DealBook: After Scandal, SAC Capital Begins to Fade to Black

Pennsylvania’s Capital Files Plan for Finances With Court

The receiver, William B. Lynch, said that the city would sell a municipal trash incinerator for $126 million to $132 million and that it would reap $1.5 million a year from the 40-year lease of 13 parking garages and lots to specific operators.

The transactions will allow the city to resolve a debt of about $345 million accumulated by the incinerator during decades of bond sales for upgrades and repairs, Mr. Lynch said in a 357-page filing with Commonwealth Court, which is expected to take two to three weeks to decide whether to approve the plan. The proceeds from both sources will allow the city to balance its budget after several years in which it has missed bond payments and struggled to meet its payroll.

The plan also avoids filing for Chapter 9 bankruptcy, an option that was taken by Detroit in the largest municipal bankruptcy in United States history. Some Harrisburg officials favored a bankruptcy filing, but Pennsylvania passed a law making the city ineligible.

The new plan gives specifics to an earlier outline agreement under which stakeholders — including creditors, bondholders, the City Council and the administration of Mayor Linda D. Thompson — settled their differences after years of acrimony over how the financial pain of settling debts and rebuilding revenue should be divided.

“Civic, community and governmental leaders, as well as creditor interests, have come together to achieve a resolution that as recently as this year many thought not possible,” the document said.

It said the agreement was reached because all parties recognized the need to make sacrifices and to “not insist on receiving the full benefit of their legal or contractual rights.”

Mayor Thompson said the plan could become a template for other cities struggling to balance their budgets.

“If confirmed by the Commonwealth Court, we believe Harrisburg will become a model for other financially distressed municipalities in Pennsylvania and across the country,” she said in a statement.

As a result of the agreement, titled “Harrisburg Strong,” the city will be permanently absolved of its huge incinerator debt without an increase in real estate taxes. It can balance its budget through 2016, and it will gain $25 million over the next several years for infrastructure, economic development and debt payment.

The agreement was achieved in part through a “meaningful reduction” in public-sector labor costs after modifying labor contracts through 2016, and by a “reworking” of the city’s obligations to its general-obligation bondholders and other creditors.

It also pledged to return the financial management of the city to its elected officials “as soon as possible,” ending the role of the receiver.

Harrisburg’s heavy debt load made it vulnerable to the recent decline in the value of municipal bonds prompted by the Federal Reserve’s statements that it intended to phase out its monthly bond buying to stimulate the economy.

“The pricing of bonds being used to fund the two transactions has not yet occurred,” the document said. “Thus, the exact amount of funds from those transactions, which are necessary to the successful consummation of this plan, are not yet known, and are tied closely to the prevailing interest rates in the municipal bond market.”

Despite the reduction in available money brought about by the decline in bond prices, financing is still sufficient for the plan to work, the document said.

The latest plan goes further than one presented for court approval in March 2012, which failed because it failed to get the agreement of all Harrisburg’s warring parties, the receiver said. By contrast, “virtually all” of the affected parties have signed on to the new plan.

DealBook: SAC Capital Closes a Trading Unit

DealBook: Fearing Loss of Capital, SAC Talks of Layoffs

DealBook: SAC Capital Is Arraigned on a Raft of Criminal Charges

DealBook: SAC Capital Advisors Is Indicted, and Called a Magnet for Cheating

DealBook: JPMorgan Chase Faces Questions on Potential New Capital Rules

Justin Lane/European Pressphoto AgencyDuring an earnings call on Friday, stock analysts asked questions JPMorgan Chase about how a potentially nettlesome regulation might affect the bank.

It’s often the case that when someone doesn’t want to talk about something, it only invites more questions.

That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.

The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.

Since the financial crisis of 2008, regulators have been introducing new rules on capital because they feel higher capital levels makes banks more able to weather storms. That’s because capital can act as a financial cushion that absorbs losses in troubled times. To measure whether it is sufficient, capital is often expressed as a percentage of a bank’s assets. For instance, a bank with $3 in capital and $100 in assets would have a leverage ratio of 3 percent.

This week, regulators proposed a new leverage ratio rule. They want large banks to hold capital that meets a certain percentage of assets, plus other risks embedded in their balance sheets. And it measures the ratios at different places in the bank’s corporate structure.

At the parent company, the leverage ratio would effectively have to be 5 percent. Meanwhile, regulators want the ratio to be 6 percent at the banking subsidiaries that are covered by federal deposit insurance.

The banks have two months to comment on the rules, during which they are almost certainly going to request changes. Once the proposed rules are put into effect, banks will have until the end of 2017 to comply with the new leverage ratios.

On Friday, JPMorgan Chase estimated that it was already close to meeting the 5 percent requirement at its holding company, saying it had enough capital to get to a 4.7 percent leverage ratio there.

Naturally, analysts also wanted to know whether JPMorgan Chase’s deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement.

“Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?” John McDonald, a bank analyst at Bernstein Research, asked on Friday.

Marianne Lake, the chief financial officer at JPMorgan Chase.

Ms. Lake responded that she would not disclose the bank leverage ratio. She added that it was lower than at the holding company.

A few minutes later, Betsy Graseck, a bank analyst at Morgan Stanley, tried. “I’m just wondering why no bank-sub disclosure. I realize that is different, but — and I heard your answer earlier — but I’m just wondering,” she asked, why the number was not provided.

Ms. Lake replied, “So, Betsy, there’s nothing sinister underlying it.”

The chief financial officer did offer some hints, however.

She said the bank subsidiary leverage ratio would be “small tens of basis points” lower than the 4.7 percent level at the holding company. A basis point is a hundredth of a percentage point. Therefore, the leverage ratio for JPMorgan Chase’s bank subsidiaries might be around 4.4 percent.

Under the proposed rules, those entities would eventually have to increase their capital holdings so they are at 6 percent.

Right now, that would mean JPMorgan Chase would have to raise capital by $40 to $50 billion at the subsidiaries. Analysts at Goldman Sachs and Keefe, Bruyette & Woods estimate a shortfall of as much as $47 billion, which is a far higher theoretical dollar deficit than exists at other large banks’ insured subsidiaries.

(However, Bank of New York Mellon’s deficit is higher as a percentage of existing capital, according to Keefe, Bruyette & Woods).

A capital hole of nearly $50 billion is significant even for a bank as big and profitable as JPMorgan Chase. That may be why the bank didn’t want to go into further detail. The fact that its dollar deficit seems to dwarf that of other banks may also be a source of discomfort. For instance, Goldman analysts estimate Citigroup only falls short by $10 billion at its insured entities.

Mark Kornblau, a JPMorgan Chase spokesman, declined to add to what the bank’s executives said on the Friday call about the leverage ratio.

On that call, JPMorgan Chase executives said the bank could increase its leverage ratio at the bank subsidiaries by moving assets or unwinding derivatives, the financial contracts that generate substantial trading revenue for JPMorgan Chase (as well as some losses, as shown by the London whale debacle last year).

Indeed, if JPMorgan does end up getting hit harder by the new leverage ratio, it may not be a complete accident.

Regulators have long tolerated immense amounts of Wall Street business taking place within insured subsidiaries. But the proposed leverage ratio may be the regulators’ new way of forcing banks to hold higher capital to protect against potential trading losses in such entities.

Goldman Sachs estimates it would take JPMorgan Chase two and a half years to earn the capital it needs to plug the hypothetical gap at is subsidiaries. This matters for shareholders. Using earnings to bolster capital might restrict what the bank can pay out in dividends and spend on stock buybacks. On Friday, JPMorgan Chase’s chief executive, Jamie Dimon, said the bank could step up distributions to shareholders and meet the new leverage ratio requirements. A bank of JPMorgan Chase’s profitability probably can do both.

Still, shareholders might feel more confidence about that assertion if the bank had detailed just how much extra capital it might have to find.

DealBook: Regulators Seek Stiffer Bank Rules on Capital

Yuri Gripas/ReutersThomas Hoenig, a Federal Deposit Insurance Corporation official.

Confronted with large and complex banks, financial regulators have spent years drafting rules that are just as complicated.

On Tuesday, though, regulators signaled that the byzantine approach was inadequate. In a significant shift, the Federal Deposit Insurance Corporation, along with the Federal Reserve and the Office of the Comptroller of the Currency, proposed stricter banking rules that aim for simplicity.

The agencies’ move is part of their continuing efforts to strengthen the financial system and prevent situations where taxpayer-financed bailouts might be required.

The latest regulations focus squarely on capital, the financial cushion that banks have to hold to absorb potential losses. In theory, a bank with higher levels of capital is more likely to weather shocks and less likely to need government aid in a crisis. The proposed rules would raise a crucial requirement for capital held by the largest banks.

“This will increase the overall financial stability of the system,” said Thomas M. Hoenig, vice chairman of the F.D.I.C. “This is an advantage to the banks over the long run, and to the economy. I am confident of that.”

The agencies’ latest push could meet fierce resistance, however. As outlined, the new capital requirements could be costly for the largest banks, which have 60 days to comment on the rules.

The F.D.I.C. estimated that the country’s eight biggest banks would have to find as much as $89 billion to comply with the proposed rules. An analysis of JPMorgan Chase’s books suggested that it might have to bolster its capital position by $50 billion, a number the bank declined to verify.

The added burden for the big banks unnerves some in the industry.

“This goes a little higher than is necessary,” said Tony Fratto, a partner at Hamilton Place Strategies, a research and public relations firm that has represented banking trade groups. Mr. Fratto said the new rules could weigh on the economy and undermine the global competitiveness of the largest American banks. “It’s our view that there has to be a trade-off with greater restrictions,” Mr. Fratto said.

The regulators are acting at a time when some members of Congress are calling for tougher bank regulation because they believe the sweeping overhauls instituted soon after the financial crisis fell short. Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, introduced a bill earlier this year that demanded capital increases exceeding what the agencies are now proposing.

“The Brown-Vitter bill really galvanized the debate about ‘too big to fail’ and capital ratios,” said Camden R. Fine, president of the Independent Community Bankers of America, an industry group that supports the agencies’ proposed rules. “It really focused the regulators’ attention on these capital issues.”

With their latest move, the regulators hope to make the rules clearer and tougher.

After the crisis, American regulators agreed to impose an international banking overhaul known as Basel III. Officials like Mr. Hoenig have criticized Basel regulations because they rely on a method called risk weighting to set capital. With risk weighting, banks estimate the perceived riskiness of assets. They are then allowed to hold less capital, or even no capital, against assets that appear less risky. A bank may have $1 trillion of assets on its balance sheet, for example, but many of those assets could have low risk weightings. As a result, the bank might be able to reduce its total of risk-weighted assets to $500 billion. It would then calculate its needed capital from that lower figure. With a capital requirement of 7 percent, the bank would need $35 billion in capital.

Critics have questioned the risk weighting process, arguing that it can be inconsistent and complex and leave banks short of capital.

The regulations proposed Tuesday are intended to compensate for the shortcomings of risk weighting. Using a yardstick known as the leverage ratio, the proposed rules would not allow the bank with $1 trillion in assets to discount any of that sum. In fact, the bank would have to increase the asset total it uses to calculate capital to reflect risks not readily apparent on its balance sheet.

The agencies estimate that the new calculations would increase the largest banks’ asset totals by around 43 percent. The $1 trillion bank would, in essence, become a $1.43 trillion bank.

The proposed rules would also effectively require the largest banks to hold capital equivalent to 5 to 6 percent of their new asset totals. The hypothetical $1.43 trillion bank would therefore have to hold more than $70 billion. “Risk weighting is based on a very arcane and complicated series of ratios and formulas that are immediately gamed,” Mr. Hoenig said. “The leverage ratio is a check on that.”

Stock market investors appeared to shrug off the tougher requirements. Shares in the largest banks, which have risen sharply in recent months, were mostly up on Tuesday.

“I am surprised by the market reaction,” said Richard Ramsden, a bank analyst at Goldman Sachs. “It’s a fairly demanding proposal.”

Only two big banks, Wells Fargo and Bank of America, appear to already have sufficient capital to meet the proposed leverage ratio requirements, according to an analysis by Keefe, Bruyette & Woods.

But other big banks may be more strongly affected. JPMorgan Chase, the nation’s largest bank by assets, has two large subsidiaries with federal deposit insurance. Those subsidiaries would have to hold 6 percent capital, according to the proposed rules. In theory, this could push up their combined capital requirement to $177 billion from the $127 billion they hold today.

Regulators may favor such an outcome because JPMorgan, like some other large banks, uses its insured subsidiaries to hold most of its derivatives. Derivatives, financial instruments that can be used to hedge risks or speculate, can be a source of losses and instability when markets are in severe turbulence.

The banks have until the end of 2017 to comply with the higher requirements. In the next two months, they are likely to push back hard. But with the economy strengthening and bank profits at record highs, the banks may not find sympathetic audiences.

Advocates of higher capital say it can increase confidence in the banking sector and promote lending.

Mr. Fratto, of Hamilton Place Strategies, is skeptical of that viewpoint. “Do we want to conduct that experiment at a time when we’ve seen banks shedding assets, exiting businesses and pulling back a bit on lending?” he asked.

These days, regulators have more power to press ahead in the face of any opposition. The Dodd-Frank overhaul passed by Congress in 2010 gave regulators added leeway to toughen rules for large banks. The leverage ratio is only one initiative regulators are pursuing. The Federal Reserve, for example, is going to propose a rule that raises capital requirements for banks that borrow heavily in the markets. But even with the flurry of new rules, Mr. Hoenig says he does not think the banks’ hands will be tied.

“They have plenty of flexibility to lend and invest,” he said.

Capital Ideas: Who Will Crack the Code?

In Singapore, Coca-Cola recently opened a plant with the capacity to produce the underlying ingredient for 18 billion cans of soda a year. In Cork, Ireland, PepsiCo has located its “worldwide concentrate headquarters,” which until 2007 had been in New York. More than half of all PepsiCo soda sold around the world starts, as concentrate, in Ireland.

What Ireland and Singapore share is a low corporate tax rate. And because soda is such a simple product, with so much of its financial value stemming from the concentrate, Coke and Pepsi can reduce their overall tax rates by manufacturing it in low-tax countries.

Partly as a result, the industry paid a combined corporate income tax rate — spanning federal, state, local and foreign taxes — of only 19.2 percent over the past six years, according to an analysis for The New York Times by the financial research group S&P Capital IQ. The average rate for the companies in the Standard & Poor 500 was 29.1 percent.

The soda industry’s success at legally avoiding taxes shows why so many economists and tax experts believe the United States corporate-tax code is terribly flawed. It includes a notoriously high statutory rate that causes companies to devote resources to avoiding taxes. But it has so many loopholes that the effective corporate tax rate in the United States is slightly lower than the average for rich countries.

The decline in corporate-tax collection in recent decades has contributed to budget deficits. It has also aggravated income inequality: a company’s shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who tend to be much more affluent than the average American, see their wealth increase.

“It’s clearly a broken system,” said Michelle Hanlon, an accounting professor at M.I.T.

Corporate taxes burst into the spotlight last week, with the release of a Senate committee report on Apple’s tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert and former Democratic Congressional aide, said he had been impressed so far by the seriousness of the committee’s work.

The effort has a long way to go, but if it succeeds, both liberal and conservative tax experts hope it will reduce the statutory rate while also eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.

Many voters, meanwhile, want to see companies paying higher taxes. In a Gallup poll last month, 66 percent of respondents said that corporations paid “too little” in taxes, compared with 61 percent who said the same about upper-income people, and 19 percent who said the same about lower-income people.

Low-tax companies are often large, global companies with the ability to use accounting maneuvers to shift earnings around the world. Having intangible assets (like a computer algorithm) or portable ones (like soda concentrate and pharmaceutical ingredients) can also help.

Carnival, the cruise-ship company, paid a minuscule 0.6 percent of its earnings in taxes over the past five years, according to Capital IQ. Starwood Hotels and Resorts, which owns the St. Regis, Sheraton, and W chains, paid 8 percent.

Amazon.com paid 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, Eli Lilly and Raytheon, 19 percent; and FedEx, 23 percent.

Individual executives also matter. The most creative can “play a significant role” in reducing taxes, according to a published study by the accounting professors Scott D. Dyreng, Edward L. Maydew and Ms. Hanlon. They built a database of 908 top executives who switched companies and identified some who were successful at holding down taxes wherever they went.

The professors did not name names. But a few executives — like John Samuels, head of the General Electric tax department — are famously shrewd.

Some companies with low tax rates, including Coca-Cola, have recently started a lobbying group called the LIFT America Coalition. Their main goal is to protect their advantages, if not bring down their taxes further. Other companies, like General Electric, are also major donors to Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee, and to Senator Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee.

ON the other end of the corporate-tax spectrum are smaller companies and those whose businesses tend to be tied down, less easily moved than Coca-Cola syrup or technological know-how. The retailers Best Buy, CVS, the Gap and Whole Foods each paid a combined rate of between 35 percent and 40 percent over the past five years. Wal-Mart paid 31 percent. Oil companies also pay relatively high rates, with Exxon Mobil at 37 percent.

To many economists, a fairer system would not lavish billions of dollars of tax breaks on only some industries for reasons that are almost accidental. “No one likes the current system,” Donald Marron, a former official in the George W. Bush administration who is now at the Tax Policy Center in Washington, said, speaking for his fellow economists if not for corporate executives.

Why, for example, should the government tax a retailer that sells soda at a much higher rate than a company that makes soda? Public-health experts note that the soft-drink industry is an especially odd candidate for taxpayer generosity, given its central role in increasing obesity and health costs.

Mr. Kleinbard, a law professor at the University of Southern California, says the only kind of overhaul that can get through Congress is one that reduces the headline corporate tax rate, from its current 35 percent to between 25 and 28 percent. In exchange, Congress would also most likely force companies to pay more taxes on their overseas profits.

Business lobbyists like the LIFT coalition are pushing for the opposite: lower overseas taxes. They say that Washington puts American companies at a disadvantage by trying (if often failing) to tax their overseas operations on top of the taxes that foreign governments collect. Instead, many companies want a so-called territorial system, in which only the local government imposes a tax.

The weakness in such a system, of course, is that some countries allow companies to operate almost tax-free. And in a globalized economy, many companies have figured out how to put much of their operations in those countries. Thus Ireland has become the world’s cola maker.

One compromise being discussed in Congress is a version of the territorial system — but with a minimum tax for any overseas operations. If companies were not paying at least that minimum to a foreign government, they would have to pay the difference to Washington.

So many companies are paying such low tax rates that even a modest minimum tax may result in a tax increase. Doubtless, though, the companies and their lobbyists will do the work to figure out how any proposed overhaul will affect them. If Congress is really going to reverse the long slide in corporate tax collection, it will have to make enemies along the way.

David Leonhardt is the Washington bureau chief of The New York Times. Kitty Bennett contributed reporting.

DealBook: Commerzbank to Raise $3.2 Billion in New Capital

Fabrizio Bensch/ReutersA branch of Commerzbank in Berlin.

LONDON – European banks have gone on a capital-raising binge.

Commerzbank of Germany, the latest entrant, began a heavily-discounted effort on Tuesday to raise 2.5 billion euros ($3.2 billion) in new capital.

The push by Commerzbank follows similar moves by other European lenders, which have come under growing regulatory pressure to increase capital reserves to protect against future financial shocks.

Despite a series of stress tests on the Continent’s largest financial institutions, investors have remained wary of the firms’ continued exposure to risky loans and sputtering economies like Spain and Greece.

Regulators have also pushed banks to shed unprofitable assets and protect against rising delinquent loans, and a proposed banking union for the euro zone is expected to lead to even greater scrutiny of balance sheets. Authorities want to ensure that banks meet stringent capital requirements outlined in new rules known as Basel III.

Under the rules, which are to come into force by 2019, firms must achieve a 7 percent core Tier 1 ratio, a measure of an institution’s financial health. Banks considered to be systemically important must hold an additional 1 to 2.5 percent in reserve.

As a result, banks have been pulling out all the stops to meet the capital demands. Last month, Deutsche Bank raised almost 3 billion euros through a rights issue specifically intended to improve its capital buffers.

The British bank Barclays has issued a number of contingent capital instruments – known as CoCos – that will wipe out investors if the firm’s core Tier 1 ratio falls below a certain level. A number of other banks, including Credit Suisse and BBVA of Spain, also have raised capital by this method.

The Swiss bank UBS, which announced a major restructuring last year, has a 10.1 percent core Tier 1 ratio. That is currently the highest figure among Europe’s largest banks, according to the data provider SNL Financial. Other big banks, including Deutsche Bank and HSBC, have ratios above 9.5 percent.

For Commerzbank, whose current core Tier 1 capital ratio of 7.5 percent is expected rise to 8.4 percent after its capital-raising effort is completed, the new funds will help to repay an 18 billion euro government bailout the firm received in 2009.

“The transaction marks the beginning of the federal government’s exit from Commerzbank,” the bank said in a statement. “The capital structure of the bank is improving considerably.”

The offering – the bank’s fifth since 2010 – allows investors to buy 20 shares at 4.50 euros apiece for every 21 shares they already hold. The price represents a discount of about 55 percent on Commerzbank’s closing share price on Monday. The bank’s shares fell 3.8 percent in afternoon trading in Frankfurt on Tuesday.

As part of the deal, Commerzbank is reportedly in talks to sell 5.7 billion euros of British property loans to the American bank Wells Fargo and the investment firm Lone Star.

More capital-raising moves are expected. British banks, for example, must raise a combined £25 billion ($38 billion) by the end of the year, according to local regulators. That includes potentially raising up to £1.8 billion, according to banking analysts at Barclays, for the small British lender Co-Operative Banking Group, which was downgraded to junk status last week by the credit rating agency Moody’s Investors Service over concerns about an increase in delinquent loans.

Commerzbank, Deutsche Bank, Citigroup and HSBC are the book-runners for Commerzbank’s capital-raising effort, which the bank said would close on May 28.

Capital Ideas: The Idled Young Americans

THE idle young European, stranded without work by the Continent’s dysfunction, is one of the global economy’s stock characters. Yet it might be time to add another, even more common protagonist: the idle young American.

For all of Europe’s troubles — a left-right combination of sclerotic labor markets and austerity — the United States has quietly surpassed much of Europe in the percentage of young adults without jobs. It’s not just Europe, either. Over the last 12 years, the United States has gone from having the highest share of employed 25- to 34-year-olds among large, wealthy economies to having among the lowest.

The grim shift — “a historic turnaround,” says Robert A. Moffitt, a Johns Hopkins University economist — stems from two underappreciated aspects of our long economic slump. First, it has exacted the harshest toll on the young — even harsher than on people in their 50s and 60s, who have also suffered. And while the American economy has come back more robustly than some of its global rivals in terms of overall production, the recovery has been strangely light on new jobs, even after Friday’s better-than-expected unemployment report. American companies are doing more with less.

“This still is a very big puzzle,” said Lawrence F. Katz, a Harvard professor who was chief economist at the Labor Department during the Clinton administration. He called the severe downturn in jobs “the million-dollar question” for the economy.

Employers are particularly reluctant to add new workers — and have been for much of the last 12 years. Layoffs have been subdued, with the exception of the worst months of the financial crisis, but so has the creation of jobs, and no one depends on new jobs as much as younger workers do. For them, the Great Recession grinds on.

For many people with jobs and nest eggs, the economy is finally moving in the right direction, albeit a long way from booming. Average wages are no longer trailing inflation. Stocks have soared since their 2009 nadir, and home prices are increasing again. But little of that helps younger adults trying to get a foothold in the economy. Many of them are on the outside of the recovery looking in.

The net worth of households headed by people 44 and younger has dropped more over the past decade than the net worth of middle-aged and elderly households, according to the Federal Reserve. According to the Labor Department, workers 25 to 34 years old are the only age group with lower average wages in early 2013 than in 2000.

The problems start with a lack of jobs. In 2011, the most recent year for which international comparisons exist, 26.2 percent of Americans between ages 25 and 34 were not working. That includes those for whom unemployment is a choice (those in graduate school, for example, or taking care of children) and those for whom it is not (the officially unemployed or those who are out of work and no longer looking). The share was 20.2 percent in Canada, 20.5 percent in Germany, 21 percent in Japan, 21.6 percent in Britain and 22 percent in France.

The European economy has deteriorated over the last two years, and the American economy has strengthened modestly. But the job growth here has been fast enough merely to keep pace with population growth, which suggests that this country still lags in the employment of young adults. In 2000, by contrast, the United States led Germany, Britain, France, Canada and Japan — as well as Australia, Russia and Sweden — in such employment rates. The nation now trails them all. Older American workers have also lost relative ground, but not as much.

As Mr. Katz, Mr. Moffitt and others note, an explanation of the root causes remains elusive. But there are obvious suspects, and each probably plays a role.

The United States, for example, has lost its once-large lead in producing college graduates, and education remains the most successful jobs strategy in a globalized, technology-heavy economy. It is no accident that the most educated places in the country, like Boston, Minneapolis, Washington and Austin, Tex., have high employment rates while the least educated, including many in the South and inland California, have low ones. The official unemployment rate for 25- to 34-year-old college graduates remains just 3.3 percent.

Beyond education, the nation has also been less aggressive than some others in using counseling and retraining to help the jobless find work. To take one small example, a recent study in France by the renowned M.I.T. economist Esther Duflo and four colleagues found that placement programs for unemployed workers helped not only the workers but the economy too. The counseled workers were more likely to find work, and they did not simply take jobs from other candidates. Overall employment rose more quickly in the regions with job counseling.

Other research notes that the United States has expanded parental leave and part-time work less than other countries — and, perhaps relatedly, employment rates among women here have slipped.

Whatever role these trends are playing, they do not appear to fully explain the employment decline. It is too big and too widespread. Existing companies are not adding jobs at the same rate they once did, and new companies are not forming as quickly.

What might help? Easing the parts of the regulatory thicket without societal benefits. Providing public financing for the sorts of early-stage scientific research and physical infrastructure that the private sector often finds unprofitable. Long term, nothing is likely to matter more than improving educational attainment, from preschool through college (which may have started already).

Many business executives and economists also point to immigration policy. Done right, an overhaul could make a difference, many say, by allowing more highly skilled immigrants to enter the country and by making life easier for those immigrants already here. Historically, immigrants have started more than their share of new companies.

Perhaps the most remarkable aspect of the jobs slump is that the Americans in their 20s and 30s who have been most affected by it remain decidedly upbeat. They are much more hopeful than older generations, polls show, that the country’s future will be better than its past.

Based on what younger adults have been through, that resilience is impressive. It’s probably necessary, too. The jobs slump will not end without a large dose of optimism.

David Leonhardt is the Washington bureau chief of The New York Times.

DealBook: In Venture Capital Deals, Not Every Founder Will Be a Zuckerberg

Harry Campbell

It’s the dream of entrepreneurs to sell their company for millions of dollars. But the dirty secret of venture capital is that the dream can be dashed as the venture capitalists make millions in a sale, leaving the founders with nothing.

A recent Delaware court case arising from the 2011 sale of Bloodhound Technologies illustrates how this happens.

Bloodhound was founded in the mid-1990s by Joseph A. Carsanaro to create fraud-monitoring software for health care claims. After several years of going it alone with a handful of colleagues, Mr. Carsanaro was able to raise Bloodhound’s first venture capital round for $1.9 million in 1999, followed by a second $3.1 million round in 2000.

When the Internet bubble burst, the company underwent rocky times. It was then that the venture capitalists seized control. Mr. Carsanaro was pushed out as chief executive. By 2000, he was gone from the company, as were four other members of his founding team.

For the next decade, Bloodhound recovered and slowly grew, raising seven more rounds of financing. In April 2011, the company was sold for $82.5 million. It was a time for Mr. Carsanaro and his founding team to celebrate their millionaire status.

But venture capital investments are structured to ensure that the venture capitalists are paid before founders and employees. When venture capitalists invest, they typically demand preferred shares that accrue a yearly dividend of about 8 percent. The dividend goes unpaid until the company is sold. In a sale, the original amount and the interest all come due. It must be paid out before the common shares, which are typically held by the founders and other employees.

The requirement that the venture capitalist be paid first, and with interest, can sometimes hit founders and employees in a brutal manner, as Mr. Carsanaro and his colleagues discovered.

The venture capitalists took almost all of the sale price. Bloodhound also paid a $15 million bonus to its current management team. The five founders of Bloodhound were paid in total less than $36,000. One received all of $99.

There is not much information on payouts to founders and employees when a company backed by venture capital is sold. But from the few studies on the subject, it appears that the situation involving Bloodhound is all too common.

The most recent study, by Profs. Brian J. Broughman and Jesse M. Fried, found that among a sample of venture capital deals, the common investors in roughly half the cases were entitled to nothing when the company was sold, even when the sale was for tens of millions. And in all but one instance, the majority of the sale proceeds went to the venture capitalists and other holders of preferred shares.

An unpublished study by Shikhar Ghosh at the Harvard Business School found that three out of four companies backed by venture capital did not return the investment. Again, it is in these cases where the founders and employees typically are entitled to receive no payment.

For those entrepreneurs who think they will be the next Mark Zuckerberg and ride their company to riches, think again. A number of studies have found that most chief executives of companies that take venture capital investments end up being replaced.

These are the successful businesses. The rule of thumb among venture capitalists is that some 20 percent to 30 percent of companies fail, returning nothing to any investor, including the venture capitalists.

The Bloodhound case is a reminder that the founders of start-ups backed by venture capital often end up nothing like Mr. Zuckerberg. Instead, they find themselves thrown out and without significant profits even if their company is sold.

Venture capitalists will argue that this is the price to pay to get their money and services. Cash is king, and in order to survive, venture capitalists will demand a high price and return.

Yet entrepreneurs can protect themselves. Professors Broughman and Fried found in their study that founders who negotiated greater control rights ended up receiving on average $3.7 million more. They did this even when the common shareholders were not entitled to a dime. By negotiating board seats or other representation, the founders were able to ensure that a sale happened only with their approval and a demand for some payment in return.

In other words, the rights negotiated by entrepreneurs when taking venture capital money really matter. Many entrepreneurs are so excited to get money that they don’t push for such rights or just don’t know to ask. Yet those who negotiate to keep a say in their company have a future, while those who don’t are more likely to be tossed aside. And it can be that this happens even in lucrative situations. Remember that Mr. Zuckerberg would have been forced by his venture capital investors to sell Facebook had he not kept control.

In the case of Bloodhound, its founders were pushed out of the company about eight years before the sale. During that time, they lacked control or ability to stop the venture capitalists from financing the company on the venture capitalists’ terms. The only substantial communication the founders had after they left was when they found out that the company had been sold for a huge price and that they would receive almost nothing.

The five founders sued in Delaware court, claiming that Bloodhound’s board and the venture capitalists had structured later rounds to favor themselves and dilute the payout of the founders. In a motion, the defendants countered that they acted fairly and that the plaintiffs’ claims were untimely because they were brought years later.

J. Travis Laster, vice chancellor of the Delaware Chancery Court, found that the claims that the venture capitalist had favored themselves to the detriment of the founders could be a viable claim claim if the facts they stated were true.

If Bloodhound’s founders are successful in their lawsuit, the case could change practices. It might require boards that take venture capital money to consider the founders and their interests before taking the next round. This could force boards to lean against diluting the payout of the founders and employees to avoid litigation.

Yet even if Bloodhound’s founders prevail, other entrepreneurs will sometimes find that their company is sold with nothing going to them. The sad reality is that there are times when the price demanded by the venture capitalists for the company to survive means that the founders will lose. Let’s face it, sometimes the company survives only because of that money and the skill and effort that the venture capitalists put in. This may have been the case in Bloodhound.

But the Bloodhound case publicizes this practice and will perhaps push boards to think harder before the founders are discarded. This may foster caution among venture capitalists, but the only thing that will truly save entrepreneurs is negotiating harder in the beginning. They may otherwise find themselves like the Bloodhound founders, left with nothing.

GE Capital Cuts Off Lending for Gun Shop Purchases

GE Capital, General Electric’s lending arm, recently stopped offering consumer financing programs to retailers whose main business is selling guns, in response to the “industry changes, new legislation and tragic events.”

The move, said a GE Capital spokesman, expanded on a policy established in 2008. That year, GE Capital stopped offering new consumer financing for purchases of guns from gun shops, but existing relationships with gun shops were grandfathered in and those programs continued.

Fewer than 75 retailers are affected by the recent policy change, a fraction of 1 percent of gun retailers in the United States, said the spokesman, Russell Wilkerson. The terminated financing programs, as a business, were “immaterial” to the company, he said.

The lending cutoff applies only to retailers whose primary business is selling guns, Mr. Wilkerson said. GE Capital is still offering financing to other retailers who sell many different kinds of merchandise, including guns. Those retailers range from Walmart to sporting goods chains.

The change in GE Capital’s lending policy to the gun stores was first reported on Wednesday by The Wall Street Journal.

The move by GE Capital comes in the aftermath of the school shooting in Newtown, Conn. General Electric, the giant industrial and finance company, is headquartered in Fairfield, Conn., and some employees have children in the Sandy Hook elementary school, where the tragedy occurred. Adam Lanza, the Sandy Hook gunman, was the son of Peter Lanza, an executive at General Electric.

DealBook: Capital One Settles Accusations It Understated Loan Losses

Brendan McDermid/ReutersA Capital One banking center in New York. Federal regulators said the company understates its losses on auto loans in filings.

Federal regulators on Wednesday accused Capital One and two of its executives of understating millions of dollars in auto loan losses suffered during the financial crisis.

The case, which the Securities and Exchange Commission agreed to settle with Capital One and the executives, illustrated a common financial misdeed during the crisis. As losses mounted in 2007 and 2008, some Wall Street firms covered up the woes from the public, prompting a wave of federal actions against Countrywide Financial and other lending giants.

In the case of Capital One’s auto-lending business, according to the S.E.C., the bank “materially understated” its loan loss expenses and “failed to maintain effective internal controls.” The S.E.C. contended that Peter A. Schnall, who was Capital One’s chief risk officer at the time, and David A. LaGassa, a lower-level executive, failed to prevent the improper statements.

“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” George Canellos, the co-chief of the S.E.C.’s enforcement unit, said in a statement. “Capital One failed in this responsibility.”

But the S.E.C. could face questions over whether its penalties fit the crime. Capital One, one of the nation’s biggest banks, paid $3.5 million to settle the case, a minuscule amount for a company of its size. And like most banks accused of wrongdoing during the 2008 crisis, Capital One was not required to admit or deny wrongdoing.

“The settlement does not require a restatement of Capital One’s financial results,” said a bank spokeswoman, Tatiana Stead. She added that the deal “will not affect any current or future business activities by Capital One.”

The two executives also emerged relatively unscathed. Mr. Schnall agreed to pay an $85,000 penalty, and Mr. LaGassa settled for $50,000. Neither is barred from the securities industry. They are still employed by Capital One, though in different roles.

“The company continues to have confidence in Mr. Schnall and Mr. LaGassa and we believe that they can perform in their current roles with the company,” Ms. Stead said.

Lawyers for both men did not respond to requests for comment.

The S.E.C.’s case stems from early 2007, when the subprime lending market was beginning to collapse. At Capital One’s subprime auto-lending arm, the losses outpaced the bank’s initial forecast.

The bank scrambled to react. Mr. LaGassa organized a “swat team” to diagnose the losses and provided almost daily e-mail updates to Capital One’s senior executives. In an e-mail cited by the S.E.C., Mr. LaGassa warned he was “not optimistic that we are going to suddenly see a slowing in losses.”

Ultimately, an internal “loss forecasting tool” traced the mounting problems to “exogenous” factors — external problems like the souring economy.

But the bank, according to the S.E.C., looked the other way. For example, according to the S.E.C., Capital One failed to include any “exogenous-driven losses” in its assessment of the second quarter in 2007.

Capital One, the S.E.C. said in the order, “gave insufficient weight to the evidence available at the time.”

The bank’s actions, the S.E.C. said, caused the company to “materially” understate its loan loss expense in public filings. In the second quarter alone, Capital One understated the expense by up to $72 million, or about 18 percent.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” Gerald W. Hodgkins, a senior S.E.C. enforcement official, said. “The S.E.C. will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

Ultimately, an internal “loss forecasting tool” traced the mounting problems to “exogenous” factors — external problems like the souring economy.

But the bank, according to the S.E.C., looked the other way. For example, according to the S.E.C., Capital One failed to include any “exogenous-driven losses” in its assessment of the second quarter in 2007.

Capital One, the S.E.C. said in the order, “gave insufficient weight to the evidence available at the time.”
Capital One’s actions, the S.E.C. said, caused the company to “materially” understate its loan loss expense in public filings. In the second quarter alone, Capital One low-balled the expense by up to $72 million, or about 18 percent.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” Gerald W. Hodgkins, a senior S.E.C. enforcement official said. “The S.E.C. will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

DealBook: Despite Cyprus Woes, European Capital Markets Show Strength

LONDON – Despite the banking crisis in Cyprus, Europe’s capital markets are still open for business.

On Friday, the British insurance firm Esure raised £604 million, or $917 million, in one of the largest initial public offerings so far this year in Europe. The European banks, Santander and KBC, also pocketed a combined $1.5 billion through a 21 percent share sale in Bank Zachodni, a Polish subsidiary.

The successful offerings come despite growing uncertainty about how the stalemate in Cyprus will affect Europe’s sluggish recovery from its debt crisis.

The Continent’s policy makers are still trying to hammer out a deal that will force the small European country to contribute 5.8 billion euros, or $7.6 billion, toward a 10 billion euro bailout package for Cypriot banks.

Some analysts have warned that the resurgent euro zone crisis could knock investors’ appetite for new listings. Before Cyprus flared up, money raised from new European I.P.O.’s in the first quarter of the year was expected to jump by almost 70 percent compared with the same period in 2012, according to statistics from the accounting firm Ernst & Young.

“Conditions have improved significantly for the region,” said Maria Pinelli, the global strategic growth markets leader at Ernst & Young’s. “However, the euro zone’s political and economic difficulties are casting a shadow across the capital markets.”

The British insurer Esure shrugged off the dark clouds on Friday after the firm secured its listing close to the top of its expected price range. Trading in Esure, which provides home and car insurance across Britain, started on Friday, and gave the British company a market capitalization of around £1.2 billion.

It is the latest firm to tap London’s capital markets. On Wednesday, the British property company Countrywide raised £200 million from its I.P.O., while the insurance firm Direct Line, which is part owned by the nationalized Royal Bank of Scotland, raised £787 million from the capital markets in October.

In Poland, Santander of Spain and KBC of Belgium also raised a combined $1.5 billion from selling shares in their Polish unit Bank Zachodni, though the firms were forced to price the sale below Bank Zachodni’s closing price on Thursday.

Despite uncertainty caused by Europe’s financial difficulties, some global markets remain strong, as investors bet on growing demand from consumers in emerging economies. Singapore and Japan accounted for almost two-thirds of the money raised from new offerings in the first quarter of the year.

A consortium led by the European private equity firm CVC Capital Partners took advantage of this sentiment on Friday by raising $1.3 billion from a share sale in Indonesia’s largest department store operator, according to a person with direct knowledge of the matter, who spoke on the condition of anonymity because he was not authorized to speak publicly.

CVC and its partners — a unit of the Indonesian conglomerate Lippo Group and the Government of Singapore Investment Corporation – will retain majority control of the Indonesian retailer Matahari, and secured backing from several global investors, including BlackRock and the asset management units of Goldman Sachs.

Neil Gough contributed reporting from Hong Kong.

DealBook: Why Carried Interest Is a Capital Gain

Kevinallenphotography.comSteve Judge, chief of the Private Equity Growth Capital Council.

Steve Judge is the president and chief executive of the Private Equity Growth Capital Council.

The current debates on tax reform and government spending levels have often focused on raising taxes on carried interest. While many, including a recent opinion piece in The New York Times by Lynn Forester de Rothschild, have homed in on carried interest to raise revenue, little discussion has focused on how carried interest actually functions and why it was treated as a long-term capital gain in the first place.

Furthermore, changing the tax treatment of carried interest would not generate the significant revenue needed to close our huge budget shortfall. Some of the latest proposals on carried interest would deprive private equity, venture capital and real estate partnerships of the same long-term capital gains treatment available to other kinds of businesses – and would only pay for merely 3.1 hours a year in federal government operations.

In order to understand why carried interest is a capital gain, we should first examine what private equity does. Private equity is an industry of investors with management expertise and vision who form partnerships with pension funds, university endowments and charitable foundations to buy companies. It is the epitome of patient capital, investing in promising companies poised for growth and those in need of a turnaround.

The average private equity investment spans three to seven years. Companies owned by private equity are located throughout the country, touching nearly every community. More than eight million people work at private equity-owned businesses based in the United States.

Private equity funds are a partnership between the firm, or general partner, and the investors, also known as limited partners. Partnerships are the oldest form of business.

In the case of private equity, the managers contribute their understanding of the companies to buy, operational expertise and, often, capital to the partnership. The limited partners – pensions, endowments and foundations – contribute just capital to the endeavor.

The partnership structure results in an alignment of interest between the private equity general partner and their investors to expand companies over the long term. Private equity firms are true owners in the companies they buy. Because they develop strategic business plans, sit on boards and work to strengthen the companies they own over many years, the income they receive is a capital gain.

The private equity firm is compensated with this alignment of interest in mind. Typically private equity investors are paid a 2 percent management fee, on which they pay ordinary income tax rates, and a 20 percent carried interest of the partnership’s profits that is only paid after limited partners receive a preferred return of 8 percent.

Carried interest, therefore, is the profits share on the sale of a capital asset and not “ordinary income” as some would have it treated. In other words, it is a capital gain within a partnership and is rightfully taxed at the long-term capital gains rate — provided that the asset, or company, is held for more than one year.

The aristocratic argument presented by Ms. de Rothschild and others that capital gains treatment should only be available to those with money to invest would advance a policy that puts a higher value on financial contributions than vision, hard work and other forms of “sweat equity.”

The underlying principle is no different than two friends who partner together to purchase a restaurant. One might bring capital and the other brings expertise. The restaurant could be in disrepair or a great concept that needs additional capital to expand. The chef identifies the restaurant to buy and possesses the skills to manage the restaurant and add value to the enterprise over time. The friend has the capital to invest, but doesn’t possess the operational or investment skills to generate a return.

When they sell the restaurant years later, both partners receive capital gains treatment on their long-term investment. A private equity partnership works in the same way. This is Partnership Law 101.

The capital gains rate exists to provide incentive for investment partnerships to take risks, invest hundreds of billions of dollars of capital into new and existing businesses and contribute operational expertise to improve these businesses over time.

The Joint Committee on Taxation, a nonpartisan committee of Congress, has pegged the additional revenue from carried interest at just $16.85 billion over 10 years. The joint committee estimate even includes the controversial enterprise value provision, which experts believe constitutes two-thirds of the total revenue assumption.

Permanent tax increases on private equity, venture capital and real estate in exchange for a short-term spending patch does not come close to solving our country’s fiscal situation. Policy makers should reject calls to eliminate this incentive for long-term economic growth in exchange for 3.1 hours of federal government operations.

DealBook: JPMorgan's Staley to Join BlueMountain Capital

Yuri Gripas/ReutersJames E. Staley had been JPMorgan’s head of investment banking until this summer.

James E. Staley, a longtime JPMorgan Chase executive who served as the firm’s head of investment banking until this summer, is leaving the bank to join BlueMountain Capital Management as a managing partner, the hedge fund said on Tuesday.

The firm he is joining, a nine-year-old hedge fund with $12 billion in assets, profited from betting against JPMorgan by taking the other side of a bet on corporate debt that eventually cost the bank billions of dollars in May. The hedge fund then helped the Wall Street firm clear out its positions through another series of trades.

Mr. Staley’s departure from JPMorgan ends a 34-year career at the bank, which stretched back to the original J.P. Morgan & Company. He worked in a wide variety of roles, from the Brazilian office to the head of the equity capital markets and syndicate divisions to the head of wealth management.

Mr. Staley, an avid sailor known to most as Jes, became the chief executive of investment banking in fall 2009, presiding over the division’s expansion in the wake of the financial crisis.

But several months after the disclosure of the trading loss, JPMorgan shook up its management team. It gave Mr. Staley the new title of head of corporate and investment banking. To some inside the bank, the move effectively sidelined him in a position that was more symbolic than substantive.

At BlueMountain, Mr. Staley will be the firm’s ninth managing partner and will join the management, risk and investment committees. He will also buy an undisclosed stake in the firm.

“I’m very excited to be joining BlueMountain at a time when sea changes in the financial industry, combined with the firm’s unique strengths, open up enormous possibilities to deliver value to clients,” Mr. Staley said in a statement. “I want to thank all my colleagues at JPMorgan, my home for the last 34 years, and I look forward to working with them in the future.”

JPMorgan Chase’s chief, Jamie Dimon, sent a memo to employees on Tuesday morning:

To: All Senior Managers
From: Jamie Dimon
Subject: Jes Staley

This morning it was announced that our colleague, Jes Staley, will be leaving JPMorgan Chase to join BlueMountain Capital Management as a Managing Partner and Member of its Management Committee. Attached is BlueMountain’s press release.

Jes has been an extraordinary leader and a valued partner for many of us at JPMorgan over the years. He joined our company more than 34 years ago, and during this time he served in many critical management roles, including head of our Investment Bank, Asset Management group, Private Bank, and as one of the founders of our equities business. He has served our firm with distinction as a member of our firmwide Operating Committee, and he has been a trusted mentor to many people at our company.

While Jes is leaving JPMorgan Chase, he is joining a respected private investment firm, BlueMountain Capital. BlueMountain is an important client of ours, and we look forward to working with Jes in the future. Please join me in thanking Jes for his decades of dedicated service to JPMorgan, and in wishing him and his family all the best in the future.

Jamie

Case Study: A Start-Up’s Dilemma: A Lack of Capital, or Lack of Control

THE CHALLENGE Running low on inventory early in 2011 and lacking the money for another production run to fulfill orders to her Web site and restock her Manhattan retail accounts, Ms. Rosshandler feared she would have to shut down her start-up. She had been rejected by bank after bank (some citing her lack of American citizenship). She had decided against asking friends for money — or her parents, who had already helped at the outset — and she had come up dry with venture capitalists. As her prospects dimmed, she started interviewing for jobs.

THE BACKGROUND Ms. Rosshandler was working at a Manhattan events and interior design company when, on New Year’s Day in 2007, she decided that like her father, a successful plastics industry entrepreneur in Australia, she would prefer to work for herself. Her idea: to improve upon a South African product called Odor-Go that she had seen in her native country but nowhere in the United States. Her product would have gel caps to be swallowed, similar to Odor-Go, but it would package them with follow-up mints to be sucked. Plus, her breath-freshening duo would be gluten-free and vegan. “I wanted to be able to take my own product,” she said, explaining that most gel caps are made using meat byproducts. She filed to trademark the name Eatwhatever.

It was her understanding that the way to vanquish bad breath caused by oniony, garlicky foods was to go to the source of the problem, the stomach. Having studied acting and law, not chemistry, Ms. Rosshandler left the product formulation to a contract manufacturer. “Parsley has been used for generations to freshen breath,” she said. “People know, just from everyday life, that freshening the mouth only — especially after consuming pungent foods — doesn’t get rid of the smell that comes from within the stomach. We found that the combination of concentrated organic peppermint and parsley oils, when dissolved in the stomach, provides this fresh feeling from within. Your breath actually smells good, from deep inside, not just superficially from the mouth.”

She hired a package designer and prominently displayed the tagline: 2 Steps to Kissable Breath. Also on the packaging was a cheeky instructional mash-up of the two operative steps (swallow and suck). She was, after all, seeking a young demographic. “I had no idea what I was doing,” said Ms. Rosshandler, laughing.

She began her sales efforts in 2008 by walking into the C.O. Bigelow flagship apothecary store in Manhattan and asking, “Who does the buying here?” She left with a sale. A month or so after Eatwhatever’s debut, a friend in public relations helped her get a mention on DailyCandy’s main page. That brought $20,000 worth of orders to her Web site in 12 hours and generated plenty of buzz. With the help of a distributor, Eatwhatever soon cracked New York retail outlets like Ricky’s, Joe Coffee and Zitomer, a specialty department store; Ms. Rosshandler even opened retail beachheads in Paris and Sydney.

But lacking contracts with mass merchants, sales volume remained low. The company’s annual revenue failed to top $40,000 in 2008, 2009 and 2010. Squeezed for cash, Ms. Rosshandler could not pay for marketing or, eventually, even for her next production run. That is when she interviewed for a job selling high-fashion hair accessories.

THE OPTIONS And then in rode her white knight. Or was he? She had networked her way to Arthur T. Shorin, an investor and former chief executive of the Topps Company, a confectionary company known for its baseball trading cards, who promised candy industry expertise and contacts and an immediate infusion of $250,000, with more to come if justified. But Mr. Shorin’s nonnegotiable terms were stark. In return, he wanted 75 percent of the enterprise. Ms. Rosshandler would retain 25 percent with the opportunity to earn back another 15 percent should certain benchmarks be met. The offer included a salaried job in Mr. Shorin’s New York company, Artuitive, an incubator for start-ups.

Friends advised Ms. Rosshandler against the deal, citing the tough terms, even if she were to rebuild her stake to 40 percent. But Mr. Shorin had impressed her in their exploratory meetings, and she asked herself this question: Isn’t 25 percent of something better than 100 percent of nothing?

WHAT OTHERS SAY Steve Schuster, founder of Schuster Products in Milwaukee, maker of Blitz mints: “Ms. Rosshandler finds herself in a precarious cash-flow position and — typical of many start-up entrepreneurs — may not completely grasp how much money she actually will need to grow her brand to a reasonable level of distribution. Arthur Shorin presents a very shrewd and unique proposition. Basically, he is her lifeline. Shorin, who made a staggering amount of money selling Topps to Michael Eisner’s private equity company, has great knowledge of the candy industry. It is imperative for Ms. Rosshandler to move forward with this proposition.” 

Josh Kopelman, a partner at First Round Capital, Philadelphia: “I believe that entrepreneurs, not investors, create great companies. In my experience, if a founder doesn’t retain meaningful equity at the seed stage, it greatly reduces their motivation and creates a real misalignment between investor and entrepreneur. I’d encourage Ms. Rosshandler to keep looking for alternatives, including the possibility of raising money from her friends. If she believes the company is going to create value and be successful, then she is actually doing her friends a favor by letting them invest — assuming she is candid about the extreme level of risk and that they don’t invest money they aren’t prepared to lose. I’d encourage her to consider tweaking the branding to make it more PG-13 than R-rated, as it might reduce some investor’s unease. I know it’s hard to turn down money — especially when a company really needs it.”

Adeo Ressi, founding member of TheFunded and head of The Founder Institute, an early stage business accelerator based in Silicon Valley: “Ms. Rosshandler should definitely not take this deal. First, she loses complete control of the company, and she can be removed or wiped out of her equity at any moment without notice. Second, the deal is very unusual, so she will never be able to attract other investors again. Third, the round values the operating business under $75,000, around two times revenue. As the terms indicate, she will be an employee of Artuitive, so this deal resembles a generous employment offer rather than a viable investment. This is an angel investment opportunity, and there are the largest number of angel investors in history. The volume of investors is both good and bad. On the positive side, if Ms. Rosshandler dedicates four months and meets with a lot of angels, she will raise $500,000 with a seven-figure valuation. On the negative side, she will need to meet with over 150 angels and waste a lot of time pitching to people that will try to take advantage of her, like Arthur Shorin.”

THE RESULTS Offer your thoughts on the You’re the Boss blog at nytimes.com/boss. Next week, on the blog and on this page, we will give an update on what Jacqui Rosshandler decided to do.

DealBook: 2 Senators Call for Greater Bank Capital Requirements

The debate over Wall Street regulation has tended to divide politicians along party lines. But on one issue at least, two senators, a Democrat and a Republican, see eye to eye.

In a new letter to be sent to regulators on Wednesday, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, argue for tougher rules on bank capital reserves, the cushion that financial institutions must keep against losses. The current proposal does not go far enough, they say.

“With financial regulators considering a host of new domestic and international capital requirements, we write today to urge your agencies to simplify and enhance the capital rules that will apply to U.S. banks,” reads the letter from the two lawmakers.

Stricter requirements would “properly align incentives for megabanks by lessening government support for the financial sector, and reassure financial markets that the U.S. financial system is healthy,” the lawmakers write.

The two men, who sit on the Senate Banking Committee, addressed the letter to three prominent regulators: Ben S. Bernanke, the Federal Reserve chairman; Martin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corporation; and Thomas J. Curry, head of the Office of the Comptroller of the Currency.

Regulators have been grappling with the issue of bank capital since the financial crisis led the government to rescue the largest banks in a taxpayer bailout. The financial industry has pushed back against calls to increase capital buffers, arguing that more equity financing would be burdensome for their business.

Mr. Brown and Mr. Vitter took up the issue in August in a letter to Mr. Bernanke, responding to the Fed’s decision to support capital rules drafted by an international group of officials known as the Basel Committee on Banking Supervision.

Those rules, called Basel III, would require banks to hold the equivalent of at least 7 percent of their assets in so-called Tier 1 common capital. Banks considered “systemically important” — those whose failure could threaten the financial system – would be required to hold capital above that amount.

Mr. Brown and Mr. Vitter write in their letter on Wednesday that these standards may not be tough enough.

They also take issue with the so-called risk weights in the Basel rules, which allow banks to hold less capital against assets deemed less risky, calling that system flawed.

“Accounting gimmicks may help institutions appear to have higher regulatory capital levels and avoid raising more equity, but when risk weights are gamed, the markets lose faith in banks’ balance sheets,” they write.

“In this case,” they say, “simpler really is better.”

The complexity of the current proposal also puts an unnecessary burden on community banks, the lawmakers say.

Mr. Brown and Mr. Vitter often find themselves on opposite sides. But Mr. Brown said in an interview that the idea of an alliance occurred to him during a hearing in July, when he admired the questions Mr. Vitter was putting to Mr. Bernanke.

The pair began discussions that led to the letter in August.

“I’m sure we were both shocked at some point to notice common threads in our thinking,” Mr. Vitter said, with a laugh. “We explored those over time.”

He said he and Mr. Brown were like an “odd couple” in the Senate on this issue.

Mr. Brown added, “I think both conservatives and progressives believe the government shouldn’t be subsidizing Wall Street banks.”

A draft of the full letter is below.

Letter from Senators Brown and Vitter

Capital Ideas: Obamanomics: A Counterhistory

WORKING out of cramped, bare offices in a downtown building here in Washington, President-elect Obama’s economic team spent the final weeks of 2008 trying to assess how bad the economy was. It was during those weeks, according to several members of the team, when they first discussed academic research by the economists Carmen M. Reinhart and Kenneth S. Rogoff that would soon become well known.

Ms. Reinhart and Mr. Rogoff were about to publish a book based on earlier academic papers, arguing that financial crises led to slumps that were longer and deeper than other recessions. Almost inevitably, the economists wrote, policy makers battling a crisis made the mistake of thinking that their crisis would not be as bad as previous ones. The wry title of the book is “This Time Is Different.”

In my interviews with Obama advisers during that time, they emphasized that they knew the history and were determined to avoid repeating it. Yet of course they did repeat it. After successfully preventing another depression, in 2009, they have spent much of the last three years underestimating the economy’s weakness. That weakness, in turn, has become Mr. Obama’s biggest vulnerability, helping cost Democrats control of the House in 2010 and endangering his accomplishments elsewhere.

Entire books and countless articles have taken Mr. Obama to task on the economy, and administration officials have a rebuttal that makes a couple of important points. The Federal Reserve and many private-sector economists were also too optimistic, Obama aides note. And they argue that the Senate would not have passed a much larger stimulus in 2009, given Republican opposition, regardless of the White House’s wishes.

But from these reasonable points, the Obama team then jumps to a larger and more dubious conclusion: that their failure to grasp the severity of the slump has had no real consequences. Even if they had seen the slow recovery coming, they say, they couldn’t have done much about it. When Mr. Obama has been asked about his biggest mistake, he talks about messaging, not policy.

“The mistake of my first term — couple of years — was thinking that this job was just about getting the policy right,” he has said. “The nature of this office is also to tell a story to the American people that gives them a sense of unity and purpose and optimism, especially during tough times.”

We can never know for sure what the past four years would have been like if the administration and the Fed had been more worried about the economy. But my reading of the evidence — and some former Obama aides agree — points strongly to the idea that the misjudging of the downturn did affect policy and ultimately the economy.

Mr. Obama’s biggest mistake as president has not been the story he told the country about the economy. It’s the story he and his advisers told themselves.

The notion of insurance is useful here. Suggesting that Mr. Obama and his aides should have bucked the consensus forecast and decided that a long slump was the most likely outcome smacks of 20/20 hindsight. Yet that wasn’t their only option. They also could have decided that there was a substantial risk of a weak recovery and looked for ways to take out insurance.

By late 2008, the full depth of the crisis was not clear, but enough of it was. A few prominent liberal economists were publicly predicting a long slump, as was Mr. Rogoff, a Republican. The Obama team openly compared its transition to Franklin D. Roosevelt’s and, in private, discussed the Reinhart-Rogoff work.

So why didn’t that work do more to affect the team’s decisions?

There are two main answers. First, the situation was unlike anything any living policy maker had previously experienced, and it was deteriorating quickly. Although officials talked about the Depression, they struggled to treat the downturn as fundamentally different from a big, relatively brief recession.

“The numbers got ramped up,” one former White House official told me, referring to the planned size of the stimulus in late 2008. “But the basic frame did not get altered.” In particular, the administration did not imagine that the economy would still need major help well beyond 2009 and that Congress would not comply.

The second problem was that Mr. Obama and his advisers believed — correctly — that they and the Fed were already responding more aggressively than governments had in past crises. Even before the election, President George W. Bush signed the financial bailout, a decidedly un-Hooveresque policy. The Fed began flooding the economy with money. The Obama administration pushed for the stimulus and, with the Fed, conducted successful stress tests on banks.

Whatever the political debate over these measures, the economic evidence suggests they made a large difference. Analyses by the Congressional Budget Office and other nonpartisan economists have come to this conclusion. Europe, which was less aggressive, has fared worse. And the chronology of the crisis tells the same story.

In 2008 and early 2009, the global economy was deteriorating even more rapidly than in 1929, according to research by Barry Eichengreen and Kevin H. O’Rourke. Global stock prices and trade dropped more sharply. But the policy response this time was vastly different, and by the spring of 2009 — just as the measures were taking effect — the economy stabilized.

In this success came the seeds of future failures. Knowing in late 2008 how much policy help was on the way, Mr. Obama and his economic advisers decided that the disturbing pattern of financial crises was not directly relevant. “In a way, they fell into a ‘This Time Is Different’ trap,” another former White House official said.