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March 27, 2012

Forensic finance: economists functioning as detectives

Why economists feel they are qualified to undertake this kind of analysis. They are a self-confident bunch and may not be inclined to ask such questions of themselves. But answers do exist.

Economics is unusual in requiring statistical sophistication plus the ability to think about man-made institutions and human motivations. And economists are naturally suspicious: rational economic man, after all, is smart and amoral, the kind of person you'd want to keep an eye on.

The forensic economics trend may be good for the economics profession, too. It requires economists not to spend too much time thinking about theory, but to pay close attention to data, and to the messy way in which markets actually work. These cannot be bad habits for economists to acquire.

March 25, 2012

Harlem re-renaissance

Norman Horowitz, an executive vice president of Halstead Property who has sold several hundred properties over the last decade in Harlem, said, "Harlem was gentrifying before the recession, then there was a pause, and now the trend is picking up again."

Some experts caution, however, that a Harlem recovery could be destabilized if a backlog of foreclosed or distressed properties went on the market. While figures are hard to come by, "there is a lot of hidden inventory, where banks are just holding on to these units, but have yet to put them up for sale," said Willie Suggs, a well-known Harlem broker.

Some builders contend that prices are still too low to justify new development. "At $500 to $600 a square foot," said Michael K. Shah, the chief executive of DelShah Capital, a developer, "condo projects just don't pencil out yet." Prerecession condominium prices in Harlem were around $850 a square foot, he said, and until prices climb further, "there is just too slim a profit margin after factoring in the cost of construction and land -- I don't think you will see a lot of new development for at least another two to three years."

Still, some brokers and residents insist that this market rebound is meaningful.

The Downeses had been living in a three-bedroom condominium on West 119th Street for six years before their growing family created a need for more space.

"We looked all over the city," said Ms. Downes, an executive vice president of Pacific Investment Management Company, "but it was really hard to find any four-bedrooms for under $3 million." When they found the five-bedroom house around the corner on West 120th Street, they began a slow negotiation with the developer over the $2 million price tag.

"Then one weekend morning I was out walking my dog, and saw two couples looking at the house, talking about making offers come Monday," she said. "I went up to them and said, 'Oh, we are already in contract, that is my house.' " She and her husband, who works on Wall Street, quickly closed the deal and moved in earlier this year.

After a Short Nap, Harlem Is Back
Published: March 22, 2012
Sales seem to be rebounding in Harlem. Prices are rising, and inventory has fallen.

March 24, 2012

High cost of blue tech refills from Mercedes

According to the Environmental Protection Agency, buyers who choose the Bluetec 4Matic over the gasoline V-6 version of the ML350 will save $450 a year in fuel. That said, Mercedes's diesel S.U.V.'s require periodic fill-ups of another precious fluid. And with dealers marking up this pollution-fighting liquid like champagne on New Year's Eve, refills can cost owners $200 or even $300, wiping out a chunk of the fuel savings.

Like other larger turbodiesels in America, the ML must carry a large onboard tank of urea crystals in mineralized water, in a solution typically branded as AdBlue or DEF, for Diesel Emissions Fluid. The solution is automatically injected into the hot exhaust stream. Fluid vaporizes into carbon dioxide and ammonia, which enters a catalytic converter to turn smog-forming nitrogen oxides, a bane of diesel engines, into harmless nitrogen and water.

But fans of diesel powertrains have complained on Internet forums about high prices for replacing the urea solution. Consumer Reports received an eye-popping $317 dealership bill to refill a Mercedes GL-Class with about 16,500 miles on the odometer. That included $241 for 7.5 gallons of solution, which worked out to $32 a gallon.

Nor can owners simply keep driving their diesel after the juice runs dry: the E.P.A. thought of that, too, and it has required models to shut themselves down after a certain number of starts if owners ignore low-fluid warnings. Each gallon of solution is good for about 1,500 miles, and Mercedes recommends topping off during regular 10,000-mile service visits.

Handy owners, however, can avoid buying steeply marked-up fluid from dealers and refill on their own at much less expense and without labor charges. Such do-it-yourself jobs are more convenient because Mercedes moved the filling spout on the refreshed M-Class to behind the fuel door from the cargo area .

At Silver Star Motors in Long Island City, Queens, a Mercedes service adviser quoted me a price of $7 a quart for the emissions fluid, or $28 a gallon.

But retailers including AutoZone and Napa Auto Parts offer 2.5-gallon jugs of DEF for around $13, barely $5 a gallon, meaning that some dealers are marking up the fluid more than 600 percent over retail prices.

The do-it-yourselfer, then, could fully refill the Bluetec for less than $40. Silver Star's adviser said owners need only remember to top off before the urea tank is nearly empty, which can require resetting the computer sensor that monitors the fluid level and system.

Donna Boland, the corporate communications manager for Mercedes-Benz USA, said in an interview that the dealer servicing also includes a flushing of the system. She added that owners who opt to replace the DEF on their own should follow the product instructions explicitly and be certain that the solution is viable, as it can crystallize if it lingers on a shelf for too long.

BMW, for its part, gives its diesel owners free urea fill-ups under its four-year, 50,000-mile scheduled service plan. Volkswagen covers refills for three years and 36,000 miles. For BMW, the plan would pay for four annual fill-ups. In contrast, a Mercedes dealer's four premium pours would pluck roughly $900 to $1,200 from an owner's pocket. Another tale BMW value.

March 18, 2012

Forensic audit finds more, costs more

To the auditing industry, the fact that investors tend to blame auditors when frauds go undetected reflects unrealistic expectations, not bad work by the auditors. The rules say auditors are supposed to have a "healthy degree of skepticism," but not to detect all frauds.

"There is a significant expectations gap between what various stakeholders believe auditors do or should do in detecting fraud, and what audit networks are actually capable of doing, at the prices that companies or investors are willing to pay for audits," stated a position paper issued in 2006 by the chief executives of the six largest audit networks.

Note that last part. They suggested that if investors were really worried about fraud, they should consider paying more for a "forensic audit" that would have a better -- but not guaranteed -- chance of spotting fraud. Don't like our work? Pay us more.

Ernst's audit opinion does not say, which is no surprise. Virtually every audit opinion in the world says almost the same thing, with no details about the company being audited. Auditors are paid millions of dollars to produce a report that no one thinks is worth reading.

On June 21, the Public Company Accounting Oversight Board, which regulates auditors in the United States, plans to ask for public comments on whether to require auditors to do more and say more.

One idea the board is expected to consider is requiring auditors to disclose more about what they did, and did not, do. Ideally, auditors would point to things that they could not audit. There are a lot of them now, and sometimes they are crucial.

Auditors could be called upon to specify where they thought fraud was most likely in a given company or industry, and what they did to confront the risk. Investors could have a chance then of comparing the work of differing audit firms, as one firm disclosed it had checked something other auditors did not mention.

If an audit was expected to call attention to possibly critical information that was not available to the auditors, perhaps there might be pressure from investors on companies to make that information available. In any case, investors could better understand what the auditors knew -- and did not know -- in reaching their conclusions.

The problems with audits now go well beyond questions of fraud. A critical element for many banks is the valuation of securities that trade infrequently, if at all. There may be a wide range of possible estimates, and the auditor now must simply conclude the estimates are within that range. If so, it signs off.

To make things worse, the estimates may have come not from the company being audited, whose work the auditor can examine, but from a pricing service that views its models as proprietary, making them virtually impossible to audit. That fact is something investors should know, but now do not.

Nor do auditors disclose information about how reasonable an estimate is. In some cases, a wide range might be defensible, and investors have no way to know whether a company was particularly conservative or aggressive in its estimates. The oversight board may consider asking that companies disclose what they deem to be the range of reasonable estimates, and why they chose the one they did. Then the auditors could comment on that.

If auditors enforced some consistency on ranges, then financial statements of different companies might be more comparable, even though they chose different estimates.

The accounting oversight board is also expected to ask if it is time to end the "one grade fits all" audit model, in which every company is deemed to "fairly" present its results. Perhaps a second grade could be added, like "presents adequately," for companies that push the envelope but do not violate the rules.

In addition, auditors could be called upon to discuss the risks the company was taking. They could also be asked to call attention to some of the most critical disclosures in the footnotes, something that French auditors already do.

If much of that happened, audit opinions could become a lot more interesting to read. Investors might actually learn something, and they might be able to form opinions about differences in audit firms.

Another long-overdue change would be to have the lead partner on an audit sign the opinion in the annual report. Now, the firm signs, and investors have no way of knowing who was responsible. If an audit signed by a certain partner later blew up, that could be devastating to his or her career if investors shied away from any companies whose audits he later signed. Would that make auditors more careful? Perhaps.

Troubled Audit Opinions
Published: June 9, 2011
Requiring more detail from auditors could help investors evaluate Sino-Forest Corporation, a company cleared by Ernst & Young but called a fraud by Muddy Waters Research.

March 17, 2012

Home office

Live-work real estate: Most spaces advertised as "home offices" are alcoves or windowless rooms that cannot legally be called bedrooms. The New York State Multiple Dwelling Law says rooms for sleeping must have at least 80 square feet of floor space, no measurement less than 8 feet, and window area that measures at least 12 square feet and is also at least a 10th of the area of the room. There are also rules about how much space needs to be between the window and the next lot. In addition, there are exceptions to this rule for some older buildings, according to an official at the New York City Department of Buildings.

A room that falls outside these parameters is given another name -- media room, den, library, dining room -- but more and more these days it becomes the home office.

According to New York City zoning rules, up to one quarter (or 500 square feet, whichever is less) of any apartment may be used for a "home occupation," which includes most desk jobs -- though not interior decorating, real estate, insurance and selling stocks, among other professions. Generally speaking, said Michael Slattery, a senior vice president of the Real Estate Board of New York, occupations that are perceived to generate noise, odor or too much pedestrian traffic are not permitted.

In parts of Lower Manhattan, up to half an apartment can be used for a home occupation, and up to three outside employees can work there. A broader range of occupations is allowed, as well.

Three employees in a home might seem like a crowd, but not in No. 1A at 7 Dutch Street, a ground-floor apartment in the financial district. The 3,400-square-foot two-bedroom three-bathroom duplex loft includes a 1,200-square-foot office in the basement with a separate entrance and a bathroom.

The 50-Foot Commute
Published: May 20, 2011
Home offices have become so desirable that they are now showing up as amenities in new construction.

March 16, 2012

Andy Haldane, patience explained

Andy Haldane, the-regulator-who-explained.

Also: Andrew Haldane asks "Is the world becoming more short-sighted?" (Bank of England)

Under one equilibrium, patience wins the day. When long-term investors start in the ascendency, prices tend to correct towards fundamentals. The performance of untested investors pursuing momentum strategies falters, while those pursuing longterm strategies flourish. The fraction of long-term investors rises. The self-correcting tendencies of market prices are thus reinforced, further supporting long-term investors. The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise.

But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction.

March 15, 2012

Groupon hired arts majors

Ms. Handler is working on an offer for Pine River Stables in St. Clair, Mich., a place she has never been to. It is the stables' first deal on Groupon: $18 for a one-hour ride for two people, half the regular price.

It takes Ms. Handler about 50 minutes to assemble the write-up, which is a few straightforward paragraphs explaining the details with the occasional gag as sweetener (The stables are closed "on Wednesdays, in the event of bad weather and on Horse Christmas.") She puts off writing the first sentences, the ones that are supposed to seduce every Groupon subscriber in Detroit -- either to go horseback riding or at least keep reading Groupon's e-mails.

Still stumped, she browses an online thesaurus. She studies the Pine River Web site for the umpteenth time. She wishes she lived in a world without horses.

Her fingers flick on the keyboard. "Without horses," she writes, "Polo shirts would be branded with monkeys and Paul Revere would have been forced to ride on a Segway. Celebrate our hoofed counterparts with today's Groupon. ..."

Good enough. She moves the copy along to the fact-checking department.

Like many others at Groupon, the 23-year-old Ms. Handler comes from an arts background. At the University of Michigan, she studied English and global media studies, wrote TV reviews for the student paper and short stories for fun.

Groupon shuns being thought of as a marketer or, worse, an ad agency, promoting cheap pizza or sushi for anyone who wants to hire it. The hope instead is that its users will eventually perceive it as an impartial guide to a city or a neighborhood, somewhat in the manner of the local paper's weekend section. With more than 400 writers and editors, Groupon's domestic editorial staff is on the verge of eclipsing the big name across the Chicago River, The Chicago Tribune.

Funny or Die: Groupon's Fate Hinges on Words
Published: May 28, 2011
The e-mail marketer hopes that its staff of 400 writers and editors will keep it one step ahead of its discounting competitors on the Web.

uch of the Groupon suite lacks finished ceilings or other signs of permanence. The occupants of offices are indicated not by plaques but slips of paper taped to the wall. Few of the cubicles have personal touches. Everything is anonymous and just about everyone is under 30.

"A lot of professional writers apply here. I've had applicants from Rolling Stone, The Wall Street Journal," said Keith Griffith, director of recruiting. "But it's really hard to get them to do what we're looking for. It's easier to teach people than unteach them."

In the mythology of Silicon Valley, tech companies hire only the geekiest engineers, weeding out the pretenders with questions that ordinary mortals could never fathom, like this: How many golf balls does it take to fill a 747?

Groupon is trying to reach a different skill set. Here is one of the questions it asks prospective hires:

Q. Which is the most interesting way to describe a 4,700-pound chandelier?

A. Blinged out

B. More brilliant than a studious Christmas tree

C. A death trap

D. Really big and shiny

Not enough people pass the test -- the correct answer is B -- or ace the sample write-up. "My constant fear is that we're going to run out of writers in Chicago," said Mr. Griffith, 27, who in his spare time is a theater critic for The Chicago Reader, an alternative paper.

Another reason the employment skews young is because the pay for new writers is less than extravagant -- about $37,000 a year. This is a touchy subject with Groupon management, which says it is offering the going rate for workers in their early twenties. Also, promotions are plentiful, even for new hires like Ms. Handler, who joined Groupon in January and is now an editor.

About two new editorial workers are being hired every weekday. It is the job of Whitney Holmes, a poet with a fine arts degree from the University of Alabama, to teach them the Voice.

Ms. Holmes began at Groupon last August as a writer, then became an editor, then senior editor. At 27, she says she feels kind of old compared to everyone else. She taught creative writing in Alabama, but the traditional assertion in classrooms that writers are born and not made is here reversed.

"Inspiration is a bunch of hooey," Ms. Holmes says. "You can teach someone how to put together things that are funny."

Addressing a new crop of writers at a training session, she seeks first to reassure. "Achieving Groupon Voice is not about being inherently funny. If it were, 93 percent of our writers would not have jobs," she says.

The writers, who have been on the job less than two weeks, laugh uneasily. Ms. Holmes takes them on a brisk tour of the history and theory of humor. Much humor, she notes, is based on superiority -- laughing at the well-deserved misfortune of idiots. Groupon doesn't do this. Incongruity, however, is fine. Shock is not funny, but surprise is useful.

Some other rules: The passive voice is to be avoided and pop culture references are verboten. A write-up for a teeth-whitening service said it was "equivalent to being punched by God twice." Angry letters followed. The new edict is to substitute Zeus for God, Greek mythology being deemed suitably innocuous.

An example of a successful use of the Groupon Voice is long overdue. Here are two classics:

For a yoga and massage service:

"Today's modern world, with its plethora of countries, panoply of waterways, and constantly changing laws about what is and what isn't mail fraud, is as confusing as it is stressful. Get a clear definition of relaxation with today's Groupon."

For a dentist:

"The Tooth Fairy is a burglarizing fetishist specializing in black-market ivory trade, and she must be stopped. Today's Groupon helps keep teeth in mouths and out of the hands of maniacal, winged phantasms."

The writers in the class do exercises on hair salons and car washes. Excellence is rare. But they'll get plenty of practice, doing as many as seven or eight write-ups a day.

"Every joke has a setup and a payoff," Ms. Holmes says. "If the setup is confusing, the payoff will never land."

March 14, 2012

Where have virus writers gone ?

Mary Landesman, a security researcher who now works at Cisco, has tracked cybercrime from its early days, when virus writers showed off their wares on message boards and hackers defaced porn sites for fun. In December 2000, Ms. Landesman saw a lament: A virus writer wondered on a message board where her fellow virus writers had gone. Ms. Landesman took it as a harbinger of the danger ahead: The virus writers had begun to work for people who could pay them, and they kept quiet.

Anonymous rewrote the hacktivist playbook. It began to challenge a far broader political and economic order. "This really is cyberwar, and I don't use that term in a sensational way," said Richard Power, who chronicled the cybercrime of the 1990s in his book "Tangled Web." "You're looking at not just one particular cause. You're attacking the whole power structure. It involves some core critique."

March 13, 2012

Doctors orders, replayed until understood

Another promising investment: In-room televisions that walk a patient through a doctor's orders - from bed rest to getting prescriptions filled.

"Like while you're in the hospital, they educate you on the TV so that you cannot see your shows until you've gone through the education, and they test you," she says.

It's a bit like not getting dessert until you've had your vegetables. Maybe this all sounds incredibly simplistic, but venture capitalists say one of the trickiest things about this new world of investing is that their returns, in many cases, hinge on humans changing their behavior. And that's a lot harder than building a robot.

-- DualCap investor Anne Degheest

Forget The Robots: Venture Capitalists Change Their Health Care Investments

March 09, 2012
by Sarah Varney

March 4, 2012

Second Avenue Subway by 2016 ?

Will the subway keep digging to downtown NY ?


Second Avenue Subway project will include a two-track line along Second Avenue from 125th Street to the Financial District in Lower Manhattan. It will also include a connection from Second Avenue through the 63rd Street tunnel to existing tracks for service to West Midtown and Brooklyn.

construction updates.

March 1, 2012

Once strong, golden America's optimism was contageous

"They know Okinawa had a genuine connection to that old, bright and strong America," Mr. Kinjo said.

Such nostalgia was apparent on a recent evening at the steakhouse, where slightly built Japanese customers sat in oversize American booths while a jukebox played "Rock Around the Clock." One, Kazue Okimura, a 52-year-old salesman from Tokyo, said he had come for a taste of a time when not only the United States but also Japan seemed more youthful and confident.

"We want to see the remaining traces of that time," he said, sawing a rib-eye steak.

Those traces are disappearing fast. A block away from the steakhouse sits the site of the Teahouse of the August Moon, a brothel-turned-dinner theater that was once a center of social life in American-occupied Okinawa. In 1956, it became the inspiration for a Hollywood movie of the same name starring Marlon Brando.

Where the Songs Linger, but the Tune Is Different
Published: February 20, 2012
The United States military has not controlled Okinawa since 1972, when it reverted to Japanese control, but there is still nostalgia in some places for an older America.