Pay Stretching to 10 Figures

In recent years, the criticism about giant Wall Street hedge funds â€" those that command billions of investor dollars from pension funds, endowments and the wealthy â€" is that they’re simply too big to beat the market.

But a number of the hedge fund leaders who had giant paydays last year bucked the trend. They earned their riches the old-fashioned way: by posting big returns on their investments.

Certainly, plenty of hedge fund titans took home billion-dollar paydays last year despite the fact they lagged the big gains in stocks. For example, Steven A. Cohen, who controls $15 billion in assets at SAC Capital Advisors, which has been under intense scrutiny by government investigators, fell just short of the market’s returns for 2012. His take-home pay, however, was about $1.4 billion, earning him the No. 3 spot among the best-paid hedge fund managers.

The Bridgewater Associates founder Ray Dalio, the colorful manager whose “Principles” manifesto discusses the virtues of hyenas’ killing wildebeests, also could not quite beat the market. Yet he ended the year $1.7 billion richer, according to the annual ranking released on Monday by Institutional Investor’s Alpha.

But for several on the richest list, good stock bets meant good paydays.

David Tepper, who oversees $15 billion of assets at Appaloosa Management, turned a modest loss in 2011 into a 30 percent gain after fees last year thanks, in part, to big bets on Citigroup, Apple and US Airways. Gains in those stocks helped Mr. Tepper, who charges his investors a 2 percent management fee and takes 20 to 30 percent of any profits, earn a $2.2 billion payday. That was enough to place him No. 1 in the rankings by Institutional Investor’s Alpha. A spokesman for Mr. Tepper declined to comment.

Strong returns also helped Leon Cooperman of Omega Advisors, which oversees $7.3 billion in assets. He doubled his money in his fund’s holdings of Sprint Nextel and took profits from Apple when he sold the fund’s entire 266,000-share stake in the fourth quarter. Those moves drove his firm to a 28 percent gain in 2012, giving Mr. Cooperman a payday of $560 million, according to the annual ranking. In an e-mail, Mr. Cooperman declined to comment.

“The managers who did well last year were those who focused on fundamental primary equity research,” said Carter Furr, a portfolio manager at Signature, an independent family office in Norfolk, Va., with $2.8 billion in assets.

“The guys who were paying attention to the macro picture, got caught up in the headlines and fear-mongering, lost sight of the fact we were having a stealth recovery in the United States,” he said.

Pay for the top 25 earners came in at $14.14 billion last year. As high as that is, it was the lowest amount earned since the financial crisis in 2008, but comparable to the $14.4 billion the top 25 earned last year, according to Institutional Investor’s Alpha.

Swashbuckling bets and robust returns are exactly what investors are hoping for â€" and paying for in outsize fees â€" when they allocate money to hedge funds. But far too often in recent years, investors have paid hefty fees for lackluster returns.

And last year was no different.

For the fourth consecutive year, most hedge funds failed to beat the market. The average hedge fund gained 6.4 percent last year, according to a composite index that tracks 2,200 portfolios compiled by Hedge Fund Research.

By comparison, the Standard & Poor’s 500-stock index climbed 16 percent when factoring in dividends. In 2011, the average hedge fund lost more than 5 percent, versus a 2 percent gain for the S.& P. 500.

Despite those returns, investors put nearly $25 billion into hedge funds, bringing the industry’s total assets managed at $2.6 trillion, according to the eVestment research firm. That is in part because of investors looking for better performance when bonds are paying low returns and the stock market remains volatile.

“The low fixed-income yields have become a major obstacle for pensions and others to achieve the rates of return that they need,” said Kenneth Heinz, the president of Hedge Fund Research.

Even weak returns at the large firms can produce huge paydays. These firms oversee giant pools of money, typically charging a management fee and taking a big slice of any profits. Institutional Investor’s Alpha arrives at its figures by estimating money managers’ portions of fees along with the value of the personal stakes in their funds.

Even though the funds run inside Mr. Dalio’s Bridgewater returned 1 percent to 12 percent, Mr. Dalio made much of his billion-dollar payday from the management fees the firm charges on the $83 billion in hedge fund assets it oversees, according to Institutional Investor’s Alpha. A Bridgewater spokesman declined to comment.

Likewise, SAC Capital Advisors, based in Stamford, Conn., where several current or former employees have been charged or implicated in a long-running government insider-trading investigation, had a below-market return of 13 percent last year.

But Mr. Cohen still pocketed $1.4 billion because his firm, which oversees $15 billion, charges investors a 50 percent performance fee. Mr. Cohen has not been accused of any wrongdoing, but SAC agreed to pay $616 million to settle two insider-trading charges. A spokesman for SAC declined to comment.

James Simons, the former chairman of the Stony Brook University math department, earned a big paycheck for a mixed performance at the company he founded. The funds housed inside the computer-driven trading operation of his Renaissance Technologies produced returns on funds ranging from a loss of 3.1 percent to a gain of more than 27 percent.

Even though Mr. Simons, 74, hasn’t handled the day-to-day management of the firm for three years, he landed in the fourth spot on the list with a payday of $1.1 billion last year, partly on the large sum of money he has personally invested in the firm’s funds. A spokesman for Renaissance declined to comment.

Many others on this year’s list posted double-digit, market-beating returns.

Kenneth C. Griffin, the head of Citadel, based in Chicago, whose two biggest funds nearly collapsed in the market rout of 2008 when they slumped 55 percent, has had two strong years. The firm’s funds had a 2011 gain of 20 percent, followed by a robust 25.5 percent return last year.

It took Citadel nearly three years for its funds to climb to levels where they could once again charge their investors the lucrative performance fees.

For Mr. Griffin, who started trading convertible bonds in his dorm room at Harvard, his 2012 payday totaled $900 million, making him No. 5 on the list. A spokeswoman for Citadel declined to comment.

Another star manager betting big with a highly concentrated fund was Edward S. Lampert. His ESL Investments moved its headquarters from Greenwich, Conn., to Bay Harbour, Fla., last year.

The firm’s returns jumped 20 percent thanks to big gains in Sears, which accounts for about 40 percent of the fund, and Auto-
Nation, which made up about a third. Another winning play for Mr. Lampert was an investment the Gap, which soared 67 percent. A spokesman for Mr. Lampert declined to comment.

The Gap and other consumer retail stocks also paid off for Stephen Mandel Jr. Some of the funds run inside his Lone Pine Capital, which oversees about $22 billion in assets. The firm collects a 1 percent management fee and a performance fee of 13 to 20 percent, giving Mr. Mandel a payday of $580 million last year, according to the rankings. A spokesman for Mr. Mandel declined to comment.

Rounding off this year’s top 10 earners on the Institutional Investor’s Alpha list were two managers who made profitable investments off the beaten track. Bets on residential mortgage-backed securities helped give Oculus â€" a $9 billion macro fund inside the D. E. Shaw Group, a hedge fund complex built by the computer entrepreneur David Shaw â€" a return of nearly 21 percent last year, its best performance since 2007. Another Shaw fund had its strongest returns since 2009 with a 15.6 percent gain.

While Mr. Shaw ceded control of the funds’ management several years ago, he still has a large amount of money invested in the firm, which helped him to earn $530 million last year. E-mail messages to D. E. Shaw brought no response.

The highest-paid hedge fund managers all took home considerably more than the top-paid chief executives of public companies. At No. 10 on the list of hedge fund managers was Daniel S. Loeb, the activist manager of Third Point, who took on Yahoo, eventually earning board seats, and made big, winning bets on Greek sovereign debt last year. With a 20 to 21 percent gain in the funds he oversees, Mr. Loeb walked away $380 million richer last year. A Third Point spokesman declined to comment.

Pay Stretching to 10 Figures

In recent years, the criticism about giant Wall Street hedge funds â€" those that command billions of investor dollars from pension funds, endowments and the wealthy â€" is that they’re simply too big to beat the market.

But a number of the hedge fund leaders who had giant paydays last year bucked the trend. They earned their riches the old-fashioned way: by posting big returns on their investments.

Certainly, plenty of hedge fund titans took home billion-dollar paydays last year despite the fact they lagged the big gains in stocks. For example, Steven A. Cohen, who controls $15 billion in assets at SAC Capital Advisors, which has been under intense scrutiny by government investigators, fell just short of the market’s returns for 2012. His take-home pay, however, was about $1.4 billion, earning him the No. 3 spot among the best-paid hedge fund managers.

The Bridgewater Associates founder Ray Dalio, the colorful manager whose “Principles” manifesto discusses the virtues of hyenas’ killing wildebeests, also could not quite beat the market. Yet he ended the year $1.7 billion richer, according to the annual ranking released on Monday by Institutional Investor’s Alpha.

But for several on the richest list, good stock bets meant good paydays.

David Tepper, who oversees $15 billion of assets at Appaloosa Management, turned a modest loss in 2011 into a 30 percent gain after fees last year thanks, in part, to big bets on Citigroup, Apple and US Airways. Gains in those stocks helped Mr. Tepper, who charges his investors a 2 percent management fee and takes 20 to 30 percent of any profits, earn a $2.2 billion payday. That was enough to place him No. 1 in the rankings by Institutional Investor’s Alpha. A spokesman for Mr. Tepper declined to comment.

Strong returns also helped Leon Cooperman of Omega Advisors, which oversees $7.3 billion in assets. He doubled his money in his fund’s holdings of Sprint Nextel and took profits from Apple when he sold the fund’s entire 266,000-share stake in the fourth quarter. Those moves drove his firm to a 28 percent gain in 2012, giving Mr. Cooperman a payday of $560 million, according to the annual ranking. In an e-mail, Mr. Cooperman declined to comment.

“The managers who did well last year were those who focused on fundamental primary equity research,” said Carter Furr, a portfolio manager at Signature, an independent family office in Norfolk, Va., with $2.8 billion in assets.

“The guys who were paying attention to the macro picture, got caught up in the headlines and fear-mongering, lost sight of the fact we were having a stealth recovery in the United States,” he said.

Pay for the top 25 earners came in at $14.14 billion last year. As high as that is, it was the lowest amount earned since the financial crisis in 2008, but comparable to the $14.4 billion the top 25 earned last year, according to Institutional Investor’s Alpha.

Swashbuckling bets and robust returns are exactly what investors are hoping for â€" and paying for in outsize fees â€" when they allocate money to hedge funds. But far too often in recent years, investors have paid hefty fees for lackluster returns.

And last year was no different.

For the fourth consecutive year, most hedge funds failed to beat the market. The average hedge fund gained 6.4 percent last year, according to a composite index that tracks 2,200 portfolios compiled by Hedge Fund Research.

By comparison, the Standard & Poor’s 500-stock index climbed 16 percent when factoring in dividends. In 2011, the average hedge fund lost more than 5 percent, versus a 2 percent gain for the S.& P. 500.

Despite those returns, investors put nearly $25 billion into hedge funds, bringing the industry’s total assets managed at $2.6 trillion, according to the eVestment research firm. That is in part because of investors looking for better performance when bonds are paying low returns and the stock market remains volatile.

“The low fixed-income yields have become a major obstacle for pensions and others to achieve the rates of return that they need,” said Kenneth Heinz, the president of Hedge Fund Research.

Even weak returns at the large firms can produce huge paydays. These firms oversee giant pools of money, typically charging a management fee and taking a big slice of any profits. Institutional Investor’s Alpha arrives at its figures by estimating money managers’ portions of fees along with the value of the personal stakes in their funds.

Even though the funds run inside Mr. Dalio’s Bridgewater returned 1 percent to 12 percent, Mr. Dalio made much of his billion-dollar payday from the management fees the firm charges on the $83 billion in hedge fund assets it oversees, according to Institutional Investor’s Alpha. A Bridgewater spokesman declined to comment.

Likewise, SAC Capital Advisors, based in Stamford, Conn., where several current or former employees have been charged or implicated in a long-running government insider-trading investigation, had a below-market return of 13 percent last year.

But Mr. Cohen still pocketed $1.4 billion because his firm, which oversees $15 billion, charges investors a 50 percent performance fee. Mr. Cohen has not been accused of any wrongdoing, but SAC agreed to pay $616 million to settle two insider-trading charges. A spokesman for SAC declined to comment.

James Simons, the former chairman of the Stony Brook University math department, earned a big paycheck for a mixed performance at the company he founded. The funds housed inside the computer-driven trading operation of his Renaissance Technologies produced returns on funds ranging from a loss of 3.1 percent to a gain of more than 27 percent.

Even though Mr. Simons, 74, hasn’t handled the day-to-day management of the firm for three years, he landed in the fourth spot on the list with a payday of $1.1 billion last year, partly on the large sum of money he has personally invested in the firm’s funds. A spokesman for Renaissance declined to comment.

Many others on this year’s list posted double-digit, market-beating returns.

Kenneth C. Griffin, the head of Citadel, based in Chicago, whose two biggest funds nearly collapsed in the market rout of 2008 when they slumped 55 percent, has had two strong years. The firm’s funds had a 2011 gain of 20 percent, followed by a robust 25.5 percent return last year.

It took Citadel nearly three years for its funds to climb to levels where they could once again charge their investors the lucrative performance fees.

For Mr. Griffin, who started trading convertible bonds in his dorm room at Harvard, his 2012 payday totaled $900 million, making him No. 5 on the list. A spokeswoman for Citadel declined to comment.

Another star manager betting big with a highly concentrated fund was Edward S. Lampert. His ESL Investments moved its headquarters from Greenwich, Conn., to Bay Harbour, Fla., last year.

The firm’s returns jumped 20 percent thanks to big gains in Sears, which accounts for about 40 percent of the fund, and Auto-
Nation, which made up about a third. Another winning play for Mr. Lampert was an investment the Gap, which soared 67 percent. A spokesman for Mr. Lampert declined to comment.

The Gap and other consumer retail stocks also paid off for Stephen Mandel Jr. Some of the funds run inside his Lone Pine Capital, which oversees about $22 billion in assets. The firm collects a 1 percent management fee and a performance fee of 13 to 20 percent, giving Mr. Mandel a payday of $580 million last year, according to the rankings. A spokesman for Mr. Mandel declined to comment.

Rounding off this year’s top 10 earners on the Institutional Investor’s Alpha list were two managers who made profitable investments off the beaten track. Bets on residential mortgage-backed securities helped give Oculus â€" a $9 billion macro fund inside the D. E. Shaw Group, a hedge fund complex built by the computer entrepreneur David Shaw â€" a return of nearly 21 percent last year, its best performance since 2007. Another Shaw fund had its strongest returns since 2009 with a 15.6 percent gain.

While Mr. Shaw ceded control of the funds’ management several years ago, he still has a large amount of money invested in the firm, which helped him to earn $530 million last year. E-mail messages to D. E. Shaw brought no response.

The highest-paid hedge fund managers all took home considerably more than the top-paid chief executives of public companies. At No. 10 on the list of hedge fund managers was Daniel S. Loeb, the activist manager of Third Point, who took on Yahoo, eventually earning board seats, and made big, winning bets on Greek sovereign debt last year. With a 20 to 21 percent gain in the funds he oversees, Mr. Loeb walked away $380 million richer last year. A Third Point spokesman declined to comment.

JPMorgan Kicks Off Bank Earnings

JPMORGAN EARNINGS SHOW STRENGTH  |  JPMorgan Chase said on Friday that its first-quarter profit rose 33 percent to $6.5 billion, supported by strength in the investment banking business and a surge in mortgage lending. The report, which kicked off bank earnings season, showed net earnings of $1.59 a share, exceeding analysts expectations of $5.41 billion, or $1.40 a share. Revenue was $25.8 billion, compared with $26.8 billion a year earlier.

“All our businesses had strong performance, and our client franchises did exceptionally well,” Jamie Dimon, the bank's chief executive, said in a statement. The bank has recorded 12 consecutive quarters of profit.

Shareholders are deciding whether to vote to strip Mr. Dimon of his chairman title, and board members have been working to persuade some big investors that Mr. Dimon should keep both roles. On Thursday, the analyst Richard Bove said on CNBC that anything short of a “blowout” earnings report from JPMorgan could create “uncertainty” for Mr. Dimon going into the shareholder meeting next month.

EX-KPMG PARTNER CHARGED WITH INSIDER TRADING  |  Prosecutors filed criminal charges on Thursday against Scott I. London, who was a senior executive at the accounting giant KPMG, revealing a two-year insider trading scheme. Mr. London's friend, Bryan Shaw, a jeweler in the Los Angeles area, who offered gifts in exchange for secret information about KPMG's clients, was not criminally charged but was named in a related civil action by the Securities and Exchange Commission. Both men have publicly confessed to their misdeeds.

“As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties,” said Michele Wein Layne, director of the S.E.C.'s Los Angeles office. DealBook's Peter Lattman writes: “Early this year, Mr. Shaw turned against Mr. London after investigators confronted him with evidence of insider trading. He became a government informant, recording telephone conversations and in-person meetings to help the authorities build a case against Mr. London.”

In a plot twist, the scandal involved Herbalife, a company that already has provided a stock market drama, Floyd Norris, a columnist for The New York Times, writes. Through no fault of its own, Herbalife “could become a catalyst for change in the auditing profession.” Mr. London leaked confidential information about Herbalife to Mr. Shaw, and the two discussed a strategy for concealing illegal trades.

BENCKISER'S $9.8 BILLION COFFEE DEAL  |  The German conglomerate Joh. A. Benckiser agreed on Friday to pay 7.5 billion euros, or $9.8 billion, for D.E Master Blenders 1753, a European coffee company. The bid of 12.50 euros per share is less than 12.75-a-share price that was disclosed when the companies said they were in talks last month, but it is a 36 percent premium to the coffee maker's average share price for the three months before that announcement. The deal is the latest, and largest, coffee takeover for Benckiser, which last year announced deals for Peet's Coffee & Tea and the Carib ou Coffee Company.

WINKLEVOSS TWINS BET ON BITCOINS  |  Known for their legal spat with Mark Zuckerberg over Facebook, Cameron and Tyler Winklevoss now see potential in another emerging technology: bitcoins. The brothers, Olympic rowers whose story was dramatized in the movie “The Social Network,” have amassed “what appears to be one of the single largest portfolios of the digital money, whose wild gyrations have Silicon Valley and Wall Street talking,” Nathaniel Popper and Peter Lattman report in DealBook.

The twins say they own nearly $11 million worth of bitcoins, based on the price Thursday morning when the entire market was worth $1.3 billion. The digital money has been extremely volatile, with the price plummeting 60 percent at one point. “To skeptics, the frenzy over the bitcoin network created by anonymous programmers in 2009 looks more like the mania for Dutch tulip bulbs in the 1600s than the beginnings of an actual currency.” Still, “bitcoin has become the financial phenomenon of the moment,” with a group of venture capitalists announcing on Thursday that they were financing a bitcoin-related company.

“People say it's a Ponzi scheme, it's a bubble,” said Cameron Winklevoss. “People really don't want to take it seriously. At some point that narrative will shift to ‘virtual currencies are here to stay.' We're in the early days.”

ON THE AGENDA  |  Wells Fargo reports earnings before the market opens. Marianne Lake, JPMorgan Chase's chief financial officer, is on CNBC at 11:15 a.m. Timothy Sloan, the chief financial officer of Wells Fargo, is on CNBC at 3:10 p.m. and on Bloomberg TV at 4:05 p.m. Senator Carl Levin is on Bloomberg TV at 9 p.m. Data on retail sales for March is out at 8:30 a.m. The Thomson Reuters/University of Michigan consumer sentiment index for April is released at 9:55 a.m.

PAULSON'S INVESTMENT PITCH: LOWER TAXES  |  John A. Paulson was reported to have pondered a move to Puerto Rico for tax relief. But while the billionaire hedge fund manager won't be relocating, he is now offering clients the chance to lower their tax bill, pitching a new fund for investors “looking to mitigate income taxes,” according to The Wall Street Journal. Mr. Paulson plans to discuss the new opportunity, the Paulson Partners Premium LP Fund, at an event on April 24, Bloomberg News reports.

Mergers & Acquisitions '

In Push for Gender Equality, Breaking Down the Boardroom Door  |  Concluding that “there was no demand for women” on corporate boards, Beth Stewart decided to start a business called Trewstar whose goal is to find them.
DealBook '

PC Sales Data May Bolster Case for Taking Dell Private  |  A new report by the International Data Corporation that details a steep drop in global PC sales in the first quarter this year appears to bolster Dell's argument for going private.
DealBook '

LinkedIn Acquires Pulse, News-Reading Service  |  LinkedIn is paying about $90 million, 90 percent in stock and 10 percent in cash, for Pulse.
BLOOMBERG NEWS

Twitter Scoops Up Music Service  | 
WE ARE HUNTED

PayPal Buys Start-Up That Helps Products Go Viral  | 
BLOOMBERG NEWS

Telecom Italia Considers a Tie-Up with Hutchison  |  The board of Telecom Italia “gave the go-ahead Thursday for talks on a possible merger with the Italian mobile business of Hutchison Whampoa that could make the Chinese group the leading shareholder of Italy's largest telecommunications operator,” The Wall Street Journal writes.
WALL STREET JOURNAL

Sinclair to Buy Fisher Communications  |  The Sinclair Broadcast Group agreed on Thursday to buy Fisher Communications for about $373.3 million, allowing it to expand in Western markets like Seattle and Portland.
DealBook '

INVESTMENT BANKING '

Penney Said to Hire Blackstone to Help Raise Cash  |  J.C. Penney has hired the Blackstone Group to help it raise much-needed cash, a person briefed on the matter said on Thursday, as the embattled retailer tries a turnaround after replacing its chief executive.
DealBook '

Private Equity Firms Said to Circle Penney  |  “The flailing department-store chain has been approached by at least three major private-equity firms over the past month, all of which have expressed interest in taking a major stake in the troubled retailer,” according to The New York Post.
NEW YORK POST

Ackman Discusses Missteps at Penney  | 
REUTERS

Copper Supply Said to Be Concentrated at 2 Trading Firms  |  The Wall Street Journal reports: “Two major commodities-trading firms have amassed much of the world's copper supplies in their warehouses, partly by paying to divert shipments away from other storage hubs, traders and analysts say.”
WALL STREET JOURNAL

The Problem With Investment Banks, as Seen By a Bank  |  JPMorgan Chase's analysts say many of the world's largest investment banks are likely to offer investors paltry returns, and they call large banks like their own “un-investable.”
DealBook '

Citigroup's Washington Push  |  Citigroup's chief executive attended the ribbon-cutting at a new branch in the nation's capital, on K Street, home to the city's legions of lobbyists. The potential symbolism is hard to avoid, Daniel Indiviglio of Reuters Breakingviews writes.
REUTERS BREAKINGVIEWS

Citigroup Sells Turkish Consumer Unit as It Pares Global Operations  |  Citigroup agreed on Thursday to sell its consumer banking business in Turkey to the local lender DenizBank as it continues to reduce its operations outside of the United States.
DealBook '

PRIVATE EQUITY '

K.K.R. to Buy Control of Indian Tire Maker  |  K.K.R. agreed to buy a controlling stake in the Alliance Tire Group from Warburg Pincus, which invested in the Indian tire maker in 2007.
WALL STREET JOURNAL

How to Value Bausch & Lomb  |  Warburg Pincus bought the eye care company for $3.7 billion at the peak of the buyout boom and has been reportedly seeking a valuation of up to $10 billion. But a figure like $8 billion makes more sense, Robert Cyran of Reuters Breakingviews writes.
REUTERS BREAKINGVIEWS

HEDGE FUNDS '

Hedge Funds Drop Campaign Against T-Mobile's Bid for MetroPCS  |  Both Paulson & Company and P. Schoenfeld Asset Management indicated on Thursday that they would support the revised proposal by T-Mobile's parent, Deutsche Telekom.
DealBook '

Third Point Plans Fund Focused on Greece  |  Third Point's new Hellenic Recovery Fund plans to invest in Greek assets, building on earlier successes by the firm, which is run by Daniel S. Loeb, Bloomberg News reports.
BLOOMBERG NEWS

I.P.O./OFFERINGS '

Nasdaq Cuts Chief's Bonus Over Facebook I.P.O.  |  The board of the market operator Nasdaq OMX has cut the 2012 bonus of the company's chief executive, Robert Greifeld, by 62 percent, as a result of the botched Facebook initial public offering last May.
DealBook '

VENTURE CAPITAL '

Technology Industry Gets Behind Immigration Reform  |  “Rarely has the industry been so single-mindedly focused on a national policy issue, with executives like Mark Zuckerberg of Facebook and John T. Chambers of Cisco personally involved,” The New York Times writes.
NEW YORK TIMES

Former Kleiner Perkins Partner Joins Reddit  |  Ellen Pao, who is suing her former firm, Kleiner Perkins Caufield & Byers, over gender discrimination, is now leading strategic partnerships at Reddit.
REUTERS

Foursquare Raises $41 Million - in New Debt  |  Foursquare, the mobile start-up focused on users letting their friends know where they are, said on Thursday that it had raised $41 million in new debt, rather than equity.
DealBook '

LEGAL/REGULATORY '

Herbalife Ties to ‘Work From Home' Promoters May Draw New Scrutiny  |  The Federal Trade Commission has received hundreds of complaints from consumers who said they were unwittingly recruited to sell for the nutritional products company.
DealBook '

Consultants to Banks Are Sharply Questioned on Independence  |  The use of consultants, who are paid by the same banks they are expected to help reform, is being examined at a Senate Banking Committee hearing.
DealBook '

Senior R.B.S. Executive in Japan Expected to Resign in Libor Scandal  |  A senior executive at Royal Bank of Scotland's Japanese investment banking unit is expected to resign in the wake of a rate-rigging scandal, according to a person with direct knowledge of the matter.
DealBook '

Creditors Have a Dim View of Cyprus's Future  |  “According to a bleak assessment released Thursday by its European partners, Cyprus will fall into a downward spiral for at least the next two years, with the economy contracting up to 12.5 percent during the period as the country reduces a banking sector that had ballooned to more than five times its gross domestic product,” The New York Times writes.
NEW YORK TIMES

Herbalife Ties to ‘Work From Home\' Promoters May Draw New Scrutiny

Entities that promote “work from home” opportunities could be a new source of scrutiny for Herbalife, the nutritional products company that has become the subject of a pitched battle on Wall Street.

The Federal Trade Commission has received scores of complaints from people who paid money to operations with names like Income At Home and Online Business Systems, according to materials the agency released under the Freedom of Information Act.

In many of the complaints, consumers who contacted such companies said they discovered at a later stage that they were being recruited to sell Herbalife products, an opportunity many did not wish to pursue.

“I have absolutely no desire to buy and/or sell Herbalife products,” wrote a person from Amarillo, Tex., who made a complaint about Income At Home last year. “I was looking for work that I can do online to earn money since I was recently laid off and have no income to devote to buying products that I don't want or need.”

The complaints could further stoke the fierce debate over Herbalife's business practices. They suggest that members of the company's sales network commonly used the work-from-home entities to recruit new members. And, in a recent move that the company has not fully explained, Herbalife in February told its salespeople that they could no longer use services provided by an entity frequently mentioned in the complaints.

Herbalife has been in the spotlight since the hedge fund manager William A. Ackman called the company a pyramid scheme and took a $1 billion investment position betting that the stock price of the company would collapse.

Mr. Ackman has called on the Federal Trade Commission to investigate the company, and his firm Pershing Square was behind the Freedom of Information Act request that led to the release of the complaints against the entities linked to Herbalife. The F.T.C. confirmed that it had released the complaints. It removed the names of the consumers in the complaints.

In total, the agency in March released 113 complaints relating to work-at-home type businesses. Over 100 of the complaints mention Herbalife in comments that detail the grievances. Herbalife cautions against reading too much into the F.T.C. complaints.

“For a company of our size, we have had a relatively low number of complaints to the F.T.C,” Julian Cacchioli, a company spokesman, said in an e-mail. He also stated that the work-at-home entities, “do not work on behalf of Herbalife and the practices are not condoned or encouraged by Herbalife.”

Still, the complaints could help regulators better understand how Herbalife recruits - and how it generates revenue. The company sells its shakes and teas through a network of recruited salespeople and other individuals who do not officially work for the company.

Herbalife says there is genuine and strong demand both inside and outside its network for its products. But the company's critics say it primarily makes money from selling products to new recruits, most of whom then fail to make much money from selling their Herbalife goods.

The distinction is crucial.

Regulators may target an entity that relies heavily on recruitment for generating revenue. Such firms have often turned out to be pyramid schemes that collapse when they eventually run out of a sufficient number of new entrants into the scheme. “As always, the agency cannot say whether it is or is not investigating a company,” said Frank Dorman, a spokesman for the F.T.C.

Herbalife has repeatedly rejected Mr. Ackman's assertions and says that for over 30 years its business has benefited salespeople and consumers.

The complaints suggest that individuals, visiting Web sites and listening to ads on talk radio, were invited to buy information on how to start an online business. One person was listed in many of the complaints: Shawn Dahl, a member of the company's so-called Chairman's Club, a senior group of salespeople. He has promoted Income At Home and Online Business Systems, both of which have been used to recruit people to Herbalife.

Many of the people assert that they did not know they were going to be asked to join the Herbalife network. When they found out, many said they had trouble getting refunds. “Rather than refunding my $9.95, the company charged me an additional $39.95,” wrote a person from Santa Cruz, Calif., in February.

This is the second batch of complaints relating to Herbalife. In January, the F.T.C. released 192 complaints against Herbalife, also under a Freedom of Information Act request. By reviewing the F.T.C. numbers attached to both sets of complaints, it appears that three in the latest group were also in the earlier release. This suggests the agency has so far released around 300 complaints relating to Herbalife, which were made over five years.

Mr. Cacchioli, the Herbalife spokesman, said the number of complaints was quite low for that time period for a company of Herbalife's size. He added, “We take complaints seriously and stand by our record of doing right by our distributors and consumers of our products.”

Still, it's not clear why Herbalife has distanced itself from the major work-at-home entities.

In February, the company appeared to sever ties with Centurion Media Group, a Barbados-based company that owns the Income At Home Web site. Herbalife told its United States sales network that they, “may not purchase, sell, endorse, recommend, promote or use anything from Centurion Media Group.”

Herbalife also said its American network could no longer use Online Business Systems for sales leads and advertising.

Since then, Mr. Cacchioli said the company had gone further. As of June 30, Herbalife will prohibit its network members from selling any sales leads. Mr. Cacchioli did not detail any specific problems that Herbalife had with Centurion Media Group and Online Business Systems. But he said that network members could use third-party firms only if they complied with Herbalife's rules and any applicable laws.

One of Herbalife's requirements is that such firms have transparency of ownership, said Mr. Cacchioli.

Centurion's Web site gives no indication who its owners are and does not provide a phone number. It lists a contact e-mail address, but messages seeking comment did not get a response.

A version of this article appeared in print on 04/12/2013, on page B4 of the NewYork edition with the headline: Herbalife Ties to ‘Work From Home' Promoters May Draw New Scrutiny.

Wells Fargo Profit Rises 22%

Wells Fargo posted a 22 percent increase in first-quarter profit on Friday as the bank, which is the nation's largest home lender, continued to notch record gains even while its mortgage machine slowed.

The bank, which benefited from recent effort to curb expenses, reported earnings of $5.2 billion, or 92 cents a share, compared with $4.25 billion, or 75 cents a share, in the period a year earlier. The results outpaced estimates of analysts polled by Thomson Reuters, who had forecast earnings of 88 cents a share.

For Wells, which is based in San Francisco, it was the 13th consecutive rise in quarterly earnings and the eighth consecutive record.

“Wells Fargo delivered outstanding first-quarter 2013 results for our shareholders,” the bank's chief executive, John G. Stumpf, said in a statement.

In a downside for the bank, however, its revenue slipped slightly, to $21.3 billion, compared with $21.6 billion in the period a year earlier.

And the bank's mortgage business, riding years of record gains, finally showed it was unable to sustain the gains.

The bank's mortgage banking income, for example, slipped 3 percent. And while handling $109 billion in mortgage originations might be a feat for some banks, it represented a 16 percent drop for Wells Fargo.

The results could present problems for Wells Fargo, whose fortunes rise and fall with the mortgage market. The bank now creates roughly a third of all mortgages in the country.

The results could also signal a flattening out of the broader mortgage market. As the Federal Reserve cut interest rates in recent years, it prompted millions of borrowers to refinance their home loans to reduce costs.

Now, that pipeline of borrowers could dry up, unless interest rates once again drop significantly or the housing market makes a fuller recovery. Refinancing accounted for 65 percent of Wells Fargo's mortgage origination in the first quarter, down from 76 percent in the period a year earlier.

Still, the bank's lending business showed some signs of strength. In the first quarter, that business helped lead the growth, as the banks overall loan portfolio grew 4 percent. And profit in the community banking division, which includes Wells Fargo's retail branches and mortgage business, climbed 24 percent, to $2.9 billion.

“Loans and deposits demonstrated continued growth in a challenging economic environment,” Mr. Stumpf said.

But the strong returns were spread across the bank. The unit that caters to corporations showed improvement, with profits rising 9 percent. The bank also reported a 14 percent profit gain in its wealth management business.

It was a welcome sign for the banking industry.

Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season. Citigroup, Goldman Sachs and other Wall Street giants will report next week.

Fewer Home Loans Start to Affect Banks

Wall Street knew the craze wouldn't last.

The nation's biggest banks, capitalizing on government efforts to bolster the housing market, have raked in handsome mortgage profits of late. On Friday, that started to change.

Wells Fargo, the nation's largest home lender, disclosed that it originated fewer home loans and recorded lower mortgage banking income in the first quarter of 2013. JPMorgan Chase, the biggest bank by assets, reported limited appetite for new mortgages and a drop in mortgage banking income.

Since the 2008 financial crisis, the banks' mortgage business had hinged on government intervention rather than fresh demand from consumers. When the Federal Reserve cut interest rates in recent years, it spurred millions of borrowers to refinance their home loans to reduce costs.

Now, as mortgage rates inch upward from their lows late last year and refinancing enthusiasm wanes, the pipeline of borrowers is drying up.

“You need a next level of people that are willing to buy and that simply isn't there,” said J. J. Kinahan, a strategist at TD Ameritrade.

Banks are more optimistic, arguing that demand for new home mortgages will replace the refinancing frenzy. The banks, in predicting a continued housing recovery, point to their declining mortgage litigation costs and the increase in car lending and credit card spending.

“People are buying cars, taking vacations and doing things to help fuel the economy,” John G. Stumpf, Wells Fargo's chief executive, said in an interview. While noting that “the country has been through a shock” in the aftermath of the 2008 financial crisis, he argued that “you will see different loan categories start to grow.”

And despite the sluggish mortgage business, the banks showed broader signs of strength on Friday and managed to report record overall profits. JPMorgan posted a 33 percent jump in first-quarter earnings, to $6.53 billion, or $1.59 a share. Those results exceeded Wall Street analysts' expectations of $1.40 a share.

Wells Fargo announced a 22 percent increase in earnings, to $5.17 billion, or 92 cents a share. The results outpaced estimates of analysts polled by Thomson Reuters, who had forecast earnings of 88 cents a share. For Wells, which is based in San Francisco, it was the 13th consecutive rise in quarterly earnings and the eighth consecutive record.

But revenue declined at both banks. And investors seemed skeptical about the banks' returns. Shares in both banks fell, with JPMorgan dropping 30 cents, or 0.61 percent, to $49.01, and Wells Fargo sliding 30 cents, or 0.8 percent, to $37.21.

The results of both banks represented a turning point for their mortgage business. That business has been especially lucrative of late, as the banks pass on most loans to government entities like Fannie Mae and Freddie Mac, which guarantee the loans will be repaid. Armed with the guarantee, the banks package and sell the mortgages to investors for a significant profit.

The Federal Reserve has also stoked a refinancing boom after keeping interest rates at record lows. But the results on Friday signaled that those gains were unsustainable.

Underscoring a slowdown in refinancing, Wells Fargo said those loans accounted for 65 percent of mortgage originations in the first quarter, down from 76 percent in the period a year earlier. The bank's mortgage banking income also slipped 3 percent, presenting potential problems for Wells Fargo, whose fortunes rise and fall with the mortgage market. And while handling $109 billion in mortgage originations might be a feat for some banks, it was a 16 percent drop for Wells Fargo.

JPMorgan's mortgage originations actually soared 37 percent, but new loan applications slipped 8 percent from the fourth quarter. In total, the mortgage banking group posted a profit of $673 million for the first quarter, down 31 percent from a year earlier.

Still, JPMorgan's chief executive, Jamie Dimon, struck a confident tone about the housing market.

“We are seeing positive signs that the economy is healthy and getting stronger,” Mr. Dimon said. “Housing prices continued to improve, and new home purchases are also starting to come back.”

He argued, however, that new regulations had clogged the lending spigot. The government's lending standards remain too tough, he said, excluding some qualified borrowers from the market.

With the mortgage business in transition, the banks found other ways to burnish profits. For one, they cut expenses. Both banks also notched big gains in credit card and automobile lending. At JPMorgan alone, car lending grew 12 percent from a year earlier, to $6.5 billion.

JPMorgan's results were also buoyed by gains in the investment banking business, where fees rose 4 percent, to $1.4 billion. The asset management business, which JPMorgan has expanded as regulations crimp other areas of the bank, reported net income of $487 million for the quarter, up 26 percent from a year earlier.

The gains were further fueled by JPMorgan's decision to reduce reserves for mortgages and credit card loans. By moving money from the reserves, which cushion the bank against potential losses, the bank collected a net gain of 18 cents a share.

Addressing questions on Friday about whether the earnings are deceptively strong, Mr. Dimon said in a conference call that even after the reserve reductions, “we had really good numbers everywhere.”

At Wells Fargo, the strong returns were spread across the bank. Wholesale banking, which includes the sales and trading business along with the corporate lending division, reported that profits rose 9 percent. The bank also posted a 14 percent profit gain in its wealth management business. And profit in the community banking division, which includes Wells Fargo's retail branches and consumer lending business, climbed 24 percent, to $2.9 billion.

“Wells Fargo's diversified business model continued to produce outstanding results,” said Timothy J. Sloan, the bank's chief financial officer.

A version of this article appeared in print on 04/13/2013, on page B1 of the NewYork edition with the headline: Drop in Home Loans Takes Toll on Banks.

HD Supply, Backed by Carlyle and Bain, Files for I.P.O.

HD Supply Holdings, an industrial distribution company owned by a group of private equity firms, filed on Friday to go public.

The company, which was bought in 2007 near the height of the buyout boom, plans to use the proceeds from the initial public offering to pay down debt. It said it would aim to raise $1 billion in the I.P.O., but that amount is a placeholder that could change.

With more than 600 locations in the United States and Canada, HD Supply serves home builders, government entities, industrial businesses and other customers. Home Depot is its largest customer, accounting for about 4 percent of sales.

The private equity owners - the Carlyle Group, Bain Capital and Clayton Dubilier & Rice - have overseen a period of growth since buying the company from Home Depot. HD Supply generated $8 billion net sales for the fiscal year that ended Feb. 3, increase of 14.3 percent from the previous year.

The company reported total liabilities of $8.9 billion as of Feb. 3. Of its $7.3 billion of long-term debt, $5.2 billion is due after the 2017 fiscal year.

Bank of America Merrill Lynch, Barclays, JPMorgan Chase and Credit Suisse are among the banks handling the I.P.O.

The three private equity owners each hold about 28 percent of HD Supply, which is based in Atlanta. In the $8.5 billion buyout, Home Depot retained a stake of about 12.5 percent.

That deal, which was negotiated as credit markets were tightening, had some challenges getting done. Home Depot was forced to drop the sale price by nearly $2 billion in August 2007.

Wi-Fi for Every Room in the Home

Wi-Fi is awesome. But when the Wi-Fi signal is weak, it's almost worse than having no signal at all. You see signal-strength bars, but you can't connect. Or videos play, but with a lot of pauses. Or your e-mail program tries to download messages, but just hangs there.

I've always wondered about Wi-Fi range extenders - little $60 to $80 routerlike boxes that are supposed to grab a weak Wi-Fi signal and amplify it. Recently, I had the perfect chance to put one to the test.

My fiancée's San Francisco apartment is a chain of rooms off a single hallway. Living room in front, then bedroom, then dining room, then kitchen. Her Wi-Fi base station sits in the living room at the front of the house. That's where the cable company's jack enters the apartment.

Trouble is, in this old, stately building, the walls are thick and strong. By the time the Wi-Fi signal reached her bedroom, it was too flaky to use. Now and then, she could pull up Web sites or check e-mail, but video and music were out of the question. The dining room and kitchen had no Wi-Fi signal at all. That was a disappointment for a skilled chef who likes to listen to Spotify or Pandora as she cooks.

One possibility, of course, was to see about having a second router installed. But that would mean having the cable company install another jack. It seemed as if it would be faster, less expensive and less disruptive to get a Wi-Fi range extender - if those things really worked.

On Amazon, the highest-rated extender at the time I shopped in December was the Securifi Almond. It was billed as the first touch-screen router and range extender, and had strong customer reviews.

It looks great. Some of the range extenders seem to have been designed to be as ugly as possible - they look like, well, networking equipment - but this one looks almost like an obese Windows Phone, thanks to the colorful tiles on its touch screen. It's very small (4.5 by 4.75 by 1.5 inches).

The touch-screen breakthrough is that you don't need to connect the Almond to a computer - or to anything but a power outlet - to set it up. We placed it in the hallway outside the bedroom door; it sits nicely and nearly invisibly on the molding above the doorway. On the screen, I tapped the name of the existing Wi-Fi network, entered its password, waited about a minute, and that was it. Suddenly there was a new Wi-Fi network in the back half of the apartment, with the suffix “Almond” on the original network's name.

This hot spot seems just as fast and capable as the real one, in the living room. My fiancée can now stream music or video, download files, do real work, everywhere in the apartment.

On her laptop, she has to switch manually to the Almond network when she moves into those rooms; my laptop usually hops onto it automatically when it wakes up.

The fine print: The Almond is also a regular router; that is, you can plug your cable modem into it to create a Wi-Fi hot spot. We didn't use it in that configuration. If you do, note that its Ethernet jacks are not gigabit speed.

You should also know that rival range extenders are dual-band (they offer both 2.4 and 5 gigahertz bands, if you know what that means), whereas the Almond is 2.4 only. Rival extenders can cost less and offer more networking features.

But they're also uglier and far more complicated to set up. The Almond does beautifully as a simple, effortless, attractive way for non-nerds to extend their hot spots into un-blanketed corners of the house.

Three Windows 8 Features Worth Celebrating

January 17, 2013, 2:44 pm

You already know my overall opinion of Windows 8: that it's two very good operating systems - one for touch screens, one for mouse and keyboard - idiotically superimposed on each other. You wind up with duplicate everything: two Web browsers, two help systems, two search features, two control panels (actually three, but never mind). It's very confusing.

But for the last few weeks, I've been up to my neck in writing a how-to book on Windows 8, and that means mucking around in its deepest, darkest corners. That means learning its idiosyncrasies and quirks. That means getting to know its most embarrassing lapses and its most unsung brilliance.

Maybe Microsoft will somehow fix what's wrong with Windows 8. Maybe people will get used to the duality. (With the addition of free programs like Classic Shell, which restores the Start menu, you can almost get away with using only the desktop mode on your PC, as before. Almost.)

In the meantime, I thought I'd share three completely overlooked gems that I've unearthed in my explorations.

Xbox Music. Don't be confused - in Windows 8, the term Xbox has nothing to do with the game console. It's now just a generic term that Microsoft puts on its online stores.

Anyway, Xbox Music is a completely great music service. It combines elements of Pandora, in that it can play endless free music in a style you choose; Spotify, in that you can listen to any song or any album or any performer, on command, free; and iTunes, in that you can buy songs to download. It's a Windows 8 exclusive; it doesn't work on Windows 7. And it's free.

The free version has occasional interruptions in the form of audio/video ads. Music streaming is free and unlimited for the first six months; after that, you can listen free for 10 hours a month. If you're willing to pay $10 a month (or $100 a year), you can get an Xbox Music Pass, which lets you (a) also listen on a Windows 8 phone and an Xbox 360 (provided you also have a Gold membership), (b) download songs for offline listening, (c) sync your playlists across multiple gadgets, and (d) eliminate the ads.

When you're listening to one type of music, Pandora-style, you can click the Skip button to pass over a song you don't care for. In theory, the free version offers only a limited number of skips a month, but Microsoft has confirmed that, for now, it's still unlimited.

Bing Magazines. In TileWorld (my name for the second operating system, the full-screen, colorful, tappable tiles), you get a handful of brilliantly executed, full-screen, perpetually self-updating “magazines” for news, sports, finance and travel.

This is a fantastic feature. Each, behind the scenes, is simply grabbing articles from hundreds of big-name news Web sites. For example, the News magazine gets its articles and photos from The New York Times, The Wall Street Journal, The New Yorker, CNN, Huffington Post, and so on.

But each re-formats everything into one uniform, attractive, screen-friendly design. No hard-to-read color schemes or ugly fonts. No blinking ads, banners or obnoxious animations.

They all work essentially alike. You open the app (Internet connection required). You see a huge cover photo. Tap or click it to read the associated article.

Or scroll horizontally to see headlines and teaser blurbs for other articles.

Each magazine is customizable; you pick the sports league to follow, the stocks you track, the news topics or news sources you prefer. The Travel magazine is integrated with Bing Travel, so you can actually book hotels and flights on the spot. Flipboard is an obvious predecessor, but it's nice that these magazines are built right in and ready to go.

Narrator. If you're blind, computers are hard enough to use without the introduction of touch screens. In Windows 8, without any fanfare whatsoever, Microsoft has followed in the footsteps of Apple's VoiceOver technology. It has turned Narrator, a weird, sad old feature that would read your error messages to you out loud, into a full-blown screen reader.

Those who are blind or have limited sight can use Narrator to describe every item on the screen, either in TileWorld or the desktop. It can describe the layout of a Web page, and it makes little sounds to confirm that you've performed a touch-screen gesture correctly.

Even if you're not blind, Narrator is still handy; it can read your e-mail back to you, or read Web articles as you're getting dressed in the morning.

When you open Narrator, you wind up at its Settings dialogue box  - and the voice of Microsoft David (no relation) starts talking, reading everything on the screen.

Like VoiceOver, Narrator takes a lot of time and patience to master; it's almost like another operating system unto itself.

But the basics are easy enough: on a touch screen, drag your finger around the screen; Narrator speaks everything you touch, so that you can get a feel for the layout of things. You can also tap to hear a single item identified. When Narrator is running, it takes two taps to open something instead of one.

To see the master cheat sheet of touch gestures in Narrator (and hear it read to you), tap the screen three times with four fingers.

If you have a keyboard, the Caps Lock key becomes specially dedicated to Narrator. Press Caps Lock and V, for example, to make Narrator repeat whatever it just said. Caps Lock and the plus or minus sign makes the voice speed up or slow down. Press Caps Lock and Esc to exit Narrator.

So yes, there's a lot of good in Windows 8, and a lot that's getting no press. Here's to the unsung engineers who came up with this stuff - and to the hope that Windows 8's split-personality problem somehow improves.

Weighing In on Sensor Size

February 23, 2013, 2:34 pm

Wow. My post on Thursday about the relationship between sensor size and soft-focus background certainly lived up to its opening premise: “photographers online are a cantankerous lot. Photography, in the end, is something of a black art, and everybody's got an opinion.”

By Saturday, about 100 photographers had flooded the comments with posts ranging from “You're an idiot” to “You're exactly right.”

(How contentious are photographers? They can't even agree if the blurry background effect is desirable. One poster calls it “lazy” and a “visual crutch.” Never mind that it's been a sought-after hallmark of professional portraiture and product photography for decades.)

But if you set aside the vitriol, you can see a lot of people trying very hard to make sense of a complex topic. Here are some follow-ups to my post, based on the comments:

* “Bokeh” does not mean “blurry background,” as I implied (and as many articles online have characterized it). Instead, it describes the character or quality of the blur. I shouldn't have used them interchangeably.

* On the other hand, “depth of field” does not mean blurry background, either, as some of the commenters have said. A shallow depth of field gives you a blurry background, but you wouldn't say, “Ooh, look at that lovely depth of field!”

* My central point was that cameras with small sensors make it hard to get blurry backgrounds. But many readers pointed out that even a phone's camera (like that of the iPhone) can produce blurry backgrounds if you hold it very close to the subject.

That's true: small-sensor cameras can sometimes blur the background when shooting macro, or close-up, shots. I'm sure commenters will explain why!

But can a small sensor camera blur the background when shooting a standard portrait, where the subject is, let's say, six feet away? Very rarely, says I. Yet it would be very easy with a large sensor camera.

There are myriad mathematical and physics-based explanations of the relationship of aperture, distance, focal length, sensor size and blur. Most of them make fairly opaque reading.

But I liked the explanation of Roberto, a 50-year career photographer from Mexico:

“The facts are really quite simple. The more a lens acts as a wide-angle lens (giving a wider field of view), the greater will be its depth of field, assuming that aperture remains constant,” he wrote. “Conversely, the more the lens acts as a telephoto lens (narrower field of view), the shallower the depth of field will be (given the same aperture).

”

He added: “The reason a small sensor digital camera will not easily blur backgrounds is that they do not have any telephoto lenses which also have wide open apertures. The zoom lenses they come with, by the time they get to telephoto length, are also typically stopped down to f/5.6 or so. If one of these small cameras were equipped with a telephoto lens which could open to f/1.8 or f/1.4, you would see plenty of background blur.
”

So I accept the critiques of readers who found fault in the way I reached my conclusion. But I'm happy to report that the conclusion itself - that large sensor cameras are better able to create background blur than small sensors - seems to be correct.

Reselling E-Books and the One-Penny Problem

There's so much to love about e-books. They weigh nothing, they remember your place, you can make the type larger.

But as I've written over and over, they are also a rip-off in one big way: Although e-books cost nearly the same as printed books, you can't sell or donate them when you're finished reading. So my eyebrows nearly shot off my face when I read an article in The Times indicating that both Amazon and Apple have filed for patents to make reselling e-books possible. These patents would cover not just e-books but music, movies and computer programs.

I took to Twitter.

YES PLEASE… Amazon and Apple are pushing for a new world where we can resell used ebooks. Cross your fingers! http://t.co/MwJFO2p6Yd

- David Pogue (@Pogue) 8 Mar 13

To my surprise, my followers weren't so much jubilant as concerned. Their questions ran along these lines:

@Pogue : What about Digital Rights Management? Who owns the content?

- William Shaw (@williamshaw09) 8 Mar 13

(In the Times article, Scott Turow, president of the Authors Guild, puts it another way: “Who would want to be the sucker who buys the book at full price when a week later everyone else can buy it for a penny?”)

Well, obviously, no plan to resell e-books would work unless the books were copy-protected. Reselling an e-book would work only if there were only one of it, just as with physical books. Once you sell it, you no longer have it.

Both Amazon's proposal and Apple's take care of that problem. Each ensures that only one person can have a particular e-book copy at a time.

@Pogue Do authors get a cut of the transaction?

- Steve (@StevePietrowicz) 8 Mar 13

You know how it works in the physical book world. Publishers and authors get money from the first sale of the book; after that the owner can sell it to other people.

Look, I'm the author of 50 books. I'd be delighted to get a cut of secondhand book sales. But I never have, and the world hasn't come to an end.

@Pogue How does that even work? How is a used eBook distinguished from a new one? Data errors?

- out of phase (@moarliek) 8 Mar 13

Funny. This Twitterite is imagining that with each new owner, the e-book becomes a little more worn, a little rattier, exactly as with printed books. Very cute. Next?

Another person restated the same concern in different words.

@Pogue Unlike physical goods like books, used digital products are just as pristine as new ones. Why would someone pay for a new copy?

- Todd Heberlein (@toddheberlein) 8 Mar 13

This finally stopped me in my tracks.

So let's see. Bob buys an e-book from Amazon for $10. After reading, he sells it to a new person for $8. After a couple more transactions the used e-book is going for $1. But the reading experience is as pristine and clean as the first one.

In this world, you could buy any e-book for $1 or less if you're willing to wait long enough. For best sellers, you wouldn't have to wait long at all.

Turns out material degradation isn't just a fond side effect of book resales. It's essential. It's what ensures that the resale price matches the diminishing value of the product. If every copy is perfect, the whole thing breaks down. With unlimited e-book sales, every book's price would eventually drop to a penny.

I couldn't believe that Apple and Amazon would be so naïve. Surely they'd thought of this nightmare situation. I decided to read the actual patents.

Patents are pretty hard for nonlawyers to puzzle through. (Typical verbiage from Apple's patent: “Storing threshold data that indicates that the digital content item is associated the specified usage amount and that a second digital content item that is different than the digital content item is associated with a second specified usage amount that is different than the specified usage amount.”)

Both Apple's patent and Amazon's are incredibly broad. And they give the publisher and bookstore a lot of control over what would happen - including, possibly, providing for a cut of each resale.

But what about the one-penny problem? These patents also give the publisher or bookstore the right to impose a minimum price for reselling an e-book. That limit could drop over time, as Apple's patent makes clear: “As another example, all digital movies must be sold for a minimum of $10 until six months after their respective original purchase date. After the six month period, all digital movies must be sold for a minimum of $5.”

Both proposals suggest that publishers could also limit the number of times a digital item can be resold: “A threshold may limit how many times a used digital object may be permissibly moved to another personalized data store, how many downloads (if any) may occur before transfer is restricted, etc.,” says Amazon's patent. “These thresholds help to maintain scarcity of digital objects in the marketplace.”

Clearly, it's much too soon for anybody to panic. Systems like this will take a long time to discuss and develop. Publishers will be given the final say and there will be so many variations and permutations it won't look anything even remotely like a used bookstore. The greatest worry isn't that authors will go out of business. It is that the resulting used e-bookstores will be so complex and saddled with restrictions, they'll be ruined before they even open.

Here's hoping that all four parties - authors, publishers, bookstores and consumers - will demonstrate good will, a love of reading and a minimum of greed and paranoia.

TiVo Explains Extra Charge for the Mini

In my column in The Times on Thursday, I reviewed the TiVo Mini. It's a small plastic box that lets you gain access to your TiVo from another television in the house without having to buy a second entire TiVo.

But I also wrote:

Incredibly, though, you still have to pay another fee for the Mini: $6 a month, or a one-time $150. Why? The fee you're already paying for your TiVo is already hard to justify; why should you pay more just to pump your legitimately recorded shows to a different room?

Unfortunately, “because we need the money” is the only plausible reason. (I suppose “because our arch-rival, the Dish Hopper, also charges for its secondary-TV boxes” is also plausible.)

After the column was published, Jim Denney, TiVo's product marketing manager, explained to me why there was a fee for the Mini.

First, he reiterated my point that all of TiVo's rivals, like the Dish Hopper, DirecTV Genie and cable-company boxes, also charge a fee for each second-TV box.

Second, he pointed out that the Mini's $6 monthly fee is a lot lower than what you'd pay for a second TiVo box ($15 monthly).

“Yes,” I said, “but what are you actually buying? I mean, you're already paying a fee for your main TiVo box. The Mini just shows what's on your main TiVo - it doesn't supply any new features of its own. TiVo isn't providing any services that would justify a separate fee. All the action is within my own network.”

He explained to me that that's not quite accurate. The Mini does connect to TiVo's service - bypassing your main TiVo - for many of its functions. For example, when you access Hulu Plus, YouTube, the search and browse functions, and the music and photo functions, the Mini goes directly to the TiVo mothership online.

He also pointed out that the Mini will gain more features and polish as time goes by, and that's worth paying something for, too.

I'm still skeptical. I don't even see why standalone DVR's need a monthly fee. Unfortunately, for better or worse, that's the business model we're all stuck with, no matter who's providing the boxes: you pay a monthly fee for your DVR, and another one for each secondary-TV box.

At least TiVo offers you the chance to pay a one-time lump-sum fee for each device - and if you opt for the monthly fee, at least it's lower than most of its rivals.

Hurrahs and Harrumphs for T-Mobile

In my Times column on Thursday, I cheered T-Mobile's bold decision to abandon the standard United States cellphone business model. There will be no more two-year contracts, no more idiotic 15-second voice mail instruction recordings, no more games with the cost of your phone.

The column set off an unusually voluminous flood of reader response. Most were as thrilled by T-Mobile's new policies as I am.

But there was, as always, a sizable crowd of people who pushed back and objected in various ways. Here are some of their comments, with my responses.

You said that T-Mobile has done away with contracts. Oh yeah? Then what about this? I think T-Mobile is lying.

Oh, for goodness' sake! T-Mobile is indeed doing away with service contracts - contracts that lock you into its cellular service for a year or two.

What you've unearthed is an agreement that you'll pay T-Mobile for the phone it gives you, even if it takes you a couple of years to do it. You can pay $20 a month, $40 a month, $100 a month, whatever you want - but eventually, you have to pay for the phone. That's all you're agreeing to.

You really expect T-Mobile to start giving away $600 phones free? Come on.

You said that you can leave T-Mobile whenever you want - you're not locked in for two years. But what if I've paid for only half of my phone? Do I get to keep it? Do I have to give it back?

Again: You have to pay for the phone, one way or another. Again: T-Mobile isn't in the business of giving phones away. So if you leave the service before you're finished paying for the phone, you'll have to pay the rest of what you owe.

Then again, you're under no obligation to buy a phone from T-Mobile in the first place. You can bring any compatible phone and just pay for the service.

I can't believe you ignored Ting/Republic/Virgin Mobile/Straight Talk/Page Plus. I pay only $45 a month, I have no annual contract, and I get everything!

There are lots of these second-tier cell carriers, known in the industry as MVNOs (mobile virtual network operators). They rent bandwidth on the networks of the big boys - Verizon, AT&T, Sprint - and offer
much lower rates.

There are some fantastic deals to be had. However, to an extent, you do get what you pay for. An MVNO doesn't offer the same phones - you generally can't get the hot phones like an iPhone or Galaxy S III, for example. With some, like Page Plus, you don't get 4G LTE Internet speeds. Some, like Virgin, don't permit roaming. Others are available only in certain regions, which won't do you much good when you travel. I really should do a column about MVNOs one of these days.

Your outrage toward mobile carriers is refreshing to read. However, the U.S. situation holds no candle to us Canadians. I am currently locked into a THREE-year contract with my cellphone provider, which is standard if you want an iPhone. The T-Mobile situation sounds like a dream.

Ouch! Sadly, T-Mobile's plan does not compare to European mobile plans. Some examples:

- In Britain, and most of Europe, you can get true pay-as-you-go, where you can put, say, £10 (about $15) on your phone and then you use that till it's up. If it takes a year, well, fine; you don't lose it (unless maybe you don't use it for a long period). 



- You don't pay for incoming calls and texts; only the initiating party pays. I think this is a big one and saves a ton of money. As far as I know, the United States is one of the few countries where you pay for incoming and outgoing calls and texts.




Yes, many readers pointed out that cellular service is better and cheaper in Europe. We're happy for you, we really are.

You didn't mention the best thing about T-Mobile: free Wi-Fi calling! I can make free calls, with fantastic signal, in my home, or anywhere else where there's a hot spot.

I've always loved this T-Mobile feature. Many T-Mobile phone models (not all) do indeed let you make free calls whenever you're in a Wi-Fi hot spot. It switches to cellular minutes only when you go outside. Fantastic.

David, you missed T-Mobile's Achilles' heel: its once vaunted customer service.

 Frankly, it went from the best to the worst in practically no time. They decided to close down call centers here in the U.S., and ship them to India. Sorry, that doesn't work for me (and I am from India). Barring a couple, they all have been rather awful.

 I am noticing changes of late that seem to indicate they are trying to right their ship.

That's a shame - but then how do we explain reader comments like the next one?

I've been with T-Mobile for almost 8 years. When I call customer service I get someone speaking perfect English, located in Albuquerque, N.M.

What almost all 500 respondents agreed on, though, is that United States cellular companies are generally rapacious and loathed by their own customers. Kind of makes you wonder: Do they really enjoy doing business that way?