Felix Salmon

Can Rupert Murdoch hold on to Kara Swisher?

Felix Salmon
Aug 28, 2013 00:19 UTC

Who is the best journalist (so far) of the new millennium? Who has best embraced the opportunities afforded by digital media, and used them to deliver breaking news and incisive opinion to the greatest effect? Put like that, it’s hard to wind up with any name other than Kara Swisher.

As David Carr and Jay Rosen will tell you at length, we live in a world of the opinionated scoopmonger — a world where a handful of brand-name journalists, wearing their opinions proudly, create a virtuous cycle of news. Ezra Klein is a good example: he is both very smart and incredibly well-sourced in Washington, which in turn lends a lot of credibility to his opinions. Because policymakers read him and respect him, they reach out to him and talk to him — which in turn gives him insight, for his opinions, and also scoops, which only serve to consolidate his importance.

Klein is in the process of building out his Wonkbook brand at the Washington Post: he’s one of a handful of what Jack Shafer calls the Marquee Brothers. Among the others: Andrew Ross Sorkin, Andrew Sullivan, and Nate Silver. All of them have strong personal brands, but only Klein is a true double threat, on both the opinion and the news-breaking front: Sullivan and Silver are read for their analyses, not for any news value they might have, while Sorkin, for all that he has a high-profile weekly column in the NYT, is still valuable mainly for his sources and the access (and information) those sources will predictably give him over any of his rivals. Indeed, there’s a case to be made that Sorkin’s column is in large part a means of buttering up the sources he’s looking to get scoops and access from in future.

There’s value in all these models, and Sorkin’s in particular is not to be sneered at. But if you can master the dual arts of both analyzing and breaking important news, and if you can do so faster and better than anybody else, then truly the journalistic world is your oyster. Klein is good, when it comes to such skills. But Swisher is better. Her analysis is more interesting, and more pointed; her news scoops are hard, rock-solid items about boards and deals and companies, rather than being softer, more conceptual pieces about things like who’s the front-runner to take over the Fed chairmanship.

On top of that, Swisher, along with her partner Walt Mossberg, has been building the All Things D brand for much longer than Klein’s been building Wonkbook, and they’ve created a true force in Silicon Valley. They’re not some buried section of WSJ.com, in the way that Wonkbook is part of the Washington Post or Five Thirty Eight and Freakonomics were part of the NYT; they’re an editorially independent, non-paywalled force of nature, competing aggressively against any and all journalists in other parts of their parent organization. People want to know what Swisher and Mossberg — and Peter Kafka, and Jason Del Rey, and Liz Gannes, and the rest of the ATD editorial staff — have to say. They love the way the site is designed, and the way in which it’s open to featuring many voices from outside News Corp. They’re reassured by the site’s editorial transparency, its writers’ detailed codes of ethics, and the fact that over many years it has proved itself to be extremely reliable in reporting the news. And, of course, they come back regularly to read the constant stream of scoops that ATD serves up.

Swisher, then, has created not just an amazing personal brand, but also a highly enviable corporate one. ATD is in many ways the most glittering digital jewel that News Corp owns — much more than its 5% stake in Vice, or the also-ran nypost.com website, or any of the stuff that gets hidden behind various paywalls. But according to Fortune, there’s now a real possibility that News Corp is going to allow Swisher and Mossberg to slip out of its grasp:

Reuters reported in February that AllThingsD co-executive editors Kara Swisher and Walt Mossberg had begun discussions with owner Dow Jones, a subsidiary of News Corp, about either ending or extending their partnership, which is set to expire on December 31.

Since then, Fortune has learned that AllThingsD is working with investment bank Code Advisors to find outside investors at an enterprise value that could exceed the $25 million that AOL reportedly paid in 2010 for rival site TechCrunch. One source says that the asking price is between $10 million and $15 million for a 25% or 30% stake in the company…

Dow Jones officially owns the AllThingsD brand, website and content. It also manages the site’s ad sales, but only Mossberg is an actual Dow Jones employee. Swisher and the rest of her AllThingsD editorial colleagues are contractors paid via an independent limited liability company. One scenario could involve the AllThingsD team leaving to start an independent venture with a new name, while Dow Jones retains the AllthingsD brand (and possibly the archived editorial content).

What’s happened here is that Swisher and Mossberg have created something with substantial value — as much as $50 million. And since the value lies with them, rather than in the ATD brand, they can walk away and find a strategic partner willing to invest an eight-figure sum in creating a new, entirely independent brand. That’s got to be attractive to them, for two reasons: firstly, they would become truly independent, and in control of their own destiny. No more begging their New York paymasters for extra investment: if they own the company, they can make all those decisions themselves. And then, of course, there’s the money: if they each own say 25% of a $50 million company, that’s a lot of paper wealth which they’re never going to accumulate working for News Corp, and which — in the way of Silicon Valley — could become worth much more still if their expansion plans work out the way they hope they will.

Meanwhile, Rupert Murdoch stands firmly on the other side of the Great Paywall Divide, and feels as a matter of principle that all of his properties (except, perhaps, nypost.com) should charge readers for their content. He’s also human, which means that, like all other humans, he’s deeply reluctant to pay a large amount of money to buy something he already owns.

Murdoch, by rights, should be able to retain control of ATD, complete with Swisher and Mossberg. They’re offering very little to his rivals: a minority stake, no editorial control whatsoever, and probably very little cashflow, at least for the first few years, since as a startup they’re going to want to reinvest all of their revenues back into their company. Meanwhile, News Corp has the opportunity to own ATD 100% (indeed, it already does), and can offer Swisher and Mossberg the ability to invest in the site without having to go through the hassles of rebranding and relaunching. Given the economics of control premiums, Murdoch should easily be able to promise significantly more resources than his rivals can come up with.

But after years of writing the entrepreneurial gospel, it’s understandable that Swisher and Mossberg might want to live it for themselves. And they’re both wealthy enough to afford a few years of startup wages: Mossberg has been one of Murdoch’s highest-paid print journalists for years, while Swisher, who’s well paid herself, is also married to long-time Google executive Megan Smith.

Swisher and Mossberg built the ATD franchise as far away from New York and Murdoch’s interference as they could — they based it in California, and refused even to share back-end technology with Dow Jones. That decision was smart: one look at The Daily shows what happens if you’re too close to the man himself. They don’t need News Corp — but if News Corp aspires to be a real force in digital media, it really does need them. The digital world is closer to TV than print, in terms of the importance of talent management and talent retention. If Murdoch and his dealmakers can’t hold on to Swisher and Mossberg, News Corp’s digital future looks pretty bleak.


This is an excellent post. The analysis of Sorkin is apt.

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Elliott vs Argentina: Enter the crazy

Felix Salmon
Aug 27, 2013 06:26 UTC

Back in February, when I made my prediction for how the Argentina endgame would play out, I got the date wrong. I did, however, get the substance right:

One likely scenario is that the appeals court will uphold Griesa’s decision at some point in April or May, forcing a big default in June. At that point, Argentina will probably launch an exchange offer under Argentine law, under which anybody holding currently-performing bonds would be able to swap them into bonds with substantially identical terms, just payable in Buenos Aires rather than New York. Given that Argentine-law bonds have been trading at tighter spreads then US-law bonds for some months now, one can assume that nearly all bondholders would jump at the opportunity to keep on getting their coupons.

Argentina might even take the opportunity to give its holdouts a third bite at the cherry, offering them some kind of option to take a haircut and get performing Argentine-law bonds in exchange for their defaulted debt. But many holdouts would still remain, and will surely continue to pester New York courts for the foreseeable future.

Timing aside, this is exactly what has now happened. Argentina might still be in the midst of its Supreme Court appeals, but given the choice between working within the US legal system and blatantly working against it, the country seems to have decided that it wants to do both at once.

For if Argentina does indeed open up this new exchange offer to existing New York-law bondholders, as the president said today that it would, that would might* be in clear and outright violation of Judge Griesa’s existing court order — the one which has not been stayed, which prevents Argentina, or its agents, from doing anything which would re-route payments on restructured debt. Doing so would pretty much guarantee that a loss for Argentina at the Supreme Court level, and might well give the appeals court all the excuse that it needs to lift the current stay.

From a tactical perspective, then, this doesn’t make a huge amount of sense: Argentina wants to delay proceedings as much as possible, and this action risks speeding them up very quickly indeed. And from a practical perspective there are massive obstacles in Argentina’s way as well. Argentina can’t do this alone: it’s going to need the help of bankers and lawyers and payment agents and trustees and the whole panoply of the international capital markets, if it’s going to come up with a way in which existing bondholders, with bonds registered in New York, can take those bonds and exchange them for new bonds which are registered in Buenos Aires.

Now Argentina has some very clever and very expensive legal minds working for it at the venerable firm of Cleary, Gottlieb, Steen and Hamilton — and maybe they’ve come up with a genius way of doing just that. But on its face, it’s going to be very difficult indeed for Argentina to find any companies in America which will help it blatantly and directly violate an existing court order — since the court order explicitly includes not only Argentina but also anybody aiding and abetting it.

If Argentina does manage to find a way to jerry-rig a bond exchange, however, then that exchange is likely to be taken up with great alacrity. Reuters poses the question well:

Fernandez’s proposal of a new bond swap raised questions about whether investors would be interested in taking Argentine bonds in lieu of foreign debt, given strict currency and capital controls that the left-leaning Fernandez government has imposed.

The answer to that question is hell yes, investors would be very interested in taking Argentine bonds in lieu of foreign debt. Here’s where I part company with the Associated Press:

Analysts have predicted that any attempt to pay bondholders in Buenos Aires rather than comply with the U.S. courts will fail, reasoning that few bondholders who now can turn to courts in New York in any dispute with Argentina’s government will be willing to risk a change that makes Argentine courts the final arbiter.

This, I think, is completely wrong. As we’ve seen time and time again over the past ten years, the ability to turn to New York courts in a dispute with Argentina is worth, to a first approximation, zero. On top of that, local-law bonds are trading inside foreign-law bonds — which is another way of saying that you get an immediate price boost to your debt as soon as you change the jurisdiction from New York to Buenos Aires. So give bondholders half a chance, and they will jump at the opportunity to change the jurisdiction and receive, in return, much more certainty that they’ll be paid in future. Sure, there are worries about exchange controls and the like. But being paid in Argentina is always better than not being paid at all.

If this exchange offer does go ahead, expect an extremely high acceptance rate — somewhere well north of 90%. And then, expect whatever New York law bonds remain to go into default shortly thereafter. That will trigger Argentina’s credit default swaps, which will pay out at a very high rate, since the value of defaulted New York law debt will at that point be extremely low. Remember that Elliott Associates is reported to own a large quantity of Argentine CDS; that means a big payday for Elliott, even if it doesn’t receive the $1.3 billion that the New York courts have ordered it be paid. Elliott, it seems, wins either way.

But frankly I have my doubts that the exchange offer will simply appear, as the Argentine president seemed to say that it would. An anonymous Argentine government official told Bloomberg that the exchange offer would only be opened up to existing New York bondholders “depending on the nation’s request for the Supreme Court to take their case” — so Kirchner might just be telegraphing what she intends to do if and when Argentina loses in Washington.

If that’s the case, she’s crazy: you might intend to do such a thing, but you don’t say that you intend to do such a thing, since that only damages your chances with Plan A, which is to get the Supreme Court to overturn the current ruling. But of course we all know that Cristina Kirchner is crazy.

All of which is to say: Kirchner has now dragged this whole saga deep into the land of the weird and irrational. Maybe we will soon see an illegal exchange offer targeted at existing New York bondholders; maybe we won’t. Either way, the rhetoric in this case will only get louder and less constructive. Expect much more heat than light going forwards.

*Update: Mark Weidemaier has found what seems to be a loophole. There were two original orders from Judge Griesa; the first implemented the draconian remedy for breaching the pari passu clause, and that was the one which was stayed pending appeal. Then there was a second “no workaround” order, which was not stayed, preventing Argentina from attempting anything clever like the exchange offer Kirchner just announced. When the Second  Circuit stayed its ruling pending appeal to the Supreme Court, however, it seems to have stayed “the November 21, 2012 orders.” Which seems to include not only Griesa’s remedy, but also the no-workaround order. If that’s the case, Argentina now has a very short window of time to get an exchange done, before the Second Circuit realizes what it has done and reinstates the no-workaround order.


The CDS won´t be triggered by the lack of payment to the defaulted bonds, the CDS language excludes that, but by the default of payment to the holdouts.

Now, have you thought about the possibility that BNY may give the bond holders names to Argentina so that the Republic can simply create an account at some Argentinian bank (in Buenos Aires)for each holder of the bonds and deposit the coupons there?

That way you don´t really need any further help from any US banks..

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Is Marissa Mayer the right CEO for Yahoo?

Felix Salmon
Aug 26, 2013 21:28 UTC

Nicholas Carlson, Joe Weisenthal, and Henry Blodget deserve many congratulations on Carlson’s monster 22,500-word profile of Marissa Mayer. It features the kind of deep reporting one normally only finds in books, and it sheds a lot of light on what is going on at Yahoo — both at the senior executive level and at board level. What’s more, Carlson was fortunate enough to get just the right amount of access to Mayer — enough to be able to fill in the necessary details, get lovely bits of color, and ask her the questions he needed to ask, but not so much that he became captured. (In general, with very few exceptions, the more time that a journalist spends with his subject, the more favorable the resulting profile will be.)

After reading Carlson’s piece, it’s clear that Mayer has genuinely changed Yahoo for the better, over the course of the year that she’s been running it. What’s not clear, yet, is whether Yahoo’s board made the right choice in picking Mayer over the alternative choice, Ross Levinsohn. Especially since the choice of Mayer was pushed through by two men — Dan Loeb and Michael Wolf — who aren’t even on the board any more.

When Loeb first took his large stake in Yahoo and pushed for a shake-up, his plan was clear. Yahoo was massively undervalued on any kind of sum-of-the-parts analysis, thanks to its large stakes in Alibaba and Yahoo Japan. As a result, if a new CEO were to come in and shake things up radically, the chances of value being destroyed were relatively low, while the amount of potential upside was enormous. So Loeb was itching to roll the dice.

What’s fascinating about Carlson’s account is the way in which Loeb, along with Wolf, his handpicked lieutenant, managed to override Yahoo’s chairman, Fred Amoroso, who favored Levinsohn over Mayer. Loeb’s 5% stake in the company was significant, but far from controlling — yet somehow, in practice, Loeb managed to get exactly what he wanted, even when he disagreed with the chairman of the board.

The choice of Mayer is particularly interesting in light of the fact that Levinsohn’s plan was in many ways more disruptive than Mayer’s. Yahoo has always struggled with the question of whether it is a media company or a technology company, and Levinsohn wanted to settle that question once and for all: he would sell Yahoo’s search business to Microsoft, while receiving MSN.com and lots of money in return, and move to using Google’s superior search product instead. And he could increase Yahoo’s Ebitda by 50%, even while he shrank Yahoo to a mere 4,000 employees — down from well over 15,000 as a technology company. At the end of the process, Yahoo would be a large, lean media machine, with more than 700 million unique visitors every month. Yahoo could sell those readers to advertisers, and make a fortune.

Given the inherent difficulty of competing over the long term not only with behemoths like Google and Apple but also with countless startups all wanting to eat your lunch, Levinsohn’s strategy made a lot of sense. You could get a lot of buzz by hiring a young, photogenic technology icon, who could then go on a massive shopping spree with shareholders’ money; that might well cause investors to boost your p/e multiples over the short term. But that basically would just turn Yahoo stock into a timing game, with the trick being to get out just as the honeymoon period is ending, and before shareholders start demanding financial returns on their M&A investments.

Loeb is a hedge fund manager: his job is to be good at timing games, buying low and selling high. And that’s exactly what he did at Yahoo. He sold his shareholding, and gave up his board seats, after the stock went up. But the job of the board, and of the board chairman, and of the CEO, is not to enrich and enable here-today-gone-tomorrow speculators. Rather, it’s to create permanent value. And it’s far too early to tell whether Mayer is capable of doing that.

Indeed, it’s still too early to tell what Mayer’s strategy really is. Levinsohn had a strategy — one which was clearly thought-out, and which would produce a focused, profitable company. Mayer, on the other hand, had, well, an excellent grasp of detail. Carlson has nailed down the timing: Yahoo’s board met with Mayer on July 11, 2012, and she gave an impressive presentation.

She described her long familiarity with Yahoo and its products. She described how Yahoo products would evolve over time under her watch. Her presentation included an extraordinary amount of detail on Yahoo’s search business, audience analytics, and data. She talked about fixing Yahoo’s culture with more transparency, perks, and accountability. She named her perceived weaknesses, and explained how she planned to address them — including by hiring people who had the skills she didn’t have.

That evening, the board decided to hire Mayer. The following morning, the board went through the motions of listening to a similar presentation from Levinsohn, along with his key lieutenants. But they’d made up their mind. Wolf started questioning Levinsohn aggressively, while Loeb spent a lot of the presentation playing with his BlackBerry (!) — and even disappeared off to the bathroom for a particularly important part of Levinsohn’s presentation.

Mayer did what she said she would do. She went on an aqui-hiring spree, buying more than 20 startups in her first year, culminating in the billion-dollar acquisition of Tumblr. She brought passion and buzz back to what had been a very demoralized company. And she sweated the small stuff: she would approve or reject, for instance, every single call or email that the PR team wanted to make to a reporter. She also dived head-first into a huge redesign of Yahoo Mail, taking personal responsibility to ship an awesome product in record-quick time.

On the surface, the results were fantastic. Yahoo’s new products, whether internal (Yahoo Mail, Flickr) or bought in (Tumblr) are best in class. Talented engineers actually want to work for the company again. And the stock price speaks for itself.

Screen Shot 2013-08-26 at 4.36.09 PM.png

But here’s the thing: it’s still far from clear what Mayer’s long-term strategy might be, or whether there even is one. Carlson does an excellent job of demonstrating how little she cared about anything on the business side of Google, and also of how distant she is when it comes to managing her direct reports at Yahoo — the people in charge of actually bringing in all the revenues. Mayer is more product manager than CEO, which maybe explains why she got on so well with David Karp — another person whose expertise is very much in the realm of product design rather than business-side nitty-gritty. When your company is your product, then the product manager as CEO can work very well. (See: Zuckerberg, Mark.) But Yahoo is not a product; it’s not even really a suite of products. To use the 90s terminology, it’s a portal — it’s a place where traffic can be aggregated and then monetized.

Yahoo’s doing very well on the traffic front, coming in top of the most recent Comscore rankings. But revenue is falling, and product design is only one of very many skills that Yahoo’s CEO needs. It’s also not even clear that Mayer is very good at that: although the new Yahoo Mail turned out lovely in the end, Carlson also recounts how Shashi Seth, the Mail team leader, along with his lead designer and his product manager, all departed shortly after their new Yahoo Mail shipped. Like Dan Loeb, perhaps, they decided it might be best to quit while they were ahead, rather than stay hitched to Mayer’s star. And these are the people in Yahoo who know Mayer best.

Mayer was extremely good at the job she held at Google until 2010 — essentially doing everything in her power to make the user experience as great as possible. Yahoo’s current users, too, have every reason to be happy that she has the CEO job — their experience is almost certainly better, as a result, than it would have been under Levinsohn. And for the time being, Yahoo’s employees and its shareholders are all happy as well. But I can’t help but feel that the CEO of a public $30 billion company, especially one which makes nearly all of its money by selling ad space to media buyers, needs certain management skills, and a passion for improving the company’s bottom line. Otherwise, Yahoo is likely to join the long list of companies where the people who sold their stock into the aggressive corporate stock buyback program ended up much better off than the loyal shareholders who didn’t.


Marissa Mayer, the Stanford genius, began her career at Google and thirteen years later, Google’s Geek Goddess switched loyalties. Wooed by Yahoo in 2012, Mayer became the youngest female CEO of her time There’s one thing about Marissa Mayer that everyone agrees to: she is among the smartest people you could meet. Mayer went to STANFORD UNIVERSITY only after scrutinizing the PROS AND CONS of 10 colleges that she had been accepted at. http://www.bidnessetc.com/business/maris sa-mayer-one-of-silicon-valleys-most-pow erful-women/

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The negative value of US citizenship

Felix Salmon
Aug 26, 2013 14:34 UTC

Kirk Semple has a big piece today on a longstanding phenomenon: the millions of people who live in America, who are eligible to become citizens, and yet who never do so. The numbers: there are roughly 8.8 million green card holders who are eligible to naturalize; about 750,000 people naturalized in 2012. Overall, if you’re still in America and you received a green card more than 20 years ago, there’s roughly a 60% chance that you became a citizen somewhere along the way.

This being a NYT story, there’s lots of talk about national identity: the lead anecdote is about a man who worries that he would “feel a little less Italian” if he became a citizen. And there are many people who become citizens, or who don’t, on purely patriotic grounds. But there are lots of other forces at play here, many of which Semple ignores entirely, or barely touches on.

Firstly there’s the fact that in many cases becoming a US citizen is a trade-off: while you acquire certain rights in the US (foremost among them the right to vote), you also lose certain rights — and sometimes your very citizenship — in your country of origin. For instance, consider a landowner with a green card who owns land in both her native country and the US. Often, the minute she becomes a US citizen, she can no longer own land back “home”.

More generally, if your home country requires that you give up your native citizenship when you become an American, then the choice can be a very tough one.

But beyond, that there are numerous much more practical considerations at play. Semple touches on one, which is the sheer cost, both financial and psychic, of going through the naturalization process. Another is jury duty. Being a non-citizen is like having a permanent “get out of jail free” card whenever you get a jury summons; many US citizens would value such a thing very highly.

And then there’s travel. It’s much easier to travel the world on a US passport than it is on a passport from, say, Syria, or Bangladesh — but, that said, there are countries which really don’t like admitting Americans, and if you already have a passport from Canada, or the EU, then you’re going to find it just as easy to travel as you would if you had one from the US. Especially given that green card holders are eligible for line-jumping programs like Pre✓ and Global Entry.

The weirdest omission from Semple’s piece, however, is the whole issue of taxes. A green card holder can leave the US at any time, give up her green card, and thenceforth never have to pay a cent in US taxes, or even file a US tax return, ever again. Again, this is an option which would be valued extremely highly by many Americans. By becoming a US citizen you essentially give up that option, as the likes of Eduardo Saverin have learned to their cost. If there’s even a small probability that you might want to move or retire to a low-tax jurisdiction, then it makes financial sense to keep the green card but not become a citizen.

Finally, it’s worth noting a statistical symmetry: the proportion of green card holders who eventually become US citizens is pretty much the same as the proportion of US citizens who vote. Voting is the top reason to become a citizen — and it’s something which roughly 40% of American citizens don’t bother to do. The NYT comments section is full of angry people who are deeply offended at the idea that people might be living in the US and not becoming citizens at the earliest opportunity. But really, if you have the same attitude towards voting as 40% of the US population, why bother? After all, if you take the option value of remaining a green card holder into account, becoming a US citizen probably has negative value, overall.


Hey guys,

First of all one cannot look at getting a citizenship for selfish/personal reasons. Many who get naturalized citizenship every year get it for personal satisfaction of being an American and the ability to participate in making this country a better place by participating in jury duty and voting. For people complaining about paying taxes after leaving this country, I can give you my personal reasons on why I feel its fair to do so. First of all, I moved into this country when I was in elementary school and got free education paid for by tax payers till graduating high school. I also got subsidized tuition for college and medical school, where I saved around 20-30 thousand dollars a year because I was an in-state resident. I also got the benefits of living in a country with good roads, electricity and water due to taxpayers money that I would not get in my home country. If I do decide to go back to my home country once I retire, I would not once hesitate to keep my US citizenship or hesitate to pay taxes, because it is immoral to do otherwise. Besides you also get the benefit of social security and medicare, and the opportunity to come to this country to visit anytime I want as a citizen. Paying some money to the betterment of this country in terms of taxes is a small price to pay for benefits and opportunities I have gotten which eventually will give me the ability to have enough money to retire anywhere around the world.

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Elliott vs Argentina: It’s not over yet

Felix Salmon
Aug 23, 2013 18:35 UTC

It’s the ruling we were all waiting — and waiting, and waiting — for: six months after hearing oral arguments, the Second Circuit has finally handed down its 25-page decision, finding in favor of Elliott Associates and against Argentina. On its face, the ruling is, as Mark Weidemaier puts it, a big loss for Argentina, and “a total win for NML”, a/k/a Elliott Associates. The ruling was unanimous — the rumored dissent never appeared — and pulls no punches: there’s no indication that this was a hard case to decide, or that the lower court’s extremely aggressive rulings were anything other than entirely reasonable.

Still, there are some oddities here, starting with the fact that this decision took such a long time to appear. The ruling, written by judge Barrington Parker, is not exactly a model of pellucid clarity; rather, it’s messy and scrappy and very narrowly argued. The real power of the lower court’s ruling was not that he told Argentina that it needed to pay Elliott: the court has been making such rulings for years, and Argentina has happily ignored all of them. So the district court judge, Thomas Griesa, went nuclear, and roped in virtually the entire global payments system as well. So long as Argentina was in default to Elliott, said Griesa, he would prevent actors like Bank of New York and Clearstream from doing their job and making the payments they’re contractually obliged to make to Argentina’s bondholders. The entire force of Griesa’s ruling, and the reason why this case is such a huge deal, is predicated on its ability to stop money from being lawfully transferred to bondholders after it has left Argentina and entered the payments system.

And yet here’s the Second Circuit blithely ducking all the hard questions raised by such an order:

The amended injunctions simply provide notice to payment system participants that they could become liable through Rule 65 if they assist Argentina in violating the district court’s orders. Since the amended injunctions do not directly enjoin payment system participants, it is irrelevant whether the district court has personal jurisdiction over them. And of course, “[t]here will be no adjudication of liability against a [non-party] without affording it a full opportunity at a hearing, after adequate notice, to present evidence.” In such a hearing, before any finding of liability or sanction against a non-party, questions of personal jurisdiction may be properly raised. But, at this point, they are premature. Similarly, payment system participants have not been deprived of due process because, if and when they are summoned to answer for assisting in a violation of the district court’s injunctions, they will be entitled to notice and the right to be heard.

Or, to put it another way: we’re going to dismiss all objections to the most important parts of Griesa’s order as being irrelevant or premature, and if you think you’re hurt by them, well, we’ll cross that bridge when we come to it. We’re not going to rule on the substantive issues, and we’re going to disingenuously declare that those issues can be litigated in some hypothetical future hearing — a hearing which will probably never happen, since the payments companies will end up just complying with Griesa’s order rather than risk him finding them in contempt.

It’s important to remember that the Second Circuit, with this ruling, is setting a hugely important precedent with massive consequences for the entire sovereign debt asset class. In such cases, it behooves any serious jurist to address the issue at hand head-on, rather than disingenuously punting with poltroonish pusillanimity.

At one point Judge Parker goes so far as to talk about “some payment system participants, ostensibly concerned about being sued for obeying the injunctions” — the “ostensibly” being a clear signal that he doesn’t even think that they’re particularly worried about being sued at all. It seems, indeed, that the Second Circuit judges take this entire case much less seriously than just about everybody else in their packed courtroom — and much less seriously than, to take one high-profile recent example, the government of France.

Indeed, Parker bends over backwards to try to persuade himself that his ruling really isn’t that important after all:

This case is an exceptional one with little apparent bearing on transactions that can be expected in the future. Our decision here does not control the interpretation of all pari passu clauses or the obligations of other sovereign debtors under pari passu clauses in other debt instruments. As we explicitly stated in our last opinion, we have not held that a sovereign debtor breaches its pari passu clause every time it pays one creditor and not another, or even every time it enacts a law disparately affecting a creditor’s rights. We simply affirm the district court’s conclusion that Argentina’s extraordinary behavior was a violation of the particular pari passu clause found in the FAA.

We further observed that cases like this one are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor.

That last sentence carries a footnote, which quotes an FT article as saying that Argentina is an “outlier in the history of sovereign restructurings”. Parker fails to mention that the article in question is in fact all about how important this precedent will be, and how it could radically upend the balance of power in the sovereign debt market. As Joseph Cotterill says, this ruling opens up “a huge fissure in pari passu litigation going forward”, and really only serves to muddy the waters, rather than clearing anything up.

All of which, weirdly, might conceivably end up being a good thing for Argentina. The country has suffered a series of brutal losses in the US courts, and there’s no particular reason to believe that’s going to change. But the Second Circuit did stay its ruling pending an appeal to the Supreme Court — and there’s even reasonably explicit language in the ruling hinting that the appeals court would actually welcome the Supreme Court taking this case. Much of Argentina’s argument was based on the idea that the ruling violates the Foreign Sovereign Immunities Act (FSIA); the Second Circuit decided that it doesn’t, but only “absent further guidance from the Supreme Court”.

As a result, it’s possible — not probable, but possible — that the Supreme Court might at least ask the Solicitor General to weigh in on whether it should accept the appeal. If that happens, the Solicitor General will face an enormous amount of lobbying on both sides, but is ultimately likely to stick with the US government’s stated position to date — which is that the ruling does violate the FSIA. And if that happens, and the Supreme Court is faced with not only France but also the US and the IMF and various other actors all saying that the case was wrongly decided, it could actually go ahead and accept the appeal.

It’s a long shot, to be sure. The Supreme Court rarely accepts appeals where all the lower courts are in agreement with each other, and unanimously so. What’s more, there’s no clear constitutional issue at hand. And in any case even if it does accept the appeal, there’s surely a good chance that the Supreme Court will uphold the Second Circuit’s decision. But I’d say that Argentina’s chances of getting its case heard in Washington probably went up today — which might explain the positive market reaction to the ruling.

In any case, my prediction that Argentina was going to default in 2013 is now straight out the window. I thought that the Second Circuit would rule in April, or maybe May, and that the default would come in June; it never occurred to me that it would take the appeals court six months to write an unimpressive 25-page ruling. And now there are going to be many further months of delay, as Argentina puts together its appeal, and (probably) as the Solicitor General takes his time responding to the Supreme Court.

Indeed, if you read between the lines here, it’s possible to see a slightly different interpretation of the appeals court’s ruling. Remember that the court came out very quickly to ask Argentina to make an offer to Elliott Associates; it then waited a huge amount of time before finally ruling, and even when it did rule, it immediately stayed the ruling pending appeal. It seems to me that the Second Circuit didn’t really want to rule in this case: what it wanted was for Argentina and Elliott to settle, and it gave them every opportunity, and all the time they needed, to do so.

It almost goes without saying that Argentina and Elliott are not going to settle — not so long as Cristina Kirchner is president of Argentina, anyway. But given how long this litigation has gone on already, it’s actually now conceivable that it could still be in front of some court or other when Kirchner finally gets replaced by someone else. (The next presidential election in Argentina is scheduled for October 2015.) The base-case scenario is still, very much, that Argentina will default on its debt once the court ruling takes effect. But looking at how slowly this case is moving, I wouldn’t like to hazard any kind of guess as to when that might be.


“poltroonish pusillanimity”

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Data crashes: inevitable and mostly harmless

Felix Salmon
Aug 22, 2013 21:34 UTC

When you look up the price of a stock on the Nasdaq stock exchange, you’re not really looking up the price at which it’s trading on that exchange. All of the Nasdaq stocks trade on dozens of exchanges, all of which have the right to trade in those stocks. That right is known in the market as unlisted trading privileges, or UTP. The job of the Nasdaq is to serve as the securities information processor, or SIP, for all those different exchanges: the exchanges report to the Nasdaq all of the information they have on bids and offers and trades, and then the Nasdaq aggregates all that information and presents it in one place. Most importantly, it shows the most recent price at which any given stock traded, on any exchange. That’s the price you’re looking at.

Now the Nasdaq is an exchange itself, but it doesn’t really have to be: it could halt all trading on its own exchange tomorrow, and no real harm would be done. So long as Nasdaq stocks could trade on all the other exchanges, and the Nasdaq could continue to keep tabs on all the trading going on across the different exchanges, no one would really notice. The real importance of the Nasdaq, then, is not its status as an exchange, but rather its status as a SIP.

The stock market is a bit like chess, or backgammon: it’s a game of (to coin a phrase) total information awareness. Everybody in the market receives the same information in real time. Of course it’s up to any individual trader how — and how quickly — they act on that information. When you enter the stock market, you basically sign a waiver giving up all privacy rights; the Nasdaq, doing its best NSA impression, watches your trades, collates the data on each one, and then republishes it. It’s a prime example of a situation where all the value lies in the metadata: if an exchange stops trading, the effect is much less drastic than if the SIP stops collating and disseminating its index of what’s going on.

Today, of course, that’s exactly what happened. In the parlance of the Nadsaq, there was “an issue at the UTP SIP”, and as a result, all trading, on all exchanges, came to a sudden stop at 12:14pm. The system stayed down for most of the afternoon, until 3:25pm.

The financial system can cope with a three-hour outage, of course. The entire stock market was closed for two days after Hurricane Sandy, and for four days after 9/11. Yes, unexpected intraday outages are bad things — they leave traders with open positions which can’t be closed. But in this case, the Nasdaq managed to reopen before the end of the day, and not much happened over the course of the three dark hours.

But the Nasdaq’s systems aren’t designed to go down and up like this. It’s really just good fortune that the Nasdaq managed to get things working again before the close. Our system of stock exchanges is so incredibly complex, with so much information flowing around at mind-boggling velocity, that it is certain to fail from time to time — and to fail in unexpected ways. We probably won’t know for days what caused today’s mysterious “issue” — and even if the Nasdaq manages to put patches in place to ensure that it doesn’t happen again, something else — something equally unexpected — will happen instead. As Alexis Madrigal says, the surprising thing isn’t that the Nasdaq broke, it’s that we don’t see this kind of thing far more often.

In fact, if I had the opportunity to interview Edward Snowden, that’s one of the questions I’d love to ask: How well do the NSA’s systems work? How often do they just crash, or otherwise stop working for an unexpected and unpredictable reason? The NSA is dealing with orders of magnitude more data than the Nasdaq, and has to do so in conditions of great secrecy. My guess is that things go wrong on a pretty regular basis. But the real-world consequences of today’s market outage, just like the real-world consequences of the flash crash, were pretty slim. And so too is it hard to determine what if any harm might be done by a temporary failure of America’s national security apparatus. When we look at an ultra-high-tech world of server farms and state-of-the-art code, we tend to assume that it’s all incredibly valuable and important. But it turns out, when we lose it, that most of us don’t even notice.


….”with so much information flowing around at mind-boggling velocity”….

Thank you for admitting that a lot of the high velocity “trading” is CIRCULAR.

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The incredible shrinking company

Felix Salmon
Aug 22, 2013 17:26 UTC

Christopher Mims has a good piece on Meg Whitman’s Hewlett-Packard today, pointing out that the company’s success (at least as measured by its stock price) over the past year or so is in large part due to her cost-cutting abilities.

Mims doesn’t mention that this strategy is hardly new for HP: it was executed with just as much success under Mark Hurd. The really big errors at HP have taken place at the board level, both in terms of hiring and firing CEOs and in terms of approving ridiculous over-ambitious acquisitions. When it puts its mind to it, HP turns out to be pretty good at shrinking. It’s growth which turns out to be where the pitfalls lie.

Which is why I’d take issue with Mims here:

A more efficient, better-managed HP doesn’t mean much in the long run if the company cannot move beyond the stagnating businesses that make half of its current revenue—PCs and printers…

Without any innovative consumer products to speak of, HP is essentially at the mercy of big businesses’ appetite for technology. And they seem to be wanting less and less of whatever HP is selling…

While she’s managing HP’s consolidation and retreat admirably, is she the CEO who can get the company to once again break the mold? Given her background as head of eBay, a company that changed little under her decade-long rule, we have to be dubious.

I can understand where Mims is coming from. HP is a technology company, and under the unspoken rules of the US stock market, all public companies, and especially all technology companies, should constantly be growing as fast as possible. It’s the inexorable mathematics of discounting: if a company can deliver consistent growth which is faster than the prevailing discount rate used to calculate net present value, then its stock price should, by rights, be infinite. Consequently, given that infinite upside, it’s worth risking quite a lot to achieve growth.

But the facts are pretty plain: (a) HP is very good at producing excellent products in the shrinking markets which make up most of its business right now; (b) HP has in recent years shown no particular ability to produce excellent products in other markets; (c) Meg Whitman is not by nature a visionary innovator. Given those facts, it makes perfect sense for HP to run its existing businesses as efficiently and as profitably as it can, and to extract as much value out of them as possible, in the knowledge that all companies are mortal. In fact, it makes more sense to do that than it does to follow the Tim Armstrong playbook, where AOL’s CEO decided to take his enviable dial-up revenue stream and invest it in doomed content plays like Patch.

John Kay had an excellent column on this subject yesterday, under the headline “sometimes the best that a company can hope for is death”. He finds the genesis for the Mims view in the work of marketing guru Theodore Levitt, who said 50 years ago that companies can and should reinvent themselves in imaginative ways. Levitt was wrong, says Kay: what really matters is not imaginative executives, but rather competitive advantage. HP has a competitive advantage making PCs and printers and servers; that doesn’t mean that it can readily apply that competitive advantage elsewhere.

Kay’s example of JC Penney is a good one. Bill Ackman looked at Penney and saw it as a company in the “retail” bucket, just as Mims looks at HP and sees a company in the “technology” bucket. Ackman then looked for the biggest retail success story he could find — Apple — and tried to inject Apple-style success into JC Penney by hiring Apple’s Ron Johnson as Penney’s CEO. That didn’t work:

The outlets of both JC Penney and Apple are shops but the age group and disposable incomes of their customers – and their reasons for visiting the stores – were entirely different: JC Penney and Apple were not really in the same business.

Penney was not going to succeed by looking at successes elsewhere in the retail space and trying to copy them with little regard for its own existing strengths. And similarly, if HP decides to “break the mold” again, the inevitable consequence will be yet further billions in avoidable write-downs. Once upon a time, HP had a legendary R&D operation — but that operation fell victim to Hurd’s cost-cutting, and in any case no R&D shop can maintain excellence forever. The HP board knows that, which is why they were open to ambitious acquisitions; they simply failed to notice that the acquisitions in question were fundamentally really bad deals.

In general, the stock market’s bias towards growth makes it very difficult for a public-company CEO to execute a strategy of shrinking profitably. Maybe at some point, as a result, Whitman will decide to take HP private, or will accept a takeover offer from a private-equity shop. But for the time being, an ambitious growth strategy is the last thing that HP needs.

It’s not easy to excel in a shrinking business: as Kay says, it goes against human nature to accept that there might be a natural life cycle for a company. But if you work with the cycle, rather than against it, it’s still possible to get extremely impressive results. Just look, for example, at Lehman Brothers International Europe — the bankrupt entity which has been spending the past five years quietly trying to repay its creditors as much money as it can. The latest news? Those creditors are going to be repaid 100 cents on the dollar — including statutory interest at 8%. As a result, some Lehman claims are trading at as much as 120 cents on the dollar.

The best thing for Whitman to do, then, is to accept that HP’s core business is in decline, but to still execute that core business as efficiently as possible. That takes a very different style of management than Silicon Valley is used to, but it can be done. And it’s much more likely to work than some Hail Mary acquisition attempt.


What percentage of total Lehman Bros. was LB International Europe? It looked like their liabilities were $8B which would be in the single-digit percentage of the full Lehman Brothers company.

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Chart of the day, bond-fund edition

Felix Salmon
Aug 21, 2013 17:49 UTC

Josh Brown reports today that according to a recent survey by Edward Jones, 63% of Americans don’t know how rising interest rates will impact investment portfolios, adding that “they’re learning the hard way right now, it would appear”.

The fact is, however, that pretty much nobody understands the connection between rising interest rates and asset prices. In fact, even the relationship between rising interest rates and bond fund prices is pretty opaque. Sure, we all know that in the world of fixed income, when yields go up, as they have of late, then prices go down. But how much do prices go down? If I tell you that the yield on the 10-year Treasury bond has gone from 1.8% to 2.8% in recent weeks, can you tell me what has happened to its price? You can’t say, since you need to know the coupon as well. For instance: with a 2% coupon, a 10-year bond seeing such a move would lose 8.6% of its value, while with a 5% coupon, it would only lose 7.8%.

But more to the point, very few individual investors actually own the 10-year Treasury bond itself. Instead, when they want fixed-income exposure, they buy a bond fund, which is likely to include a wide variety of coupons, credits, and maturities. There are quite a few stock-pickers out there, but there are precious few bond-pickers: bond investing is hard, boring, laborious work, and just about all individual investors outsource it to someone else.

So, how are bond funds doing, during this torrid time for the fixed-income world? The chart above shows how various popular bond funds have performed over the past 10 years; the main line shows the fortunes of the $110 billion Vanguard Total Bond Market fund, an index fund which gives a pretty good impression of how  bond investors as a whole are doing. Its fortunes are more or less in line with those of the Fidelity Total Bond fund, the Fidelity Spartan US bond fund, and the Pimco Total Return fund. The Pimco Unconstrained bond fund — the light green line — has outperformed, while the Loomis Sayles bond fund — the light blue line — has done better still, albeit with much higher volatility.

All the bond funds have seen a bit of a dip in recent weeks, but it’s the kind of move they’ve seen many times in the past, and it’s not the kind of move which is likely to cause an individual investor to panic. The main thing you learn from looking at this chart, indeed, is not that we’re in the midst of a historic bond-market selloff, but rather just that bond funds in general are pretty good at doing what they’re meant to do — which is to broadly retain their value over time, and with any luck go up over the long term, with reasonably low volatility.

Now it’s true that over most of the period seen in the chart, rates were going down rather than up. But it’s not strictly true that if rates are going up then the value of your bond-fund holdings is certain to go down. And even if you hold an index fund, I can tell you with 99% certainty that you have no idea how much it might fall in value with any given rise in rates. Individual investors neither can nor should be expected to do complex modified-duration calculations on their fixed-income portfolios, let alone be able to add a credit-forecast overlay to such a thing.

The fact is that rising rates are, in general, a sign of improving economic fortunes — and that they might well coincide with tightening credit spreads and greater economic activity, including new corporate borrowing. Yes, they might also mean a reduction in bond prices, but that kind of cost is easy to bear if it means a return to normality and growth in the rest of the economy, including possibly in stock portfolios.

According to a recent Fannie Mae forecast, the quantity of new mortgage lending will go up by 21% in the second half of this year compared to the first half, higher mortgage rates notwithstanding. And it’s a well known fact that house prices in general have basically no correlation at all to mortgage rates, even though you’d think they would.

Bond funds aren’t exactly the same as houses, of course. But even if you think that we’re about to enter a long-term period where interest rates rise steadily, that doesn’t necessarily mean that you should divest yourself of all your bond funds. I haven’t read Simon Lack’s new book yet, where he advocates exactly such a course of action, but the fact is that market moves, by their nature, are generally unforeseeable. Even if your rate forecast is exactly right, there’s still a good chance that your decision to dump your bond funds might turn out to be a mistake.


Yes, total return would be more meaningful.

And I don’t know many individual investors who worry about the distinction between losing 8.6% and losing 7.8% in a single hypothetical scenario. Either way, a significant rise in interest rates would cost a year or more of return.

I’ve been building cash since the start of the year, as bond funds simply aren’t tempting yet. I’ve earned just a few pennies of interest, but that is still better than if I had held bonds over that period. When I am confident that five-year returns will be positive, I’ll consider bonds again.

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The White House’s anti-Yellen sexism, cont.

Felix Salmon
Aug 20, 2013 21:22 UTC

Neil Irwin is not going to have made many friends in the White House with today’s piece on the problems the Obama administration has with Janet Yellen. It makes the White House economic team seem insular, sexist, and deeply mistaken about what the right and proper role of the chairman of the Federal Reserve Board should be. Worse, there’s every reason to believe that Irwin’s piece is entirely accurate.

Irwin enumerates three main reasons why the White House is underwhelmed with Yellen. The first is the “team player” attack: Yellen is an independent thinker more than she is a loyal deputy to Bernanke. And because she was 3,000 miles away from the action during the financial crisis (she was running the San Francisco Fed), she never became part of the boys’ club which was making enormous decisions on a daily basis in the fall of 2008.

As Irwin puts it, “she was on the outside looking in regarding some of the seat-of-the-pants decisions that were being made over how to rescue the American economy” — and the people who made those decisions are the exact same people who are advising Obama on whom to nominate as Fed chair. They have all worked closely with Summers, they enjoy the way he makes decisions, and they’ve all been through various crises with each other.

The “team player” argument, then, is basically the “one of us” argument, thinly disguised. Which is the first place that the sexism comes in: everybody named as being part of the “team” (Larry Summers, Tim Geithner, Ben Bernanke, Bill Dudley, Don Kohn, Kevin Warsh, Gene Sperling) is undeniably male — and, what’s more, the kind of male who takes great pride in his own intelligence, and loves it when the world knows just how smart he is.

But it gets worse:

She is methodical, not manic. And the prevailing style of the White House insiders advising on the decision leans a bit more toward manic. Geithner, for example, jumps from meeting to meeting, from hearing to phone call, without so much as a set of talking points to work from.

This second reason essentially takes the “team player” argument past its breaking point, to the point at which the Obama team is basically saying “Yellen needs to share our biggest weaknesses.” Sometimes crises move so fast that policymakers have no choice but to make decisions on the fly; when that happens, however, the decisions often turn out to be pretty bad. The story of the European crisis is full of such episodes, but for a domestic example, look no further than the image of Tim Geithner, at the New York Fed, doing his best deranged-Yenta impression as he desperately tries to engineer improbable mergers between Lehman and Barclays, or Citi and Goldman, or just about anybody and just about anybody else. The bankers, to their credit, managed to stand up to the pressure from their primary regulator — but even Geithner would admit that this was not his finest hour. This is not really a criticism of Geithner — we all make bad decisions when we haven’t had remotely enough sleep and we’re extremely stressed. But it’s ridiculous to think that a more deliberative approach is in any way inferior.

Maybe this bias towards the manic is what Obama is really talking about when he says that he wants a Fed chair who’ll be good in a crisis. The implied logic: Yellen is perfectly good if you give her lots of time to sit down and slowly work things out. But crises move fast, and no one thinks faster than Summers. Yellen’s brain isn’t as fast and fecund and facile as Summers’s brain, so we’d better appoint Summers.

Spelled out like that, the argument is downright offensive — and, of course, highly sexist.

“The question,” Irwin writes, “is how Yellin’s cautious approach would work when she is dealing with the full panoply of issues that a Fed chair must grapple with”. The answer, surely, is that the Fed chair is the number one place where, ex ante, a cautious approach is exactly what you would want. Someone who carefully scripts her words before saying anything? Someone who insists on thinking things out before acting? Yes please! The only conceivable reason to believe otherwise is if you’ve already decided, through personal friendship, that you want Summers to be the nominee, and then simply decree that whatever attributes Summers has and Yellen doesn’t are precisely the attributes you’re looking for.

Which brings us to Irwin’s final reason to be uneasy about a Yellen Fed: she’s more worried about reducing unemployment than she is about staving off bubbles. Or something like that — it’s not entirely clear. This of course is exactly as it should be: the Fed has a formal written mandate to reduce unemployment, while for much of its history it has operated with a policy that it’s pretty much impossible to identify bubbles and deal with them in real time. Yellen says that she’s serious when it comes to worrying about bubbles — but for whatever reason she isn’t considered serious enough, compared to Summers. (Which is pretty funny, given the degree to which Summers-era deregulation helped inflate bubbles of the past.)

More to the point, as Brad DeLong notes, it’s simply wrong to say that Yellen’s weak when it comes to identifying bubbles:

Yellen was equal to Ned Gramlich and out in front of all other Federal Reserve policymakers in the 2000s in her real-time worries about the housing bubble. Demonstrated ability to see a bubble and think about its risks in real time is one of Yellen’s strengths, not a weakness.

DeLong’s reaction is telling: he supports Summers, and still finds all of the administration’s arguments to be woefully weak. This entire debate strikes me as one of the most badly-orchestrated trial balloons I’ve seen in a very long time. If the White House wanted to maximize the degree to which people would think the Obama administration to be clubby and sexist and insular and narrow-minded, it could hardly do better than it has done when whispering about Larry at the Fed. And by making it clear that no decision is going to be made for a while, the White House is only ensuring that the same story is going to get repeated ad nauseam for weeks to come.

The chairman of the Fed is a position which requires the trust of the public. Larry Summers does not have that trust: indeed, almost uniquely, he’s mistrusted by the left, by the right, and by Wall Street in equal measure. He is, however, trusted by the president of the United States. Is Obama really so arrogant as to privilege his idiosyncratic personal opinions so highly, when the obvious candidate is right in front of his face? I hope not. But I’m losing optimism.


Is Irwin a mind-reader?
Are suppositions journalism?
Irwin will be made a fool if Obama selects Yellin or another woman

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