The Audit

Audit Notes: The IRS story in context, Silicon Valley oligarchs

Necessary context from ProPublica and the NYT on the overblown scandal

By Ryan Chittum   May 23, 2013 at 06:50 AM

The bulk of the IRS scandal press coverage has been seriously devoid of the kind of context that tells readers how and why the targeting of Tea Party groups was almost certainly not a Nixonian plot from the Oval Office to intimidate political opponents.

So it’s great to see ProPublica’s excellent piece showing why the scandal is way, way over-hyped (emphasis mine):

With all the furor over applications being flagged from conservative groups — particularly groups with “Tea Party,” “Patriot” or “9/12” in their names — it’s worth remembering that a social welfare nonprofit doesn’t even have to apply to the IRS in the first place.

Unlike charities, which are supposed to apply for recognition, social welfare nonprofits can simply incorporate and start raising and spending money, without ever applying to the IRS…

Of the more than $256 million spent by social welfare nonprofits on ads in the 2012 elections, at least 80 percent came from conservative groups, according to FEC figures tallied by the Center for Responsive Politics.

None came from the Tea Party groups with applications flagged by the IRS. Instead, a few big conservative groups were largely responsible.

And the kind of targeting done by the IRS’s Cincinnati office was hardly limited to Tea Party groups. Also, read Dick Tofel on why ProPublica’s receipt of conservative-groups’ tax records is almost surely no scandal either (it was likely inadvertent).

— The New York Times also had a solid effort on the IRS story a few days ago, examining the Cincinnati office at the root of the uproar:

Overseen by a revolving cast of midlevel managers, stalled by miscommunication with I.R.S. lawyers and executives in Washington and confused about the rules they were enforcing, the Cincinnati specialists flagged virtually every application with Tea Party in its name. But their review went beyond conservative groups: more than 400 organizations came under scrutiny, including at least two dozen liberal-leaning ones and some that were seemingly apolitical.

Over three years, as the office struggled with a growing caseload of advocacy groups seeking tax exemptions, responsibility for the cases moved from one group of specialists to another, and the Determinations Unit, which handles all nonprofit applications, was reorganized. One batch of cases sat ignored for months. Few if any of the employees were experts on tax law, contributing to waves of questionnaires about groups’ political activity and donors that top officials acknowledge were improper…

It is not unusual for I.R.S. specialists to search for patterns in applications, in part for clues toward fraud and scams — a single tax preparer employing the same tax gambit for multiple clients, for example — and in part to ensure that similar groups are treated in a consistent way, the former officials said.

It’s Occam’s razor: An evil administration out to squelch its opposition, except the ones who actually had the money to oppose them? Or low-level bureaucrats doing what they always do?

— Quote of the day goes to Robert Levine on Twitter for this sharp insight:

Tech companies’ biggest costs are content, bandwidth, and programmers. They’ve made political causes out of reducing the cost of all three.

Silicon Valley has cloaked itself in the language of revolution and liberty, but it does seem that more people are beginning to seeing through that. Read Evgeny Morozov’s epic Baffler takedown Tim O’Reilly and the Randian underpinnings of the tech evangelists.

Here’s Larry Elliott in The Guardian writing about Google Chairman Eric Schmidt in the corporate-tax row going on in the UK right now:

He likes to portray himself as the new sort of boss of a new sort of company, the ones that boast of their non-hierarchical structures, their dress-down policies and their chill-out zones. But the row about tax has shown that the people running these new-wave behemoths are not hippy capitalists, they are robber barons in chinos.

And here’s Joel Kotkin, no lefty he, writing in The Daily Beast:

What we have then is something at once familiar and new: the rise of a new ruling class, arrogant and self-assured, with a growing interest in shaping how we are governed and how we live. Former oligarchs controlled railway freight, energy prices, agricultural markets, and other vital resources to the detriment of other sectors of the economy, individuals, and families. Only grassroots opposition stopped, or at least limited, their depredations.

But today’s new autocrats seek not only market control but the right to sell access to our most private details, and employ that technology to elect candidates who will do their bidding. Their claque in the media may allow them to market their ascendency as “progressive” and even liberating, but the new world being ushered into existence by the new oligarchs promises to be neither of those things.

Bloggers for hire on a penny-stock pump and dump

The Motley Fool digs into a brazen and successful scheme to manipulate share prices

By Ryan Chittum   May 22, 2013 at 06:50 AM

The Motley Fool’s Brian Richards posts a fascinating look inside the pump and dump world of penny-stock promoters, reporting how the hype machine worked in the case of a shell company called Goff Corporation.

Richards describes Goff as “a social recruiting-company-turned-Colombian-gold miner,” which should have been enough to scare off any investor with a light on upstairs. Fortunately for penny-stock scammers, there are lots of dopes out there.

Lots.

Richards reports that investors have traded more Goff shares every day since it IPO’d in March than they have Apple and Exxon, two of the most valuable and liquid stocks on the market. Yahoo Finance puts Goff’s average volume at a whopping 29.3 million shares a day. Exxon’s daily volume was 13 million over the last three months.

Before collapsing 97 percent to 2 pennies apiece, Goff hit 65 cents a share at one point last month. How? It was helped by a flurry of glowing blog posts about this virtually unknown stock’s prospects, and it was boosted by a rent-an-analyst report that initiated coverage with a $4 price target. The analyst was paid to initiate coverage (and tells Richards he got $5,500 and that “the reader should assume the covered company is funding the report directly or indirectly”), and so were at least some of the bloggers.

On April 2, just as the hype game was getting going, a Motley Fool blogger was asked privately about writing a blog post on Goff.

A person calling himself “John O’Connell,” purportedly representing “Investor Associates, LLC,” contacted the blogger via LinkedIn. O’Connell offered “four-figure” compensation to write a positive article about the company — and when our blogger declined the offer, O’Connell even offered to write it for him, if the blogger would simply post under his own byline.

The blogger still declined, and immediately thereafter brought it to our attention. When I spoke with O’Connell by phone, he told me he had only reached out to two people, neither one taking him up on the offer. He ceased such blogger outreach once realizing it was against Fool rules, he said.

And yet, in a stroke of incredible good fortune and unbelievable coincidence for the stock promoters, somehow blogs got written — glowing blogs, each writing optimistically about a company that, to recap, (1) has never made a single cent and (2) went through a wholesale management and business-model change less than 90 days prior.

Richards reports the site “has banned four bloggers because they submitted suspiciously glowing posts on Goff.” He also notes that SeekingAlpha, a competitor stock-blogging site, published four positive Goff posts during the pump.

And hats off to the blogger, whom Motley Fool doesn’t name, for having the integrity to turn down the bribe. Because others didn’t think anything of it. Here’s one of the banned Motley Fool bloggers:

When we questioned the nature of his Goff post, he said it wasn’t a big deal: “I am on a regular basis offered compensation to write about multiple firms.”

The obvious question here is: How prevalent is corrupt user-generated content like this on the financial blogs? And since the answer to that question is unknowable, how can you trust any of it? Richards reports that Motley Fool has “strict rules against publishing stories on micro-cap companies with limited liquidity and/or low share prices to avoid manipulation of stock price, intentional or not,” but it clearly didn’t work here, at least until it was too late.

But give Motley Fool a lot of credit here for simply doing the story, much less diving into it. Richards doesn’t shy away from reporting how his site’s own blogging platform got abused in the matter. It would have been much easier for Motley Fool to let this story slide. The transparency is refreshing, particularly compared to how ABC, say, has reacted this week after it became clear that anonymous sources manipulated its Jonathan Karl into misleading and false coverage of the Benghazi story (read Jay Rosen’s great piece on that).

The micro-cap underworld is a brutal, scam-ridden area, and there are very few reporters keeping an eye on it. If Motley Fool hadn’t reported on it, there’s a good chance this scam wouldn’t have gotten reported. You can bet there are many, many of them that never do.

OKC’s TV news excels in another disaster

Life-saving information before the tornado, essential reporting afterward

By Ryan Chittum   May 21, 2013 at 06:50 AM

In Oklahoma, particularly in the springtime, dangerous weather is a part of life. And so are the local TV news stations in my home state.

Chances are good that the bottom corner of your TV screen come May has the familiar map of the state covered with red, yellow, and green Doppler radar images on loop denoting the severity of the latest thunderstorm, flash flood, or tornado warning in your area.

Weather is routinely a matter of life and death in the state, and meteorologists rank somewhere between football coaches and pastors on the authority spectrum. If there’s anyone left in journalism with the fabled stature of a Walter Cronkite, it’s probably an Oklahoma weatherman, and probably Gary England, whom OKC blog The Lost Ogle calls “our Severe Weather Savior” (only half in jest).

Yesterday’s tornado was the second catastrophic twister to hit the Oklahoma City suburb of Moore in 14 years and as with the May 3, 1999, tornado, viewers got lots of advance warning from their local TV stations. As I write this, the death toll is at 91 and climbing (UPDATE: The medical examiner has dialed that back sharply to 24 so far this morning), but there’s no doubt that the OKC TV weather folks saved untold lives.

On KFOR, for one, meteorologist Mike Morgan told viewers ahead of time that the storm would be enormous and that if they couldn’t get underground to flee the area—astonishing advice to those of who grew up climbing in the bathtub with couch cushions or eying bridge underpasses in case we had to book it out of our cars (the whole lie-in-the-ditch advice never seemed sound to me).

He was right. Here’s hoping the people in this neighborhood heard him:

As important as the meteorologists are in warning people, the helicopter pilots/reporters chasing the storms are critical too. They beam back pictures to everyone in the metro that show how deadly serious a storm is. Back in 1999, I watched that series of tornadoes on local TV for two hours before it passed west of where I was in Norman. If I hadn’t been watching it live on TV, I probably would have gone ahead and tried to make a hockey game in downtown OKC, driving right into the path of a funnel with wind speeds measured at 318 mph.

In other words, this kind of journalism directly saves lives. It’s a real public service. And once the threat has passed on, these choppers become first-line reporters on what has happened.

Brian Stelter, who did great work from Joplin for The New York Times, quotes KFOR’s chopper pilot right after the storm had passed:

Once the tornado passed, the helicopter pilot, Jon Welsh, turned back to survey what had been lost. He pointed out a landmark for local viewers, Veterans Memorial Park, and said starkly, “It’s gone.” Nearby was a housing development. “Completely gone.” Mr. Welsh’s cameraman panned to the south, toward more homes. “Gone.”

Two minutes later he could see a school in the distance. “Oh, my God,” he said, grasping for words. Mr. Welsh called out for police while he tried to identify the cross streets for what turned out to be Plaza Towers Elementary School, one of at least two schools decimated by the storm. The cameraman’s close-up showed adults running toward the rubble.

It wasn’t just the meteorologists and helicopter teams doing outstanding work in Oklahoma City yesterday. I watched KFOR and News9, and the anchors’ tone was right, the reporting was excellent, the reporters were professional but human (I’m thinking of reporter Lance West breaking up on camera from the site of the Plaza Towers Elementary tragedy), and they were cautious but on top of breaking news. I saw no real missteps.

Jim Roberts, executive editor of Reuters Digital, noticed this too, writing on Twitter:

Worth repeating. Very impressed by thoughtful, professional, experienced local news reporters & anchors in Oklahoma today.

That is very, very difficult to pull off in a fast-moving, confusing story like this.

How technology redefines norms

Reasonable resistance to the upending of cultural mores is not “technopanic”

By Felix Salmon   May 20, 2013 at 12:40 PM

Jeff Jarvis reprints the clip above, in an article dismissing the privacy concerns surrounding Google Glass. The Victorian attitudes of Newport’s cottagers, he clearly implies, were misguided and misplaced. “Rest assured,” he writes. ” I will ask you whether it’s OK to take a picture of you in private.”

The key words, here — words which weren’t even part of the cottagers’ vocabulary — are “in private”. We now live in a world where we have public lives and private lives — and for over a century now, since roughly the point at which the above article appeared, the portion of our lives considered “public” has been expanding, while the portion of our lives we can consider “private” has been contracting. What’s more, Jarvis himself is a prominent proponent of the idea that we should maximize the speed at which we move our lives into the public realm; he also equates a desire for privacy with being “scared of the public” .

Never before have we faced so many opportunities to turn the formerly-private into the newly-public. As those opportunities arise, many people adopt them, and turn “public” into the new norm for such activities. Eventually, the norms become societally entrenched, to the point at which it is now utterly unobjectionable for those who once would have been labeled “kodak fiends” to take photographs outside a Newport tennis tournament.

My point here is that technology has a tendency to create its own norms. The classic example is the automobile — a technology which kills more than 30,000 Americans every year. From the 1930s through the 1990s, societal norms about who roads belonged to, and what people should do on them, were turned on their head thanks to the new technology. The dangerous new activity allowed by the new technology became the privileged norm, to the point at which just about all other road-based activity — and roads have been around for thousands of years, remember, since long before the automobile — essentially ceased to exist. Eventually, we reached the point at which elected representatives were happy saying that if a bicyclist gets killed by a car, it’s the bicyclist’s fault for being on the road in the first place.

If Google Glass — and wearable computing more generally — takes off and fulfills its potential, it will change society’s norms about what is public and what is private. It is therefore entirely rational, whatever you think of the set of norms we have right now, to assume that they will end up moving towards something more well disposed towards the new technology.

Jeff Jarvis will welcome that move, and can come up with dozens of reasons why it would be a good thing rather than a bad thing. “There’s no need to panic,” he writes. “We’ll figure it out, just as we have with many technologies—from camera to cameraphone—that came before.” But let’s be clear here about how much weight is carried by that “we’ll figure it out”. Realistically, “figuring it out” means, in large part, changing norms: irrevocably moving the line between what is private and what is public. That might be a good thing, it might be a bad thing. But if you like the norms we have right now — or if you think they’ve already gone too far in terms of robbing individuals of their privacy — then you have every reason to worry about what the onset of wearable computing might portend.

Update: Noah Brier points me to a quote from Daniel Mendelsohn, who goes back further still than the Victorians:

I am amused by the fact our word idiot comes from the Greek word idiotes, which means a private person. It’s from the word idios, which means private as opposed to public. So the Athenians, or the Greeks in general who had such a highly developed sense of the radical distinction between what went on in public and what went on in private, thought that a person that brought his private life into public spaces, who confused public and private, was an idiote, was an idiot. Of course, now everybody does this. We are in a culture of idiots in the Greek sense.

Audit Notes: WSJ on the IRS, countering Kinsley, Cramer gets an ‘F’

The paper mishandles news on the Tea Party targeting story

By Ryan Chittum   May 20, 2013 at 06:50 AM

Rupert Murdoch must have loved his Wall Street Journal front page on Saturday. Editors splashed this headline across the top of the paper:

Higher-Ups Knew of IRS Case

Hearing Shows Obama Administration Officials Were Told in June 2012 of Probe Into Tea-Party Targeting

Headlines like these, with their dark insinuations, play right into the hands of the paper’s columnists, who are doing all they can to tie this quasi-scandal to the White House.

The WSJ’s own second paragraph shows why this story is sexed up and then reverts to sexing it up in the third paragraph:

The disclosure to the Treasury general counsel and the deputy secretary was a cursory one, according to J. Russell George, the Treasury inspector general for tax administration. He said he didn’t reveal conclusions of the probe, which was in its early stages, and his disclosure came as part of a routine update to Treasury leaders. At the time, Republican lawmakers were complaining publicly about alleged IRS targeting of tea-party groups.

The revelation nonetheless raised a fresh set of questions about who was aware of the problem within the Obama administration.

— The new site PunditTracker’s “mission is to bring accountability to the prediction industry,” which sounds good to me.

The first pundit to get an in-depth look is an excellent choice: CNBC’s Jim Cramer. He gets an F:

Given our assumed three-month holding period, we have now graded two years worth of Cramer’s picks: those made from January 2011 through December 2012. That amounts to 552 calls overall, of which 254 outperformed the index (46% hit rate).

On average, Cramer’s picks returned -0.08% versus the 1.35% S&P 500 return over the corresponding period. That amounts to 142 basis points of quarterly underperformance, or 568 basis points on an annualized basis, which amounts to an F grade in our grading system. (We award an A for 500+ basis points of annual equity outperformance and an F for 500+ basis points of underperformance).

For more on Cramer, read Dean Starkman’s 2008 piece on a dispute between CNBC and Barron’s over his picking prowess.

PunditTracker says it will post quarterly updates of Cramer’s performance. Now, how about all those austerity proponents?

— The Atlantic’s Matthew O’Brien, Foreign Policy’s Daniel W. Drezner, and Berkeley’s Brad DeLong tear apart this truly terrible Michael Kinsley column on “Paul Krugman’s Misguided Moral Crusade Against Austerity.”

Krugman also is on to something when he talks about paying a price for past sins. I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. That’s too easy. Sure let’s raise taxes on the rich. But that’s not going to solve the problem. The problem is the great, deluded middle class—subsidized by government and coddled by politicians. In other words, they are you and me. If you make less than $250,000 a year, Obama has assured us, you are officially entitled to feel put-upon and resentful. And to be immune from further imposition.

Austerians don’t get off on other people’s suffering. They, for the most part, honestly believe that theirs is the quickest way through the suffering. They may be right or they may be wrong. When Krugman says he’s only worried about “premature” fiscal discipline, it becomes largely a question of emphasis anyway. But the austerians deserve credit: They at least are talking about the spinach, while the Krugmanites are only talking about dessert.

O’Brien:

This gets things completely backwards. The longer we put off austerity, the lower the price will be, since fewer of the long-term unemployed will become unemployable. And besides, there’s no reason we shouldn’t produce as much as we can now just because we made mistakes before. As Keynes said, the resources of nature and men’s devices are just as fertile and productive as they were — or, as John McCain might put it, the fundamentals of the economy are strong. It’s up to us to make those fundamentals work with the right ideas.

Peggy Noonan loses it on the IRS story

The Journal columnist draws an evidence-free connection to the White House

By Ryan Chittum   May 17, 2013 at 06:50 AM

We are in the midst of the worst Washington scandal since Watergate.

That’s Peggy Noonan today in The Wall Street Journal, and no, she will not be laughed out of Washington. There are papers to sell and clicks to harvest. Forget about the fact that there’s zero evidence of any White House involvement in the IRS flagging Tea Party groups, and forget about past scandals like Iran-Contra, the Iraq War, the US Attorneys, and Bill Clinton lying under oath about hooking up with an intern.

As I wrote yesterday, it’s hard to get too worked up about Tea Party applicants getting flagged when journalism startups got the same treatment—and the nonprofit-news applicants had a much better case for approval than Tea Party groups.

But Noonan also alleges that the IRS, under the White House’s direction, targeted individual conservative activists with tax audits. That would be a serious crime, but here’s all her evidence for such a serious allegation:

The second part of the scandal is the auditing of political activists who have opposed the administration. The Journal’s Kim Strassel reported an Idaho businessman named Frank VanderSloot, who’d donated more than a million dollars to groups supporting Mitt Romney. He found himself last June, for the first time in 30 years, the target of IRS auditors. His wife and his business were also soon audited. Hal Scherz, a Georgia physician, also came to the government’s attention. He told ABC News: “It is odd that nothing changed on my tax return and I was never audited until I publicly criticized ObamaCare.” Franklin Graham, son of Billy, told Politico he believes his father was targeted. A conservative Catholic academic who has written for these pages faced questions about her meager freelance writing income. Many of these stories will come out, but not as many as there are. People are not only afraid of being audited, they’re afraid of saying they were audited.

All of these IRS actions took place in the years leading up to the 2012 election. They constitute the use of governmental power to intrude on the privacy and shackle the political freedom of American citizens. The purpose, obviously, was to overwhelm and intimidate—to kill the opposition, question by question and audit by audit.

It is not even remotely possible that all this was an accident, a mistake.

Here’s the problem. The IRS audits about 1.5 million individual tax returns a year. Guess what? Some of those 1.5 million unlucky taxpayers will be conservative political activists. Some of those will be liberal political activists. What about all the big conservative donors who weren’t audited? There’s just no evidence that activists that individuals were targeted based on their political views or that conservatives got audited disproportionately.

You, average American, have a little better than 1 percent chance of getting audited in any given year, and your chance of getting audited is much higher if you make lots of money, like VanderSloot and Scherz, and if you take lots of write-offs. Betcha George Soros has been audited a time or two, and not necessarily during Republican administrations.

In other words, it’s not smart to pick up a handful of anecdotes from across the country and turn them into evidence of a Nixonian conspiracy that threatens the republic. (Another outlet doing this is ABC, which ratcheted up the Benghazi story last week with a false report by Jonathan Karl based on misrepresented documents that apparently came from Republicans in Congress, according to CBS).

Remember, the 501(c)(4) hubbub, which Noonan conflates here with the supposed persecution of individuals, did not involve audits. It involved flagging groups applying for tax-exempt status and checking whether they were really political organizations, which are supposed to be ineligible for tax exemption. All the flagged groups were eventually given tax-exempt status after a long delay. The same thing has happened with the nonprofit-news sector (though the investigative journalist Roddy Boyd, for one, says that his Southern Investigative Reporting Foundation is still awaiting approval). The Inspector General report found that the Tea Party targeting was “not politically biased” and that “officials stated that the criteria were not influenced by any individual or organization outside the IRS.” Two-thirds of the flagged applicants were not conservative groups.

Noonan mentions none of this.

And, yet again, it’s worth noting the head of the IRS during all this was a political appointee put in charge of the IRS by… George W. Bush. Noonan forgets that too.

I’ll go out on a limb here and predict that Obama’s Watergate this is not. It’s flat irresponsible to suggest otherwise in the pages of the country’s most important business outlet—at least from everything we know thus far.

(h/t Andrew Sullivan)

Read the IG’s report here:

Inspector General's Report on IRS Reviews of Tax-exempt Applications by mmemmott

The other IRS target: the press

The nonprofit news experience undermines the Tea Party targeting outrage

By Ryan Chittum   May 16, 2013 at 06:50 AM

Conservatives are howling about the IRS targeting Tea Party groups applying for nonprofit tax exemptions.

Well, welcome to our world. Nonprofit journalism has been going through the same thing for the last few years, with almost none of the screeching—even though journalism organizations had a much better case for tax exemptions than did the Tea Party groups.

Tell me if this sounds familiar: The IRS targets a particular kind of nonprofit applicant for special scrutiny. Scrutiny comes from the Cincinnati office, works upward to Washington, D.C., and leaves applicants in limbo for years. After years of rubber-stamping approvals, the review comes amid a surge in applications in a murky part of the tax code. Some suggest politics plays a role in favoring some applications. The IRS itself specifically questions applicants about their political activities.

That’s what happened to the nonprofit-news movement for the better part of three years, something I reported on last fall. But there’s been little-to-no uproar over the First Amendment implications of selecting journalism startups for special scrutiny.

San Francisco Public Press, El Paso’s Newspaper Tree, New Orleans’s The Lens, Rhode Island’s Johnston Insider, the Investigative News Network, San Diego News Room, Virginia’s The Arlington Mercury, and the Chicago News Cooperative all had to run the IRS gamut—and those are just the ones we know about. (The right-wing provocateur James O’Keefe III’s Project Veritas, by contrast, breezed through 501(c)(3) approval while legitimate news organizations who had applied earlier waited years, answering repeated (and repetitive) inquiries from IRS agents.)

The INN’s Kevin Davis told me last November that “The IRS has preemptively suggested that we modify our procedures, change our policies, and modify our articles of incorporation to remove the word ‘journalism’ because that is not a charitable cause.” Agents asked the SF Public Press, repeatedly, to sign forms promising not to make political endorsements, according to Steven Waldman’s Council on Foundations report two months ago.

Why did the IRS suddenly start putting nonprofit journalism startups through the wringer, and why did it take so long to finally approve them? The Cincinnati IRS office noticed a surge in activity in the sector a few years ago as for-profit journalism took a beating, and while the IRS had typically put up little resistance to nonprofit news applicants (at least since it threatened Mother Jones’s tax-exempt status in 1981 and was defeated), Congress has never specifically protected journalism in the 501(c)(3) section of the law.

Journalism organizations, including this one, get in under the educational activity exemption, which requires “the instruction of the public on subjects useful to individuals and beneficial to the community.” While the IRS’s fumbled the handling of nonprofit news in the last few years, the need for an updated code specifically exempting journalism is clear.

Why the nonprofit news mess took so long to sort out is less clear, though it’s worth noting, as David Cay Johnston has, that the IRS is seriously understaffed. The Transactional Records Access Clearinghouse at Syracuse University says IRS staffing is down 23 percent in the last two decades, while tax returns are up 27 percent. Do the math.

The Tea Party story is awfully similar. There’s a surge in applications from these groups, except they’re applying under the 501(c)(4) section, which allows groups “operated exclusively to promote social welfare” to operate without taxes. The code specifically prohibits political organizations, but with a loophole big enough to drive an American Crossroads and a Priorities USA through:

The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).

It’s unsurprising that the sudden increase in Tea Party-related 501(c)(4) applicants would raise red flags at the IRS since these groups, by their nature, likely had political objectives. None of their applications ultimately were denied (read an IRS expert, David Cay Johnston, for more on this).

So, for folks like George Will to be conjuring the specter of Richard Nixon and impeachment is a bit much.

For one, there’s zero evidence that there was any White House involvement. For another, the IRS director during the targeting was a George W. Bush appointee. And many liberal 501(c)(4) applicants also got the same IRS questions, though apparently they weren’t flagged by keyword. Will doesn’t bother to mention any of this.

All this is a separate issue from whether IRS officials misled Congress when it asked whether the agency was targeting the Tea Party. That appears to be a bigger problem, and you can be assured it will be fully investigated.

Now, about those secret Obama administration subpoenas of the Associated Press’s phone records, combined with the administration’s past prosecution of leakers.

That’s a scandal.

Audit Notes: Student loan profits, paywall incentives, postal banking

The Huffington Post on a government bonanza

By Ryan Chittum   May 15, 2013 at 06:50 AM

The Huffington Post’s Shahien Nasiripour comes up with a great angle on news that the Education Department expects to make $51 billion in profit this year off student loans:

Exxon Mobil Corp., the nation’s most profitable company, reported $44.9 billion in net income last year. Apple Inc. recorded a $41.7 billion profit in its 2012 fiscal year, which ended in September, while Chevron Corp. reported $26.2 billion in earnings last year. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo reported a combined $51.9 billion in profit last year.

It’s outrageous that student loan interest rates—in a bad economy where recent graduates struggle to find jobs, much less ones that give them raises and the like—are as high as they are when other interest rates are as low as they are, something Senator Elizabeth Warren has spotlighted recently. Nasiripour:

But as the Federal Reserve attempts to lower borrowing costs for everyone from households and small businesses to large corporations and Wall Street banks, student borrowers have not been able to benefit.

Compared to a benchmark interest rate — what the U.S. government pays to borrow for 10 years — student borrowers have never paid more, increasing the burden of their student debt as wage increases and yields on investments and bank accounts fail to keep up with the relative increase in student loan interest payments.

This ought to be a bigger story.

— Former Wall Street Journal digital editor Alan Murray, now president of the Pew Research Center, gives a presentation on digital journalism that’s well worth watching.

He says that paywalls not only can bring in desperately needed revenue, but they focus news organizations on doing journalism that has value, something The Audit’s Dean Starkman has argued.

Watch Murray’s brief speech here:

— David Dayen makes a solid case in Pacific Standard for allowing the US Postal Service to offer simple banking services, both as a way to bring in new revenue and as a competitor to predatory lenders:

According to the FDIC’s 2011 National Survey, over 10 million US households are “unbanked,” with no access to the financial system. Another 24 million households are “underbanked,” meaning they have a bank account but they also rely on providers of “alternative financial services”: remittance or money order shops, payday lenders, check-cashing operations, pawn shops, or associated services. Many of these services are among the most unscrupulous in American society, preying on people with few other options and charging usurious interest rates or carving out large fees. These roughly 68 million unbanked or underbanked Americans represent a huge market for non-bank financial predators.

In other countries, this market is served at the post office. Almost every developed nation in Europe and East Asia operates a postal banking system. A few have been privatized, including what was the world’s largest savings bank, Japan Post. And some operate as a private-public partnership. But countries like Israel, France, Switzerland, Russia, South Korea, South Africa and more all allow their citizens to perform simple banking tasks at the local post office. New Zealand’s Kiwibank, a recent innovation, was established in 2002 specifically to protect citizens from financial predators. It has been wildly successful, according to Ellen Brown of the Public Banking Institute, with one in eight Kiwis moving their services to the postal bank in the first five years…

There’s no question that the commercial banking industry and the fly-by-night non-bank financial predators alike would fight such a proposal in Congress, just as the banks did in 1911 with the original Postal Savings system, in an effort to rid themselves of any competition. And these operators are pretty adept at getting what they want out of Washington. But the Postal Service, which has been around since before we were a country, operates as a Constitutionally mandated public service for all Americans. Extending access to financial services for all Americans—especially those who are woefully underserved in the current market—would fit well with that mandate. And it would help solve the Postal Service’s current crisis as part of the bargain.

The Bloomberg terminal scandal

Not nearly in the Murdoch hacking league, but it requires a cultural shift

By Ryan Chittum   May 14, 2013 at 06:50 AM

The Bloomberg terminal-snooping story is a serious ethics problem, but I’ve read some awfully hysterical takes on it in the past couple of days. It’s time to get some perspective on what we know happened and just how wrong it was.

Adam Penenberg of Pando Daily wrote a head-scratcher headlined, “How is Bloomberg’s snooping different from News Corp.’s phone hacks?”

Because it’s not illegal? Because reading internal customer-service transcripts is not the same moral and ethical horror as hacking the voicemail of a murdered 13-year-old? Because they didn’t knowingly employ an ax-murder suspect—one convicted of planting cocaine on an innocent woman—to bribe government officials and hack phones? I dunno. Just a few off the top of my head.

The most over-the-top piece comes from Stuart Stevens, the guy who headed Mitt Romney’s presidential campaign, who writes that the Bloomberg affair is worse than the News Corporation hacking scandal. Stevens knows not what he’s talking about.

Stevens writes in The Daily Beast that “Bloomberg Terminal Scandal Makes Bunga-Bunga Parties Seem Quaint,” comparing the political and media power of New York Mayor Michael Bloomberg to that of Silvio Berlusconi, and says that reporters were allowed to “peep and pry into the personal activities of important clients.”

Bloomberg is the nanny-state billionaire mayor of the biggest city in the country and owns a highly lucrative financial-data business that sidelines in news. Berlusconi was the super-corrupt billionaire prime minister of Italy who had a near monopoly on public and private Italian television while in office. The analogy with Bloomberg really isn’t there.

And it’s stretching it to say what Bloomberg News was up to here was spying on the “personal activities” of clients. Reporters could tell when a client had logged on to his or her Bloomberg terminal, could read help-desk chats, and could see what high-level functions they had used—as in Jamie Dimon looked at, say, bond indexes. Matt Winkler, in his apology on Sunday, wrote that “At no time did reporters have access to trading, portfolio, monitor, blotter or other related systems. Nor did they have access to clients’ messages to one another. They couldn’t see the stories that clients were reading or the securities clients might be looking at.”

In other words, the information Bloomberg reporters could get at was quite limited. It’s hardly a huge scandal that Bloomberg reporters could find out how long it had been since someone had logged on to their terminal, which is effectively the most expensive social network in the world, as Heidi N. Moore writes. She also notes this:

It is the height of irony that those financial firms, who make their living by collecting and slicing data on client trades, are complaining that Bloomberg was making use of some data on their traders.

That’s not to minimize the snooping here, it’s just to keep it in perspective. As I said last week, Bloomberg’s journalists should never have had access to this customer-service data in the first place. Executives apparently knew there was a problem with this years ago but did nothing to fix it. There’s always the possibility that there are other shoes yet to drop.

And it’s a bigger problem that reporters could see stats on what functions clients were using. Winkler wrote Sunday that “This is akin to being able to see how many times someone used Microsoft Word vs. Excel,” but it still could have provided leads on a very broad level on what executives and government officials were thinking about. It was just simply unfair and unethical for Bloomberg News to let reporters access that information.

So how did it happen? One of the smartest things I’ve read about this scandal is Zach Seward’s Quartz piece on how the cultural, um, eccentricities of Bloomberg dovetail with what we know about the terminal snooping.

At Bloomberg, omniscience is a feature not a bug.

The company’s New York City skyscraper unfurls around its courtyard like a panopticon. Inside, the decor is punctuated at every turn with fish tanks. No one has an office to hide in, and the meeting rooms are enclosed in clear glass…

Within the company, stalking is simply part of the culture. Employees can look up—using the function on their terminals—the last time anyone scanned into or out of a Bloomberg office, which they use to keep legitimate tabs on coworkers and, more voyeuristically, to track their executives on business trips (“Winkler just badged out of Tokyo!”). Some staff make a habit of looking up the last time Michael Bloomberg—the company’s founder, longtime chief executive, and now mayor of New York—visited his family’s foundation, which uses the same security system.

That’s how this scandal happened. And it’s not enough for Bloomberg to disable a couple of functions on reporters’ terminals. Bloomberg News is a big player now, one of the most important news organizations in the world.

This is a perfect time to rethink its culture.

Audit Notes: Bloomberg apologizes, Snow Fall re-imagined, Carr on Advance

Winkler admits reporters should never have had access to customer data

By Ryan Chittum   May 13, 2013 at 06:50 AM

Bloomberg News has gotten a big black eye for snooping on its customers, and Editor-In-Chief Matt Winkler apologizes in a column headlined “Holding Ourselves Accountable.”

We are defined by our words — and they applied to us when a Bloomberg LP customer expressed concern that Bloomberg News reporters had access to limited client information. Our client is right. Our reporters should not have access to any data considered proprietary. I am sorry they did. The error is inexcusable. Last month, we immediately changed our policy so that reporters now have no greater access to information than our customers have. Removing this access will have no effect on Bloomberg news-gathering.

Now let’s also be clear what our reporters had access to. First, they could see a user’s login history and when a login was created. Second, they could see high-level types of user functions on an aggregated basis, with no ability to look into specific security information. This is akin to being able to see how many times someone used Microsoft Word vs. Excel. And, finally, they could see information about help desk inquiries.

I’ll have more on this story soon.

— Aron Pilhofer of The New York Times shows what the paper’s landmark “Snow Fall” feature would have looked like if it had been slapped into the website’s normal template.

Here’s how the top looks as it actually appeared on nytimes.com:

And here’s Pilhofer’s image of how it would look like if the Times hadn’t gone all in on a new design for the story:

And:

The web is by and large an awful place for reading. But let’s hope we’ve hit a turning point, where squeezing clicks out of your readers comes after giving them a good reading experience.

— David Carr writes about The Advocate’s battle against the Times-Picayune in New Orleans and what it says about the industry as a whole:

The much ballyhooed unmaking of daily newspapering seems to be unmaking itself, and there’s a reason for that. Most newspapers have hung onto the ancient practice of embedding prose on a page and throwing it in people’s yards because that’s where the money and the customers are for the time being.

The industry tried chasing clicks for a while to win back fleeing advertisers, decided it was a fool’s errand and is now turning to customers for revenue. But in order to charge people for news, you have to prosecute journalism.

The belief that historic monopolies will hold together just on the basis of inertia has proved to be wrong. Newspapers that have cut their operations beyond usefulness or quit delivering a daily print presence have suffered. The audience has to be earned every day.

That’s easier said than done, of course. Many newspapers may be too far gone. And even the ones that aren’t will have a hard time finding owners like Aaron Kushner and Eric Spitz, who believe that investing serious new money into newspaper journalism will pay off in the medium to long term.

Audit Notes: Bloomberg snoops, Alan Abelson, Niall in denial

And the New York Post scoops

By Ryan Chittum   May 10, 2013 at 06:50 AM

The New York Post reports that Goldman Sachs complained to Bloomberg that its reporters were spying on it via the company’s famous terminal:

In one instance, a Bloomberg reporter asked a Goldman executive if a partner at the bank had recently left the firm — noting casually that he hadn’t logged into his Bloomberg terminal in some time, sources added.

Goldman later learned that Bloomberg staffers could determine not only which of its employees had logged into Bloomberg’s proprietary terminals but how many times they had used particular functions, insiders said…

“You can basically see how many times someone has looked up news stories or if they used their messaging functions,” said one Goldman insider.

“It made us think, ‘Well, what else does [Bloomberg] have access to?,’ ” the insider said.

No kidding. Bloomberg’s instant-message function is one of its killer apps.

Bloomberg has now disabled reporters’ ability to access this information, but they should never have had it in the first place.

— Alan Abelson, a giant of Dow Jones and one of the all-time business-press greats, died yesterday at 87.

Abelson spent 57 years at Barron’s, including a 12-year stint at the helm. He started writing his withering Up and Down Wall Street column in 1966 and continued writing through February of this year.

Ed Finn, who replaced him as editor of Barron’s two decades ago, eulogizes him:

For many readers, there can be no substitute for Alan’s witty, wise, and wonderfully written comments each week in Up and Down Wall Street. But Alan’s contributions to Barron’s, and to financial journalism, go beyond his marvelous column. During his career, Alan trained dozens of journalists to be skeptical, to be exacting, to help average investors, and to be on the lookout for Wall Street’s crooks. About 10 of these fine journalists still work at Barron’s, I’m happy to say. Others have gone on to do groundbreaking work at The New York Times, Bloomberg BusinessWeek, and numerous financial newsletters.

One of the unique things about Alan was that his keen knowledge of Wall Street was matched by his love of artful writing. Before Alan began his newspaper career in 1947, he earned a bachelor’s degree in English and Chemistry from The City College of New York and a master’s degree from the prestigious Writers’ Workshop at the University of Iowa, which counts among its alumni Flannery O’Connor, Jane Smiley, and John Irving. In our view, Alan ranks among them.

Unlike a lot of the business press, Abelson never bought Wall Street’s BS.

— Business Insider’s Joe Weisenthal has a good post running down how wrong Niall Ferguson has been about seemingly everything throughout the crisis:

His most spectacularly incorrect call came in in the Summer of 2009, when he took a victory lap, proclaiming that since interest rates were rising, he was correct that the bond vigilantes were rebelling against the large stimulus and historic deficits.

Treasury rates have plunged again since then. Weisenthal also remembers Ferguson’s kooky claim in Newsweek that we were in double-digit annual inflation, when, in fact, prices were increasing about 1 percent a year on average.

In February 2010 he predicted a Greek crisis was coming to America. Verdict: Wrong.

And in June 2009, he predicted a painful conflict (imminently) between monetary and fiscal policy. Verdict: wrong.

Don’t forget Ferguson’s deceptive and flat-wrong Newsweek article from last summer.

Ferguson is a professor at Harvard.

The WSJ editorial page hits rock bottom

And that’s saying something

By Ryan Chittum   May 9, 2013 at 01:14 PM

I’m still trying to reattach my jaw after reading this op-ed published by The Wall Street Journal today. It’s shameful even by the dismal standards of that page.

In Defense of Carbon Dioxide

The demonized chemical compound is a boon to plant life and has little correlation with global temperature.

Breaking! Plants like CO2.

The numbskullery on display here was actually put best by Republican Congressman John Shimkus a few years ago:

Also, it’s false that CO2 levels have “little correlation with global temperature.”

The op-ed is written by Harrison H. Schmitt and William Happer, who are adjunct professor of engineering and a physics professor, respectively, not climate scientists.

Here are some greatest hits from their column today:

… The cessation of observed global warming for the past decade or so has shown how exaggerated NASA’s and most other computer predictions of human-caused warming have been—and how little correlation warming has with concentrations of atmospheric carbon dioxide…

There isn’t the slightest evidence that more carbon dioxide has caused more extreme weather…

For most plants, and for the animals and humans that use them, more carbon dioxide, far from being a “pollutant” in need of reduction, would be a benefit…

At the current low levels of atmospheric carbon dioxide…

Nowadays, in an age of rising population and scarcities of food and water in some regions, it’s a wonder that humanitarians aren’t clamoring for more atmospheric carbon dioxide.

War is peace and all that.

Just astonishing.

Audit Notes: Farm labor fight, government debt, dumb-question headlines

Americans sue to get farm jobs from Mexican guest workers

By Ryan Chittum   May 9, 2013 at 06:50 AM

The New York Times is good to go page one with a story on a fascinating lawsuit in Georgia that alleges racial discrimination… in favor of Mexican guest workers.

But as Congress weighs immigration legislation expected to expand the guest worker program, another group is increasingly crying foul — Americans, mostly black, who live near the farms and say they want the field work but cannot get it because it is going to Mexicans. They contend that they are illegally discouraged from applying for work and treated shabbily by farmers who prefer the foreigners for their malleability.

“They like the Mexicans because they are scared and will do anything they tell them to,” said Sherry Tomason, who worked for seven years in the fields here, then quit. Last month she and other local residents filed a federal lawsuit against a large grower of onions, Stanley Farms, alleging that it mistreated them and paid them less than it paid the Mexicans.

Wait, but John McCain said Americans wouldn’t pick lettuce for $50 an hour!

This quote, from a manager at Southern Valley farm, is revealing about the power relationship between capital and labor:

“When Jose gets on the bus to come here from Mexico he is committed to the work,” he said. “It’s like going into the military. He leaves his family at home. The work is hard, but he’s ready. A domestic wants to know: What’s the pay? What are the conditions? In these communities, I am sorry to say, there are no fathers at home, no role models for hard work. They want rewards without input.”

That’s why employers like Southern Valley push for loose immigration laws: American workers, even from the underclass, have the gall to ask for a raise or for better working conditions. They’re too difficult and too expensive. It’s much easier to import obedient poverty-stricken foreign workers.

— How many times have we heard politicians, usually unchallenged by the press, trot out the false notion that government finances are like household finances.

Bloomberg View’s Josh Barro calls out Speaker John Boehner for trotting out this old chestnut on Bloomberg TV the other day. Boehner:

We have spent more than what we have brought into this government for 55 of the last 60 years. There’s no business in America that could survive like this. No household in America that could do this. And this government can’t do this.

Barro notes that “It’s hard to think of better evidence for the sustainability of budget deficits than the fact that we have run them for 55 of the last 60 years.”

Of course, budget deficits work because the government is different from a household. A government does not have a life cycle, does not ever expect to stop generating income to support itself, and, therefore, does not ever have to retire its debt. It must keep its debts at a manageable size relative to the economy, which the U.S. has done over that 60 year period. If the economy is growing over the long term, that means the government can run a deficit and grow the debt every year — sustainably.

Just like Walmart, as Barro points out. He shows how the retailer exponentially increased its debt levels over the past quarter century, from almost nothing to more than $46 billion. Thing is, its sales also grew exponentially, so it can afford the debt.

And Walmart can’t even print money.

— The Wall Street Journal’s MarketWatch asks a really dumb question:

Are frequent-flier miles pointless?

Similar perks now doled out to frequent tweeters

Does MarketWatch troll for clicks with stupid-question headlines?

Seriously, the story is a good personal-finance piece tainted by a clickbait headline. But “Airline miles tougher to redeem”—what the story’s actually about— doesn’t tempt the mouse finger like “Are frequent-flier miles pointless?”

These short-term clicks come at the expense of long-term credibility.

The Advocate raids the Picayune

Major defections from the New Orleans paper intensify a newspaper war

By Ryan Chittum   May 8, 2013 at 04:36 PM

I wrote this last week about the South Louisiana newspaper war: “It will also not have a hard time poaching talent from the Picayune and its layoff pool.”

“It,” being The Advocate, the Baton Rouge-based daily that is walking through the door opened by the Times-Picayune’s retreat in its own hometown.

The exodus has already begun—in a big way.

The Advocate announced today that it has picked up highly regarded Times-Picayune news editor Martha Carr and investigation editor Gordon Russell, who will become New Orleans managing editor and investigations managing editor, respectively. The Advocate also picked up two Picayune reporters.

And Dan Shea, the former Picayune co-managing editor, and the newly hired general manager of The Advocate, tells me more is coming. “If you ask me are we getting an outpouring from the Picayune, I feel like I’m in a lifeboat (pulling up to) the Titanic,” he says. “Our problem now is we have more people trying to climb into the lifeboat than we possibly can accommodate. The calls and the résumés are just unbelievable.”

I don’t doubt it. That matches what I heard about reference requests and résumés when I reported my Battle of New Orleans piece from the March/April issue of CJR.

I talked briefly with Russell via phone as he headed up to Baton Rouge this afternoon. He will oversee investigations for the entire paper but will be based in New Orleans. “I don’t agree with the direction that the Picayune’s going in,” he says. “There’s an increasing emphasis on quantity over quality and speed and breaking news—but small news. I love breaking news as much as the next guy but it feels a little like being on a hamster wheel.”

“I love the Picayune. I’ve worked there almost 15 years. I feel like it’s in my blood and my DNA. There are a lot of terrific people who work there—terrific people and terrific journalists. That makes this a little bittersweet.”

The defections are another major blow to a Times-Picayune already reeling from a series of self-inflicted wounds over the past year.

Last May, Shea and co-managing editor Peter Kovacs were for weeks—very visibly—excluded from a series of top-secret meetings on Advance’s plan for the future of the paper. They were summarily let go in June, along with nearly half the Picayune’s journalists, some of whom were asked to reapply for new digitally-focused jobs at the new NOLA Media Group (the paper eventually ended up with a newsroom about 25 percent smaller after rehires and hires from outside the paper).

Advance and new publisher Ricky Mathews killed daily publication of the Picayune, an excellent paper with the highest penetration in the country in a tradition-loving city, and decided to stuff seven days of news into Wednesday, Friday, and Sunday editions (plus a Monday sports tabloid after Saints games launched after fans revolted). The company focused its “digital-first” newsroom on a clicks strategy for the paper’s website Nola.com, widely regarded as substandard, and shifted diminished newsroom resources away from hard news and toward sports and entertainment. The paper’s longtime absentee owners, the Newhouse family, turned a deaf ear to demands from New Orleanians to at least consider local offers to buy the paper, telling The New York Times that “”We have no intention of selling no matter how much noise there is out there.”

I’ve argued that the Advance plan was effectively a liquidation of the paper that could make more money riding down declining revenues than through a sale.

The plan had a serious flaw, though. It didn’t take into account the possibility that someone else would come into New Orleans and compete—in print. But that’s exactly what happened. Baton Rouge’s David Manship, publisher of the state capital’s Advocate, sensed opportunity and launched a skeleton-staffed edition of the paper in New Orleans in September, days before the Picayune went to three days a week. The Advocate became the city’s only daily newspaper and picked up nearly 24,000 sales a day in three months despite the paper’s scrappy but barebones New Orleans coverage.

But to truly take on the Picayune, The Advocate needed far more resources than it could get from the Manships. Enter John Georges, the New Orleans businessman and former political candidate who was one of those who expressed interest in buying the Picayune last year.

The wealthy Georges has now instead bought The Advocate. He promptly hired Shea and Kovacs to run the paper and is pouring resources into New Orleans while promising to not subtract from Baton Rouge.

The Times-Picayune, preparing for battle, tried to step on The Advocate’s news by announcing it would return to quasi-daily publication with a newsstand-only tabloid called, unfortunately, TPStreet.

That’s not going to cut it now. It’s very clear from the caliber of his early hires that that Georges is investing serious resources into the New Orleans market.

Mark it down: The Newhouses will have to return the Picayune to daily delivery of a real newspaper if they want to head off Georges and The Advocate.

In an interview with me, Shea turned aside the idea that the turn of events felt like vindication after his treatment by the Picayune last year. “I truly believe what the Picayune did hurt the city of New Orleans and the surrounding area,” he says.” We are trying to fill that void because that’s what the people want there.”