Felix Salmon

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For the first time, the Fed has explicitly tied its interest rate policy to specific levels of unemployment and inflation. Short-term rates will stay at essentially zero as long as unemployment is above 6.5% and inflation is under 2.5%, the Fed announced today. WaPo’s Neil Irwin says Fed policymakers “unveiled a huge surprise”.

If you’ve been following Chicago Fed president Charles Evans, this policy — a version of which is known as the “Evans Rule” — is familiar. The surprise is that Bernanke delivered almost exactly what Evans advocated: monetary policy that is tied to economic conditions, rather than the Gregorian calendar. Jon Hilsenrath and Brian Blackstone point out that the move comes in the context of increasingly coordinated and unprecedented actions by central bankers around the world; this is certainly the latter, if not the former.

Why the historic shift? Because the economy isn’t growing fast enough, and because unemployment is still too high. As Reuters’ Pedro da Costa and Alister Bull note, the Fed cut its growth expectations for next year, and business investment remains weak. Look at Tim Duy’s bleak picture of the American consumer and you can see why the concern is justified. Rates have been at zero since December 2008, which means that one of the few remaining tools the Fed has is setting expectations.

Mark Thoma points out that after decades of rhetoric aimed at controlling inflation by raising rates, the Fed “has too much credibility on inflation” (and, presumably, not enough on unemployment). Pedro da Costa reports that Jan Hatzius, Goldman Sachs’ chief economist, thinks the Fed’s target is “problematic…because the unemployment rate… is an imperfect measure of progress.” Bernanke’s insistence in his press conference that 6.5% unemployment is a guidepost, “not a target” indicates that he knows the headline unemployment rate doesn’t always tell the full story.

It’s not just Bernanke whose approach has changed. The members of the Fed’s Open Market Committee have been shifting all year. As today’s news demonstrates, the Fed is now “aggressively dovish”. — Ben Walsh

On to today’s links:

Taxmageddon
It’s now pretty damn clear that businesses are freaking out about the fiscal cliff – WaPo
Think of the children…and increase government spending – Christian Science Monitor

JPMorgan
The SEC was politely chiding JPMorgan about disclosures months before the Whale trade blew up – Bloomberg
The SEC demanded that JP Morgan provide more disclosure about Goldman Sachs’s prop trading – Matt Levine

Hope/Change/Etc.
Actually, the White House is serious about another round of economic stimulus – Sam Stein and Ryan Grim

Inequities
The booming American industry where the gap between CEO and worker pay has doubled in just 10 years – Bloomberg

Leaders
Jamie Dimon will defend your freedom on the beach of the Bay of Pigs if he has too – Huffington Post
China’s fail safe plan to achieve social stability by not wearing ties – Quartz

Pivots
Drivers like mass transit once they give it a try – Atlantic Cities

Tax Arcana
Breaking: the US Treasury does not have to pay taxes – John Carney

Awesome
“As GZA was sitting beside me…”: RZA reviews “Django Unchained” – Huffington Post

Wonks
Mark Carney is talking about NGDP targeting again – FT Alpaville
“The Shrinkage Factor” and how to make a prediction – Farnam Street

Big Brother
Police use the hum of an electrical outlet to timestamp crimes – BBC

The main problem with trying to explain the fiscal cliff, as I see it, is that people get far too caught up in the details — tax deductions, tax hikes, spending cuts, debt ceilings, and the like. Which are all important, but they’re not fundamentally what the austerity bomb is about. Rather, the reason that everybody’s worried about the effects of the fiscal cliff is simple Keynsian mathematics: if we cut spending and raise taxes, that means less economic activity — and a nasty recession, just when we can least afford it.

So this video is my attempt — with a big red dog, and Superman, and Batman — to get back to what really matters, and to try to underscore something quite interesting, which has been lost in the politics, which is that in terms of the deficit, both Obama and Boehner want something very similar. The deficit is big now — about $1.1 trillion — and they both want it to come down by roughly $200 billion, which is much less than what will happen automatically if they do nothing. In that case, the deficit would plunge by a disastrous $500 billion or so.

Deficits are a good thing, in terms of economic stimulus, and taking away a large deficit too quickly is a great way of causing a recession. I do understand that at some point deficits become a bad thing, especially if the bond markets decide that there’s a real question mark over whether all that borrowing can ever be repaid. But we’re not at that point yet. So it falls to Barack Obama and John Boehner to come together to prevent an entirely avoidable recession. They can do it, and they will do it. But we’ll have to suffer a lot of sturm und drang — not to mention gimmicky YouTube videos — before we get there.

There are a lot of very weird aspects to today’s announcement that Berkshire Hathaway has bought back $1.2 billion in stock.

Firstly, the way that the announcement came out seems incredibly shambolic. The stock market opened, and then just a few minutes later trading in Berkshire was halted, pending a news announcement. The announcement was made, and trading resumed, but there’s really no reason why the announcement couldn’t have been made ten minutes earlier, before the market opened.

Secondly, the buyback took long enough: Berkshire first announced that it was thinking of doing such things back in September 2011, saying that it would buy back stock “at prices no higher than a 10% premium over the then-current book value of the shares”. After that there was nothing, until today — when Berkshire, with its very first first significant buyback, managed to break its own self-imposed constraint:

Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value. Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value.

This smells. “The estate of a long-time shareholder” is clearly code for “an old friend of Warren’s”. When that person died, the estate clearly took the decision to liquidate the entire holding, possibly for fiscal-cliff-related reasons. (There’s a good chance that the taxes on estates and capital gains will rise substantially in 2013.) It’s possible that Berkshire was a little bit worried about the effect that the sale would have on the share price, but it’s unlikely: average volume in the stock is more than 56,000 shares per day, so selling 9,200 shares without moving the market much is pretty easy.

So there’s no particularly good reason why Berkshire should step in and make this purchase just to keep the market price smooth, especially when Buffett says he doesn’t pay much attention to short-term stock-price fluctuations anyway. And there’s definitely no good reason why this particular estate sale should be the catalyst for the Berkshire board breaking its own rules, and buying back its stock at levels far in excess of 110% of book value. (Book value is $111,718 per share, which means that the buyback price was just over 117% of book value.)

Finally, there’s no good reason why the buyback should have been done in this highly undemocratic manner. As we have seen, some $7.5 billion in Berkshire A shares change hands every day: Berkshire Hathaway, as a public company, made the decision many years ago that the stock market was the best place for its shares to trade. And yet, when it came to its first-ever stock buyback, Berkshire decided that it didn’t want to go to the stock market after all, and instead just did a bilateral side deal with the estate of a long-time shareholder.

Buybacks are considered a good thing, on the stock market, for three reasons. Firstly, they reduce the number of shares outstanding, which means that the value of the remaining shares goes up: the company is worth the same amount, so the value per share is higher. Secondly, they provide an extra bid in the market, which helps support and drive up the share price. And thirdly, they give shareholders the opportunity to sell their shares back to the company: if they want to sell where the company is buying, they have that option. And options are worth money.

Berkshire, with this buyback, achieved the first of those three reasons, but punted on the other two. It didn’t provide a bid in the market, and it didn’t give its shareholders that lovely marginal option of selling their shares to the company rather than to the traders who are in and out of the market every day. Instead, it decided to give special treatment to a single long-term shareholder.

The whole point of the stock market is that shares are fungible, and that all shareholders are equal. Berkshire has violated that principle today, for no good reason — while also breaking its self-imposed discipline of only buying back shares if the price is below 110% of book value. If you’re going to do a buyback, this is pretty much the worst way to do it.

Update: Apparently I shouldn’t trust Yahoo Finance, and when it reports volumes in BRK-A, it’s actually overstating them by a factor of 100. i.e., when it says 90,800 shares were traded yesterday, in fact that means that 908 shares were traded yesterday. Sorry.

Update 2: Ben Berkowitz correctly points out that this is Berkshire’s second buyback. It previously bought back $67.5 million of its shares from September 2011-December 2011 and disclosed the repurchase in its 10-K.

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Among the many conventional wisdom fixes in the latest reports on the fiscal cliff negotiations: raising the eligibility age for Medicare.

Combine the costs of Medicare with Medicaid expenses for the poor and, as one professor said, you’ve got “pretty much the entire ball game” of US debt. “Government spending on medical expenditures outstripped revenues by $775 billion, which represents 58% of the 2011 Federal deficit,” Robert Dittmar calculated.

But the mention of a raising the Medicare eligibility age has drawn an outcry from economists and policy wonks. For that, you can blame, well, math. Raising the cut-off for Medicare to 67 from 65 would save the US government $5.7 billion in 2014, but would increase total health care costs by $11.4 billion, including higher costs for employers and states. Worse, it could raise premiums by some 3%. And, though the CBO says the move could save the government $148 billion over 10 years, it would have an outsized effect on the less educated, minorities, and the bottom 50%, who, unlike the well-off, have seen almost no increase in life expectancy in the last 30 years. In Duncan Black’s words: “it will cost money, not save money, and also kill people”.

Matt Yglesias calls this “an absurd means of saving the federal government money—akin to raising $12 billion in taxes and then setting half the money on fire. The only people who actually benefit from this shift are health care providers who get to charge higher prices to 65- and 66-year-olds.” Ezra Klein wonders if policymakers have “a kind of elite blindness” to the idea that some people — poorer people, especially — don’t like to work. Making people wait longer for Medicare, he writes, would address exactly none of America’s truly crucial healthcare problems:

It doesn’t modernize the system or bend the cost curve. It doesn’t connect to any coherent theory of health reform, like increasing Medicare’s bargaining power, increasing competition in Medicare, ending fee-for-service medicine, or learning which treatments work and which don’t.

Klein’s preferred age-related approach, from Ezekiel Emanuel, would tie of Medicare eligibility to lifetime earnings. — Ryan McCarthy 

On to today’s links:

Long Reads
E.Coli, antibiotic resistance and heart attacks: Inside the modern beef industry – Kansas City Star

Liebor
Three men arrested in Libor manipulation investigation – Dealbook

Housing
It should really be possible for middle-class families to afford decent-sized houses in places like Brooklyn – Matt Yglesias

Milestones
New Yorkers’ miserable lives reach record length – Mike Bloomberg

Regulations
The unsurprising winners and losers of right-to-work laws – Brad Plumer

Investigations
HSBC will pay a record $1.92 billion to settle charges that it laundered money for Iran and drug cartels – Dealbook
HSBC got the bank equivalent of a stiff speeding ticket – Tim Fernholz

Popular Myths
No, risky mortgage lending didn’t cause the financial crisis – Noah Smith

Oxpeckers
Adventures in absent fact-checking, Buzzfeed edition – The Oatmeal
Why we won’t have tablet-native journalism – Felix

Quotable
MBA expenses: expensive dinners and “traveling to ski resorts over long weekends” – Forbes

Contrarian
Peter Peterson, failure – Dave Weigel

Good Luck With That
Fareed Zakaria’s grand fiscal bargain: end the war on terror – WaPo

Data Points
The alarming decline of Jedi Knights in England and Wales – Guardian

Time to Panic
America’s milk industry is in crisis – WSJ

New Normal
A rising number of active duty soldiers are too obese to serve – WaPo

Blake Gopnik has an excellent piece on the art bubble in the latest Newsweek (where he was sadly laid off last week), which has been met by a predictable rubbishing from Marion Maneker. Both men agree on the symptoms: prices unrelated to quality, and artists who can go from hot to not in a very short amount of time. But they disagree on what those symptoms mean: Gopnik thinks that they mean “today’s contemporary market is due to deflate”, while Maneker sees art-market ups and downs as just part of what happens in any healthily-functioning market, and nothing to get particularly excited about.

The point that I think Maneker misses — and that he consistently misses in his attacks on people who are “complaining about the art market” — is that this particular market is qualitatively different from what you would consider a healthy market to be, not least because the prices are quantitatively completely bonkers. That was the main thrust of my Occupy Art post, and of the pieces by Dave Hickey and Sarah Thornton and Jerry Saltz and Charlie Finch that I linked to: markets, in general, are good and useful things. But sometimes they go crazy, and this is one of those times, and that’s a bad thing, not a good thing.

Collectively, we have managed to spark at least the hint of a debate — or, as Patricia Cohen describes it while quoting a slew of dealers and collectors at Art Basel Miami Beach, a “backlash against the backlash”. (One hint to people talking to the New York Times: saying things like “I’m grateful to Bugatti” is not likely to attract readers to your cause.) Debate is good! But I do still feel that everybody’s talking past each other. For instance: if the critics complain about the prices that some contemporary art is selling for, responding by saying “but other art is cheap”, as gazillionaires Don Rubell and Marc Glimcher do in Cohen’s article, does seem to miss the point.

Similarly, saying “look, some art is going down in value”, as Maneker gleefully did in November, also misses the point. Yes, Damien Hirsts are worth less today than they were in 2008. That was entirely predictable (I called the top of the Hirst market exactly when it happened), and it’s entirely in line with the way in which Hirst has graduated himself out of the art market and into the luxury-goods market. As I said in March, Hirsts have not been a speculative investment since 2008, and the fact that Hirsts are dropping in value does not, to use Maneker’s word, “confound” those of us who have a beef with the upper levels of the contemporary-art market.

Rather, what is uniquely troubling about today’s contemporary art market are two things: absolute values and relative values. Gopnik runs down a list which could have dozens of different names:

A Richard Prince “nurse,” hung amid Picassos and Miros, selling for $6.5 million; a Damien Hirst “medicine cabinet” priced at $4 million; Julie Mehretu squiggles, barely a decade old, for $2.6 million—all for sale at Art Basel, and all with prices so high they are bound to crash-land…

An unproven artist such as Wade Guyton, now showing at the Whitney Museum in New York, can fetch more than a legend of pop art like Richard Artschwager, on view downstairs from Guyton’s work.

These numbers are scarily high in absolute terms, and relative to anything you might want to name: Old Masters, vintage cars, four-bedroom houses. And there’s real delusion behind them. In a passage which didn’t make it into the final version of Gopnik’s article, he writes:

The market for art is unlike any other, because it’s built on some notion of true, underlying value ­­- on the idea that you buy art not because of its price (because of how much others might want to pay for it) but because of some real cultural worth that it represents. “We would not be mistaken for taking Richter’s abstractions as retroactively analogous with Mark Rothko, Barnett Newman, or Yves Klein,” says the auction text for a glitzy, record-setting abstraction by Gerhard Richter ­- a genius figurative painter whose abstract work could be mistaken for mall-gallery schlock. The auction copy for Koons’s $34 million “Tulips” compares the sculpture to a Brancusi and says that Koons has “tapped into the canon of the history of art by taking flowers as his subject for this still life colossus, introducing ideas of the memento mori as well as romance and beauty.” Yet if these judgments about cultural worth turn out to be wrong, then so is any big price they bolster.

The real forces driving the seven- and eight-figure prices in the contemporary market are not art-historical importance, so much as what Gopnik characterizes as the souk-like atmosphere surrounding both fairs and auction houses — the places where most big-ticket contemporary art is now sold, and places where the act of spending money is more important than the art it’s being spent on. Maneker is absolutely right about this: “Of course it’s not about the art,” he writes. “An auction is an event about the buyers, not the art.” And exactly the same thing can be said about an event like Art Basel Miami Beach — an event where Kelly Crow’s curtain-raiser can include this photo caption:

New York artist Wade Guyton earned a reputation for using a large inkjet printer to create images of the letter ‘U.’

Those “U” panels now sell for upwards of $200,000 apiece, brand new, and one early X painting recently sold for $782,500.

Without art-historical importance, there’s no way that these artworks are going to hold their value for more than a few years. And even with art-historical importance, there’s no reason why they should cost orders of magnitude more than art which genuinely has stood the test of time. As Sean Kelly tells Gopnik, you can buy 10 or 20 Marcel Duchamps for the price of one Jeff Koons, which just doesn’t make any sense at all.

To quote Herb Stein, if something can’t go on forever, it won’t. And as Gopnik says, “someone, someday, will be left holding the bag”. Narrowly, that group of people will be the collectors who are currently spending obscene sums on churned-out artwork: it just doesn’t make sense to drop millions of dollars on a Christopher Wool, say, when no one has a clue how many thousands of the things there are in existence. More broadly, however, the bursting of the bubble is likely to mean a very nasty recession across the whole of the art world, causing serious damage to a slew of curators, gallerists, artists, museum professionals, and other non-rich people. Spectacular busts are born of overconfidence, of the idea that this time is different. And the signs of overconfidence are hard to miss:

Every time you thought the world was ending,” Kelly says, “this market has confounded that prediction.” After 9/11, he asked himself, “Who’s ever going to buy art again?” only to discover that his clients were more eager than ever to nest at home with precious things.

A crash of the market’s biggest players might still bring everyone down, but Kelly feels that today’s art world has probably—probably—become such a broad river, as he puts it, that a whirlpool in one place might not disturb currents elsewhere. (Every gallerist I spoke to insisted that the market for their particular, singularly talented artists was bound to be stable, even if their colleagues were clearly at risk—precisely the kind of bulletproof thinking that’s typical of boom times.) This fall, Kelly almost quadrupled the size of his gallery; our interview ended so he could vet yet another applicant to his growing staff.

Sean Kelly has for decades been one of the most respected gallerists in New York, with a small space showing beautiful, austere work at high-but-not-bonkers prices. His shows are often curated better than those at major museums, and he has neatly sidestepped the trendy in favor of the timeless. Until now. Kelly clearly can’t sustain that modest practice any more: the art market has become a world of “go big or go home”, and Kelly now represents glitzy and trendy artists like Terence Koh and Kehinde Wiley. When even Sean Kelly can no longer resist the gravitational pull exerted by the weight of money chasing shiny objects, and instead sounds like Ben Bernanke circa March 2007, then that’s a sign that the whole art market has become hollow at the core, in a way it never used to be. Like all hollow things, bubbles included, it’s liable to implode at any time.

Greece’s bond buyback has succeeded, after a fashion. There weren’t enough bids by the original deadline of Friday, but then the offer was extended and two things happened. First, Greece’s banks bowed to the inevitable and tendered all of their bonds, rather than just most of them. And second, the Greek government made its most explicit default threat yet:

Stelios Papadopoulos, the head of the Public Debt Management Agency, stated “We have decided to extend the Invitation to offer Designated Securities for exchange to 11 December 2012. Holders that have not tendered so far can still take advantage of the liquidity opportunity offered by the Invitation. Investors should bear in mind that even if Greece accepts all bonds tendered in the Invitation, it will continue to engage with its official sector creditors in considering further steps to put its debt on a sustainable path. Future measures may not involve an opportunity to exit investments in Designated Securities at the levels offered for this buy back.”

In English: you can hold on to your bonds and hope to get paid out in full, if you want — rather than accepting 33 cents on the dollar right now. But be aware: Greece has to do what its official-sector paymasters tell it to do. And if it takes “further steps to put its debt on a sustainable path”, who knows how much money you might end up with when it’s all over. Are you sure you don’t want to just take those 33 cents?

Joseph Cotterill makes a good point: with the Greek banks now having been taken out of their bonds, the low-lying fruit for any future restructuring offer is now gone, which means that in any future restructuring, Greece is going to be dealing with hard-nosed hedge funds rather than complaisant domestic banks. That said, Greece might conceivably now have a nuclear option in its back pocket: the comments to Cotterill’s post are full of speculation that Greece might be able to find a way not to cancel the bonds its buying back. In which case it could use its new supermajority vote to cram down a very bad deal indeed on any holdouts.

All of which is to say that this buyback deal is increasingly feeling a lot like a second default, just months after the first one. It’s good for the optics of Greece’s debt-to-GDP ratio, and it doesn’t seem to be triggering any CDS. But it’s a useful lesson for any other European countries (Ireland and Portugal are the obvious next candidates) who are thinking about restructuring their private debts. You don’t necessarily need to do the whole deal at once: especially if you are clever in your use of collective action clauses, you can start with a small and insufficient haircut, and then follow it up with a second restructuring a bit further down the road. If your creditors are largely domestic banks, that could work out much better than socking them with one-off monster losses.

Last week, when the Daily died, I declared that the reason, in part, was that tablet-native journalism was impossible. And I got a lot of rather vehement pushback, including some smart commentary from John Gruber, taking the other side of the argument.

That most existing iPad magazine apps are slow, badly-designed, can’t search, etc. does not mean iPad magazine apps cannot be fast, well-designed, and searchable. Salmon says “This wasn’t The Daily’s fault” but he’s 180 degrees wrong. All of these problems were entirely The Daily’s fault.

All impossible tasks have not been accomplished; but not all tasks that have not yet been accomplished are impossible. When it comes to media, what strikes many as The Daily’s cardinal sin is eschewing the open Web for the closed garden of a subscriber-only iOS app. The idea being that you can’t win without a web-first strategy. But that’s what “everyone” said about social networks too — until Instagram came along and became a sensation with an iPhone-only strategy.

I’ve since talked about this issue at some length, with both David Jacobs of 29th Street Publishing — someone who specializes in developing iPad-native apps — and with Ben Jackson, another one of my critics. And I still think that tablet-native journalism is an idea which isn’t going to take off any time soon.

Gruber’s point, which Jackson also made, is that you can’t tar an entire platform with a few bad apps. Maybe The Daily was bad; maybe lots of Condé Nast apps are bad; maybe the people selling ads on iPad apps are responsible for degrading the experience of using them so as to maximize ad revenues. But in theory, all of these problems can be overcome — and in fact, in practice, many of the problems I cited in my post have already been overcome, at least by one or two publishers. (For instance, the Businessweek app does have search, and the NYT app will let you start reading stories before the whole thing has downloaded.)

Be that as it may be, however, no one’s been able to convince me that there even is such a thing as tablet-native journalism, let alone that it has any chance of really taking off.

Certainly there’s lots of journalism which appears on tablets, and sometimes even exclusively on tablets. The Magazine, from Marco Arment, is the most cited, but one might also point to (what’s left of) Newsweek, where something called Newsweek Global “will be supported by paid subscription” and available on tablets. In both cases, however, the main reason for moving to the tablet seems to be revenue-related: it’s just vastly easier to charge for subscriptions on a tablet than it is on the web, and Newsweek needs to have a subscription product, to prevent itself from being forced to refund all the money it’s already been paid by print subscribers.

And if The Magazine is really the best thing we’ve found so far in the tablet-journalism space, that’s pretty depressing. For one thing, there’s pretty much zero journalism in it; it’s mostly first-person essays by Marco’s friends. And then there’s the fact that it deliberately abjures all the clever things that the iPad can do, opting instead for a very clean and simple interface: what Craig Mod calls “subcompact publishing”.

Subcompact publishing helps in terms of making great writing immersive: there are no distractions, just text (and maybe the occasional link or illustration) on a white background. Once you get lost in the story, the medium becomes invisible, just like all great storytellers should. It’s taking journalism and doing to it much the same thing that Readability does, or Apple’s “Reader” button in Safari. But when all you have is text, the journalism itself isn’t really tablet-native: it doesn’t shape itself to the contours of the medium in the way that radio journalism does to radio, or TV journalism does to TV, or tabloid-magazine journalism does to tabloid magazines. You’re basically left with a high-tech means of reading the kind of thing which could have been written centuries ago.

But Jacobs makes a good point: if you look at these publications at the story level, you’re missing something very important. Jacobs has worked on apps for websites like Gothamist and the Awl, where the content in the app is exactly the same as the free content on the website, but the way that content is presented is different in important ways. Websites need to be fresh and constantly-updated; apps can be a bit more curated. And importantly what’s not there makes a big difference: one of the great things about The Magazine is that each issue is an easily-digestible length.

Marco has a lot of information, from Instapaper, about the stories people like to read on their tablets, and specifically how long the sweet spot is. Each issue of The Magazine, or the Awl’s Weekend Companion, is much shorter than the daunting downloads one might get from The Daily or Wired or Businessweek. These smaller apps are not trying to present everything; they’re acting as real editors, and serving up something much more digestible. In the case of the Awl, the value ($4 per month) is actually in the way that the editors have subtracted a huge amount of the content available on the website. Similarly, Matter publishes just one article at a time, and doesn’t even force you to use its own app: you can call it up online and then read it using Instapaper, if you like.

So my feeling is that insofar as tablet journalism is going to have any success in the foreseeable future, you’re not going to see it in elaborate downloads with glossy production values. Jackson made this point: every time someone demonstrates ability in putting together great, intuitive iOS applications, they tend to be hired (or acqu-hired) very quickly by some big company like Facebook or Google. Radio journalists know how to edit radio shows, and TV producers can put together TV shows, but there are basically no journalists who can produce an iOS app to tell the stories they want to tell, and the coders they might conceivably work with, as part of a team, tend not to work for news-media organizations.

Instead, we’re going to see universal journalism, which can be accessed — and possibly edited — in different ways on different devices. It might be free on the web, for instance, while costing a couple of bucks in the form of a simple iOS app. Maybe it will only be available on iOS, but for business-model reasons, not because it couldn’t work on the web. Or maybe, as in the case of Matter, it will be available in any format you like, for a single flat price.

I’m quite excited about what Ev is doing at Medium, in terms of creating a new and intuitive way of writing online — it’s long past time that we managed to move away from the evil tyranny of Word. And then, once a Medium post has been created, it looks great on any device. That’s the future, I think: write once, look great anywhere. Rather than anything tablet-specific.

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The thing about Too Big to Fail financial firms is that they tend to be Too Big to Fail in several countries at once. Hence, the “shared strategy” laid out in a new joint paper from of the FDIC and the Bank of England that aims to protect taxpayers from paying for the rescue of gigantic multinational corporations.

Even if it’s just a set of principles, any sort of action on cross-border resolution has been a long time coming. As Simon Johnson has pointed out, the IMF has been pushing for at least a decade for some method of unwinding international financial firms.

The new strategy, summarized in this FT op-ed, has some clear improvements over crisis-era handling of TBTF firms. The company’s home regulator would take control of the firm (lucky them), shareholders and unsecured creditors would be forced to take losses (slow clap), and senior management would be removed (rousing applause). Liquidity would be parceled out by regulators to newly spun-off divisions and any taxpayer losses could be recovered from the financial sector — though it’s not quite clear how.

The FDIC-BoE approach — like this 2010 IMF proposal — also calls for something like a Pause button for derivatives contracts; a “stay of termination rights” would temporarily prevent counterparties from being paid out after a TBTF firm fails.

Regulators are taking another welcome step to protect taxpayers from TBTF: enforcing existing regulations on foreign companies. Shahien Nasiripour and Brooke Masters pick up on a recent speech by the Fed’s Daniel Tarullo which suggests regulators may soon force foreign subsidiaries to actually obey local capital requirements. The idea is to keep banks’ subsidiaries from posing a risk to domestic taxpayers. Larry Fink, the CEO of BlackRock, apparently isn’t happy about this:

 “If that is the new strategy among regulators, it really throws into question this whole globalisation of these firms,” he said at a conference last week. “It also means each country for themselves. I wouldn’t call it a trade war, but I would certainly call it a high level of protectionism.”

None of this is going to be easy, especially if more than one TBTF firm fails at once. As one former Fed regulator said last year: “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems”. Try resolving that in the middle of a crisis. — Ryan McCarthy

On to today’s links:

Liebor
The EU is expected to accuse multiple banks of fixing LIBOR’s “lesser known cousin” – WSJ

Tax Arcana
Google saves about $2 billion per year using Bermuda tax shelters – Jesse Drucker

Billionaire Whimsy
3 people say Bloomberg is pondering buying the “bisque-colored” FT – NYT

The Singularity
The Robot Economy and the new rentier class – Izabella Kazminska

Hard Landings
China is the world’s new Rust Belt as it faces “decades of de-industrialization” – Forbes
On the other hand, China’s factory output just hit an 8-month high – Reuters

Wonks
Goldman’s top economist talks about the coming US rebound – Joe Weisenthal

Failure
The world’s deadliest road got even worse when the World Bank stepped in – Guardian

Your Retirement Plans
“Work is wage slavery and…retirement is freedom” – Stumbling and Mumbling

Cartography
Where the pirates are – Business Insider

Awesome
Paul Krugman on Isaac Asimov and the promise of social science – Guardian

Wonks
Chinese corruption in a (US) historical context – Tyler Cowen

Old Normal
When the US Army settled labor disputes – Bloomberg

Alpha
“The best-case scenario for bonds is the worst-case scenario for stocks” – Whitebox Advisors

Charts
The labor force is shrinking because of demographics – Calculated Risk

New Normal
“Sperm counts are plummeting across the industrialised world” – Economist

Apple
Apple’s new map system sends travelers to Australian National Park instead of city – Victoria Police News

Revealed
The secret sex of cheese – Molecular Love

As Henry Blodget realizes, the most interesting part of the latest speculation about Bloomberg buying the FT is buried en passant:

Factions within his company have argued that it would be smarter to buy a digital property, pointing to the Web site LinkedIn as an example.

As Blodget also notes, this isn’t really an either/or choice: the price tag for LinkedIn would be so gargantuan that it would make very little difference whether Bloomberg also bought the FT or not. But a billion dollars — the much bandied-about price tag on the FT — is still a large enough sum that anybody paying such a price has to have a pretty clear strategic reason for doing so. And if you’re going to start putting serious money against a strategic vision, then it makes sense to be very clear what that strategy is, and what it isn’t.

The purchase of the FT would basically be a soft-power move. Bloomberg has a stated aim of becoming “the world’s most influential news organization”, and the FT would be a helpful fill-in acquisition on the road to that goal. Bloomberg’s influence started in the financial markets, but the company has become more ambitious than that, so it’s investing other ways of reaching important people who might not have any need or desire to spend $20,000 a year on a Bloomberg terminal. And the investment in news outside the Bloomberg wire is paying off: Bloomberg TV got the first Obama interview after the election, for instance, while Bloomberg Businessweek had that juicy interview with Tim Cook.

Still, the FT is a news product, which would fit within the broader Bloomberg News operation, and wouldn’t really alter the mission or the economics of the company as a whole. Bloomberg makes its money selling terminals to Wall Street, and it sells those terminals as a one-stop shop for everything you need, from the Lebanese yield curve to the flight schedule between Rio de Janeiro and Santiago de Chile. One of the things that Bloomberg subscribers want is high-quality news, and thus was Bloomberg News born: its first job is always to give the terminal subscribers the news they’re demanding.

Buying LinkedIn, by contrast, would involve moving far beyond the terminal and into a much bigger world. Bloomberg’s business has — somewhat amazingly — not yet been disrupted by the internet. To the contrary, Bloomberg has been able to piggyback on the bandwidth revolution, and can now sell terminals in Riyadh as easily as it can in London. But there’s a limit to how many people are willing and able to spend $20,000 a year on an information terminal, especially given how much richness of information can be found on the internet for free. And Bloomberg is running up against that limit. Which means that the company is faced with a choice: either continue to reap the spectacular dividends from the existing franchise, or else try and grow, somehow, beyond the confines of the terminal.

If Bloomberg opts for growth (and there’s no reason why it should, given that it’s not a public company), then it’s easy to see why LinkedIn could be a very smart way of getting there. In the beginning, traders got Bloomberg terminals because of the unrivaled fixed-income analytics. But for many years now the terminal’s killer app has been its messaging product, which alone is worth $20,000 a year to many if not most of Bloomberg’s subscribers.

More than five years ago I was describing Bloomberg as “the world’s first social-networking billionaire”. With apologies for quoting myself:

Bloomberg invented social networking before Mark Zuckerberg was even born. Bloomberg LP was founded in 1981, and Bloomberg saw very early on the huge potential of two-way information flows. Rather than just sending information to his clients, he would allow them to ask specific questions and get immediate answers. Once that was possible, it was relatively easy to allow them to message each other. Long before email really took off, Bloomberg messages were regularly flying all over Wall Street, both within firms and between them.

At the center of it all was an open directory of pretty much everybody on the Street. Everybody had his own page on Bloomberg, could be found very easily, and could communicate equally easily with anybody else on the system, bypassing the phone calls and layers of secretaries which had previously intermediated the conversation. It wasn’t long until a Bloomberg became as necessary as a telephone as a tool for keeping in touch. And even today, long after every firm has opened its systems up to the internet and email, many research notes and messages continue to be sent out on Bloombergs instead.

Since then, however, the social-networking world has exploded, even as the Bloomberg network hasn’t. The astonishing rise of Facebook and LinkedIn show the power of network effects: everybody’s on them because everybody’s on them, while attempts to build smaller, more “exclusive” networks invariably fail. Bloomberg might have been the first social network, but it shunned rather than embraced the open internet, and today it’s in pretty much the same place it was in five years ago: extremely profitable, but with limited growth potential.

The acquisition of LinkedIn would be a clear declaration that Bloomberg had its eye on more than just the people with $20,000/year terminal budgets, and was interested in reaching the professional world more broadly. LinkedIn has not taken off as a messaging medium in the way that Bloomberg did, but in many ways it’s the closest thing there is to Bloomberg Messenger for the rest of us. Bloomberg knows, on a deep institutional level, how professionals network and message each other; LinkedIn has a network which dwarfs Bloomberg’s. The two together could be a formidable combination.

That said, I don’t think LinkedIn would be worth the money, for Bloomberg. If you’re thinking of acquiring a company, the first question to ask is how much it would cost to build something similar yourself. And if Bloomberg wanted to port its network over to the internet, so that it was available to people who don’t subscribe to the terminal, the benefits could be similar while the cost (including any drop in terminal subscriptions) would surely be much lower.

Pricing would be tough; I suspect that Bloomberg would want to charge something reasonably substantial for the service, positioning it somewhere in between LinkedIn, which is free, and the terminal. The trick would be to make it expensive enough that current Bloomberg subscribers wouldn’t need to worry about getting constantly spammed by random nobodies. Maybe that’s not possible: maybe the universe of Bloomberg subscribers is the maximum size that an open network, where everybody is connected to everybody else, can get. At some point, surely, spam starts becoming a problem.

But surely it’s inevitable that Bloomberg’s social network will make its way onto the internet at some point, somehow. When that happens, it will become an immediate and obvious competitor to LinkedIn. And if LinkedIn is worried about that potential competition, maybe it should be receptive to any overtures it receives.

This is a bit odd. Last month, Lettie Teague had lunch with Robert Parker, and asked the questions on everybody’s mind: “Was Parker planning to retire? Did he have a replacement? Was he selling the Wine Advocate?”

Parker told Teague that he had no intention of retiring, nor of selling:

Parker said he has entertained offers to buy his newsletter over the years, including three from “hedge-fund guys,” but so far he has refused them all, in part because he would not relinquish editorial control of the newsletter.

Today, however, Teague is back, this time in the pages of the WSJ. And it seems very much that Parker has sold the Wine Advocate after all — to a shadowy group of investors in Singapore, no less. What’s more, he’s relinquishing that editorial control as well: he’s “turning over editorial oversight to his Singapore-based correspondent, Lisa Perrotti-Brown”.

Nothing about this deal makes any sense, on its face. The new owners are going to start accepting advertising — something which makes sense financially, since those 50,000 subscribers tend to be extremely well-heeled. But at the same time, they’re scrapping the print version of the newsletter,* despite the fact that (a) it’s profitable, and (b) they would surely be able to charge much higher rates for print ads than for online ads.

The new owners also have no experience either in wine or in publishing: Parker says that they’re “young visionaries” in the financial-services and IT fields, whatever that’s supposed to mean. Their vision is, to say the least, a big jump from TWA’s current incarnation:

More than four out of five Wine Advocate subscribers are American, but the new investors are planning an abbreviated Southeast Asian edition aimed at corporate clients like airlines and luxury hotels.

The newsletter also will put more emphasis Asia’s nascent wine industry. Ms. Perrotti-Brown plans to hire a new correspondent likely to be based in China.

“The correspondent will cover wines produced in China, Thailand and other Asian countries,” she said, and will help to produce tasting events, another focus of the new Wine Advocate.

Corporate clients? Chinese wine? Tasting events? These are huge new steps for TWA — and, contra Teague, much bigger steps than the decision to accept advertising. I don’t think there’s any good way of rating Chinese wines: either the scores will be low, thereby annoying the very customers they’re supposed to appeal to, or they will be high, and ruin TWA’s reputation for impartiality among its 40,000 US subscribers. There might come a day when China produces world-class wines, but that day has not yet come, and no one knows that better than Robert Parker and Lisa Perrotti-Brown.

As for tasting events, you can’t run those without having a business relationship with winemakers. Perrotti-Brown tells Teague that “no winery or wine-related business will be allowed to advertise,” but there’s not really any need for them to advertise, if they can simply underwrite a grand wine-tasting event instead. Having your wines featured at a Wine Advocate tasting event is the best marketing any winery can hope for, and they will be very willing to pay top dollar for the privilege.

Parker himself will retain the title of Chairman, and will continue to review his beloved Bordeaux and Rhone wines, but none of this seems like the action of a man who wants to preserve his legacy. Robert Parker is the Wine Advocate — and now he’s handing his baby over to a group of people he won’t even name, but who will probably eviscerate everything he stands for? He told Teague he was presented with “a plan he couldn’t refuse”, but I can’t imagine what that might be. He’s never been a profit-maximizer, but he’s managed to become rich all the same; it’s hard to see how a large check alone would have sealed the deal.

I suspect that in coming days and weeks there will be further shoes to drop; quite possibly, this deal won’t end up closing at all. But if it does, and if TWA does indeed move to Singapore, then that will only serve to accelerate the backlash against Parker’s palate which has been gathering steam for some time now. What’s bad for TWA could be very healthy for the wine industry as a whole: if it is no longer particularly beholden to one man, it can branch out into making more heterogeneous and individualistic wines. The idea that a 95-point wine is always better than an 85-point wine is an idea which deserves to die. And this deal, with luck, might just hasten its demise.

Update: Parker now tweets that he’s not scrapping the print edition after all. And if you were missing a hint of squid in your wine, here’s Adam Lechmere:

Decanter.com understands that agents acting for the critic have been approaching high-net-worth individuals in Asia since the early part of the year.
All those contacted have denied any involvement and refused to speak on record, although one told Decanter.com he was approached by ‘current and former employees of Goldman Sachs’ with a business prospectus for ‘commercialisation of the Parker brand.’

When S&P downgraded Greece to Default on Wednesday, I thought it was a bit silly. After all, here’s a chart of the benchmark 2042 bond, since issue: although it’s trading at just about 30 cents on the dollar, that represents an all-time high, and the price has trebled since the end of May. When an issuer’s bonds were trading at 10.65 in May and are 30.63 today, that’s not the kind of price action you expect from a defaulting entity.

When one of the big two ratings agencies says that an issuer is in default, that’s an important determination. But S&P doesn’t seem to be keen to own it: the stated reasons read a bit like “we’re only following rules, there’s nothing else we can do”. The logic goes like this: Greece is buying back its debt at a substantial discount to face value — and when investors “receive less value than the promise of the original securities”, that counts as a default, as far as S&P is concerned.

Now the analysts at S&P are human, so they’re allowed to make a reasonable determination as to what that means in practice. Specifically, what was “the promise of the original securities”, and are the investors who tender into the exchange getting less than that? One way to make that determination is to simply look at the face value of the bonds, but that’s silly. A long-dated zero-coupon bond, for instance, will always trade at a big discount to its face value, but that doesn’t mean it’s distressed, or delivering any less than was promised. And the 2042 bond I’m charting above, for instance, has a very low 2% coupon, so of course it’s going to trade well below par.

So instead, it’s worth looking at the yield on the bonds — in this case, it’s about 11.5%. That’s high, but I don’t think it necessarily enters into “distressed” territory. In any case, we know exactly what the promise of the original securities was: when they were fresh off the securities-creation machine, they were worth about 24% of face value, and now they’re worth about 30%. So investors are getting substantially more than the promise of the original securities, if you use the market as your measuring stick.

Judging by S&P’s own criteria, then, I’m not a huge fan of the decision to brand Greece as being in default. Certainly the credit default swaps aren’t going to be triggered, and on its face this deal doesn’t feel like a default: the tender offer is a voluntary one, it improves the value of the bonds rather than destroying value, and at the margin it means that the bonds are more likely, rather than less likely, to pay out in full and on time.

But then I saw this:

Banking sources told Kathimerini that Greece’s four main banks – National, Eurobank, Alpha and Piraeus – submitted all their bonds, with a nominal value of 11.5 billion euros, to the buyback process…

Sources said local banks are hopeful that investors’ take-up of the offer from the Greek government, which had set a price range of between 30.2 and 40.1 percent of the principal amount, was big enough to allow lenders to eventually hold on to some of the bonds they submitted.

Greek banks were hoping to keep 20 to 30 percent of their bond holdings to minimize their losses.

As far as Greece’s banks are concerned, then, this is not a voluntary deal after all. They don’t want to tender all their bonds, but they are tendering all of their bonds, and they’re hoping to be able to keep at least some of them. Why would they do something they don’t want to do? Because the alternative is that they risk Greece failing to get enough tenders, which would cause the offer to fail, which in turn would be disastrous for the economy. Technically, the banks have a choice here, but in practice they don’t. And when you’re being coerced to give up your bonds at 30 cents on the dollar, that feels like a default.

From the point of view of the Greek banks, then, I can see why this might be considered a default. On the other hand, from the point of view of any independent investor, including all the hedge funds who have made very good money on these instruments in recent months, the exchange isn’t a default at all. Independent investors really do have the voluntary choice of whether or not to tender into the exchange, and in fact they love the fact that the exchange is happening: it’s providing a healthy bid for their paper.

So, is Greece defaulting on its bonds again? My feeling is that the answer is no. You can make the argument that this is a coercive distressed exchange, and that coercive distressed exchanges are one way of defaulting. But default is a fraught word, and I don’t think it should be used lightly. In this case, when the exchange is genuinely voluntary for all but the Greek banks, it seems weird to call it a default. Especially when the bonds are trading at their all-time highs.

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Facebook is unlikely to become your go-to source for corporate announcements any time soon. In July, Netflix CEO Reed Hastings said on his Facebook page that viewers had watched over one billion hours of video using his company’s service in June. Now, the SEC may bring a civil suit against the company for improperly disclosing that information.

As the NYT’s Michael de la Merced reports, the regulator is “concerned that the post violated the Regulation Fair Disclosure rule…which requires a company to announce information that is material to its business to all investors at the same time”.

The idea that a public post on a social networking site isn’t up to the SEC’s standards was met with a fair amount of derision. Business Insider’s Jay Yarow called the move “ridiculous…Hastings has 200,000 subscribers on Facebook, including journalists and analysts”. New York Magazine’s Kevin Roose wrote that the “SEC isn’t showing a ton of awareness about the way news distribution works in 2012”.

Netflix responded to the allegations, claiming that the post was public and that the information in it wasn’t material. Matt Levine finds those arguments wanting, especially since a lot of institutional investors aren’t even capable of accessing Facebook while at work. Dan Primack concurs, pointing out that “investors in publicly-traded companies should not need to crawl all corners of the Internet to discover material information”.

So why did Hastings use Facebook to disseminate news about his company in the middle of the trading day? He hasn’t presented an answer to that question, but we do know that he is on Facebook’s board, and bought 48,000 shares in August. – Ben Walsh

On to today’s links:

Strong Statements
Mike Bloomberg says US immigration policy is “national suicide” – NY Daily News

Primary Sources
US economy beats expectations and adds 146,000 jobs in November, unemployment drops to 7.7% – BLS

Profiles
The man who looted the Congo – Bloomberg

Long Reads
Google accidently built a social network users loved, and replaced it with Google+ – Buzzfeed

Popular Myths
“Obama doesn’t want to punish success any more than a pair of swashbuckling centrists do.” – Matthew O’Brien

Alpha
Generate astonishing returns in 2013 by investing in Chipotle gift cards – Thought Catalog

Oxpeckers
Thank the lord the NYT isn’t the newspaper of record – Jack Shafer

Regulations
Interns of the world unite! You have nothing to lose but your unpaid experiences – Guardian

Servicey
“We’re offering the Mayan ‘End of the World’ Auto Loan Special.” – Financial Brand

This is the US unemployment rate, from Calculated Risk. Today’s jobs report was a very positive one: not only did job creation exceed all expectations, but unemployment fell too, to 7.7%. For the first time, the unemployment rate is lower than it was when Barack Obama took office, in January 2009.

The employment recovery is now 33 months old, and as strong as it’s ever been. We’re still a long way from achieving pre-recession levels of employment, but the fact is that it’s hard to maintain a sense of crisis and emergency for this much time: if you live with anything for more than a couple of years it becomes normal. (Which is one reason why Europe, which has a structurally much higher unemployment rate than the US, doesn’t consider itself to be in a permanent jobs crisis.)

The levels in the employment report are still scary. 7.7% is high in absolute terms, and both the employment-to-population ratio and the labor force participation rate are much lower than they should be. America should have millions more people at work than it does, and there’s a very strong case, looking at levels alone, for further economic stimulus to help us further in the right direction.

But there’s something oxymoronic about the concept of a permanent state of emergency. And in terms of how strong the recovery feels, first derivatives are just as important as levels: if unemployment has fallen from 8.7% to 7.7% in the past year, that feels better than an economy where unemployment has risen from, say, 6.1% to 7.1%. When the temporary payroll tax cut was passed, unemployment was higher than it is now, and it was rising; clearly we’re in a much better spot now than we were then.

The best-case outcome from the fiscal negotiations now taking place between Barack Obama and John Boehner is that they move us out of the “permanent temporary” tax code and into a world where everybody knows what tax rates are and what they will be. Putting expiry dates on tax cuts is a gimmick, and while there’s a case for doing that kind of thing in the middle of a major crisis, we’re really not in the middle of a major crisis any more. It took far too long for the unemployment rate to start falling, and it has been falling far too slowly. But “unemployment should be falling faster” is not a crisis.

With any luck, then, the resolution to the fiscal-cliff debate will be a set of tax policies that both sides agree on, along with a clear date when they will be fully in force. I’m thinking January 1, 2014. The key number to look at will be total federal taxes as a percentage of GDP: it needs to be high enough to be able to run a mature modern democracy. Then, once you have a clear and permanent tax code as your primed canvas, you can start having a sensible conversation about government expenditures: where they need to come down, and which areas of the economy need some stimulus. Even if spending-related stimulus is no more effective than tax-cut-related stimulus, it’s still a better option, because it allows you to leave the tax code alone.

If Obama’s first term was about doing whatever was necessary to get us out of the biggest crisis in living memory, his second term should be dedicated to building strong and permanent foundations for the economy going forward. America’s fiscal architecture is a key part of that — indeed, it’s the key part. So if the payroll cut disappears, along with all other temporary bells and whistles, that’s fine. What’s good for the economy now will also be good for the economy next year, and the year after, and the year after that. Let’s structure any a deal so that it can work forever. And then, if there are temporary political and economic issues which need addressing, let’s tackle them through means other than the tax code.

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American manufacturing has gained boosters recently, with politicians from President Obama to Rick Santorum championing its merits. The Atlantic’s current cover proclaims “Comeback”. Even Apple — the epitome of the Made-in-China multinational — is bringing a mini portion of its manufacturing back to the US: CEO Tim Cook says that “next year, we will do one of our existing Mac lines in the United States”.

Cook’s announcement, which came in the form of an interview with Businessweek, is a savvy move by a company that has faced questions about its reliance on an overseas suppply chain. Still, it’s not much of a homecoming. The FT’s Tim Bradshaw, looking at the $100 million that Cook says he will invest in US manufacturing, notes that it pales in comparison to the billions Apple has invested in Asian manufacturing in the last year alone.

In many ways the much bigger news is that Foxconn, the Chinese behemoth which makes most Apple goods, is expanding into the US. (It might actually be the same news: Cook’s line about Apple’s US manufacturing is “This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.”) Steve Jobs famously said that America’s lost manufacturing jobs “aren’t coming back”. He’s still right. As Felix noted, a big problem with tomorrow’s US manufacturing jobs is that they look more like today’s Chinese manufacturing jobs than yesterday’s US manufacturing jobs. — Ben Walsh

On to today’s links:

Enforcement
Size of likely HSBC fine rises to $1.8 billion - Reuters

On Language
Defining deviancy down, troll edition – Farhad Manjoo
Trawling isn’t trolling – Choire Sicha

#Sandy
After Sandy, the NYPD says Occupy reduced crime and saved lives – NY Post

Primary Sources
Cutting government spending worse for growth than raising taxes – IMF

Billionaire Whimsy
It’s special-dividend season in America – Agnes Crane

Deflation
Steve Cohen’s absence may dent Art Basel’s profitability, sense of superiority – NYT

RIP
Oscar Niemeyer, sensual Modernist – NYT
Major-General Tony Deane-Drummond, escaped from capture three times – Telegraph
Dave Brubeck, jazz legend – New Yorker
Elisabeth Murdoch, matriarch of a media empire – NYT

Takedown of a Takedown
“Why is an ESPN VP speading rumors that I’m straight?” – John Koblin

Oxpeckers
When painful faux-hip-hop slang meets the FT style guide – New Statesmen

Politicking
Bobby Jindal’s innovative, forty-year-old fiscal policy proposal – Matt Yglesias
Senator Jim DeMint resigns to pursue ideals, larger salary – Reuters

Wonks
“I am Snoop Lion! Ask me anything!!” – Reddit

Taxmageddon
DC’s new consensus: truth, justice, and Simpson-Bowles – Alex Pareene

In the wake of Citigroup’s cost-cutting announcement yesterday, which hit the bank’s international branch network very hard, Bloomberg’s Christine Harper and Yalman Onaran have a very good overview of how international banking is becoming increasingly difficult and expensive. National regulators at both the subsidiary level and at the corporate-parent level are becoming much more aggressive, compliance costs are rising fast, and the whole business rapidly begins to look like it’s much more trouble than it’s worth. According to Citi’s press release, it will save about $1 billion of expenses per year by paring back, while reducing revenues by less than $300 million per year.

The potential problem here for Citi is that while the cost-benefit analysis undoubtedly makes a lot of sense on a branch-by-branch basis, there are second-order network-effect and reputational consequences which are much harder to quantify. Jeff Horwitz and Maria Aspan at American Banker have a story headlined “Citi’s Latest Cuts Target International Identity”, which cuts to the chase:

More than 6,000 of Corbat’s layoffs and reductions will fall on the global bank, which Citi has long argued hitched its success to those of affluent urbanites in emerging markets. The bank plans to limit or shutter its consumer operations in such places as Turkey, which posted an 8.5% GDP in 2011, and Uruguay, which grew by 5.6% last year. In Turkey, Citi will curtail a 37-year relationship; in Uruguay, almost a century of doing business.

The same is true in Paraguay, and Romania, and Pakistan, as well as second-tier locations in key markets like Hong Kong, Korea, and Brazil. And the result is that Citi risks losing much of its future.

Citi’s branches in far-flung parts of the world have massive long-term value to the bank in ways which can’t be found on any income statement. For one thing, they’re a constant reminder of the bank’s ubiquity. They’re a bit like The Economist like that: if you’re part of the international cosmopolitan classes, then wherever you go in the world, you’ll be able to find the British newsweekly at a local newsstand, and a branch of Citibank somewhere reasonably near your hotel. You might not buy that local copy of The Economist — you probably have it on your iPad — and you almost certainly won’t enter that Citi branch. But just seeing them, knowing that they’re there, targeted at people like you, is a very powerful brand message.

Part of that message is that the bank is so big and international that it’s a notch or three above any purely local institution. During the financial crisis, when Citigroup was insolvent, the vast majority of its $773 billion in deposits was uninsured, held outside the country. If those depositors were rational, they would have moved their money somewhere much safer. But they didn’t: Citi’s storied history and massive international branch network helped to reassure them that their money was safe, even when it really wasn’t. In many emerging markets, Citibank has had a banking relationship with a plurality of the most important local families for many generations: it’s a baked-in part of the architecture of power. That kind of thing ends up having value in all manner of places: when a scion rises up the corporate ranks in some other country entirely, he’ll still feel that in a weird way he has known Citi since before he was even born.

The world is changing, of course, but not as fast as you might think: emerging-market economies are often still dominated by old families, and rich Brazilians and Argentines still like to know that they have access to their bank in Uruguay, even if their main branch relationship has moved to Miami. And while it’s incredibly easy to make fun of former Citigroup CEO Vikram Pandit and his love of what he liked to call “globality”, the fact is that there are really only two banks in the world which can claim a genuinely global branch footprint. If Citi is shrinking, that leaves just one, and I can’t imagine that anybody would be well served by HSBC becoming a complacent and rent-seeking monopolist for the kind of people who don’t really consider themselves of any one nationality at all.

Pandit was right that you go to war with the army you have, and the only area where Citibank is clearly superior to nearly all of its competitors is in its history and international reach. Mike Corbat, who has spent most of his long Citi career working with non-US clients, knows this better than anyone, so I don’t think we’ll see a wholesale dismantling of the model. And I’m pretty sure that the two big national banks that Citi owns outside the US — in Poland and Mexico — are also safe. Citi is big enough to be able to shoulder the costs that the Bloomberg article talks about, and will be smart to do just that. But it has sold off its entire branch network in other countries, like Germany, and it hasn’t placed its entire brand identity behind its global status in the way that HSBC has. As US and international regulators continue to breathe down its neck, there will be continued temptation to keep on shrinking in far-flung nations. And it’s hard to do that without the risk of damaging Citi’s priceless long-term international franchise.