Look, Google Books Can't Rip Off Everyone At Once

There were a lot of responses to my defense of Google Book Search, and a couple of them are worth mentioning here. Harvard law student Jason Harrow wrote to point out that while I said that Google has clearly expressed a preference for a price point of "free," the Google agreement with authors and publishers precludes Google from offering the complete database of out of print books for free. Harrow is absolutely correct here. What Google can, and I expect will, continue to offer for free is the chance to search the entire database, see excerpts, and buy individual volumes at a reasonable price. That already goes beyond anything that I would have expected a publicly supported database of the sort that Harvard's Robert Darnton would do.

Which brings us to the other point, made by Mike Perry, who claims that I was grossly inaccurate in saying that opponents of the Books Search agreement have been unsuccessful in getting actual writers or publishers to explain how they might be harmed by Google's efforts. He points out--accurately--that opposition to the Google Books has been stronger outside the United States than inside, and he's right that I probably should have looked more outside the country. But Perry's main example is a letter signed by 2,000 German authors objecting to the Google settlement. You can go ahead and read the letter, a master work of high falutin' rhetoric about the rights of authors from which I absolutely can't deduce exactly what harm the folks who signed the letter actually expect.

Is it worth mentioning, by the way, that Perry's own Inkling Books business seems to consist partly (judging by the titles listed on Perry's website) of reprinting no-longer-copyrighted works, which, thanks to Google, are now available for free online? I'd say so.

I'm convinced that many of the authors who oppose Book Search outside the US completely misunderstand the terms. They think that unless they opt out, they give Google the right to publish their work for a token fee. This is completely false. The moment rights holders want to get out of Book Search, they can, simply by asking that their work be excluded. The only thing that the settlement prevents is an author or publisher having Google include a book in its database, wait a few years until plenty of people have seen it, and then sue for copyright violations. All the people who imagine that Google is stealing their rights should take a careful look at the opposition in the US from people who have actually looked at the settlement carefully, and comes not from those who are afraid that Google will pay authors too little but those who are afraid that the database will cost (and therefore, pay authors and publishers) too much.

Boring Post Plugging Other Stories

But they're not boring stories! One reason that there have been fewer posts than at some points in the past is that with my column running on The Big Money most weeks ... well, there's only so much I have to say. Sometimes I respond to reader comments about those columns here, but mostly I can't even keep up with that.

So, for those who've missed my Deep Thought On The Pressing Matters of our time, I'll just take a second to direct anyone who's interested to a couple of recent stories I've liked. One's about the ass-covering talents of Angelo Mozilo, the chief of the late, unmourned Countrywide and possibly the most evil man in American business this side of Madoff--and yes, I emphatically include the folks who ran Enron in this calculation. Mozilo's worth writing about because while the never-ending financial crisis continues to receive attention, the cynicism of the people who made it happen, with Mozilo at their head, is already receding into memory.

On the other hand, no one will claim that Michael Jackson has not received enough attention (especially me; I have never owned "Thriller" and am not rushing to buy it now). But I don't think I've (yet) seen another story on Jackson, the Oscars best picture expansion, the "Winner Takes All" economy, and Chris Anderson's "Long Tail" theory. All in one go.

Protagoras Goes To Wall Street

I've gotten a lot of reaction to my story about Nassim Nicholas Taleb, which is not surprising, because he has a lot of followers. In looking over the story, I feel like I made one point a little too equivocally. So I'll put it more strongly here: Taleb's general approach, as far as investing goes, is a losing strategy. Maybe times have changed, and we are in a protracted period of increased flux and unpredictability. But in general, historically Taleb's strategy of effectively buying insurance and waiting for a crash has been a loser. And I would add that I suspect it's especially likely to be a losing strategy at points when the rest of the world is running to safety and it is no longer contrarian.

There's another point, thought, that comes out of reader's letters and comments that's more interesting. Many Taleb fans wrote or commented to say that, hey, I just don't get Taleb's philosophy. As one commenter wrote, "He is totally against those making predictions. He laughs at them." Well, I do get that. The thing about Taleb is that he wants to get credit for his good calls, and at the same time he wants to be seen as making a broader philosophical point about the nature of prediction and expectation. It's that second part that gets a lot of people very excited, and they see some really deep thinking there. But it's all not nearly as new as a lot of Taleb's fans believe. It falls in a skeptical tradition going all the way back to Protagoras, who was supposed to teach his students to argue both sides of an issue with equal vigor, and has branches that stretch out not just to Karl Popper, the philosopher of science, but to Jacques Derrida and deconstruction.

Taleb talks about "prediction" where others talk about "truth," but the basic philosophical game of first undermining the received wisdom and then turning the skeptical view around and undermining your own claims is very old, and still very exciting when you first see it.The best practitioners are those who can play it longest without getting pinned down. But it is a game, and eventually it ends. Either you do get pinned down with "truths" or "predictions," and it loses its interest. Or you you don't, and eventually your followers get bored and go back to all the received ideas they'd so wholeheartedly abandoned and trying to remember what all the fuss was about.

So What About That Big Bad Bank?

Okay, so do you remember that there was going to be a trillion dollar bank bailout that would have private equity funds, with government backing, take all those bad real estate assets off the banks' hands. Well, that was a long time ago--like, two months. Now the first part of the big asset purchase plan has fizzled to nothingness. And the whole project seems to be shrinking by the minute. What the heck happened?

I wish I could say that I called this early on. I have looked through old blog entries convinced that I must have, but the truth is that I did not. What I did say is that banks weren't anywhere nearly as eager to get rid of their "bad" assets as folks thought, and if the government did make sure that banks got more for these dead assets than they were worth, then it really wouldn't be much of a bailout. But I thought some kind of asset swap was a done deal, which meant that the government would ultimately come up with a plan that overpaid for bad assets to help prop up the banks.

The first idea here--that despite all the talk of "zombie banks," cleaning up their balance sheets wasn't all that big a priority for bankers--was right. Banks think that the value of cleaning up their balance sheets is a lot less than that of kicking the can down the road and seeing if all those bad debts might be worth something. The second part though, that the government was so committed to putting all that debt in the hands of private equity players or some Resolution Trust-style entity that it would find a way to make the math work, was not.: Nobody's giving the banks much of a bonus to sell. Ergo, that trillion dollar asset swap ain't happening.

Evan Newmark of the Wall Street Journal says that's because we don't need it anymore, and ready to hail Hank Paulson as a "national hero" who saved the economy. Newmark is jumping the gun on this--let's see just what happens with all that distressed debt over the next few quarters (and maybe over years)--but he does have a point. If Paulson's plan wasn't enough, and taking over all that bad debt and putting it in A Big Bad Bank was really so pressing, then shouldn't we be dealing with a new wave of bank failures and an economy accelerating toward doom right about now?

How To Sell Single Payer: Lie About Other Policies

One tried and true way to win political debates is to vigorously misrepresent the facts. Health care, full of genuinely knotty public policy tangles, particularly lends itself to this. Everybody remembers the contribution of the insurance industry's "Harry and Louise" ads to the failure of the Clinton health plan. Just don't imagine that the dishonesty is confined to the right wing.

The Times last week ran one of their "room for debate" online roundtables, about health insurance mandates. In it, Marcia Angell, the former editor of the New England Journal of Medicine and a supporter of single payer, tries to paint any other system as a giveaway to insurance companies. Says Angell of the mandate to buy insurance:

I live in Massachusetts, where we have one. It requires people to buy private insurance at whatever price the companies choose to charge. As might be expected, this is a windfall for the insurance industry. Premiums are rising much faster than income, benefit packages are getting skimpier, and deductibles and co-payments are going up.

The idea that people in Massachusetts are buying insurance at "whatever price companies choose to charge" is absolute nonsense. You'd imagine from this that every insurance company in the country is rushing in to squeeze the poor citizens of Massachusetts. But in fact the only insurers that offer individual plans that satisfy the state mandate are non-profit. And while they offer many plans, including very expensive ones, the price of the most basic plans is not "whatever the companies choose" to charge, but fixed by the state. As for this premiums going up: you bet they are. That's because the reality of the "mandate" is that it has plenty of holes, and the first people to sign up have been, as you'd expect, the ones who need the most services.

At least Angell is honest enough to admit that one reason she doesn't like mandates is that she doesn't like any health plan that's not a government run single payer system. I don't think that misrepresenting the alternatives is the way to make that happen--then again, I don't like single payer and don't think it's politically viable anyway, so, like Angell, I'm biased here. I don't love mandates either, but if I had to choose between that and single payer, I'd go for the mandate. The biggest problem in health care isn't figuring out who should pay for it. It's changing how care is delivered so it does more and costs less (you can see some of the problems with the current system on display in Atul Gawande's fantastic article about McAllen, Texas). Neither mandates nor single payer will help on that score, but single payer will just bring us universal Medicare: ever rising costs for over-aggressive, under-effective medicine.

Extreme Problems Call For Extreme Solutions

The most striking lead I've read recently--actually, ever--in an economics treatise. From a paper that examines the "principal-agent" problem in cases of political corruption:

Castrated slaves, called eunuchs, were employed by Sultans to guard their harems. This solution to a particularly distressing principal-agent problem is one instance of a general strategy that can be called choosing agents.

What the application of this is to politics I'm not sure. The paper seems to conclude (as others have ) that eliminating the temptation to use public office for personal gain is a particularly intractable problem. But the lead does make you wonder what might happen if, say, politicians were prohibited from appearing on television.

The Shoemaker's Children ...

I wrote a story about credit cards a few days ago, and in retrospect I feel like this might be one on which I buried the lead. I started with some general points about the credit card wars, but for those who are looking at the issue seriously, the real takeaway is about Advanta. Advanta seems to have been--judging from the sheer volume, as well as the consistency of the complaints about them--the clear leader in sleazy credit card rate hikes. It's now essentially defunct as a credit card issuer, and hurtling toward insolvency. The bottom line is that sudden rate hikes work just like a run on the bank: credit card customers whose payments suddenly jump stop paying their bills. Even with Advanta's 34.99% interest, the defaults pile up faster than the payments.

One of the reasons I feel like I have a pretty good sense of this is that my own financial affairs ain't what they could be (I was relieved to read Edmund Andrews' great story and find that among writers about business and economics I'm not alone--and also, frankly, that my financial problems don't hold a candle to his). I have a pretty good sense of how over-extended debtors are likely to act because I'm one of them, carrying several cards with high balances. I actually have more sympathy for the credit card issuers than you might expect. All but one of my card issuers tried to raise my rates. I accepted slightly higher rates on two cards, "opted out" on  three more (the ones with the highest balances) that wanted much more. I don't have an issue with banks raising rates on future purchases. I don't think a bank is obliged to lend me more money at the same interest forever. The opt out terms were reasonable. In fact, Citibank's were generous: I can not only pay off the old balance at the old interest, but can keep making purchases until they expire.

This works for me, and it also works for the card issuers. If, on the other hand, my rates had simply gone up with no notice ... well, it would have been just as bad for them as for me. Because the reality is that I can't afford to pay 25% on all my cards. If I could, then I would be paying them off right now. So in practice the alternative for Citi is keeping the 8% rate I have now, or "raising" the rate to 25% and very likely charging off the debt in six months. It would not only be unfair to me, but disastrous for the bank. I have the suspicion that the result of the latest round of rate hikes from card issuers that hit folks who didn't look at their statements or didn't bother to call and opt out could yield default rates much higher than they anticipate. If it wasn't for the last couple of years of banking history, I might have thought that the banks must know something I don't about predicting default rates. Now, though, I wouldn't count on that.

Asshole Of The Month Award

One of the great things about writing online is that there is instant response to stories from readers--both those who agree with a story, and, more often, those who don't. Many emails are angry, and I have no problem with that.  I like discussing stories with folks who disagree with me. Often people who start out by insulting me turn out to be willing to engage on the issues. I find myself sympathetic to many of them: what they're often really asking for is more transparency, and they're right to do so.

But this post isn't about those readers. It's about the folks climb out of their miserable little caves to send repeated barrages of insults in an effort to prove ... well, God knows what. Every journalist gets emails from these people, whose vitriol tends to be slathered in proportion to the triviality of their points. This weekend I got a bunch of missives from one of these cave dwellers, a guy named Robert Howard who seems to write some sort of stock newsletter called Positive Patterns. Bob read my story about the involvement of the vice president's son, Hunter Biden, and brother, James Biden, with a hedge fund called Paradigm Global Advisors . The story was about a sleazy plan in which Paradigm would solicit investments from public employees' pension funds, and James Biden would get pension fees.

Bob Howard seemed to think that by, as he put it, "bending over backwards to give the Bidens the benefit of the doubt," I was auditioning for a job in the Obama administration. Well, there are a couple of reasons why the story makes an effort to give the Bidens the benefit of the doubt on some issues. One is that it's a complicated story: the plan to get public pension fund money wasn't actually put into action. Another is that a compelling investigative story is precisely one that gives its subject the benefit of the doubt. You don't convince readers by hammering them over the head and ignoring any objections.

None of this matters to Bob, and folks like him. And it certainly doesn't matter to him that if indeed I was auditioning for that Obama administration job, a much better strategy for me would be not to have done that story at all. Logic, however, doesn't really matter much to the Bobs of the world. What's matters is that you agree with every bit of their Looney Tunes worldview. The weirdest thing about Bob's emails is that his objections weren't to the points I made about Jim Biden's shady plans. It was just that, after digging through court records, I came up with a story that was just a little bit less prosecutorial in tone than the one that Bob imagines is out there. For this reason, I am "a good little soldier" who's "in the tank" for the current administration.

Eventually I gave up on Bob and told him the truth: that he seems to get his ideas from an off-price rack where they come cheapest (yes, I also told him he can go tip a cow and do whatever the hell he might want to do late at night with his Richard Nixon portrait). Bob tried to set me straight on this point, too: "I make plenty of money," Bob's next email clarified. Yes, Bob, but that thing about getting your ideas where they come cheap? It's a figure of speech. People don't really have to spend money to buy ideas. Though, heck, maybe Bob's found a way to do that. In that case, Bob's getting ripped off. But I'm afraid I can't really do anything about that.

There's one thing Bob mentioned, though, that really is worth noting. Bob wrote that he knows that "you writers always fantasize that their dissenters [sic] live in the basement with their moms." I'll skip the comments on Bob's writing style and just jump to the heart of this: No, Bob, we don't. We know that morons who like sending out insults to anyone who seems like an available target mostly don't live in their moms' basement. They have homes and cars and families and publish stock newletters just like other folks. They look just like anybody else. You really can't tell how creepy they are inside until they sit down at their computers and start spitting out bile.

Nobody Plans The Path To Ruin

Another week, another Ponzi scheme. This time, it's a guy named William Parente, who as his investments started to unravel, shot his wife and two daughters in a Sheraton hotel. The scale's a lot smaller, but I'll submit that the end result does put Madoff into perspective: yes, there are far greater levels of evil out there.

One point this should underline is that the "Ponzi scheme" is not a distinct type of financial malfeasance. Hardly anyone sets out to create a "Ponzi scheme." Yes, Charles Ponzi himself is a rare exception. But in the main Ponzi schemes are merely investment vehicles of all sorts that have gone bad. The manager lies about the results, hoping that the next month or the next year he can turn things around. He can't, so he lies some more. The deeper in it, he is, the less likely things will ever turn around. Eventually some investors ask for their money back. The first ones get it back, and there is less and less money in the pot. Eventually the fund is broke and it all comes tumbling down. What keeps it going is not financial wizardy. It is merely desperation.

Still Hoping For Cheap Healthcare Reform

Timothy Noah, a writer whose work  I respect a lot, recently published a story arguing for a national single payer health plan that included among its arguments the idea key idea that Medicare has administrative costs that are one third that of private insurers. I found this number extremely suspicious, and have now tried to spend a while tracking it down. Noah attributes it to a study from the Lewin Group. According to that study, administrative costs for small group private insurance plans are 31.7% of claims, compared to what the plan estimates at 13.2% for public plans.

Even for small firm plans--costs for large companies will be much, much smaller--this is a stunning number. But it's impossible to trace back from the Lewin study where that number comes from (the footnotes don't tell you). A recent and much more wonky Lewin report detailing the assumptions used by their health care models, however, includes some similar numbers on administrative costs (look at table 49, on page 107), and those do get a footnote. That footnote lists the source as a Hay Group study that was presented to Congress in 1990. I've seen other links to that study with the date as 1988, and some questions about the methods. I can't find those now, but really it doesn't matter: the bottom line is that the numbers that the Lewin Group is relying on here are a full 20 years old.

There's no question in anybody's mind that insurance for individuals and small groups is overpriced. Part of any health care solution is bringing down those costs to the levels that large employers pay. But what I find mistaken in Noah's and the Lewin report is the underlying hope that health care reform can be accomplished at low cost merely by trimming the fat of insurance company profits and administrative costs. That's not true. There are still health insurers with way out of line administrative costs. But in most cases, they're not. Medicare has lower costs where it provides lower reimbursements (and, it should be noted, transfers a lot of the administrative costs to health care providers). And that's reflected in the number of doctors who won't take it. If doctors and hospitals were required to accept the rates of a single payer system, that would change. But I would question whether there is any political appetite to make doctors the only people in the country who have government mandated rates.

PS: Oddly, the Lewin Group itself, it's worth noting, is a subsidiary of a company called Ingenix, which is itself a subsidary of UnitedHealthcare. So whichever side you're on, you can at least credit the health insurers with providing the data to hang them with.

The Two Faces Of The Treasury

So does Timothy Geithner want banks to repay TARP funds or not? It seems to me that in Geithner's latest testimony you can find any answer you prefer. On the one hand, the stress tests are supposed to determine which banks have sufficient capital to return government money. On the other, whether the government will take it back will be determined not only by the tests, but whether it is in the national interest: in other words, Treasury would prefer that banks lent out the money than that they return it. The initial assumption that banks that didn't take money would be at a competitive disadvantage has been replaced by another idea (admittedly already present in Hank Paulson's initial pitch) that dividing banks into government supported, tottering ones and self supported stable ones would put the government supported banks at a disadvantage.

There's another, unspoken, assumption--or maybe hope--here, though, which may be even stranger. It is that adding more capital to the banks will make it feasible for them to increase lending to levels that will jump start the economy. To some extent, of course, that's true. Cheap money will be lent out. However, what's keeping the stronger banks from lending right now is not a lack of capital. It is rising losses on loans they've already made. Loans that were risky before are more so now in the midst of a recession, and there is no magic solution that will both increase lending and reduce risk. This ultimately is Treasuries dilemma: telling banks to lend more and do it more responsibly at the same time. On this, as with repayment, the government is speaking out of both sides of Geithner's mouth.

Their Own Private Bailout: More On Goldman And AIG

Have I been going too easy on Goldman? One reader wrote yesterday to take me to task for turning a blind eye to Goldman's "double dealing." In his view, it's scandalous that Goldman was at one and the same time packaging mortgage backed derivates (CDOs) and betting on a crash through CDS contracts made with AIG. If  Goldman thought mortgage backed derivates were a bad deal, why were they selling them to clients? And if they didn't, why were they betting against them?

I don't think this is fair. Goldman wasn't one of the biggest CDO players by any means. This reader forwarded a column by Ben Stein that cited Goldman as one of the "top ten" issuers of these derivatives. But Goldman is one of the world's biggest investment banks; its rankings in these areas are far lower than Goldman's rankings in other areas of finance. I don't think you can say that if anybody at an investment bank sold a certain kind of instrument, then nobody else there can bet against it. That's not double dealing. That's hedging risk, and it's what an investment bank is supposed to do. There's a gray area here. If a bank systematically promotes bad products to clients, that is indeed a meaningful issue. But we don't have nearly enough insight into Goldman's workings to say that (by contrast, I think we can say that about Bear, Stearns, which seemed to have taken its worst, least sellable CDOs and dumped them in to Ralph Cioffi's funds).

It's also worth noting that some of the criticism of Goldman really puts any investment bank in an unwinnable position. If they hedge their exposure, they're "double dealing." But if they don't have lots of exposure to mortgage bonds, and are simply making bets on the derivatives market through its AIG contracts, they're "speculating." Either way, the investment bank is somehow supposed to be culpable. You can see the irony of this if you look over the broader landscape. The banks that lost money are supposed to have been criminally negligent because they didn't see where the market was going. Now it seems Goldman, one of the few banks that made money in all this, is supposed to be slimy because they did.

PS: Should we stop trading in the kinds of derivatives that AIG dealt in, as George Soros advocates? Yes. But that doesn't mean we should criticize and/or punish Goldman for having been on the right side of the trades when no one saw just how stupid and destabilizing AIG's business was.

Bad Asset Math, Bonus Edition

On Monday, writing about the Geithner asset purchase plan, I wrote that you should put your money on the pessimists and bet that the asset purchase plan will cost the government a bundle. I think I could have done a better job of explaining why. In general, you'll find a lot of people who will assume that "if Wall Street and private equity likes it, it's a bad idea." The thinking is that the sharpies on Wall Street will always get a good deal. I'm suspicious of that knee jerk response. The experience of the last year has shown that's not true: investment banks have shown themselves very capable of making horrendous bets in markets they designed themselves . The fact that private equity is willing to play with Geithner doesn't in itself mean we're getting ripped off.

But there's still reason to be skeptical that the government will get off pain-free. Supporters of the Geithner plan think we're using the power of the communal mind to come up with the right price. The private equity folks want to make money on this deal, and the temptation is to think that if they make money, the government does well, too. The only thing the government gives up is the notional value of its loan guarantees, and it even gets to share in the profits.

However, it doesn't work quite like that. The problem is that how the private equity players do in aggregate isn't what matters. It's how they do on each deal. Let's say they buy three batches of CDOs; we'll call these CDO Larry, CDO Moe, and CDO Curly. If CDO Larry turns out to be a good deal, while CDO Moe and CDO Curly are worthless, the investors can do quite well. The private equity investors can make a profit on Larry, but still call in the government's loan guarantees on Moe and Curly. You might say, hey, that's not fair. Shouldn't they have to cover the loss on Moe and Curly if they made a lot of money on Larry? Well, no. Not as the plan stands now if I understand it correctly. Maybe over the next weeks the plan will develop further. If Geithner & Co. can find a way around this problem, then this could turn out to be a much better deal for the government. But so far, I don't see what that way would be.

The AIG Gravy Train

One of the latest bailout memes going around is that maybe the government shouldn't have bailed out AIG, because an "AIG bailout" really means a bailout of the counter-parties, like Goldman Sachs, who were dumb enough to have AIG insure their transactions. Interestingly, one of the first people to voice this idea was none other than former AIG patriarch Hank Greenberg (whom I wrote about today), who's said that shareholders would have fared better in an AIG bankruptcy than in the federal bailout. Greenberg's take is odd--hey, wouldn't shareholders have been left with zip in a bankruptcy? But the more general complaint that about AIG--that it's not clear why the the government should be funding a $12-plus billion stealth bailout of Goldman--is understandable.

Understandable, but still wrong. One of the government's aims over the last months has been to separate toxic assets from good ones. If that's what you want to do, then AIG is by default a pretty good vehicle for doing it. It is in effect, a "bad bank"--one that has concentrated risk in bad CDOs that no one wanted. Backing AIG is in effect a way to get bad assets off other banks' balance sheets. It helps contain the cycle of failure.

Should AIG have been allowed to offer the derivatives that brought it down in the first place? Clearly, no. But they were. When it comes to insurance and bank deposits, the principle of caveat emptor is a bad one. Awful as the current crisis is, it would be worse if there was no assurance that the buck stopped somewhere. Take it away, and you simply create a world of ever more baroque transactions set up to deal with the uncertainty that insurance companies will pay out on their policy and banks will return money to depositors. The government's first job is to stop an insurer from writing hurricane policies if it would bankrupt it. But it's second is to backstop the insurance when it does.

The question of what would have happened if the government had not backstopped AIG, however, is an interesting one. Goldman says that their exposure to AIG was itself hedged . We don't know how effectively that could have been done--but we also have no reason to doubt it. If that is the case, then in fact we simply don't know who would have been on the hook if AIG failed. In effect, it might not be Goldman being bailed out, but still another set of banks and insurers. So that would add yet another "unknown unknown" to the crisis--reason enough to tread very carefully.

Tom Friedman Says It's August, 1914. Time To Buy?

At some point this, too, shall pass. I don't think we're at that point yet, despite the rise in the markets (and note the Dow's at 7,000--exactly where Nouriel Roubini said we'd be). However, there are some reasons out there for hope that we may not be at the threshold of a cataclysm that makes the world of Mad Max look like a luxury resort in Acapulco.

First, Citi seems to have indicated that it may have a profit this quarter. Now, this comes on top of close to $40 billion in losses, and who knows what kind of extraordinary special write downs there might be in addition to this profit. So it's a little like the guy in the burnt out butcher's shop saying, "Well, we did sell some kielbasa!" But the notion that, with government help, Citi could turn out to be solvent would be a dramatic boon to the markets. (Just don't count on it yet. We still have no idea of how to value all those zombie assets.)

Second, Goldman Sachs is talking seriously about returning the government's money (take a look at Stephen Labaton's interesting story in the Times). Ironically, the bailout was supposed to restore confidence in the markets. But it's hard to imagine anything that would be more encouraging right now than Goldman or Wells Fargo coming out and saying they don't need it. Goldman in particular, it seems to me, has been unfairly tarred here. Having read the mortgage market right, Goldman has still had the stigma (and boy, it has turned out to be a stigma) of taking taxpayer funds. They're very much in their rights to toss it back and not offer much in the way of a thank you. Then they can all go on some fancy junket.

The final reason for optimism? The chorus of doom saying has reached a crescendo. So far, the evidence of this crisis is that the conventional wisdom is consistently wrong. Miserably wrong. And there is no better barometer of the conventional wisdom than Thomas Friedman's column. Today, more finger wagging about the impending disaster. According to Friedman, we're at "9/12" or at "August, 1914". Umm, maybe. Or maybe we're at 1618, right before the 30 Years' War. Or maybe ... the sack of Carthage! Why look just a century back? Yes, those who forget history are condemned to repeat it. But those who who start volunteering historical analogies by the bushel in an effort to make up for failing to predict the last crisis by talking up the next one are ... I don't know. Maybe they are condemned to write books that sell millions of copies to folks who have no intention of ever reading them.

Get Used To It: House Prices Won't Bounce Back. Ever.

Just how old is the idea that the price of real estate only goes up? Certainly at least several centuries. Call it Ricardo's Mistake, after the great economist and preeminent theorist of free trade David Ricardo. Ricardo believed that land was the one scarce economic resource, and that over the gains of a growing economy would accrue only to landowners, a situation he proposed to remedy by a system of land taxes.

A year and a half into this down market, the notion that things have to go back up is still with us. A few days ago I wrote about the Obama administration's foreclosure plan . I still think it is a good idea. But even in the rescue plan there is hiding a core of the same thinking that led us to where we are. One hope of the administration is that five years from now, home borrowers who are underwater will no longer be. Or at least that's the hope implied by the plan of letting folks refinance their mortgages up to 105% and/or get a five year interest rate break from the bank. Problem is, after those five years are up, many of the same people will still be facing foreclosure (not all).

And it's not just the administration. Consider the plan put forward in Slate that would give banks a share in the future appreciation of a house for which they agree to take a haircut on the mortgage--the idea that banks can cut mortgage principal by 20 percent and make up most of their loss with an option on the future appreciation (a plan, by the way, similar to one that Barney Frank proposed some time ago) is pure fantasy. But it's a fantasy that's attractive because even at this stage many people are not prepared to stomach the thought that housing prices will not rise, on an inflation adjusted basis, for many, many years. Like John Updike's Rabbit Angstrom in "Rabbit is Rich" with his pile of gold coins, we hold to the idea that tangible property like a house, is the a guarantee of future income.

Having written so much about mortgages in recent months, by the way, I wonder if some readers are asking if I own a house. The answer is no. My ex-wife and I bought a co-op apartment in New York in 2003. Even at that time, prices seemed out of line to me, and I bought with some trepidation. My wife got the apartment in the divorce, and since then it has been sold. At a profit, I'm pretty sure.

The Last Man Left To Defend Wall Street

The Dow's below 7,000 (as Nouriel Roubini--and Chumpchanger! --said it would be), the banks are about to be nationalized, and Chumpchanger has been ... close to AWOL for a month.

So there's some catching up to do, and I'll start with last week's story from Slate's The Big Money, Is Wall Street Evil? My editor for some reason preferred "evil" to "wicked"; I like the sound of "wicked" better, but maybe "evil" scores higher in the hit counts. One reader, Kim Elliot, took me to task for "a veiled attempt to excuse rich people while lecturing us folks who make an honest living, however delusional our choices." Obviously, I disagree. On two counts. First, I don't think I was lecturing. Second, heck, I thought it was pretty unveiled attempt to excuse rich people. I may well be one of the poorest men in history to take on the mantle of defending the prerogatives of the monied interests.

On investigating further, however, it turned out that Elliot and I agreed on more than we disagreed. Elliot's biggest issue with Wall Street was not the enormous amount of money reaped by the Street before and (in the case of Merrill, even during) the crash, but the smugness and sense of entitlement that persists despite the enormous evidence of Wall Street thorough going incompetence. On this I agree whole heartedly, except that I see this same smugness well beyond the boundaries of Wall Street. The builders and commercial bankers, the mortgage brokers and realtors, the journalists who believed the housing bubble would never burst and the builders of McMansions who to this day imagine that they made no mistakes and resent bailing out their neighbors--all of the other players who created the current mess all manage to smugly insist that the failings of character and of basic common sense all happened somewhere else. They resent bailing out their less fortunate neighbors and rant about the failings of Wall Street with the same smugness that Elliot (rightly!) criticizes Wall Street for. And that smugness drives Elliot and me equally crazy. Money does corrupt, and it corrupts in a particularly insidious way that makes those who have it believe that it is a justified reward for their own intellect and character. This is the case on Wall Street, and off it. And to this problem, I see no solution at all.

The Dull News Awards

Headline today:

Live Blogging Amazon's Kindle 2.0 Launch.

This from a bona fide major media site.

Look Who Else Is Mad About Those Bonuses

I've been reading the comments on the Times' Dealbook blog about those infamous Merrill bonuses. The item's already two months old, but it's worth going back to for the notes from folks who say they're Merrill employees (I see no reason to doubt this) and sound just as mad about the bonuses as anyone else. One question I haven't seen addressed is how much of Merrill's bonus pool was contractually guaranteed. I would imagine a lot, but then you'd think that Thain and Co. would be shouting from the rooftops that they had no choice.

So why aren't they? It might be because bonus guarantees were not a big factor (I really don't know). But it also could be because the folks with the guarantees were those at the top. The comments from the Merrill folks imply that while Merrill gave out a lot less in bonuses than last year, what cuts there were came at the expense of the people at the bottom of the pecking order, who got their bonuses cut to nothing.

Leave Steve Alone

Just a very short post here. In a story published yesterday I talk about why the Steve Jobs cancer watch and the calls for him to disclose more about his illness seem to me to be unseemly and misguided.  For now I feel like I've said all I need to about this (for online, it's a long piece) and I'll leave it at that.

Back To Plan A On The Bailout?

One of the reasons I've been reluctant to weigh in on the relative merits of each iteration of the bank bailout scheme is that I've felt like a lot of folks much more qualified than me have come up with good arguments for and against each plan. I noted this in an earlier post in which I touched on the pros and cons of buying up bank assets versus using the bailout money to provide funds to get banks to start lending. If you've been following the debate, you may remember that Hank Paulson's initial plan was to use the money to take bad assets off the banks' hands. This was widely criticized as a give-away to financial companies that would result in the government paying too much for bad assets and still failing to quickly jump start the credit markets. So the government went with an alternate plan of pumping capital into the banking system as quickly as possible with an emergency package of low rate loans.

It's become clear that approach has not worked yet, and will not work as fast as was hoped. Now the consensus is shifting again, and the current thinking is that the government will need to set up a "bad bank" similar to the Resolution Trust Corporation, which bought up bad assets of savings and loans in the crisis of the 1980s. It turns out, it seems, that if the government doesn't buy all those bad mortgages and other failing securities, the banks will simply keep taking whatever money is given to them to lend out and use it to shore up their balance sheets.

This leaves us back almost exactly where we were three months ago. The next debate among economists will be about how much the government will have to pay for all those bad assets. The answer, unfortunately, is going to be "a lot more than they are worth." At this point, however, the concern about how much the bailout will cost is looking a lot less important than finding a solution to the intractable and worsening credit crisis--it's turned from a question of "How much will this cost us?" into one of "Is there any stimulus plan that's likely to succeed?"

Pigs, Pokes and Bank of America

In a story a little while ago, I speculated that the only way to explain Bank of America chief Ken Lewis's obsession with buying companies--Countrywide and Merrill Lynch--with potentially near liabilities could only be explained by Lewis's certainty that if anything went wrong, the government would bail him out. Mea culpa. The truth is, nothing can explain it. Yes, the government is bailing out Bank of America. But that doesn't mean Lewis won't be out of a job.

This seems like a good time to review the old saw about buying pigs in pokes. The issue with those unseen pigs is what you can think of as a problem of asymmetric information. The problem is not only that buyer of the pig in a poke doesn't know what's in the bag. It's that the seller does know, so the trade gets executed in a way that's guaranteed to be advantageous to the seller and disadvantageous to the buyer. The buyer can't just take his chances and hope for the best, because the seller has all the information necessary to mislead him. It turns out that the basic rule about farm animals in sacks applies very well to investment banks with enormous liabilities. It's not just that Lewis didn't know just how big Merrill Lynch's liabilities could be--it's that Merrill's John Thain did. Now Thain is out of a job, but he never wanted to work for Lewis anyway. Whatever is left on Wall Street will have a place for him. For Lewis, however, the only open spot seems to be in the Megalomaniac Hall of Fame.

A Thief By Any Other Name Can Still Be Sued

Chumpchanger has rarely--well, never before--had a chance to venture into art criticism, an area I've touched in another blogs, Deadletter.net, but thought would never make it into a blog devoted to economics and finance. Fortunately, I was wrong. Last week, the worlds of intellectual property law and art theory had an unusual collision, when the photographer Patrick Cariou sued the much better known artist Richard Prince for appropriating his work.

If a finance blog can have a least favorite artist, Prince would be Chumpchanger's. Of major artists working today, there are some whose work is less pleasant to look at, but none who are as perniciously vacuous as Prince. The ostensible subject of his paintings is the problematization of authorship, an end to which Prince has routinely repurposed old Marlboro advertisements and stale jokes, which in his hands get turned into multi-million dollar oil paintings. Other, smarter artists--Damien Hirst's jewel encrusted skull comes to mind as a great example, but even Jeff Koons counts here--have executed plenty of preposterous works that are essentially colossal jokes at the expense of the art market. But they have a sense of humor. Prince's paintings on the other hand, are a rehash in visual form of debates in art theory that were already tired twenty years ago.

I won't make a judgement here on Cariou's photography; you can click the link and see it for yourself. I will say, though, that at the very least it's photo-journalism that took some meaningful thought. That sets Cariou apart from Prince, and that means that when it comes to intellectual property, Cariou's interests and those of Chumpchanger are quite closely aligned. Intellectual property law have at times been misused by those who seek to keep ideas out of the hands of the public. But if it might need fixes at the margin, the general thrust of it is to make sure that people whose work involves setting down ideas, whether in the form of writing, visual arts, or technological invention, get compensated for it and keep doing it. It boggles the mind that anyone would believe that any intellectual purpose is achieved when Prince steals the work of a less well know, far less highly paid artist, turns it into his own bricollage, and sells it for hundreds of thousands of dollars. The market value of ideas is already undergoing a significant erosion. The one thing to be optimistic about here is that while the absence of any real ideas may not be a big deal in the art market, it'll be a real liability when Prince's lawyers try to come up with some reason why a court should view what Prince does as anything better than naked theft.

The Bernie Bailout

At the end of last week I wrote a piece about why Madoff should stay out on bail. Over the last two decades pre-trial detention in the federal court system has gone from its age old purpose of preventing flight to a routine tool used by prosecutors to increase the pressure on defendants and in essence a way of getting to the punishment before the conviction. Up to a few hours ago, amid the anti-Madoff braying, my view was seen as an eccentric outlier. But it has turned out to be the view of the judge as well--a very good thing indeed for the rights of the accused, most of them less wealthy and well-lawyered than Bernie.

Department of Odd Headlines

From today's WSJ.com:

Exxon Fuels Speculation Deal Is on Tap: Exxon is poised to acquire a rival energy firm or join up with an oil rich nation, industry experts believe.

Wait,  what the hell does "join up with an oil rich nation" mean? Merge with, say, Dubai or Brunei? That feels like it's going a little too far, especially seeing as we've already let Citigroup merge with Washington, DC.

On the subject of oil and gas, for anyone who's interested I'll note my story last week about Putin's Ukrainian adventure. After decades of worrying about how oil will be used as a weapon to shut down the West, it is as clear now as it ever was that the greatest political advantage that can accrue to the world's energy exporting (and generally kleptocratic) powers comes from selling it at the highest price the market will bear.

With the political corruption stories sprouting mushroom-like all over the place, it's worth going to the Chumpchanger backlist for a well considered and still startlingly relevant take from someone in a position to know a lot about the temptations of public office. From Francis Bacon's essay Of Great Office:

Men in great place are thrice servants: servants of the sovereign or state; servants of fame; and servants of business. So as they have no freedom; neither in their persons, nor in their actions, nor in their times. It is a strange desire, to seek power and to lose liberty: or to seek power over others, and to lose power over a man's self. The rising unto place is laborious; and by pains, men come to greater pains; and it is sometimes base; and by indignities, men come to dignities. The standing is slippery, and the regress is either a downfall, or at least an eclipse, which is a melancholy thing. ... Certainly great persons had need to borrow other men's opinions, to think themselves happy; for if they judge by their own feeling, they cannot find it.

Bacon served as attorney general and later Lord Chancellor of Great Britain under James I--a post he lost in an embezzlement scandal.

Now Meg, About Those IPO Shares...

The LA Times reports that EBay's Meg Whitman is considering a run for governor of California ... so, is it impolite to bring up the old IPO shares scandal. I sat through Frank Quattrone's first trial, and looked through the list of folks Quattrone funneled cheap IPO stock to. I think I reported it at the time in Fortune, but no one seemed interested, and I can't really understand why.

The trial was a travesty, and the government's obstruction of justice case against Quattrone (after two mistrials, the government gave up and settled for a slap on the wrist) was miserable. But whether doling out IPO shares--really, at the time, free cash--to the people you hope will give you business may or may not be illegal, but it was unquestionably a sleazy business. What I could never understand, though, is why giving out the shares was worse than taking them. Why is offering a bribe worse than accepting one? I still can't, and if indeed Whitman runs I hope someone gets around to asking about it.

Update: After I published this post, I wrote in more detail about Meg Whitman's IPO shares, and everything else wrong with her plan to run for governor of California in this story for The Big Money.

Polaroid And The Ponzi Scheme

You probably missed it with all the Madoff stuff out there, but there's another alleged Ponzi scheme that's blown up in the last weeks, and seems to have taken Polaroid with it. Polaroid--which just declared bankruptcy for a second time--was part of the empire of Minneapolis takeover mogul (I know, those words don't seem together) Tom Petters who's now accused of running a $3 billion investment racket. In any other week, this would be front page news, but Madoff is the clear market leader among investment scam stories.

Polaroid's limp march to liquidation or wherever its story ends feels quite sad to me, because Polaroid's Edwin Land was a giant among American inventors. Not only did he personally come up with the instant photo process (and defend it against Kodak, getting what's still one of the biggest patent infringement judgements in history), but his company was for years a truly innovative enterprise. The SX-70 remains a design triumph: it folded flat, looked beautifulm and the autofocus version not only took instant pictures, but was only the second autofocus camera in production (with a sonar-like focusing system that works surprisingly well). Land took a real interest in what was done with his cameras: Walker Evans was one of the first SX-70 users, and Chuck Close--and probably other major photographers, but Close comes to mind--did some extraordinary things with giant-format Polaroids that the company kept on hand and invited artists to use.

From a business perspective, however, Land's story is a cautionary tale. It was a company built around one vision, and never managed to evolve. First the cameras it made became cheap and ugly, then they became obsolete. And now Polaroid is out of the instant photography business entirely, though what other business they have that could possibly be worthwhile, God only knows.

PS: This is probably the place to plug my Slate story about the great brand myth. Polaroid of course was one of the great brand names of all time. But that doesn't do them any good. Once the business is shot, the brand--whether it's Polaroid or Pan Am or Cadillac--is shot too.

Umm, What's The Next Bailout Plan?

Two months ago, when The Great Wall Street Bailout Plan I was being hashed out, a number of very able economists, including the fairly clairvoyant Nouriel Roubini, argued that that buying up all the banks' bad loans would cost the government a fortune without solving the credit problem. Agreeing that guaranteeing bad loans wasn't enough, Paulson & Co. reversed course and more or less adopted the alternate plan of pumping capital into the banks.

Now we've injected some $350 billion of new capital into the banking system, and it seems to have failed so far to reopen the credit markets and disappeared into a giant sinkhole. (And don't believe for a second that the government is going to earn some kind of great windfall on it preferred stock deal. As Zubin Jelveh at Portfolio.com has pointed out, other countries have been down this road before.) So, will $350 billion more do the trick? Or is there another idea?

Madoff's Victim, And His Enablers

Last week in The Big Money I wrote about why, given the precedent set by the last big hedge fund fraud, investors who noticed that something seemed suspicious about Madoff and reported it would have been likely to be rewarded by losing their shirts . One reader, Debbie Reches, took me to task for justifying a corrupt, look out for yourself mentality of Wall Street. She wrote me an email:

In the regular world, if someone is aware of a crime or fraud being committed it is expected that they will report it. Yet in the case of these investors, the question becomes, "How can anybody be expected to report on an illegal activity, inknowing it might cost them money?" Better to just ignore the whole thing and hope it goes away. Really? I don't think so. saying that people who suspect something have no choice but to keep quiet shows an entitlement mentality that needs to go.

The last thing I wanted to do, however, was to justify the action of funds like Tremont and Fairfield that seem to have done their level best not to find anything wrong. I have a ton of sympathy for ordinary investors--including very rich ones--who lost money with Madoff, but those guys may well turn out to be little better than silent co-conspirators. However, regardless of what kind of investor we're talking about, I think that you have to separate the ethical question of when a fraud should be reported from the practical question of how to maximize the chances that frauds actually will be reported.

If investors who pull their money out of a scheme like Madoff's and then report it to the SEC wind up being told that they then have to give back what they recovered and share it with other people who were ripped off, the reality is that they simply will not go to the SEC. That just doesn't work. There's no easy solution here, but my impulse is to err on the side of a system that encourages rather than penalizes reporting, while still keeping lucky early investors in a Ponzi scheme get windfall profits.

That said, the theorizing here may turn out to be moot. The question right now is just how entangled Tremont and Fairfield, which essentially marketed Madoff's services, will turn out to be in all this. I'm with Donald Trump on this one: you don't pull off a fraud like this alone. (And I second Trump's suspicions that the sons weren't as clueless as they claim. The Donald's a blowhard, but I imagine that decades in New York and Atlantic City real estate make you pretty good at recognizing the smell of bullshit.)