him that thieves would do a Google search using his grandmother’s name to find out more about the paintings and how much they might be worth.

Gundlach told the authorities that they should check the Internet to see who might have googled the name Helen Fuchs. He says exactly two such searches were executed: one by him and one by the thieves.

Now, another man has been arrested for art theft, and was found in much the same way:

In their investigation into the art theft, [officials] found that Mr. Istavrioglou had searched the Internet for reports about the robbery after it took place but before the story became news.

Law enforcement officials, it seems, have pretty easy and routine access to Google’s search-history database, and this is surely only the beginning when it comes to sifting through huge amounts of data to find evidence of crimes. The SEC, for one, has had a large data-mining team in place for a good five years now, going through enormous quantities of data to look for signs of suspicious activity.

Even journalists are getting in on the act of using data to uncover criminal activity. The Sun Sentinel, in Florida, managed to obtain a year’s worth of SunPass toll records for cop cars. That meant that they had data on the amount of time it took cops to drive from one toll plaza to the next. All they needed to do then was measure those distances, divide the distances by the time taken to drive that length of road, and come up with an average speed, for cops who were often just commuting to or from their houses, out of their jurisdiction. The result? The Sun Sentinel found “almost 800 cops from a dozen agencies driving 90 to 130 mph on our highways” — in a state where speeding cops have caused at least 320 crashes and 19 deaths since 2004.

Part of the reason why it has taken so long to bring Libor prosecutions is that going through millions of email and IM records, looking for smoking guns, is still a laborious and time-consuming process. But as data mining techniques continue to evolve, and as databases become increasingly unified and tractable, and our lives are lived almost entirely online, it’s going to be harder and harder for criminals not to leave a discoverable data trail — especially opportunistic criminals, who break the law when they’re given a chance, as opposed to more considered criminals, who spend a lot of time plotting a crime before committing it.

It stands to reason, given advances in computer power and given the size of the networks that we all involve ourselves in every day, that the kind of data crunching that used to be solely the domain of places like the NSA and GCHQ is now going to be available to local police forces and even ordinary citizens, including journalists. The privacy implications are profound, of course: millions of innocent people are going to have their personal data combed on a real-time basis, every day. But that seems to be inevitable, insofar as it isn’t already a reality.

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Everyone loves corporate tax reform these days. In his state of the union speech, Barack Obama called for closing corporate tax loopholes; the G20 and OECD say they’re also on the case. The US and Switzerland are vowing to share more information, as a part of the 2010 Foreign Tax Compliance Act, which intends to do pretty much what its title suggests.

Tim Fernholz cites a recent report that says the US lost between $57 billion and $90 billion in revenue in 2008 thanks to overseas tax shifting. That’s real money: the sequester of cuts Congress is arguing over are worth $110 billion.

But finding that money is easier said than done. Whether it’s John Paulson’s reinsurance company in Bermuda, Dell’s MBO, David Einhorn’s idea for extracting value from Apple, or even Starbucks classifying coffee-roasting as manufacturing, tax avoidance is an entrenched global industry, endemic to all multinational corporations.

The Economist’s new cover package reveals the magnitude of the problem globally: there’s a “missing $20 trillion” stashed in offshore in a patchwork of 50-60 tax havens, ranging from Delaware (home of “dodgy shells”) to the Seychelles (“shadier” and reportedly favored by Russians and Africans).

Amid all this heat, the tax-avoidance industry is working on a rebranding: “‘Offshore’ is considered pejorative, ‘tax havens’ unmentionable”, the Economist writes. The preferred nomenclature is “international financial centre”. — Ryan McCarthy  

On to today’s links:

Popular Myths
No, there aren’t any global “currency wars” – Economist

Hackers
China’s army is said to be behind a number of cyberattacks on the US government – NYT

Data Points
“4% of the internet counts as entertaining rubbish” – Robert Cottrell

Advanced Strategy
Morgan Stanley’s tried and sure to fail new plan: get traders and bankers to work with retail brokers – Dealbook

New Normal
Our historically weak recovery in three charts – Ezra Klein
The world’s developed nations need to start having more kids right now – WSJ
How robots are eating the world’s manufacturing jobs – Quartz
Horsemeat, brought to you by a Russian arms dealer – Guardian

Politicking
Why it’s time to update the GOP’s Reaganism – Ramesh Ponnuru
Reaganomics was a failure for the middle class – Paul Krugman

Epistles
Regulators probably don’t appreciate snark – FT Alphaville

Blatant PR Pushes
“I supply you with fully developed stories that you can publish under your byline” – Jim Romensko

Possibly Useless Data
77 people say they don’t have cable – Dan Frommer

Strangely Existential
Most stocks, like most people, fail to live up to expectations – Ivan Hoff

Ugh
Nearly 10,000 Americans will lose access to AIDS drugs under the sequester - WaPo

Oxpeckers
The art of the good bad review – Irish Times

Investigations
Big banks are still getting used to this “we may have to admit guilt” thing – Dealbook

Financial Arcana
Value-destroying acquisitions: a good reason to discount cash on corporate balance sheets – Credit Slips

Right On
Nearly 150,000 people have watched this video of Elizabeth Warren going hard at bank regulators - YouTube

Tragic
“Black men in their 20s and early 30s without a high school diploma…[are] more likely to be in jail than have a job - NYT

Capers
Diamonds and gold worth $67 million stolen from Swiss-bound plan – Evening Standard

I wrote something stupid on Friday. I was putting together a follow-up post about Maria Popova and her blog, Brain Pickings, covering a bunch of points I’d failed to make in my original post on the subject. And it turns out that there were a lot of those points: the follow-up post ran to more than 2,400 words, on top of the 1,000-word original.

The second post was written disjointedly, on trains and on strange couches and while sitting in a lecture hall at Yale Law School, half-listening to panel discussions about impact investing in emerging markets. As such, it wasn’t one of those posts where you have something to say, and then you write it down, and then you press “publish”; instead, it was one of those posts where you write a bit, and then you do a podcast, which gives you another idea, which you squeeze in somewhere, and so on. The perfect blog post is exactly one idea long; in that respect, this post was far from perfect. I just didn’t want to spend all week writing about Maria Popova, so I tried to get everything covered in one fell swoop.

As a result, halfway through the post, I made an ill-advised detour into gender politics. (Not that I had any advisers telling me this was a good idea: it was entirely my own mistake.) Here’s what I wrote:

The consistently positive and upbeat tone to Popova’s blog might generate healthy Amazon income as a side-effect, but it’s also genuine: she’s one of those bloggers — Gina Trapani is another very successful example — who have no time for snark and who naturally look for things to celebrate rather than things to tear down. (Just listen to that O’Reilly talk: she dishes out huge amounts of praise to virtually everybody she cites.)

To a certain extent, this is a female thing: positive happy bloggers tend to be female, as do their readers. And when someone like Anne-Marie Slaughter supports Maria Popova to the tune of $300 per year, there’s definitely an element there of supporting the sisterhood. Which is a good thing!

But to many male observers, there’s something a bit off there.

This did not go down well, and I soon ran into a firestorm of criticism on Twitter, accusing me of saying that women are simple and happy. How could I be so sexist? How could I generalize about women, or about women bloggers, in that way?

My first reaction was indignation: I hadn’t generalized about women, or women bloggers. If I say that “brain surgeons tend to be men”, you really haven’t learned anything about men, or about male surgeons. Men don’t tend to be brain surgeons, and neither do male surgeons.

But on reflection, including that passage was pretty obviously stupid. For one thing, my language (“female thing”, “male observers”) naturally and unnecessarily raised a lot of hackles: there’s a line between being plainspoken and being needlessly provocative, and I crossed it. In doing so, I made it far too easy for my readers to miss the precise meaning of “most positive happy bloggers are female”, and to read it instead as “most female bloggers are positive and happy”, or even “most females are positive and happy”.

And then there’s the bigger question of why on earth I thought it was a good idea to bring sex into the blog post at all. It really wasn’t a particularly important part of what I was saying, but it created a situation akin to a long play with a nude scene in the middle: once it’s over, all that anybody remembers is the nude scene. By including this passage, I was effectively doing my best to ensure that people would completely ignore the other 2,300 words of the post.

Finally, and most importantly, I was wrong on the substance of what I said, as well. This one took me longer to work out; I’m indebted to Salon’s Irin Carmon, who spelled things out in an email to me, for explaining something which can’t really be encapsulated in 140 characters:

You seem completely ignorant to the fact that if many women behave in a “positive” fashion, it’s partially because the social costs of being anything else are much, much higher than they are for men. Women who are critical, opinionated etc are still “crazy” or “bitchy” or whatever. Meanwhile, women have socialized to not make too much noise, be nice, make other people feel better about themselves — to enormous professional cost, I would argue, even if they are inherent goods for society. The successful women you write about are clearly threading that needle, and it’s working for them — but the way you described them clearly implied that it made them unserious (“to many male observers”, etc).

In a similar vein, women are often disqualified from serious discourse for writing about things that are become serious when men do them. See: Andrew Sullivan writing about his personal life. Women who do it are navelgazers.

When I talked about “male observers”, I didn’t mean the word “male” as a compliment. Far from it. But Irin’s point is well taken: there’s a societal pressure on women to be pleasant, and the many wonderful snarky female bloggers out there generally face much nastier and much more personal pushback than do those of us who are men. So it’s fine to praise a male blogger for being positive and happy, just as it’s fine to praise a white man for being calm and slow to anger. But talking about positive and happy female bloggers is a bit like talking about calm and controlled black men — it’s something which is incredibly fraught, and which you certainly don’t want to do in passing.

Katha Pollitt, in 1991, coined what she called the “Smurfette Principle” of children’s books:

The message is clear. Boys are the norm, girls the variation; boys are central, girls peripheral; boys are individuals, girls types. Boys define the group, its story and its code of values. Girls exist only in relation to boys.

My “female thing” was a prime example of the Smurfette Principle in action. Snarky and political male bloggers are the norm; happy and positive female bloggers are the peripheral exception. That is pretty offensive, and also untrue. Blogging is a broad and vibrant church, and singling out some random subset of it as being particularly female is very unlikely to be helpful. So: apologies to everybody who was offended by this wholly unnecessary passage. There was no good reason for publishing it, and doing so was entirely my fault.