Felix Salmon

Every time an IPO has a big pop on its opening day, the same tired debate gets reprised: did the investment banks leading the deal rip off the company raising equity capital? The arguments on both sides are well rehearsed — I covered them myself in no little detail, for instance, after LinkedIn went public, in 2011.

Back then, I had sympathy with the bankers:

If the large 7% fee does anything, it aligns the banks’ interests with the issuer’s. If the banks felt they could make millions more dollars for themselves just by raising the offering price, it’s reasonable to assume that they would have done so. I’m sure that the institutions which were granted IPO access are grateful to the banks for the money they made, but that gratitude isn’t worth a ten-figure sum to the ECM divisions of the banks in question.

Today, however, I have to take all of that back. And it’s all thanks to Joe Nocera, who has a great column this weekend, where he uncovers a bunch of documents in one of those interminable securities lawsuits against Goldman Sachs. The documents should have been sealed; they weren’t. And now, thanks to Nocera, we can all see exactly where Goldman makes its money, when it comes to IPOs. (It’s fantastic that he put those documents online, although it’s hard to read them in the browser; here’s the download link which the NYT weirdly removed from its own site.)

The lawsuit in question concerns the IPO of eToys, back in 1999. The company sold 8.2 million shares, raising $164 million; Goldman’s 7% fee on that amount comes to $11.5 million. If Goldman had sold the shares at $37 rather than $20, it would have received an extra $10 million — and what bank would willingly leave $10 million on the table?

What Nocera has discovered, however, is that Goldman was not leaving $10 million on the table. Instead, it was making more than that — much more — in kickbacks from the clients to whom it allocated hot eToys stock.

Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman’s I.P.O.’s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case.

eToys opened at $78 per share, which meant that Goldman’s clients were sitting on a profit of $475 million the minute that the stock started trading on the open market. In most cases, the clients cashed out — which was smart, because eToys didn’t stay at those levels for long. But if Goldman got back 40% of those profits in trading commissions, then it made $190 million in commissions, compared to that $11.5 million in fees.

If Goldman had raised the IPO price to $37 per share, then yes its fee income would have gone up by $10 million, to $21.5 million. But — assuming the stock would still have opened at $78 — its clients’ opening-tick profits would have come down to $336 million, and Goldman’s 40% share of that would also have come down, to $135 million. Total income to Goldman? $156.5 million, rather than $201.5 million. If the IPO price were higher, Goldman’s total take would have gone down by about $45 million.

All of these numbers are hypothetical, of course, but the bigger point is simple: if Goldman manages to get kickbacks, in terms of extra commissions, of more than 7% of its clients’ profits, then it has a financial incentive to underprice the IPO. And Goldman’s clients were desperate to give it kickbacks: they didn’t just route their standard trading through Goldman, since that wouldn’t generate enough commissions. Instead, they bought and sold stocks on the same day, at the same price. Capstar Holding, for instance, bought 57,000 shares in Seagram Ltd at $50.13 per share on June 21, 1999 — and then sold them, on the same day, at the same price. Capstar made nothing on the trade, but Goldman made a commission of $5,700. Capstar’s Christopher Rule says that in May 1999, fully 70% of all of his trading activity “was done solely for the purpose of generating commissions”, so that he could continue to keep on getting IPO allocations.

Goldman, of course, revealed none of this to eToys. Instead, they pitched eToys with a presentation saying, on its first page, in big underlined type, “eToys’ Interests Will Always Come First“. On the page headlined “IPO Pricing Dynamics”, they explained that the IPO should be price at a “10-15% discount to the expected fully distributed trading level” — which means not to the opening price, necessarily, but rather to the “trading value 1-3 months after the offering”. After all, this was the dot-com boom: everybody knew that IPOs were games to be played for fun and profit, and that the first-day price was a very bad price-discovery mechanism.

If you look at the chart of what happened to the eToys share price in the first few months after the IPO, the price fluctuated around $40 a share — which means that by Goldman’s own standards, it really ought to have priced the IPO much closer to $37 than to $20. And this was no idiosyncratic mistake on Goldman’s part: Goldman’s other IPOs all fit the same pattern. For instance, look at the three deals run by Lawton Fitt, the Goldman executive in charge of the deal, before the eToys IPO. First was pcOrder, which went public at $21 and opened at $55.25. Then there was iVillage: that went public at $24, and opened at $95.88. Finally, there was Portal Software, which went public at 414 and opened at $36. When eToys went public at $20, Fitt knew exactly what was going to happen: indeed, she bet her colleagues that eToys stock would hit $80 on the opening day. She knew her market: it actually traded as high as $85.

Some big names jump out from the documents here — none more so than Bob Steel, who was then Goldman’s co-head of equity sales, and who went on to put out financial-crisis fires for Hank Paulson at Treasury before going on to become the CEO of Wachovia. Steel wrote a detailed email to Tim Ferguson, the chief investment strategist at Putnam Investments, saying that he would try to help Putnam out “with regard to IPO allocations”. At the same time, however, he added that “we should be rewarded with additional secondary business for offering access to capital markets product”. Which, in English, means that if Putnam got access to Goldman’s IPOs, it would have to steer more soft-dollar commissions to Goldman.

Meanwhile, if you didn’t toe the investment banks’ line, they would cut you. Toby Lenk was the CEO of eToys, and in a 2006 deposition he was asked whether he ever “voiced any displeasure” with Goldman about the fact that they left so much money on the table. He said no — and added “a little story” about why it was never a good idea to annoy a big investment bank. In 2000, Lenk explained, when eToys was desperate for money, it raised some cash through a convertible debt offering:

We initially selected Merrill Lynch to be our lead convertible debt underwriter, and Goldman Sachs came in and put a strong foot forward to take that away, and Merrill Lynch we kept as a secondary underwriter in the secondary position and kept them in the deal. They were in the deal, and I believe it was the morning of the deal going into the marketplace, or the night before, or right around that time, Merrill Lynch’s lead internet analyst, Henry Blodget, downgraded our stock as that was going into the marketplace, and made it extremely difficult for that placement to happen.

The investment banks have punitive power over us. We need them to raise capital. You don’t go complaining to investment banks because they will crush you, and that is a perfect example. We got penalized by Merrill Lynch. We got slapped hard, and it nearly sank that offering, and I can tell you that nearly sank the company.

This is just the flipside of pumping up companies in order to get investment banking business: if you lose that business, then you do the opposite, and downgrade the company just when doing so causes the most pain. As a result, as Lenk says, you didn’t cross the bankers — and you certainly didn’t cross Goldman.

All of which puts Goldman’s 7% fee into very interesting perspective. Goldman likely made much much more money on the eToys IPO from its buy-side clients than it did from eToys itself. Indeed, it could have offered to run the IPO for free, the IPO would still have been very lucrative for Goldman. But of course eToys would never have given Goldman the IPO mandate if Goldman had offered to run it for free — because then it would have been obvious where Goldman’s loyalties resided.

The real purpose of the 7% fee, it seems, was to make eToys think that it had hired Goldman and that Goldman was working for eToys — and also to tie eToys into a close relationship with Goldman. (Lenk, for instance, became a personal client of Goldman Sachs shortly after the IPO.) As Andrew Clavell once put it:

If you claim you do know where the fees are, banks want you as a customer. You don’t know. Really, you don’t. Hang on, I hear you shouting that you’re actually smarter than that, so you do know. Read carefully: Listen. Buster. You. Don’t. Know.

The 7% fee is a very large shiny object, which diverts everybody’s attention from where the real money is made — or at least did, back in 1999. Have things changed since then? Here’s Nocera:

The documents are old. Some will dismiss them as relics of another era. But I continue to believe that the mind-set created by the I.P.O. madness of the late 1990s never really went away. To this day, an I.P.O. with a big first-day jump is considered a success, even though the company is being short-shrifted. To this day, investors know that they are expected to find ways to reward the firms that allocate them hot I.P.O. shares. The only thing that is truly different today is that few on Wall Street are so foolish as to put such sentiments in an e-mail.

That’s the one point at which I’m willing to disagree with Nocera. Nothing ever changes much on Wall Street, including the degree of professional foolishness. I’m sure if a determined prosecutor went hunting for similar emails today, she could probably find them. But I don’t know what the point would be. Because there’s nothing illegal about asking buy-side clients to send commission revenue your way — or even about explaining to them how much money you’ve helped them make. eToys’ creditors might ultimately win this case against Goldman, or they might not, or the two sides might settle. But whatever happens, the implications for sell-side equity capital markets desks will be minuscule. Because the amount of money they’re making right now will always dwarf any potential litigation risk 15 years down the road.

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It’s International Women’s Day, which makes today a good day to examine why America just can’t seem to pay women as much as men.

To be sure, the gender pay gap has been shrinking for decades. But, by one measure, it got worse last year, the Institute for Women’s Policy Research reports. In aggregate, women working full-time earned 80.9% of what men earned in 2012; in 2011, that ratio stood at 82.2%.

There are some disagreements about these figures. The White House has said that women earn 77 cents for every dollar men earn; on the other hand, writes Suzy Khimm, if you totally disregard life choices, like having kids, that number hits 91 cents.

But the plain truth is that women often get paid less for doing the exact same jobs as men. Planet Money recently compiled a list of the jobs with the biggest gender pay gaps. They found that female insurance salespeople, financial advisors, physicians and surgeons get paid roughly 60-70% of what their male counterparts do. On the other end of the spectrum, female counselors are paid 2.6% more than men.

Though the gender pay gap tends to narrow when you compare similar jobs, as the St Louis Fed notes, there’s a still a depressingly 1950s breakdown of what professions men and women enter:

Men are more likely to be lawyers, doctors and business executives, while women are more likely to be teachers, nurses and office clerks. This gender occupational segregation might be a primary factor behind the wage gap.

Lisa Pollack has a nice two-part guide to some of the other thorny studies on gender and pay. She highlights one study which finds that women get paid less because they don’t ask for raises, though the study looked only at administrative assistant jobs. Another study found that women get more raises than men, but it only examined small companies.

One thing we do know is that gender inequality in pay is pervasive. It cuts across race, and it applies to both hourly and full-time workers, Dylan Matthews notes. It also starts as soon as women graduate from college. Since 1979, the BLS says, women have gone from earning roughly 60% of what men earn, to somewhere near 80%. Still, “men’s economic privilege has been dented rather than eroded,” Mathews writes. — Ryan McCarthy

On to today’s links:

Primary Sources
A hugely positive jobs report: the US added 236k jobs in February – BLS

Felix
Why analysts generally make terrible investors – Felix

Tax Arcana
The largest U.S. companies are dramatically increasing their untaxed offshore cash piles – Bloomberg

TBTF
Big banks banks pass the possibly not-very-stressful test tests - Dealbook
Goldman Sachs and Morgan Stanley pass stress tests with a convincing “barely” – FT

Remuneration
Ex-Barclays CEO set to be paid $3 million, a year after bank’s LIBOR scandal – Reuters

Charts
The scariest job chart ever gets is now less scary — but still depressing - Calculated Risk

Ugh
Why Canada’s economy is in trouble – Sober Look

Alpha
Hedge funds may be all grown-up, but we’ll always have those crazy SWFs – Alternative CIO

WTF
“Necropsy of Burned Dogs Yields Surprises” – NYT

Says Science
The surgical masks, they do nothing! (probably) – Fortune

Servicey
The best time to have coffee is around 2 pm – Quartz

Wonks
The employment-to-population ratio hasn’t budged in 3.5 years – Brad DeLong

Defenestrations
Pandora’s CEO steps down – NYT

Awesome
Nicolas Cage roulette – nicolascageroulette
Every fucking website – everyfuckingwebsite

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On January 7, the auxiliary power unit (APU) of a Boeing 787 caught fire at Logan airport. The APU is a lithium-ion battery, roughly 1-foot cube, and the consequences of a fire can easily be catastrophic. There was no one on the plane at the time, which is lucky, because the fire was extremely difficult to extinguish, with firefighters encountering “no visibility” thanks to thick smoke. What’s more, the “quick-disconnect knob” was melted. In flight, these batteries control critical flight systems: they cannot fail.

And yet, twice in 58,000 hours of usage, the lithium batteries on the new 787 contrived to catch fire; this is obviously not something the FAA — or even Boeing, for that matter — can risk happening again. There’s really only one thing to be done: all lithium batteries on the 787 must be swapped out for nickel-cadmium or lead-acid batteries, which have the great advantage that they don’t catch fire.

The bigger story here, however, is about engineers’ hubris and regulatory capture. As the interim report from the National Transportation Safety Board says, the FAA was well aware, when Boeing said it wanted to use lithium batteries, that such batteries are inherently dangerous and have a tendency to catch fire whenever they are used elsewhere.

But Boeing persisted, and came up with some hilariously overprecise probability estimates. The batteries would only emit gas or smoke once every 10 million hours, the company calculated, and would only catch fire once every billion hours. The reasoning is bonkers: Boeing’s analysis “determined that overcharging was the only known failure mode that could result in cell venting with fire”. They then contrived to conclude that if they put in overcharge protections, the risk of overcharging would be brought down to one in a billion, and that therefore the risk of a fire would also be brought down to one in a billion.

As Steve LeVine notes, Nassim Taleb would take one look at that reasoning and simply laugh. For one thing, how on earth is it possible to determine that the risk of an overcharge is less than or equal to one in a billion? Probabilities that small simply can’t be measured. And more importantly, how did Boeing determine that the probability of a fire absent an overcharge was zero? There’s good evidence that neither of the battery fires were caused by an overcharge — but Boeing seems to have decided that fires caused for any non-overcharge reason were, literally, impossible. Once again, it’s incredibly hard to conceive of any coherent line of reasoning which could come to that conclusion.

But somehow the FAA accepted Boeing’s analysis at face value, and allowed Boeing to install lithium batteries on its planes, just as long as certain safeguards were put in place.

This is the same kind of literal quantitative thinking which helped cause the financial crisis. Put engineers in charge of something, and they’ll measure what they can measure, they won’t measure what they can’t measure, and they’ll protect against only the things they managed to foresee. And as all of us who spend our lives surrounded by electronic devices know, sometimes they fail. In a sense it doesn’t matter what the reason is: failure is just a fact of life, which is a real problem when failure could mean the fiery death of hundreds of people.

Statistically speaking, airplanes are safer today than they’ve ever been. And electronics are a key part of that trend: they might occasionally fail, but they are also increasingly good at preventing human error, or just at doing the things that fallible humans used to do, only much more reliably. That said, as airplane engineers stop being grease monkeys and start being coders, we’re losing a certain amount of holistic and heuristic understanding of how to ensure real-world safety.

If you basically outsource an entire airplane, as Boeing did, you lose your institutional ability to ensure that airplane is safe. And sadly, it seems that Boeing’s failures on that front will automatically cascade down to the FAA. The reports and post-mortems surrounding the lithium batteries’ safety will be very deep. Let’s hope the FAA is just as critical when it comes to its own decision to accept Boeing’s analysis at face value.

Today’s jobs report is an unambiguously positive one: America had 236,000 more jobs in February than it had in January, and the unemployment rate is down to 7.7%, the lowest it’s been since 2008, before Barack Obama was even sworn in. (Although, it’s still nowhere near the 6.5% at which the Fed will start thinking about tightening monetary policy.) Things are getting better, US fiscal policy notwithstanding, and it’s great to see construction in particular, especially non-residential construction, finally making a substantial positive contribution to the numbers.

All is not entirely sweetness and light, though, as Brad DeLong and many others have noted. The number of multiple jobholders rose by 340,000 this month, to 7.26 million — a rise larger than the headline rise in payrolls. Which means that one way of looking at this report is to say that all of the new jobs created were second or third jobs, going to people who were already employed elsewhere. Meanwhile, the number of people unemployed for six months or longer went up by 89,000 people this month, to 4.8 million, and the average duration of unemployment also rose, to 36.9 weeks from 35.3 weeks.

In terms of the economy, it’s not good enough to simply increase employment and decrease unemployment, if the proportion of people with jobs isn’t actually going up. Which is why this chart, from Calculated Risk, is the most important one to look at right now:

Both the employment-to-population ratio ad the labor force participation rate are much lower than they ought to be: if this is a recovery, the former in particular ought to be going up, rather than going nowhere. Yes, it’s important to ensure that the unemployed get jobs. But in many ways it’s even more important to try to create jobs for people who simply aren’t working, rather than just for the people who are actively looking for work.

To turn these ratios into hard numbers: there are 89.3 million Americans who are not in the labor force, of whom just 6.8 million currently want a job. The economy ought to be able to find good, rewarding jobs not only for the 6.8 million, but for a large chunk of the other 82.5 million as well. Just imagine what that would do for tax revenues: all our fiscal problems would be solved at a stroke!

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Who controls how hard is it to get a job in America? The next few jobs reports, including tomorrow’s, Mohamed El-Erian says, will give us some insight into the answer to that question. If the Federal Reserve is effectively in charge, rolling “out one untested measure after the other”, that could help create new jobs. But if our dysfunctional, austerity-inducing Congress has the upper hand, expect job growth to sputter out. Neil Irwin sees things similarly, although he identifies a booming housing market, a rising stock market, and deleveraging consumers as the key forces pulling the American economy forward.

There may be, however, a simpler way to give the economy a shot in the arm: hiring the unemployed to fill vacant jobs. Sounds sensible, right? Here’s Catherine Rampell:

Many companies remain reluctant to actually hire, stringing job applicants along for weeks or months before they make a decision… The number of job openings has increased to levels not seen since the height of the financial crisis, but vacancies are staying unfilled much longer than they used to — an average of 23 business days today compared to a low of 15 in mid-2009, according to a new measure of Labor Department data by the economists Steven J. Davis, Jason Faberman and John Haltiwanger.

This isn’t happening because of a lack of applicants — not when there are more than 3 unemployed Americans for every job opening. And it’s not happening because workers lack skills, either. The common executive complaint, that the average US worker is average, is really just a tautology, and not something you hear during periods of full employment.

For the last few years, the relationship between job vacancies and unemployment, known as the Beveridge Curve, has shifted dramatically. There are now more unfilled jobs than during previous recoveries. Matt O’Brien says this is because employers simply aren’t hiring the America’s long-term unemployed.

In his most recent letter to shareholders, Warren Buffett belittled his peers for complaining that uncertainty was cramping their decision-making. Low growth may be a better explanation. Note that over the last year, US corporations dramatically increased their holdings in Treasuries. They weren’t rushing to buy these safest of safe-haven assets because they doubted America’s workforce. Rather, they doubt America’s future economic growth. — Ben Walsh

On to today’s links:

Popular Myths
The US will never, ever turn into Greece – Matt O’Brien

Epistles
Carl Icahn sincerely hopes he can resolve his differences with Dell in private – WSJ

New Normal
Public colleges are getting less funding, and students are paying more – NYT

Good News
Another way immigrants help the US economy: they buy homes – WSJ

Oxpeckers
Time Warner will spin off its magazine group into a separate company – NYT
AOL’s Tim Armstrong: If I had my druthers, I’d buy Time Inc – Forbes

China
Communist China’s congress is increasingly filled with people who are richer than Romney – Bloomberg

EU Mess
Get excited: Draghi expects the eurozone to recover… gradually… in late 2013 – Bloomberg

Cosmic
Scientists discover “spooky action” of particles that travel at 4 times the speed of light – MIT Technology Review

Good News
Americans’ net worth back near pre-crisis peaks – Calculated Risk

Takedowns
“Far more worrisome than a student loan bubble is the student loan anvil” – Chadwick Matlin

Oxpeckers
“There is no universe in which it’s possible to maintain a site like the Atlantic…without falling back on linkbait blogging” – Paul Carr

Genius
Senior financial services exec has an important talking point to relay: stupid ≠ illegal – Politico

Billionaire Whimsy
Billionaire philanthropy club refuses membership to someone worth $800 million – John Gapper

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Back in October, Andy Zaky put out his sixth “buy” recommendation on Apple stock. The first five — in July 2006, November 2008, August 2010, June 2011, and May 2012 — all did spectacularly well, and all hit his price target within the time span he specified. Zaky was a first-rate Apple analyst, quoted by me and many, many others; as Philip Elmer-DeWitt says, he had “a series of spot-on predictions”, of everything from Apple’s earnings, to its iPhone sales, to — of course, its stock-price movements.

Smart and accurate Apple analysts are in high demand, and Zaky, quite sensibly, decided to monetize his gift. In June 2011 he put his blog behind a paywall, charging first $49 per month and then, in June 2012, $200 per month. With 700 subscribers, that meant a six-figure income per month, just by selling access to his detailed Apple analysis and trading recommendations.

Unlike most analysts, however, Zaky soon discovered* that his subscribers actually followed his recommendations — to the letter, in many cases. They weren’t using his analysis to inform their own decisions, they were outsourcing all of their decision-making to Zaky, simply placing the trades themselves. And so Zaky made a fateful decision: in that case, he might as well start his own hedge fund.

Bullish Cross Asset Management was launched in late 2011, and by November 2012 some 28 investors had invested a total of $10,607,815 with Zaky. And had lost it all. For Zaky, it turns out, was a truly dreadful fund manager: the kind of guy who not only put all his eggs in one basket, but the kind of guy who would also desperately double down upon incurring trading losses. With that kind of a trading strategy, even someone who’s right 85% of the time is going to blow up pretty quickly.

Zaky of course feels bad about this, and says he wants to make his partners whole, and “make things right”. But that would involve investing money, and investing money is clearly something Zaky is incredibly bad at. It’s easy and facile to sneer at analysts, saying that if they were actually any good at their jobs, they’d be making ten or a hundred times as much money by actually investing, instead of just putting out recommendations. But the fact is that analysis and investing are two very different skillsets, and while Zaky was very good at the former, he was very bad at the latter.

There’s no particular shame in that; sometimes you only learn your limitations by trying and failing. But the most astonishing part of the Andy Zaky story is not that he set up a tiny hedge fund which failed. Rather, it’s the lemming-like way in which the subscribers to his newsletter lost a mind-boggling sum of money — quite possibly well over $1 billion.

Elmer-DeWitt has heard from 36 former subscribers to Zaky’s newsletter; between them, they lost a whopping $92.5 million. Just one of them claims to have lost $50 million, or five times the total assets of Zaky’s hedge fund. If you ignore that one outlier, the rest of the subscribers have still lost an average of $1.2 million apiece — vastly more than the $380,000 or so invested by the average partner in Zaky’s hedge fund. And if you include the $50 million outlier, then the average loss rises to $2.6 million. Multiply either number by 700 subscribers, and it’s easy to see how total losses could reach the billion-dollar mark.

Reading Elmer-DeWitt’s original story, it’s clear that many of those investors were incredibly unsophisticated. And probably their self-reported loss estimates should be taken with a pinch of salt: they’re probably calculating their losses from their mark-to-market high point, rather than from the amount of cash they invested into trading Zaky’s recommendations. Still, this story is clear proof, in case any were needed, that you don’t need to qualify as a sophisticated or wealthy investor in order to engage in ridiculously risky trading strategies.

The Zaky story is depressing for another reason, too. The subtitle of his blog is “The Power of Compounded Returns in Holistic Quantitative Modeling” — it looks impressive, but it’s ultimately meaningless, and it naturally appeals to the ignorant. It can’t have taken Zaky very long to work out, on a subconscious if not a conscious level, that the best way to develop a reputation, and to build up his subscriber base, was to be as aggressive as possible in his calls, and to try to maximize both returns and risk. No one was going to pay him $2,400 a year to outperform Apple stock a little bit: these people were greedy, and wanted to shoot the moon. As such, they only have themselves, rather than Zaky, to blame for their losses. In fact, by creating a strong incentive for Zaky to ramp up the risk quotient in his calls, they probably helped turn a first-rate analyst into a busted investor: Zaky’s behavior, in some sense, was his subscribers’ fault.

Zaky, it’s clear, had much more value to the world of investing when he didn’t have skin in the game than when he did. That might be hard for a former trader like Nassim Taleb to understand, but the fact is that investing creates all manner of psychological feedback loops, which have to be managed with discipline. If you can’t manage those feedback loops, you’ll blow up — but at the same time, absent those feedback loops, you can still be a very perspicacious analyst.

Why did people take money they couldn’t afford to lose, and invest it in high-risk options strategies playing a single stock? Why did one person invest 50 million dollars in such strategies? And why did any of them trust a kid with no investing track record? It seems incomprehensible to me. But as Larry Summers famously said, “there are idiots. Look around.” You think a billion dollars is a lot to lose on Apple stock? Well, Macau’s casinos took in $3.4 billion of gambling revenues just last month. There will always be gamblers, and gamblers will always lose money. But it’s easy to see why Apple’s executives have historically paid as little attention as possible to the antics of the stock market.

*Update: Mick Weinstein points me to an unbelievably hubristic Zaky post from October 2011, which helps explain why people were following him so slavishly. There’s a whole section called “Bullish Cross Model Portfolios: The Importance of following our Models to the Letter”:

We’ve repeatedly mentioned over and over again that closely following the various Apple-based model portfolios to the letter is very key. That when we make a decision with regards to these portfolios, that decision is very carefully calculated and delicately executed to contemplate nearly every scenario that the market can throw at us. If you decide to deviate from the model, you’re likely to run into problems…

I could put out 10,000 pages of material and that wouldn’t even come close to scratching the surface of what goes into my decision making process. There is no way for me to practically reduce all of my knowledge, experience or reasoning abilities to the written word…

It is completely unreasonable to expect me to reduce every single thought or reason behind every decision we make to the written word. No one could do that… There is so much in terms of experience that there is simply no practical way I can teach people everything.

The equity markets is very much as complicated as the human body and it would be like asking a physician to teach you to practice medicine in a few months. When we make a decision, we try to do the best we can to give the core reasons behind that decision. But you should understand right now that (1) there’s very little that is lost on me, (2) there’s very little that you’ve thought of that isn’t already on my mind.

For 95% of people, this kind of thing is a huge red flag, saying “stay well away from this guy”. But for the other 1%, it’s weirdly comforting.

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Apple may want to keep its capital, but big US banks want to return some of theirs. Tomorrow the Fed will release the first set of data from its stress tests. Bank execs will have to wait until next week to find out whether they’ll finally be allowed to return more capital to shareholders.

Bloomberg’s Dakin Campbell and Hugh Son write that US banks may return $41 billion to investors over the next year, using the average of estimates from research analysts at Barclays, Credit Suisse, and Morgan Stanley. As David Benoit notes, this is a turnaround from last year, when Bank of America and Citi were forced to keep their payouts at a pro forma cent a share.

Bank earnings rose 20% in 2012 and executives want to hand capital to shareholders, even if, as Benoit writes, they’re unlikely to return enough to drive major moves in bank stocks. Before they can do so, big banks must pass the Fed’s stress tests, which simulate two scenarios. Scenario 1 is six consecutive quarters of economic contraction with rising interest rates; Scenario 2 is 13% unemployment combined with a 52% fall in the stock market.

Jesse Eisinger thinks Bank of America, for one, is being overoptimistic with respect to the amount of capital it’s showing regulators. He says that the bank has low-balled the amount money it has set aside to pay future legal settlements, despite continuing to face lawsuits related to its ill-fated acquisition of Countrywide.

Banks have traditionally paid, and their investors have expected, healthy dividends. But since the financial crisis, that hasn’t always been the case. The rest of the stock market is showering shareholders with unprecedented amounts of cash: as Cardiff Garcia points out, February was a record month for share buybacks. So far, however, non-financials have led the way. Because of the realities of post-crisis regulation, banks have to wait before finding out whether they’ll get to join the party. — Ben Walsh

On to today’s links:

Popular Myths
America is actually terrible at globalization – Tim Fernholz

Alpha
Once again, the media is asking all the wrong questions about the stock market – Josh Brown
What Warren Buffett’s worst year says about his skill – FT

Punditry
World’s wrongest man ventures latest prediction about the economy – Jonathan Chait

Austerity Bites
The eurozone will probably shrink again in 2013 – Reuters

New Normal
Low-income students’ college completion rate is 6 times lower than high-income students’ – Bloomberg
A college degree is still the best indicator of employment for the young – Catherine Rampell

TBTF
Citigroup explores the novel idea of measuring employee performance using data – Jonathan Weil
Michael Corbat: “You are what you measure” – WSJ
The US attorney general is worried that America’s banks are too big to prosecute – The Hill

Servicey
Shorts, and 9 other health supplements you actually need – Hamilton Nolan

This Is Actually Happening
China is upset that Japan is keeping its currency artificially low – WSJ

Oxpeckers
Absurd Business Insider headlines subreddit – Reddit
Ta-Nehisi Coates: the job of a writer is “being ignorant and learning” – NY Observer

Regulations
EU fines Microsoft $731 million for making Europe use the terrible Internet Explorer – Reuters

Ouch
Bill Gates takes to his blog to slam a popular book on economic development – The Gates Notes

Troubling
Stock market leverage is nearing 2007 levels – Finalternatives

Hegemons
“China has established a hydro-supremacy unparalleled on any continent” – Brahma Chellaney

Follow us on Twitter and Facebook. And, of course, there are many more links at Counterparties.

The main lesson I’ve learned from the sequester fustercluck, and from the failure of austerity programs in Europe, is that you can steer yourself very, very wrong indeed if you try to find fiscal solutions to fiscal problems.

The two phenomena are different: the stated aim of the sequester was to focus attention on long-term fiscal problems, while European austerity is generally targeted much more at the short term. But both resulted in the same thing: governments cutting their spending and hurting growth, when growth is the only real solution to the problem at hand.

In Europe, the key short-term problem is unemployment; in the US, the long-term problem is America’s ability to pay its scarily-rising healthcare costs. In neither case do government budget cuts do anything whatsoever to address the problem; instead, they exacerbate it.

Unemployment is the more obvious case: if the government lays off thousands of workers, and stops injecting money into the economy through other channels, that’s never going to help people find work in the short term. But the case against a fiscal solution to the healthcare-cost problem is also a pretty simple one. Here’s John Carney:

The main challenge we face on entitlements is not financial — it’s demographic. It’s not really even a question of “entitlements” at all. The challenge is just whether the economy in the future will be productive enough to produce all the medical care, food, and shelter required by the elderly when there are fewer people actually working. How we pay for this is secondary matter.

To put it differently, no matter what budget reforms we enact, we have a long-term care problem — not a long-term deficit problem. Even if we dramatically cut down on the long-term deficit by slashing entitlement spending, so that any care in excess of that has to be funded privately, we’ll still face the same challenge.

That challenge cannot really be solved through budgets. No matter how much we tax now, no matter how much we save now, in the future the economy will be limited to what it is able to produce. The challenge is to set that limit as high as possible, so there is as much as possible for the young and the old to divide it among themselves.

Put aside, for one minute, the question of whether marginal discretionary government spending is good or bad for economic growth; the point here is that the problem of healthcare costs isn’t fiscal. Indeed, it’s easy to go even further than that, and to say that the more money the government spends on healthcare, the smaller that the problem of healthcare costs becomes. After all, everywhere in the world, including in the US, the government gets by far the best price in the market when it spends money on healthcare. If you switch healthcare expenditures from the public sector to the private sector, all you do is make them more expensive.

And as Joe Weisenthal points out, quoting Richard Koo, the more that a government worries about long-term fiscal balance, the less effective it becomes in attempting to stimulate the economy to provide the kind of growth that everybody wants to maximize. Just look across the Pacific, says Koo: Japan has never once met its fiscal targets in the past 20 years, precisely because it has been consistently far too worried about meeting its medium-term fiscal targets.

The solution to all these problems has to be to maximize the number of people with jobs; to maximize the amount of money those jobs pay; and to maximize the number of years that people are earning money in those jobs. Eduardo Porter, today, makes the case for raising the retirement age, which of course would reduce the increase in Social Security costs. But he also makes the point that if people stay in well-paying jobs for longer, that benefits the entire economy — which in turn will improve our ability to provide America’s seniors with the healthcare they deserve.

Meanwhile, the rhetoric of the sequester is making everybody look in exactly the wrong place for solutions to America’s long-term fiscal problems. The amount that the government spends on national parks, or on FBI salaries, or even on mine-resistant, ambush-protected Army vehicles, is of course irrelevant to the question of how to create an economy which can afford medical care for all over the long term. But it also creates a framing problem — making it seem as though government expenditures are the nail, and that therefore budget cuts are the necessary hammer. Even as, all the while, the deep and real problems become that much more structural, embedded, and intractable.

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There’s a reason why we think America’s young generation is doomed (besides the rise of the emoji, that is). The FT and the WSJ both report that the young are no longer partaking in the great American sacraments of bingeing on credit card and mortgage debt. Instead, they’re racking up record amounts of student loans.

The number of student loan borrowers and the average balance have both jumped by 70% in the last eight years, according to new data from the New York Fed; what’s more, as Pew Research also shows, student loan debt was the only major type of debt to increase during the downturn. Delinquency rates on student loans are also soaring — for all age groups.

The problem with this turn to student debt, the Center for College Affordability and Productivity reports, is that there simply aren’t enough good jobs. Specifically, there are roughly 28 million jobs requiring a college degree in America, but some 41 million employed college graduates in the workforce. This is partly why the NYT recently said “the college degree is becoming the new high school diploma.”

Investors are snatching up securities backed by student loans, and SecondMarket will soon let issuers sell securitized loans directly to investors. But does this mean there’s a student loan bubble? Not quite, says Lisa Pollack. She points to a few aspects of the market which might make it prone to overheating: debt-to-income ratios for new college graduates are too high, lenders could rush into the student loan market knowing that student loans can’t be discharged in bankruptcy, and colleges are in a perpetual race to raise tuition.

But Pollack also notes that college is still largely a good investment: Fed research has shown the cost college education can usually be recouped in 10 years or less. If there is a student debt bubble, it probably won’t put clusters of companies out of business, as the dotcom and mortgage bubbles did. Some 85% of student loans are owned by the government – private student loans are still a small part of the market. Which means that the approximately $1 trillion outstanding student debt looks less like a quick-bursting bubble and more like a slow, constant drag on the economy. And, arguably, on youth itself. — Ryan McCarthy

On to today’s links:

Crisis Retro
How a crisis-era CDO blessed by S&P blew up in less than a year - Bloomberg

Tax Arcana
The tax-free, “stealth subsidy” that’s going to finance stadiums, offices, and wineries - NYT

Oxpeckers
A day in the life of a freelance journalist: Telling people you can’t work for free - Nate Thayer
The problem with online freelance journalism - Felix
The Washington Post is going to try sponsored posts - Digiday

Wonks
“We rely upon the financial sector to tell us sweet lies” - Steve Waldman

Financial Arcana
Wall Street’s newest old idea: turning illiquid securities into high quality collateral - Tracy Alloway

Must Read
“The seventh circle of bureaucratic hell” – Inside the Kafkaesque Dodd-Frank rulemaking process - Washington Monthly

JPMorgan
Senate report blames JPMorgan execs — not just a single trader — for $6 billion trading loss - Dealbook
“Dimon has tried to create a one-man show that he is able to micro-manage” - Euromoney

Says Science
Americans find love in a hopeless place: Walmart - CBS Houston

Alpha
Useless market indicator hits an all-time high (if you discount inflation) - Ezra Klein

Renumeration
There’s nothing intrinsically wrong with bonuses - Chris Dillow
Heinz CEO’s “golden parachute” could be worth $213 million - Dealbook

Billionaire Whimsy
Does a Saudi prince exaggerate his net worth just for the Forbes Billionaire list? - Forbes

New Normal
The solution to the sequester’s job cuts is simple: force rich Americans to hire a butler - Bradenton Herald

Fair Points
The payday lending industry would like you to know it’s not as sketchy as its online competition - American Banker

Follow us on Twitter and Facebook. And, of course, there are many more links at Counterparties.

Nate Thayer caused quite a stir in the Twittersphere this morning when he published the email correspondence between himself and Olga Khazan, an editor at the Atlantic. Khazan had seen Thayer’s 4,300-word piece for North Korea News about “basketball diplomacy”*, and decided that it would be great to have a shorter version of the story at the Atlantic. After a bit of back-and-forth, she proposed this to Thayer:

Maybe by the end of the week? 1,200 words? We unfortunately can’t pay you for it, but we do reach 13 million readers a month. I understand if that’s not a workable arrangement for you, I just wanted to see if you were interested.

I spoke to Bob Cohn, the head of Atlantic Digital, today, and he said, echoing editor in chief James Bennet’s formal apology to Thayer, that this was a mistake. It would have been OK, probably, to ask Thayer if the Atlantic could cross-post, or syndicate, the original piece, with no more work involved on Thayer’s part. At that point, he could have said yes or he no (or, in this case, he could leave the decision to NK News, which owns the copyright on the piece) — but he wouldn’t have been asked to work for free.

The cross-posting model can be a very healthy one: once a piece has been written and published, it can reach a much wider audience if it appears on a few different sites. To take one high-profile recent example: “I am Adam Lanza’s Mother” did very well at its original location, getting 1,738 comments. But it did even better at HuffPo (15,220 comments, 1,269,516 Facebook Likes) and at Gawker (794,000 Likes, 3.8 million pageviews). That’s a special case, of course. But both professional and amateur writers tend to want their stuff to be read by as many people as possible, and (like me) normally say yes to people asking if they can cross-post.

I don’t think that Thayer would have been offended by a simple cross-posting request: that can be dealt with with an equally simple yes or no. Instead, however, he was asked by the Atlantic to cut 4,300 words down to 1,200 words — something which involves a substantial amount of work, and often a substantial amount of rewriting. For that, the Atlantic should have offered to pay him. Or, more realistically, they shouldn’t have asked him to do that in the first place: there is value to reprinting the original story, and there is value in quoting it and linking to it, but there’s not a huge amount of value in editing such a thing down — not when your medium has no space constraints.

Also, there’s something a little disingenuous about the “13 million readers” thing. I can say that Reuters has 40 million readers every month, but that tells you nothing about the number of people reading my blog. It’s OK to ask people to do things for free, but it’s not OK to oversell yourself in the process: when Khazan tells Thayer that “some journalists use our platform as a way to gain more exposure”, she should be honest about the number of readers that Thayer’s post is likely to get, rather than citing huge numbers with very little relevance to Thayer. What’s more, at the margin, a large readership should by rights increase a publication’s ability to pay freelance contributors, rather than merely increasing freelancers’ desire to appear in that publication.

The exchange has particular added poignancy because it’s not so many years since the Atlantic offered Thayer $125,000 to write six articles a year for the magazine. How can the Atlantic have fallen so far, so fast — to go from offering Thayer $21,000 per article a few years ago, to offering precisely zero now? The simple answer is just the size of the content hole: the Atlantic magazine only comes out ten times per year, which means it publishes roughly as many articles in one year as the Atlantic’s digital operations publish in a week. When the volume of pieces being published goes up by a factor of 50, the amount paid per piece is going to have to go down.

But there’s something bigger going on at the Atlantic, too. Cohn told me the Atlantic now employs some 50 journalists, just on the digital side of things: that’s more than the Atlantic magazine ever employed, and it’s emblematic of a deep difference between print journalism and digital journalism. In print magazines, the process of reporting and editing and drafting and rewriting and art directing and so on takes months: it’s a major operation. The journalist — the person doing most of the writing — often never even sees the magazine’s offices, where a large amount of work goes into putting the actual product together.

The job putting a website together, by contrast, is much faster and more integrated. Distinctions blur: if you work for theatlantic.com, you’re not going to find yourself in a narrow job like photo editor, or assignment editor, or stylist. Everybody does everything — including writing, and once you start working there, you realize pretty quickly that things go much more easily and much more quickly when pieces are entirely produced in-house than when you outsource the writing part to a freelancer. At a high-velocity shop like Atlantic Digital, freelancers just slow things down — as well as producing all manner of back-end headaches surrounding invoicing and the like.

The result is that Atlantic Digital’s freelancer budget is minuscule, and that any extra marginal money going into the editorial budget is overwhelmingly likely to be put into hiring new full-time staff, rather than beefing up the amount spent on freelancers. Cohn didn’t give me hard numbers, but some back-of-the-envelope math would indicate that more than 95% of his total editorial budget is spent on staffers, rather than freelancers.

Staffers come in, work hard at a multitude of jobs, and coordinate with each other surprisingly well; it also takes them very little time to understand how to create great web content quickly and internally, rather than relying on outsiders. Khazan had only just started her job when she tried to get Thayer to repurpose his article; my guess is that with a little bit more experience, she would have found it much easier to simply write a quick article of her own, linking to and blockquoting Thayer’s piece, driving traffic to him without having to negotiate with him at all. Look, for instance, at how David Trifunov of Global Post tackled the subject: he wrote a short but interesting post of his own, incorporating links to three outside stories, including Thayer’s, as well as another Global Post story. That’s the natural way of the web, and it doesn’t involve any freelancing.

The fact is that freelancing only really works in a medium where there’s a lot of clear distribution of labor: where writers write, and editors edit, and art directors art direct, and so on. Most websites don’t work like that, and are therefore difficult places to incorporate freelance content. The result is that it’s pretty much impossible to make a decent living on freelance digital-journalism income alone: I certainly don’t know of anybody who manages it. There’s still real money in magazine features, and there are a handful of websites which pay as much as $1,000 or $1,500 per article. But in general it’s much, much easier to get a job paying $60,000 a year working for a website than it is to cobble together $60,000 a year working freelance for a variety of different websites.

The lesson here, then, is not that digital journalism doesn’t pay. It does pay, and often it pays better than print journalism. Rather, the lesson is that if you want to earn money in digital journalism, you’re probably going to have to get a full-time job somewhere. Lots of people write content online; most of them aren’t even journalists, and as Arianna Huffington says, “self-expression is the new entertainment”. Digital journalism isn’t really about writing, any more — not in the manner that freelance print journalists understand it, anyway. Instead, it’s more about reading, and aggregating, and working in teams; doing all the work that used to happen in old print-magazine offices, but doing it on a vastly compressed timescale.

There are exceptions to this rule, of course — websites which still pay freelance writers decent sums. The New Republic, for one, seems to be carving out an impressive niche as a place to find carefully-edited, print-quality freelance content even when the piece in question doesn’t appear in the magazine. And when the web slows down, as it does at places like Matter, it’s quite easy to find in-depth journalism and reporting from well-paid freelancers. But in general, it’s fair to say that the web is not a freelancer-friendly place. Just be careful about extrapolating: there are lots of very good digital-journalism jobs out there, no matter how badly some freelancers get treated.

*Update: In another layer of irony, it turns out that Thayer’s piece itself was deeply indebted to — and yet didn’t cite or link to — Mark Zeigler’s 2006 story on the same subject. (Although it does at one point mention “documents obtained by the San Diego Union Tribune in 2006″.)

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Monetary policy is largely about setting expectations. When the likely future Chairman of the Fed speaks, as Janet Yellen did earlier today, we’re given a glimpse into what what we can expect when Ben Bernanke’s term ends in January 2014.

Earlier this year, Yellen diagnosed the reasons for America’s lackluster post-crisis recovery — and, to the delight of nerds everywhere, she explained it in chart form.

Today, Yellen’s message was a clear indication that she would continue Bernanke’s strategy of monetary stimulus (aka “quantitative easing”). Why? Here’s Yellen:

There is the high cost that unemployed workers and their families are paying in this disappointingly slow recovery. There is the risk of longer-term damage to the labor market and the economy’s productive capacity. At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment.

Neil Irwin thinks Yellen’s speech was a direct response to the recent bubble bursting rhetoric of Fed Governor Jeremy Stein. Translating brusquely, Irwin says Yellen’s message was, “Are you crazy?… Why should we cripple the prospects of economic recovery just because investors may be paying too much for certain types of corporate bonds and end up losing money”.

The FT’s Robin Harding says that Yellen supports continuing to refill the economy’s punchbowl through asset purchases. Yellen also specified the factors that would need to improve in order for her to consider ending the policy: unemployment; employment growth; the job-quitting rate; personal consumption. Monetary policy based on those five metrics is a world away from that of the Greenspan era.

Yellen wasn’t always such a marked supporter of loose monetary policy. In 2010, she was openly worrying about the next bubble. But if Narayana Kocherlakota can transition from an ultra-hawk to a committed dove, there’s no reason for Yellen to feel overly tied to her previous comments. Regardless, her next big challenge may be of a completely different sort: unwinding what JP Morgan’s Michael Cembalest calls the market’s “tangled, complicated relationship” with quantitative easing. — Ben Walsh

On to today’s links:

Remuneration
A terrific guide to the economics and politics of capping EU banker bonuses – FT

Felix
The economics of paying for content online - Felix

New Normal
It’s a “golden age” for corporate profits, but not for corporate workers – NYT

Startups
Groupon investors Andreessen and Horowitz annotate Groupon CEO’s goodbye memo – Rap Genius

Good Reads
“What if frustration, inconsistency, forgetting, perhaps even partisanship, allow us to be complex social actors?” – Evgeny Morozov

Ugh
Not surprisingly, the sequester’s cuts will overwhelmingly hurt America’s poor – NYT
Economists may be finally ready to say that slow growth is here to stay – WaPo

Deals
Michael Dell should explain why he wants Dell to go private — or he should quit – Dan Primack
Dell shareholder says Einhorn’s plan for Apple is better than Dell’s plan for Dell – WSJ

China
Pollution is slowing China’s economic growth – FT Alphaville

Facebook
Paying Facebook to share your link is a lot more effective than sharing it yourself – Nick Bilton

Oxpeckers
Bill Keller may have made a glaring mistake in his latest NYT column – Greg Sargent

Right On
Deficit reduction is counterproductive – Felix Rohatyn

EU Mess
The cradle of Western civilization has been reclassified as an “emerging market” – Telegraph
Professional clowns upset by comparisons to Italy’s politicians – IBT

Yup
“Wal-Mart is the wrong place to put the blame or to expect the solution” to America’s slow growth and rising inequality – Slate

Regulations
The JOBS Act is the “greatest loosening of securities regulation in modern history” – Steve Rattner

Wonks
Bernanke recently gave some very indirect hints about the consequences of higher rates – Econobrowser
Is there a Bitcoin bubble? – Scott Sumner

Yikes
Nasdaq is executing trades at a loss – FT

Duh
Maybe US consumers aren’t immune to macroeconomic forces after all – WSJ

Servicey
Which incredibly long profile of Aaron Swartz should you bother to read? – Adrian Chen

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On Friday, the Second Circuit court of appeals issued an order, aimed at Argentina. The order is worth quoting in full, because it helps to explain the reasoning by which the Second Circuit is going to end up pushing Argentina into default:

At oral argument on Wednesday, February 27, 2013, counsel for the Republic of Argentina appeared to propose that, in lieu of the ratable payment formula ordered by the district court in its injunction and accompanying opinion of November 21, 2012, Argentina was prepared to abide by a different formula for repaying debt owed on both the original and exchange bonds at issue in this litigation. Because neither the parameters of Argentina’s proposal nor its commitment to abide by it is clear from the record, it is hereby ordered that, on or before March 29, 2013, Argentina submit in writing to the court the precise terms of any alternative payment formula and schedule to which it is prepared to commit.

The court directs that, among the terms specified, Argentina indicate: (1) how and when it proposes to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years; (2) the rate at which it proposes to repay debt obligations on the original bonds going forward; and (3) what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action.

A bit of background here: at the big hearing last week, Argentina complained that it had never been given an opportunity to propose terms on which it might be willing to pay Elliott Associates, the plaintiff in the case. This is the first paragraph of the Second Circuit’s response: OK then, tell us what your proposed terms might be. And then the second paragraph contains the punch: those terms had better explain how you intend “to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years”.

Argentina, of course, has no such intention. When it files its response at the end of this month, it will almost certainly propose what is essentially a second reopening of the 2005 bond exchange: it will allow Elliott to swap its old defaulted debt into new, performing bonds on more or less the same terms — including a 70% haircut — that everybody else got. In no event will it allow Elliott to be paid off in full — to be “made current” — on the original terms of its bonds.

The Second Circuit, on the other hand, clearly sees its job as being to enforce the original bond contract, which has been in default for 11 years. When Argentina proposes something roughly 4,000 days late and a billion dollars short, that’s all the provocation the Second Circuit will need to bring down the hammer and uphold the district court’s orders.

Those orders are tough indeed. Commenter “paripassuwatch”, on my original post, notes that the court’s injunctive remedy is “the most powerful enforcement mechanism in the realm of sovereign debt since the era of ‘gunboat diplomacy’. Blocking access both to the world payment system and world capital markets is as close one can get to blocking access to trade and customs duties”.

These days, as Don Henley famously said, a man with a briefcase can steal more money than any man with a gun — and the Second Circuit is going to hand over to Elliott Associates one of the most powerful briefcase-based weapons the world has ever seen. That doesn’t mean Elliott’s going to get paid, of course. But it does mean that that the hedge fund can essentially turn Argentina into a global economic outcast unless and until that happens.

The consequences for Argentina could well be very real and very painful. All governments need to fund themselves, and Argentina is no exception: what’s more, all governments borrow money from foreign investors, by issuing either foreign or domestic debt to those investors. Again, Argentina is no exception — foreign investors have long been a large part of the investor base for Argentine domestic debt. So in theory, losing access to US capital markets might be no big deal: Argentina could simply move all of its funding operations to Buenos Aires.

In practice, however, as DanielKoehler, another commenter, says, things are more complicated than that. Foreign investors tend to want dollar-denominated debt, and whenever you’re dealing in dollars, various intermediaries are going to be transferring those dollars into a US bank account. Similarly, Bank of New York, as the trustee for the bondholders who are receiving interest payments right now, would have to be involved somehow in any attempt to exchange those bonds for new domestic bonds. In both cases, US institutions could find themselves at risk of being found in contempt of court in New York, and might well refuse to cooperate with Argentina.

Just finding a bank willing to lead-manage any exchange offer would be difficult, for Argentina, given the legal and reputational risks associated with such a mandate. The New York courts are being very clear: if Argentina wants to be able to pay its current bondholders, it’s going to have to pay off its holdouts at the same time. (Or, conversely: if Argentina wants to remain in default on the holdouts, it’s going to have to default on everyone.) No one knows how this whole thing is going to play out, but New York’s jurists aren’t stupid, and are good at closing all the obvious loopholes. Argentina has very good and very expensive lawyers, but there’s no particular reason to believe that they’re going to be able to conjure up some clever mechanism which allows the country to continue paying the bondholders it wants to pay, while keeping Elliott out in the cold.

That said, the New York courts are playing a very risky game here. If Argentina does end up defaulting on everybody, it’s only going to be a matter of time before it unveils some kind of exchange offer, which would probably be open to holders of all defaulted bonds. Most likely the bondholders who are currently receiving interest payments — the exchange bondholders represented in court by David Boies — would be offered 100 cents, or maybe even slightly more than that, on the dollar, while the holdouts, like Elliott, would be offered maybe 70 cents on the face value of their claims. (Elliott is asking the court for roughly 300 cents on the dollar, thanks to the wonders of past-due compound interest.)

Such an exchange offer could easily be presented by Argentina as a good-faith effort to cure a default which was forced on it by hostile American courts. And David Boies would certainly be arguing vociferously for the right of bondholders to decide whether they wanted to accept Argentina’s offer or not. At that point, what would Judge Griesa, and/or the Second Circuit, do? They could stand firm, and essentially block the entire exchange offer — thereby keeping Argentina in default against its own will. But while they’re sworn to uphold the sanctity of contracts, they also have to have at least one eye on the ability of New York’s financial markets to function effectively. And it’s hard to see how they can do that if they’re preventing a sovereign nation’s best attempt to extricate itself from default.

So while the current situation is certainly very bad for Argentina, it could wind up being just as bad for the Southern District, and for New York’s status as an international financial capital. Which is why the Second Circuit is going to have to think very hard indeed before handing down any particularly draconian decision.

Apologies for the delay between part 1 and this: I wanted to wait until Amanda Palmer’s TED talk appeared online, because it’s an important part of the other big aspect of content economics. Part 1 was about the ability of publishers to sell readers to advertisers; part 2 is about the ability of publishers to persuade readers to pay the publisher directly.

There are basically three ways to go about this. You can put up a paywall; you can ask for donations; or you can sell non-digital things to your digital audience.

On its face, Palmer’s talk is about the second strategy, but in fact it’s about all three. (And yes, I’m the “financial blogger” referred to in the talk.) For instance, when it comes to online publishing, why are paywalls more common than tip jars, despite the fact that they’re much more difficult to implement? Palmer does a great job of walking us through the answer to that question: there’s something shameful, there’s a whiff of the panhandler, in asking strangers for money.

At the beginning of the talk, Palmer talks about her early career as a living statue, and the people who would drive by, shouting “get a job!” as she waited for people to drop money into her hat. The implication, of course, was that being a living statue is not a job (its surprisingly consistent revenue stream notwithstanding), and that a living statue’s income represents an entirely one-way transmission of value: spectators give money, and receive nothing in return. The rest of Palmer’s talk is an attempt to explain that the value goes both ways, and that there is (or should be) nothing shameful about creators asking for money. But the attitude she’s pushing against is deeply ingrained.

A couple of weeks ago, for instance, I asked Andrew Sullivan why he chose to put up a paywall rather than putting up a tip jar. His answer (at about 23:00) was unambiguous:

This is not a tip jar. And it is not a pledge drive. It is a subscription. And that makes it a different proposition. It’s telling people I’m not an amateur, and I’m not a charity. I’m doing work that I’m asking people to pay for. And it seems to me that at some point, we have to say that, in new media. Or else it is not going to continue to exist…

I had two pledge drives early on, in 2002 and 2003, which netted a certain amount of money. But this is a different model. This is trying to make it sustainable, long term: don’t give it money just because you like me. We are trying to create an actual site that is news and opinion that people value and pay for, and become associated with in the long run. We could have done a tip jar. We decided no. We wanted to be a business. And do it the right way.

The distinctions here are subtle ones: Sullivan still nags his readers, just as public radio does during its pledge drives, but in his mind those nags aren’t part of a pledge drive, because he’s a business, rather than an amateur, or a charity. And similarly, although he raised $500,000 from readers before his paywall even existed, those dollars weren’t donations, for much the same reason. There’s something shameful, on this view, about working for tips; there’s an unpleasant neediness about asking for charity. And it was those reasons, as much as any simply financial considerations, which resulted in Sullivan plumping for a paywall model.

Truth be told, Sullivan’s paywall is not much of a wall at all. 70% of his readers don’t click on the read-on links at all; they just stay on the home page, which is always free. And of the 30% who do click on read-on links, 91% are still within their allocation of seven free stories. Which means that overall, just 2.7% of his readers are reaching the point at which it gets a little bit harder to read what they want to read. And the actual number is lower even than that: many of his readers use RSS readers to consume his content, or else they disable cookies, or otherwise don’t get counted among the people visiting his website.

But as Sullivan would probably agree, the choice between a paywall or a tip jar is not as clear-cut as it sounds: realistically, it’s more of a spectrum. Some paywalls are forbiddingly high “Berliners“: if you don’t cough up, you have no access. Most, however, are porous to a greater or lesser extent. The Times and Sunday Times of London will give you the first 75 words or so of any story; the New York Times will allow you a certain number of free articles per month, plus all articles arrived at from external sites; the WSJ will let you in if you’re coming from Google, or from a link which has been emailed to you by a subscriber. At other sites, the wall is drawn around some content but not all: the New Yorker, for instance, puts only some of its magazine content online for free, while the Boston Globe hides all of its content behind a Berliner paywall but then allows a subset of that content onto Boston.com for free.

None of these models is obviously better than any of the others. No paywall lasts untouched for long: all publishers are making decisions to put up or take down paywalls every day, and it can be hard to keep track of which publications have which model. (Right now, for instance, without looking, I genuinely can’t remember whether the Economist is paywalling any of its content or not.) Just in the past few days, we’ve seen one high paywall demolished, at Variety; there, the new proprietor, Jay Penske, called it the “end of an error“. Meanwhile, another paywall has been erected, at Fortune: for the time being, for now, most Fortune magazine content is now behind a wall, while online-only content is free.

In an editor’s letter which isn’t online, Fortune’s Andy Serwer says that “we consider Fortune’s content valuable enough that we have decided not to give it all away online”. The unfortunate implication is that the online-only content, including the excellent Term Sheet blog, is not valuable enough to be worth charging for. On the other hand, if you look at the pricing, you’ll see that the cost of a digital subscription — $19.99 per year — is exactly the same as the cost of a digital subscription plus home delivery of the magazine. And the unfortunate implication of that is that all the extra value one finds in a magazine — the art direction, the layouts, the ability to read it while waiting for your airplane to take off — is also worthless. (Contrast that with the NYT paywall, which doesn’t really charge for the content at all, but rather for the online ability to navigate from one story to another.)

The real reason why Fortune put up a paywall, of course, has nothing to do with how valuable Andy Serwer thinks the magazine’s content is. Instead, the paywall is just another way for the Time Inc brass to try to make money and keep the magazine’s rate base high, the idea being that people will be less likely to cancel their magazine subscriptions if they know that they won’t be able to read that content online for free.

Which brings up a fundamental rule of online subscriptions: there is zero correlation between value and price. There are lots of incredibly expensive stock-tipping newsletters which have a negative value: you’d be much better off if you didn’t subscribe to any of them at all. And of course there’s an almost infinite amount of wonderfully valuable content available online for free, starting with Wikipedia and moving on through the sites of organizations like Reuters, Bloomberg, the Guardian, and the BBC.

Or look what happened when Newsweek and Sullivan parted ways: both of them started subscription products, at almost identical prices. (Sullivan wants $20 per year; Newsweek wants $25.) That doesn’t mean the two products have almost-equal value; it just means that both Newsweek and Sullivan — just like Marco Arment, for that matter — came to the conclusion that the $20-a-year range was more or less the point on the supply-and-demand curve where they would maximize their income. They might be right about that; it’s hard to tell. Paywalls are put together in so many different ways, at so many different price points, that trying to work out their relative merits, in terms of income generated, is almost impossible.

But there’s another consideration, too: the more formidable the paywall, the more money you might generate in the short term, but the less likely it is that new readers are going to discover your content and want to subscribe to you in the future. Amazing offline resources like the Oxford English Dictionary and the Encylopedia Britannica are facing existential threats not only because their paywalls are too high for people to feel that they’re worth subscribing to, but also because their audiences are not being replaced at nearly the rate at which they’re dying off. The FT, for instance, has discovered that its current subscriber base is pretty price-insensitive, and has taken the opportunity to raise its subscription prices aggressively. That makes perfect sense if Pearson, the FT’s parent, is looking to maximize short term cashflows, especially if it’s going to sell off the FT sooner rather than later anyway. But if you’re trying to build a brand which will flourish over the long term, it’s important to make that brand as discoverable as possible.

And the lesson of very porous paywalls, like Sullivan’s, or even of pure tip jars, like Maria Popova’s, is that on the internet, people prefer carrots to sticks. That’s one of the lessons of Kickstarter, too. To put it in Palmer’s terms: if you want to give money, you’re likely to give more, and to give more happily, than if you feel that you’re being forced to spend money. If you look at the $611,000 that Sullivan has raised to date, essentially none of it has come from people who feel forced to cough up $20 per year in order to be able to read his website. To a first approximation, all of that money has come from supporters: people who want Sullivan, and the Dish, to continue.

Palmer concludes her talk by saying that “people have been obsessed with the wrong question: how do we make people pay for music. What if we started asking: how do we let people pay for music?” The same question can and should be asked about other forms of online content, too. Tomorrow Magazine raised $45,452 — more than three times its goal — from 1,779 people, none of whom felt in the slightest bit grudging about the money they were spending. A mere 296 people clubbed together to raise $24,624 for Baltimore Brew. 99% Invisible, a radio show, raised $170,477 from 5,661 people. And that’s just a few of the Kickstarter journalism projects which were funded in 2012. There are lots of other models, too, like membership of Longreads, or Spot.us, which helps to fund all manner of interesting and amazing journalism. What all of these projects have in common is that they’re free online even as they’re asking for money: they’re not going to punish anybody for not supporting them by throwing up a paywall and saying “well, in that case, we won’t give you access”.

As Palmer says, this kind of model involves something quite rare in the journalism community: the ability to trust that people will support you, even if they don’t have to do so. And the stronger the relationship you have with your readers, the more you’ll be able to trust them. This is why Palmer’s Kickstarter campaign was so successful: not because she had a lot of fans (that, in itself, doesn’t work), but because the connection she has with her fans was so strong. As Paul Smalera says, “digital media needs to reconnect to readers”:

For all of the hype around interactivity, big media is still primarily a one-way street. And the rise of programmatic ad-buying will only reinforce that trend. Most old media revenue officers aren’t going to care about connecting to their online audience, beyond understanding their aggregate profile and average value to an ad network. Yet cultivating those reader relationships on an editorial level can unlock all sorts of value, understanding, and yes, even revenue.

Twitter is great at this: readers are quite right when they feel that they know the people they follow on Twitter, in a way they never do just by reading polished content. But there’s more to connecting with your audience than Twitter. Indeed, the best way of all to do it is to venture out into the real world.

Events are one obvious way of doing that, and can be significant profit drivers in their own right. Atlantic Media is fantastic at monetizing its brand by putting on conferences, as are other franchises: the tech world is a particularly good place for such things, as All Things D or Wired or TechCrunch will attest. The NYT has its Dealbook conference, the New Yorker has its festival, and of course the business press has branched out into things like the Economist’s gatherings or the WSJ’s whole suite of events.

Big formal expensive events like these aren’t easy to put on, of course — they require large dedicated staffs, and a huge amount of effort. But non-sponsored events like Radiolab Live are a bit cheaper and easier, and anyone can cobble together a Meetup, or even just tell his readers to meet him at the Oyster Bar for an impromptu celebration.

And events are just one tiny part of the non-digital world which digital creators can put their brand on and sell. The whole Kickstarter phenomenon, for instance, is based on the idea that if you give enough money, you’ll get stuff in return. Palmer was offering glossy books and LPs and CDs and even (if you ponied up $10,000) promised to come and paint your picture and have dinner with you. Tomorrow offered a phone message from a porn star. 99% Invisible offered books and shirts and all manner of other stuff. Kickstarter is no tip jar: make no mistake, it has a very large element of e-commerce to it as well. Meanwhile, Monocle has seven stores around the world, plus an elaborate e-commerce site, and Mental Floss magazine makes a good third of its revenue from selling things.

Think of this as the flipside of content marketing: if brands can bypass publishers and create their own content in order to sell the stuff they produce, then publishers can bypass advertisers and sell their own stuff — be it a $40 chemistry cocktail set or a £415 cashmere scarf — to their readers directly.

The bigger lesson here is that when it comes to persuading your readers to pay you money, it actually helps to be small. There’s an exception for finance, of course, and also for the NYT, which is unique in many ways. But the lesson of Palmer’s talk is that while 25,000 supporters aren’t nearly enough to support a band on a record label, they’re more than enough to support a band on Kickstarter — or, for that matter, to keep an iPad magazine going strong. What’s more, while consumers can be very loyal to brands and to publications, in many ways it’s easier to become loyal to an individual, especially when she has an idiosyncratic and unique voice.

If you want to read The Dish, you can’t get there by going to thedish.com or to thedailydish.com or anything like that: you get there by going to andrewsullivan.com. The person is the site, and when that happens, the readership becomes much more willing to hand over money. Do I want to give Fortune $20 a year so that I can read its magazine articles online? No, I do not — especially when we live in a social world, where if I find a story I love, the first thing I want to do is be able to share it. On the other hand, I’m much more willing to spend $20 a year to support Andrew Sullivan, even if I rarely visit his site, precisely because I don’t particularly have to do so, and can read any of his stuff whether I pay him or not.

We’re not talking about micropayments here: those have never taken off, and I doubt they will, at this point. For a long time, people thought that the sheer size of the internet would enable enormous numbers of people to pay negligible sums of money, which would add up to substantial amounts in aggregate. The problem with that was that it’s just too hard to spend money online: the effort involved just isn’t worth it, for sums of a dollar or less.

Instead, the sheer size of the internet enabled the opposite to happen: it enabled smallish numbers of people to pay modest amounts of money, which can add up to just as much in total.

So if you’re a huge publicly-listed corporation, by all means create an elaborate paywall in the hopes that people will decide that they need your content and will just have to pay for it. Every so often, that can work, as it has at the FT and the NYT. But frankly I don’t think those examples are particularly replicable: they’re both sui generis in many ways. Instead, it seems to me, the most promising aspect of content payments is at the other end of the spectrum. Build up a relationship with your readers, in large part by giving your content away for free; ask for money with pride and shamelessness; and place no cap on how much you let your readers spend. Give them the opportunity, and you might be very surprised at what they’re willing to buy.

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How should a CEO act? Andrew Mason, the co-founder of Groupon, is stepping down, and his legacy is already being defined with terms like “quirky” and “eccentric”. In a terrific resignation letter, Mason said he’d “like to spend more time with my family. Just kidding – I was fired today.” He may or may not have tweeted obscure Godfather references on the way out.

Of course, there’s one thing that determines whether adjectives like “quirky” are pejorative when describing a CEO: the stock price. Earlier this week, the company released another typical Groupon earnings report — revenue was up, but the company posted a $12.9 million operating loss, sending its stock down 24%. Groupon’s market cap is now roughly 75% lower than when it went public in 2011. This all comes more than a year after the company abandoned a controversial accounting method and restated years of earnings, basically halving its revenue.

In as co-CEO’s are Ted Leonsis and Groupon-co founder Eric Lefkofsky, whom Mason had reportedly been feuding with. But as Rolfe Winkler tweeted, it’s not clear that Mason was even Groupon’s biggest problem. The company has actually been doing better than that it was at the time of its IPO, in terms of revenue, billings and income (not that any of that helped Felix with his wager). But fewer people are using Groupon’s deals, and as Winkler noted this fall, half of the company’s cash was owed to its merchant partners.

Groupon also provides a lesson in how not to do late-stage investing. In January 2011, Several big Silicon Valley VC firms pumped $950 million into the company, at a reported valuation of $4.75 billion. Groupon went public that November. But, as Peter Kafka notes, that money didn’t really help the company: Groupon kept only $136 million of the proceeds. The rest went to “right back out the door, to employees and early investors.” By August the WSJ was reporting that those investors were running for the hills.

None of this is to completely excuse Andrew Mason. Still, it’s worth remembering that when a CEO of a struggling company toys with the idea of sleeping in his clothes, we call him strange. When a more successful CEO invites a Canadian politician to kite surf naked, we call him Richard Branson. — Ryan McCarthy

On to today’s links:

Cephalopods
Goldman’s lavish partner ball is back for the first time since the crisis – Kevin Roose

Billionaire Whimsy
Pete Peterson has squandered half a billion dollars on his misguided austerity crusade – Businessweek

EU Mess
An economic tragedy that everyone saw coming is now unfolding in Europe – Joe Weisenthal

Wonks
Don’t listen to those silly “the sequester isn’t that bad” arguments – Josh Barro
Probably the most comprehensive sequester explainer you’ll ever read – Dylan Matthews

Life Is Not Fair
“Does Ben Bernanke care too much about unemployment?” – National Journal
Reminder: Bernanke has the second-worst unemployment record of any post-war Fed – Floyd Norris

Alpha
Carl Icahn basically just going to be a vitamin salesman now – Matt Levine

Leaders
Jamie Dimon, consistent flip-flopper – Ben Walsh

Cheery
“How the hell is it going to be OK? The worst word in the English language is hope” – NYT

Says Science
Nearby supermassive black hole spins at close to the speed of light – Guardian

New Normal
Millennials don’t care about cars, and nobody cares about TV – Atlantic Cities

Investigations
Chesapeake (and its former CEO) are under investigation by the SEC – Reuters

Remuneration
“Growth shares” – one way banks will avoid the EU bonus cap – Sarah Butcher

Oxpeckers
Goodbye Globe, hello global NYT – Jack Shafer

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I first heard about the Sustainable Preservation Initiative back in 2009. Back then, it was little more than an idea attached to a tollgate. The problem at hand is the large number of antiquities and important archaeological sites which exist in poor areas of poor countries. Historically, that has been a recipe for looting; more recently, those sites have been more at risk of simply being bulldozed as urban areas sprawl. As SPI’s Larry Coben and Rebekah Junkermeier write, the way that archaeologists have historically attempted to address those problems — conservation, education and museums — simply didn’t work. So, they came up with another idea — one which would give locals a sustainable financial incentive to maintain and preserve their patrimony.

Four years on, SPI is a well established organization. The bare-bones original concept was simply to put up a fence in front of an archaeological site, and let locals charge for admission. When tourists would arrive to see the ruins, they would pay the locals, creating a brand new income stream. Today, SPI’s ambitions — and the incomes, and the number of people that a single site can support — are much bigger. The organization’s first big project was in San Jose de Moro, in Peru, a region where incomes average $9.50 per day. SPI came in with a $48,000 one-time grant, which paid for a visitors center, a snack bar, toilets, a crafts workshop — standard touristic infrastructure, which is now providing good incomes to a dozen local residents. The local crafts, based on local antiquities, are even available now on Novica.

SPI has now launched its first crowdfunding campaign, to bring the model to two more sites in Peru, and already it has raised more than $25,000 of its $49,000 goal. I really like this model: it uses poverty alleviation as a tool with which to save priceless artifacts, and in many ways the means are more important and impressive than the end.

The trick here, of course, is to empower the locals as much as possible, rather than to parachute in and tell them how to run a business. But the fact is that even if the locals aren’t particularly well educated, and have very little financial capital, they are rich in what you might call cultural capital. And a single up-front investment in touristic infrastructure can create a sustainable, profitable enterprise which can not only last for decades but can even grow over time.

This kind of thing doesn’t scale very easily: it needs to be implemented by sensitive experts who know what they’re doing. But there are lots of opportunities to build these kind of projects all over the world, from Bolivia to Albania. Those countries might not be among the world’s top tourist destinations, but that’s OK — you really don’t need many tourists to make these projects work. And it turns out, as you might expect, that archeologically-minded tourists in far-flung destinations are actually very keen to spend their money at these sites, given half a chance. Let’s help them do so, rather than forcing them to spend their money only in the big tourist cities and long-established sites.