Gary Weiss has a profile of John Paulson in the February issue of Portfolio which I misread when I first came across it. He talks a bit about Paulson being "unrepentant" about the money he's made during the market crash and making "no apologies" for it. And as if to answer the question of what Paulson has to apologize for, he adds this: Left unexamined is the uncomfortable moral dimension of Paulson's achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging? My feeling is that Paulson is exactly the kind of person we want more of: someone who makes big directional down bets when he sees a market getting overheated. Enough of those, and the market might be able to self-correct, rather than implode. Far from having anything to apologize for, Paulson is one of the heros of this crisis, all the more so for actually putting big money on the line rather than simply waxing bearish in the financial media. Weiss cleared this up for me: "I don't think Paulson did a thing wrong, morally or legally or in any other way," he said. In fact, Weiss is quite the fan of short selling, as he's explained on his blog and in his book: Short selling is the only market force that can impede the inflated pricing of hyped stocks. Countless studies of short selling have proven that shorting improves the liquidity of the market, and is the only means by which negative information is incorporated in stock prices. Weiss also gets an anecdote from short-seller Jim Chanos, who says that he was put under some pressure by Bear Stearns CEO Alan Schwartz to go on CNBC and defend the bank, the day before it went under. "That fucker was going to throw me under the bus," says Chanos; Schwartz's people deny the whole thing, but the denials, coming as they do only from an anonymous person "who has spoken to Schwartz," are unconvincing. There are precious few heroes in the story of this financial crisis, but if there are any then Paulson should probably be counted among them. Don't hate him for his money, or for his hubris: there are lots of proud rich fund managers, and most of them have avoided receiving the kind of opprobrium which has been aimed at Paulson. As Jesse Eisinger says in his own column this month: We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistle­blowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing. Related LinksSign of a Bottom?The Good, The Bad, The UglyNew Yorker Blind Item Watch

The message on the Wallstrip home page is upbeat: Happy Birthday to us That's right, two years of pure web video stock market fun. The market's slowing down, but we're not! Except, Wallstrip has slowed down all the way to a complete stop. It hasn't updated since December 12, and now PE Week Wire says that it's not going to come back: A source familiar with the situation says that Wallstrip owner CBS Interactive plans to "take the DNA from WallStrip and apply it" to fellow CBS property BNet. No word on if that DNA includes current WallStrip host Julie Alexandria, or past host Lindsay Campbell (whose subsequent CBS show MobLogic also hasn't published since Dec. 12). CBS had acquired WallStrip for $5 million in May 2007, from a group of angels that included Fred Wilson. For these purposes, I think it's fair to assume that "the DNA from WallStrip" is at this point worth zero, which means that CBS has managed to blow not only the $5 million acquisition price but also whatever extra money it's pumped into the property over the past year and a half. Wallstrip always seemed like a reasonably good way of making money, because it managed to place itself in the sweet spot for web advertising: rich, high-end viewers watching video content -- which has always sold for very high rates compared to banner ads. Its demise is bad news for the secondary market in blogs: it's probably the most expensive blog ever to go all the way to zero. Well done to Fred Wilson et al for getting out at the top: yet again, smart investing has proven to be all about when you sell. (HT: Kedrosky)Related LinksThe Takeaway: Gauging the Media EconomyOnline Ad Revenue UpYahoo Earnings: Just How Bad?

In one of the longest news articles I can remember reading in the New York Post, the SEC's Meagan Chung -- the woman who investigated Bernie Madoff in 2005 and cleared him of fraud -- tries, unconvincingly, to defend herself. Instead, she comes across as even less competent than we thought: [Said Cheung:] "If someone provides you with the wrong set of books, I don't know how you find the real books." ... Regarding Madoff specifically, Cheung said, "I never met the man."... Markopolos gave the investigators a long memo that flatly said that "Madoff Securities is the world's largest Ponzi scheme."... Soon after, in January 2006, the New York branch of the SEC opened an enforcement case on Madoff based on Markopolos' claims. The document authorizing that probe is signed by three SEC staffers: Cheung, attorney Simona Suh, and Assistant Director Doria Bachenheimer. But after interviewing Madoff... the SEC probe "found no evidence of fraud," according to a case closing recommendation signed off by those three staffers. The first quote here is utterly damning: Cheung seems to be saying that unless a fraudster actively cooperates with the SEC, there's no way he's going to be caught: the SEC just checks books against themselves, rather than against any kind of reality. And the second is even worse: Cheung led the investigation, which included interviewing Madoff, but she herself "never met" him. What's most striking is that Cheung shows no remorse at all: she never even says that she wishes she had uncovered the fraud, or that she's sorry she didn't. Instead, we get this: "Everyone in the New York office behaved ethically and responsibly and did as thorough an investigation as we could do," said Cheung. Did we ever live in a world where professionals take responsibility for their actions? I guess not: "I supervised some lawyers and I was supervised by many levels above me. I'm just mid-level management." It's just as well that Cheung has left the SEC already, for personal reasons. She certainly wouldn't be happy there now.Related Links8,000 Pleas for HelpHow Did Madoff Fool the SEC?Sex, Drugs, and Options Backdating

One of the defining features of the dot-com bubble was the long line of loss-making companies coming to market with IPOs. That all came to an end when the bubble burst, and right now nobody is coming to market with an IPO. Nobody, that is, except Friendfinder Networks. Which not only is losing lots of money: it's also in default on its debt. Just check out the prospectus: in the first nine months of this year, the companyhad a net loss of $32 million, after losing $50 million in 2006 and $30 million in 2007; its accumulated deficit now stands at $131 million. Right now its total liabilities of $691 million significantly exceed its assets of $647 million, which means that shareholders' equity is negative. Oh, and there's this risk statement: Our financial statements include an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business or generate revenue. Friendfinder Networks has exactly one asset that anybody has any interest in: lots of (mostly insalubrious) web traffic. Just like during the dot-com boom, we're being asked to ignore the P&L, and concentrate instead on the the eyeballs -- or, as they're known now, visitors. But unlike the dot-com boom, there's also that debt to worry about. If anybody really wanted to own Friendfinder Networks, all they would need to do is buy up its bonds, refuse to modify the covenants, accelerate the debt, and force the company into bankruptcy, where it would be handed over to its creditors, with shareholders being wiped out. Given that very realistic scenario, it's very hard to see why anybody at all should be interested in participating in this IPO. As Floyd Norris says, you don't need moral squeamishness to stay away from this: there are "plenty of other reasons for investors to shy away". Is Renaissance Capital really underwriting this offering in the old-fashioned sense that it's promising to buy any shares which nobody else wants to touch? What does Renaissance intend to do with such a large slug of worthless equity? Something weird is going on here, because I simply can't see why anybody thinks this IPO can get off the ground -- especially in this market. But maybe that's why I'm not a banker in equity capital markets. Related LinksDigg and the IPO ProblemFrank Quattrone, WhinerStumbling Into a Dark and Lonely I.P.O. Market

The end of the world is nigh! Or the end of the print edition of the NYT, anyway, at least according to Michael Hirschorn, in a piece which has been generally well-received by a blogosphere. For me, however, the article makes very little sense: Hirschorn seems to think that given a choice between defaulting on debt payments and stopping its print presses, the Sulzbergers might choose the latter. But they wouldn't: for one thing that's not a decision the NYT's lenders would actually want, and for another thing the New York Times Company has any number of assets it could sell off, especially in Boston, before taking such a drastic move. Hirschorn also seems to think that the newspaper might soon be up for sale, if it isn't already, and reels off a familiar list of potential buyers: Geffen, Bloomberg, Slim, Murdoch, Google, Microsoft, CBS. But even they can't save the print edition, he says: At some point soon--sooner than most of us think--the print edition, and with it The Times as we know it, will no longer exist. And it will likely have plenty of company. The second part is right: many smaller newspapers will close their print editions, which have lost the classified-advertising bread-and-butter revenue stream upon which they've historically relied. But the New York Times is not a small newspaper. It has an enormous display-advertisement inventory, and sells most of it at high rates. It's also incredibly well placed to go national, as smaller papers close, and become a replacement for people who've lost their local paper and who shudder at the prospect of ever reading USA Today. Hirschorn, by contrast, is thinking small: he calls the Huffington Post "the prototype for the future of journalism", and singles out the NYT's DealBook blog as "a cash cow for The Times". I'm not sure what Hirschorn's idea of a cash cow is, but that characterization just looks strange coming, as it does, in the wake of Hirschorn's easy dismissal of the extremely-lucrative T Magazine as "lifestyle fluff". I can assure Hirschorn that DealBook's email ads make a lot less money than T's luxury gloss. And then, to top it all off, there's this: As of December, its stock had fallen so far that the entire company could theoretically be had for about $1 billion. The former Times executive editor Abe Rosenthal often said he couldn't imagine a world without The Times. Perhaps we should start. Er, no. The NYT has two classes of stock, as Hirschorn knows full well: the secondary-market price of the non-voting stock can't simply be extrapolated to get the amount that someone would need to pay for voting control. And in any case, $1 billion is still a lot of money. To put that number in perspective, over the past four quarters, the New York Times Company has lost about $30 million. I think it's pretty safe to say that the NYT is going to continue to exist in its present form for quite a long time yet.Related LinksLate Breaks: Hirschorn, Romney, MarthaIdle Chatter: Hirschorn, Painton, Fuller, ShearerNerd Fight! Joel Stein Zings Michael Hirschorn

How to tackle foreclosures and unemployment at the same time: Get some desperately-needed empirical data on loan mods. Doing the Math to Find the Good Jobs: Mathematicians have the top three best jobs. Economists are in 11th place, just ahead of philosophers. Preach What You Plan To Practice: "You can get better results from using hypocrisy than any other technique." Choice of audit firm: "Ernst and Young, KPMG and PWC all have a reasonable chance of failing as a result of auditing Madoff feeder funds."Related LinksTax Fraud Indictments at E&YTax-Shelter Case Torn DownThe "It's Your Fault I Was Wrong" Defense

I was talking about quant funds this afternoon, and got to wondering what on earth they're doing these days, given that their m.o., up until say the summer of 2007, was to find trading ideas, backtest them, try them out in real life for a while, and then pull the trigger and actually trade on them. The question then becomes: what now? When you backtest, do you backtest through the quant blow-up of 2007 and the stock-market meltdown of 2008? If so, do you really think that's going to give you the kind of trading idea which will make money going forwards? And if not, then what do you ignore, and why do you ignore it, and what makes you think you won't run into a third period of high volatility which will lie well outside any reasonable assumptions you might make? Up until 2007, the problems with quant funds was that the models didn't remotely conceive of the world as it transpired. Now, the problem with quant funds is that they can't help but conceive of the world as it transpired -- and basing your trading strategy on black-swan events which happen only very rarely is not a way to make lots of money. I did express some hope, over the course of a fine bourbon, that the quants in question would find something rather more useful to do, rather than try to predict the future path of the ridiculously complex system that is the global financial system. But quants, anecdotally, are still in demand -- I get the feeling that many investors seem to believe that if they've blown up once, they're somehow less likely to blow up again. Which is something for which there is no empirical evidence at all.Related LinksChart of the Day: Money Market Stress EasingInnocence LostYankee Dollars, Come Here!

How low can recovery rates go? Today the CDS auction on Tribune's defaulted bonds settled at 1.5 cents on the dollar, which is low but in line with expectations of bondholders essentially getting nothing once the secured creditors have been paid. Much more startling is the price on the senior secured loans: just 23.75 cents on the dollar. I checked in with Nishul Saperia at Markit, and he said that it was the lowest recovery rate he'd ever seen for a secured loan; historically, such debt would recover at 70 to 90 cents on the dollar if it ever defaulted. A lot of the problem is that Tribune is a mess of a company, and it's going to take a lot of time and money to liquidate the assets which will ultimately be used to pay off the loanholders. Plus, of course, the fact that most of the loans were extended during the boom years when covenants and other creditor protections had a habit of disappearing for little if any reason. I should imagine that today's news has been greeted with a shudder at the Chicago Tribune, the LA Times, and other Tribune properties: clearly no one on Wall Street thinks they're worth much even without the huge pile of debt that Sam Zell loaded onto their fragile shoulders. Is David Geffen still interested in buying an uneconomic trophy property? He could turn out to be many employees' final hope.Related LinksYankee Dollars, Come Here!The Dollar's Not That StrongBeware ETNs

I've been catching up on the art blogs this slow news day, which means catching up on a long and sometimes confusing debate about deaccessioning which was sparked by the sale of two paintings by New York's National Academy. Ground zero for this debate is Donn Zaretsky's Art Law Blog, but a lot of big names have been drawn in, including David Ross, the former director of both the Whitney and SF MoMA, who has been commenting chez Richard Lacayo. Ross and Lacayo talk of a museum collection as an accretion of curatorial decisions: "museums collect most heavily when trustees and other donors are prospering," says Lacayo, adding that "in any given period a museum collection is a combination of available funds plus curator/director taste." But that's not really true at all. While there are isolated cases of generous benefactors leaving large amounts of cash to art museums, as Leonard Hanna did in Cleveland or David Rockefeller did in New York, most of the time it's private collectors who do the acquiring, rather than institutions. The institutions then collect the collectors, and persuade them to leave all or part of their art to the museum. As a result, most museums have large quantities of art that none of their directors ever particularly wanted, which ended up in their collection thanks to some bequest or other, and which will, realistically, never be shown. Even if such art is sold to a private individual it will still be seen by more people than if it's kept in a basement somewhere. And if the sale conforms to Adrian Ellis's proposed rule, I don't see any downside at all. Here's the rule: You can deaccession and spend the money on whatever you want - a new roof, working capital, education programs, or even a boffo night out with your chums on the board -- provided that you ensure that the institution or individual to whom you sell commits in some binding form to equal or higher conservational standards and equal or higher public access. It's a bit like a Creative Commons license for art, and it seems like a great idea to me. Consider the Eakins which once belonged to the National Academy and now belongs to LACMA: this is a classic positive-sum bargain which benefits both institutions and the general public. Ellis's rule even provides something of a bridge to Tyler Green, who's very much on the side of the no-deaccessioning absolutists. Writes Green: If an institution, such as the National Academy or someone else, can't operate effectively enough to stay open, it should close. Then it should disperse its collection to non-profit institutions -- to other museums. This way art collections held in a public trust remain held in a public trust. If the National Academy were to adopt Ellis's rule, then the worst-case scenario would effectively be what Green is talking about here: it keeps on selling off its collection to other museums until there's nothing left. On the other hand, if such sales manage to keep the institution alive and thriving, attracting new artists who donate valuable examples of their own work, then we end up at a place which is unambiguously better than closing. As Zaretsky says, "meet Mr. Pareto". I do, however, have sympathy for Green's idea that selling off a permanent and irreplaceable part of your bequest in order to meet temporary liquidity needs is generally a very bad idea. Which is why it might be good to have some kind of "uptick rule" in place as well, which makes it much easier for flush, successful museums to deaccession than those who are in desperate financial straits. The best time to sell off extraneous art is when the market is hot, when donors are giving you and other museums lots of money, and when you can deaccession in a considered and strategic manner. The worst time to sell art is when you need to plug a fiscal hole, the market has tanked, and you flail around to find the most valuable paintings in your collection. In any case, I do hope that this debate makes it out of the blogosphere and into the realm of the Association of Art Museum Directors, whose prissy fatwa on the National Academy is a classic example of rules-based rather than principles-based silliness. With a bit more imagination and a bit less ideological fervor, everybody in the museum world, including the all-important general public, could benefit. Update: Lacayo asks whether "a standard of 'equal or higher public access' to a work of art mean that institutions in large cities could only sell to institutions in cities of roughly the same size". That's easy: No, it doesn't. Public access means the number of members of the public who actually see the work in question: if the work is permanently in storage, that number is zero. And it's entirely possible that even if the work is on show, more people will see it at a big museum in a small town (like Crystal Bridges) than at a small museum in a big town (like the National Academy).Related LinksThe Culturati: NovemberMummies, DearestSelling Iowa's Pollock

Michael Kaiser makes some good arguments in favor of increased arts funding, but unfortunately he mixes them up with bad ones, and he glosses over the best ones. The result is that Tyler Cowen gets to take the moral high ground by saying that "culture for the rich" is "not a priority". In reality, however, arts funding is a great way of spending any stimulus money, as anybody with a pocket calculator to hand might be able to work out from a couple of the numbers in Kaiser's piece: The arts in the United States provide 5.7 million jobs and account for $166 billion in economic activity annually. I'm not sure what the source of these numbers is, but they work out at an all-in cost of less than $30,000 per worker. Compare that to the kind of infrastructure projects that are going to be funded generously in the stimulus plan, and you'll see that there's pretty much no area of the economy with higher jobs per dollar than the arts. Kaiser even has a fiscally cost-free way of increasing arts spending, which seems like a no-brainer to me: "we need legislation that allows unusual access to endowments", he says. Tough times like these are exactly what endowments are made for: endowment spending should be countercyclical, and it would be silly to constrain arts organizations from tapping their endowments in any way. But I'm still struggling with trying to work out what on earth Kaiser thinks he's saying here: It takes as much time to play Beethoven's Fifth Symphony today as it did when the piece was composed, and the same number of actors are required for "Hamlet" as when Shakespeare wrote the play more than 400 years ago. Unlike other industries, the arts cannot cover the cost of inflation by improving worker productivity. This is why subsidies -- in the form of government grants or private contributions -- have long been required to help arts organizations balance their budgets. Is he saying that Beethoven's Fifth Symphony was a happily profitable enterprise when it was composed? That arts revenues don't keep up with inflation but costs do? That subsidies should fall in a low-inflation environment? It's all most confusing. But it shouldn't prevent a significant chunk of any stimulus program going to the arts. Related LinksLooking DownComparing American and European Unemployment InsuranceMerry Christmas, You're Fired

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