Такси, помощи и субсидии няма да зависят от минималната заплата

бел.ред. — Сега като отвързаха цените колко взимат партиите на глас ще стане едно крадене... не е майка работа

Правителството реши окончателно да отвърже от минималната работна заплата таксите за преглед при лекар, субсидиите за партиите и още много плащания, чийто размер досега зависеше от движението на най-ниското трудово възнаграждение. От догодина повечето от тях ще се определят в твърда сума, а промяната им ще зависи от фактори като инфлация и др. Обвързани с минималната заплата остават само плащания, които имат характер на трудово възнаграждение като социалните помощи за деца с увреждания, заплатите на приемните родители, възнагражденията на субсидирани от държавата дейности.

Проблемът с обвързването на куп социални и др. плащания с минималната заплата се появи покрай увеличението й от 240 на 270 лв. от 1 септември. Поради липсата на достатъчно средства в бюджета не се промени размерът на тези, за които не е записано изрично обвързване, но досега са се движили успоредно с промяната на минималната заплата. Например помощите за майките студентки и за отглеждане на дете не бяха увеличени заедно с минималната заплата от 1 септември.

Кабинетът прие да бъдат променени 16 закона, 8 наредби и 5 правилника. Предложенията трябва да бъдат направени от ресорните министри до 1 ноември.

Всички плащания, които имат характер на такси, от догодина няма да зависят от минималната заплата. Таксата за преглед при лекар например ще е фиксирана сума, а не както досега – 1% от минималната заплата. Занапред размерите на таксите ще зависят от разходите по услугата.

Плащания с характер на помощи също няма да са свързани с минималната заплата от догодина. Отвързват се и свързаните досега различни по вид премии, отличия и т. н. Размерите им ще са конкретни суми. Парите за кредитиране на студенти и докторанти, заплащането на членове на различни комисии също ще зависят не от най-ниската заплата, а от спецификата на работата.

Субсидиите за партиите също няма да са 5% от минималната заплата за всеки спечелен глас, а твърда сума.

Искане

От Националното сдружение на общопрактикуващите лекари настояват потребителска такса да плащат всички пациенти. Сега от нея са освободени хора с редица тежки заболявания, бременни жени и инвалиди, но сумата не се възстановява на лекарите. От сдружението предлагат да се определят групите, които ще ползват това подпомагане с политическо решение. При посещение при лекар освободените да плащат такса, а срещу документ тя да им се възстановява от съответните институции.

От Министерството на здравеопазването заявиха, че предложенията на сдружението на лекарите са постъпили във ведомството и се разглеждат, но все още не е ясно какво становище ще бъде взето по тях.

© 2011 Nova, Такси, помощи и субсидии няма да зависят от минималната заплата

Ascent and dissent

"Russia needs more successful young entrepreneurs, therefore, governors should have more children!"

At first it may seem a non-sequitur. But in Russia the joke is obvious, cutting to the heart of a growing source of discontent among the young: routes to professional success are fewer and fewer, while the offspring of top provincial officials and the like do well.

"They're just plain lucky" was the sarcastic headline in Moscow's Vedomosti newspaper on an April expose of the uncanny business success enjoyed by the children of provincial governors. Vedomosti (part owned by the Financial Times) uncovered the case of a 25-year-old daughter of the governor of Sverdlovsk province in the Urals who co-founded and made a Rbs126m ($4.5m) investment in a timber mill, after just a few years working for a Moscow accounting firm.

Many children of the elite find their route to the top an easy one. The son of the head of the Federal Security Service is president of the north-west regional branch of VTB, the second-largest bank in Russia. The son of the chairman of Russia's national security council is president of Rosselkhozbank, another of the country's largest lenders. The list goes on.

For many, the lesson is stark. While income distribution in Russia creeps towards Latin American levels of inequality, having widened notably since the turn of the millennium, the state has incubated an ever more entrenched and inaccessible elite that now controls government and business, and jealously guards its privileged domain.

Connections and nepotism are the rule and social mobility is grinding to a halt. "Unless you have connections it's impossible to find a job," says Vladimir Aleshkin, a recent graduate from Moscow State University with a degree in Arabic, who has spent months pounding the pavement and looking on the www.jobs.ru internet site for work, with little luck.

With an eye on the Arab spring protests in the Middle East, blamed by many experts on the lack of opportunities for advancement for a younger generation growing up in authoritarian regimes, some Russian politicians have started to examine the problem of weak social mobility in earnest. Some suspect that the entrenchment of an upper class may be behind the falling popularity of Dmitry Medvedev, the president, and Vladimir Putin, prime minister, as a presidential election approaches next year, as well as a rise in nationalist violence since late last year.

As one measure of the stasis, although reshuffles have taken place lower down, the country's top 70 officials have not changed at all under Mr Medvedev, says Olga Kryshtanovskaya, a sociologist and member of the ruling United Russia party.

That has created annoyance in the tier below and translates down the chain into unrest at the bottom of the social ladder. A study of focus groups across Russia by the Moscow-based Centre for Strategic Research predicted in April that the ruling tandem of Mr Medvedev and Mr Putin would face a "crisis of legitimacy" as early as the autumn. Polls taken by the Public Opinion Foundation, a research agency that works with the Kremlin, show the "protest mood" has grown.

Mikhail Prokhorov, billionaire leader of the Right Cause party, a business-friendly grouping that plans to run in December parliamentary elections, told a magazine interviewer recently that Russia reminded him of Egypt before the fall of Hosni Mubarak.- "The situation here is no better. It's the Soviet model," he said, pointing out how rapidly political circumstances can change. "I don't think in July 1991 anyone realised what was going to happen in August," he added, referring to the coup that brought down the USSR that month.

Mikhail Chernysh at the Russian Academy of Science's Institute of Sociology says the lack of social mobility is a problem common to many large emerging economies, such as Brazil and India, where inequalities of wealth are even higher.

In the developed world, the same is true of the US. But in Russia the problem is newer: just two generations ago, virtually everyone in the Soviet Union - from doctors to factory workers - had the same flow) standard of living. Now, Russia's resource-exporting economy cannot create enough skilled jobs for the vast number of talented and highly educated graduates, many of whom instead leave to work abroad in places including Silicon Valley and the City of London. The outflow of emigrants is thought to be roughly 100,000 a year.

"Russia is an Oil and gas exporting economy, and oil and gas production does not require large amounts of highly qualified labour," says Mr Chernysh. "Only 15 per cent of jobs are highly skilled, so.under present circumstances that is the largest that the middle class can be."

To some, the monopolisation of the state by a nepotistic and increasingly inaccessible elite reminds them of the final days of the Soviet Union, before the perestroika reforms led to social explosion and the collapse of communism. While the Communist party was the traditional route to the top, gaining advancement within its ranks became an ever slower affair. "The same process which led to the end of the USSR is happening now," says Larisa Kosova, a professor of sociology at Moscow's Higher School of Economics, who has researched social mobility in the last three decades of the Soviet period, showing how it progressively worsened until the late 1980s.

Measuring income inequality and social mobility today in Russia is admittedly difficult. The data do not capture the small but stratospherically wealthy Russian oligarch class -"They don't fill out surveys," quips Mr Chernysh - and income data are sporadic and anecdotal. So it is hard to study such things as the correlation of children's income with their parents. But what is clear is that new college graduates find it harder than ever to get a job. Moreover, half the graduates interviewed by Mr Chernysh confessed they used family connections to land a position. Even those who find work are paid a pittance, says Mr Alekshin, the Arabic graduate. That extends from the humanities into science, he points out: a starting salary for a nanotechnology engineer, at Rbs15,000 a month, is Rbs1000 less than a street sweeper makes. Across the economy, meanwhile, real wages are at best stagnant as inflation rises. "The problem is not so much in the growing income inequality," says Ms Kosova. "The problem is that the channels for moving up are blocked."

Increasingly, she says, the only route for social advancement is the bureaucracy. Recognition of this is reflected in numerous opinion polls that show the public sector as the preferred career path. "All my students in the 1990s wanted to go into business. Now they want to be state bureaucrats," Ms Kosova adds. "The basic problem is that the state now once again has control over all the channels of social mobility."

That is eerily familiar. In a recently published study, she traced the decline in social mobility in the Soviet Union from the Stalin years to the fall of communism. Such social data on the USSR are notoriously hard to come by, but in tracing the careers of hundreds of top-level bureaucrats from 1953 to 1988, she found that under Joseph Stalin the time it took for the average bureaucrat to reach his or her first "nomenklatura" level job, the cream of the Soviet elite, was eight years. By 1988, on the verge of the communist collapse, it had become 23 years.

Inevitably, it was the repression of the Stalin era that enabled the relatively rapid promotion of Soviet cadres, when nomenklatura were purged and shot in record numbers, opening new rungs on the social ladder. "When the meat grinder was working, there were plenty of free places. But as soon as the repressions stopped, so did social mobility," she says.

The end of communism created chaos, but the economic liberalisation under the presidency of Boris Yeltsin

opened the way for some Russians to become ultra-wealthy, creating a class of oligarchs. "Suddenly, the state was not the only elevator to the top -there were plenty of alternative ways to reach the elite, especially through business," she says.

In the 2000s, under Mr Putin's presidency, two opposite tendencies occurred. Real incomes steadily rose, doubling between 2000 and 2008, giving average Russians who were living in the grip of poverty in the 1990s the chance to travel abroad and have a higher standard of living.

But while middle-class comfort became achievable for many, the chance to reach the elite became harder. As the state seized back the commanding heights of the economy, the private sector route to social advancement dried up. The state grew fast during the oil-fuelled growth years under Mr Putin, with the number of federal employees rising from 866,000 to 1.5m between 1999 and 2009, according to Rosstat, the official statistical service.

Signs do exist that Russia's leadership understands the problem. In an interview with the Financial Times in June, Mr Medvedev criticised the growing size of the state sector.

"When I went to university and a bit later, everybody wanted to be economists and lawyers," he said. "However, I have learnt that many young people want to be state officials; not business people, lawyers and economists, let alone cosmonauts and engineers, but civil servants." Opportunities for corruption were also a motive for seeking such a career, he said.

Last year, Mr Medvedev pledged to cut the civil service by'up to 20 per cent. He has introduced economic liberalisation as a boost to the private sector. But it is unclear whether the system will tolerate reform or if Russia is destined for yet another social explosion. United Russia's Ms Kryshtanovskaya says that in spite of a lack of movement at the very top, among leading bureaucrats such as governors there is more turnover than in the Putin era - 38 per cent of these officials have been moved or sacked in Mr Medvedev's first three years as president, compared with 24 per cent under Mr Putin.

Yet without comprehensive economic reforms, aimed at creating more skilled private sector jobs, social mobility in Russia will probably continue to decline. The consequences are anyone's to. guess - but they are unlikely to be joked about.

Economic reform

Moscow seeks to shift skilled into services

Moscow seeks to shift skilled into services

Russia's answer to Silicon Valley is scheduled to be up and running by 2013 as a hub for investment in what the Kremlin hopes will be a growing technology sector, writes Charles Clover.

The business park planned for the high-end Moscow suburb of Skolkovo symbolises President Dmitry Medvedev's modernisation drive, focused on boosting service industries. He has also announced plans to turn the capital into a global financial centre by streamlining regulation and attracting foreign banks.

Service industries could alleviate a chronic lack of skilled middle-class jobs, reckoned to account for only 15 per cent of gross'domestic product, and expand social mobility.

While the US and many other western countries made the transition from manufacturing to service-based economies in the 1970s, in Russia sectors such as finance and technology remain underdeveloped. Services form 51 per cent of the economy, according to the International Monetary Fund, compared with an average of 80 per cent for most European countries and the US.

Russia boasts a number of features that should give it a natural advantage in its quest to expand its service industries. It has a world-renowned education system and a higher income per head than Brazil, India or China, the fast-growing emerging economies that are the remaining Bric nations.

But it has disadvantages, too, including high labour costs, a result of the overvalued rouble; and low productivity arising from pervasive bureaucracy and regulation.

For western economies, the transition to services was not without cost. In the US, for example, the move of manufacturing jobs overseas in the 1970s and 1980s left "rust belt" cities I such as Pittsburgh and Detroit in crisis.

Russia's own manufacturing sector is already suffering. Many factories were closed in the 1990s. Alexei Kudrin, finance minister, says state subsidies for those in business today could total as much as 5 per cent of GDP.

A smarter way to spend these funds, many economists say, would be to retrain workers for service jobs and to let these manufacturing industries close.

© 2011 Financial Times, Ascent and dissent

US: Obstacles to progress

When Rusiko Jibladze stepped off her flight to Dulles airport, gateway to the capital city of the richest country in the world, she was taken aback. The 48-year-old from formerly Soviet Georgia, this year making her first visit to the US, could scarcely believe what she saw.

“It was the airport that shocked me first – everything seemed to be so old and falling apart – and then the roads. I expected everything to be shiny and new, and instead it was grey and worn out,” Mrs Jibladze recalls. “All my life I heard how amazing America is, so I thought I’d find myself in a fairy tale. Instead it was so grim.”

Barack Obama understands Mrs Jibladze’s reaction all too well. Aware that crumbling infrastructure is holding back economic growth, the president has been talking about the urgent need to invest since before he took office. “America, it is time to focus on nation-building here at home,” he said in June, contrasting that task with efforts in Afghanistan.

Certainly, Mr Obama has tried to think big, portraying a vision of an America with the fast trains of France, the smooth highways of Germany and the internet connectivity of South Korea. Just as Abraham Lincoln had transcontinental railroads, Franklin Delano Roosevelt had the New Deal public works programme and Dwight Eisenhower oversaw the creation of the interstate highway system, Mr Obama saw scope for a post-recession infrastructure boom.

But increasingly partisan politics and a stubbornly weak economy have conspired to force him to act small. The impact of the $787bn Recovery Act, the package of tax cuts and “shovel-ready” infrastructure projects Mr Obama introduced when he took office, is petering out; and the wrangle over raising the federal borrowing limit has made any talk of spending almost impossible. “It’s a different time in Washington right now,” Robert Puentes, an infrastructure expert at the Washington-based Brookings Institution, says of the way deficit cuts dominate discussion. “Today everything is on the back burner.”

The president, who last year set an ambitious goal of doubling exports within five years, has signalled he will refocus once the debt ceiling debacle is over. “If we have a plan to get that done, then the next step is looking at bolder plans like infrastructure,” he said in a television interview last month. “Putting people to work, rebuilding. Not just our roads and bridges, but also broadband lines, high-speed rail – putting all those construction workers that used to be in housing to work.”

A senior administration official says the president will settle for incremental progress. “If we can’t do all of these things at one time, let’s do the things that we can get done, and over time they add up,” he says.

Such progress cannot come soon enough for business leaders such as Scott Davis, chief executive of UPS, the package delivery company for which a delay of five minutes a day per truck costs $100m a year. “The US is not going to be competitive with the rest of the world if we don’t have the proper infrastructure. It’s frustrating,” Mr Davis says, describing how moving goods by truck is eight times more efficient than by air, and rail is four times more efficient than trucking. Ships are the most efficient of all but ports are congested, he adds.

It is imperative to tackle the problem, he says. “The way we’re going to have jobs is by growing and exporting. We need to be able to compete with the developing world but we can’t unless we have the infrastructure.”

Indeed, the US spends only 2.4 per cent of gross domestic product on infrastructure – less than half the average of 5 per cent that prevails in European countries – and half the level of 1960, according to the Treasury. In its latest infrastructure report card, the American Society of Civil Engineers awarded America a D. One in every five bridges is classified as “structurally deficient”, requiring significant maintenance, repair or replacement. This was the classification held by the I-35W bridge in Minneapolis before it collapsed in 2007, killing 13 and injuring 145.

The number of miles travelled by cars and trucks has doubled in the past 25 years, but highway lane miles have increased by only 4.4 per cent. Demand for electricity has increased by about one-quarter but the construction of new transmission facilities has decreased by 30 per cent. The US now ranks 23rd for overall infrastructure quality, according to a World Economic Forum study.

Deteriorating surface transport infrastructure will cost the economy more than 870,000 jobs by 2020 and suppress GDP by $3,100bn, says the ASCE. If investments in surface transport are not made within the next decade, businesses will pay an added $430bn in costs and exports will fall by $28bn.

To bring surface transport infrastructure up from deficient to sufficient would require an additional $94bn investment in highways and transit systems, the report concluded. “If we continue to fail to make these investments, it will affect families, businesses and our place in the world economy,” says Kathy Caldwell, president of ASCE.

But such large numbers are a hard sell in Washington. Though some deficit-cutting proposals included plans to increase infrastructure spending, none came close to the level needed even to maintain roads, bridges and airports in their current condition.

There is little doubt infrastructure projects are a winner when it comes to creating jobs, even if only in the short term. “For every dollar spent, we get more out of infrastructure investment than anything else,” says Donna Cooper of the liberal Center for American Progress think-tank, a former deputy mayor of Philadelphia. “If you give $1bn in tax breaks, you’re not sure if it creates any jobs. But spend $1bn on bridges and you know it creates 18,000 jobs.”

However, efforts to promote infrastructure spending are bogged down in Washington over concerns about who receives credit for creating jobs, Ms Cooper says. “This is not because of the financial or the budget crisis – this is politics. It’s all caught up in the fight for the next presidential election,” she says.

Numerous proposals have stagnated on Capitol Hill. The previous five-year authorisation for highway spending, worth $285bn, expired in 2009 and Congress has failed to pass a new one, instead using a hodge-podge of extensions. With the latest due to expire on September 30, John Mica, Republican chairman of the House of Representatives transport and infrastructure committee, last month unveiled a six-year bill that would cut spending by about 35 per cent.

The Senate’s environment and public works committee responded with a two-year, $109bn bill that would keep spending at current levels plus inflation rather than cutting it. Though some Democrats are unhappy at maintaining the status quo rather than boosting spending, this proposal is more likely than Mr Mica’s to win bipartisan support. House Republicans “would vote down a Mother’s day resolution if it had extra spending”, he said, referring to the Tea Party caucus that generally objects to any increased spending.

Infrastructure should be a promising area for bipartisan compromise, says Ryan McConaghy of the Third Way, a left-leaning think-tank. “For the left it’s a job creator with immediate effects, like FDR’s New Deal or Eisenhower’s highway system. And the business community supports it because it makes investment decisions more attractive.”

Both the labour unions and the Chamber of Commerce, seldom on the same side of an issue, support greater infrastructure spending. The chamber has criticised Mr Mica’s $230bn bill for being too small.

The problem is not about the rationale but the revenue. American infrastructure investment has historically followed a user-pays model. Money for roads, for example, comes from the Highway Trust Fund, by way of a fuel tax of 18.4 cents a gallon and 24.4 cents per gallon on diesel. But revenue from petrol and diesel taxes has shrunk, particularly as high pump prices cause drivers to economise, while the cost of building and maintaining roads has risen. The fund will run dry in 2013 if left unaddressed.

The tax is low by international standards, and has not risen since 1993. But every elected official in Washington knows that messing with it is political suicide. “So the question is, how do you pay?” says Mr McConaghy of Third Way. “Banks get you only part of the way, bonds get you only part of the way, but ultimately you need a new revenue stream.”

As an example of good governance, Ron Utt of the conservative Heritage Foundation holds up Bob McDonnell, the Republican governor of Virginia. Mr McDonnell campaigned for office in 2010 with a proposal to fund improvements to the state’s roads without raising taxes. “He found $1bn in [public] money sitting around or being wasted, which he has used on a huge and ambitious building programme, resurfacing roads and building new bridges,” Mr Utt says.

Chris Edwards, who runs down­sizinggovernment.org for the libertarian Cato Institute, says the government should hand infrastructure to the private sector. “Other countries – in Europe, and Canada and Australia – have privatised their air traffic control, airports and roads,” he says. “We don’t have the money for infrastructure that we had in the 1950s.”

The incentive to do more with less is adding new impetus to decades-old plans to establish a national infrastructure bank, an idea supported by Mr Obama. In his budget in February, the president requested that Congress put $5bn a year for six years into establishing such a bank.

Several blueprints are in circulation, including one from Democrat John Kerry and Republican Kay Bailey Hutchison that would create a lender based on the federal Export-Import Bank, which Mr Kerry says could turn $10bn into as much as $640bn in 10 years. Others want to model it on the European Investment Bank, which holds about $300bn in capital from European Union member states. “The whole point is to leverage private capital so it won’t just be on the government’s dime,” the administration official says.

Critics warn that, if the infrastructure bank issued its own bonds, it could run into trouble like Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders whose debt Washington was forced to guarantee in 2008. But in an area where cost overruns are rampant, a greater involvement of private capital could help assuage concerns.

The bank also offers something sorely missing from US transport policy, which has not been updated since the 1960s: a national strategy. It would have an independent board of directors that would give projects the green light based on need, rather than pork-barrel politics. Lawmakers have used “earmarks” to win funding for developments in their district, regardless of whether they made regional or national sense. The most notorious was the $398m Alaska bridge connecting the island to a town of 50 people, which was scrapped in 2007 after a public outcry.

“I don’t think the American public needs any convincing that we need infrastructure investment,” says Ms Cooper. “I think they need convincing that the government can do it right, and that they won’t waste their money on bridges to nowhere.”

Local funding: Slower muni sales point to a mood of austerity and a fear of defaults

Municipal bond issuance, which finances a big chunk of the roads, bridges, tunnels, sewer systems and schools built across the US, has plunged to its lowest in more than a decade. The drop follows a retreat by investors, who fear rising local defaults following the recession, as well as austerity among politicians shying away from big projects and debt sales, writes Nicole Bullock.

“In the current political environment, some people, not only elected officials, are claiming that there is no distinction between ‘spending’ and ‘investing’,” says Emil Frankel of the Bipartisan Policy Center, a think-tank.

States and local governments typically do not build reserves for these investments. For its part, the federal government provides tax breaks for local individual investors to buy “munis”, allowing states and city governments to pay relatively low interest rates on their borrowings.

So far this year, about $140bn in muni bonds have been issued, the slowest annual pace since 2000, according to Thomson Reuters. Analysts’ estimates are for $250bn-$275bn for the full year, compared with an annual average of $360bn over the past decade.

Direct infrastructure investment by the private sector could fill some of the gap, but such deals are less common in the US than in Europe and Asia – partly because munis have provided cheap funding. Such projects have faced resistance from those who fear rising costs if assets are run for profit.

But interest in public-private partnerships is growing, especially for transport projects and the management of vehicles used for public services, says Christopher Mier at Loop Capital, a broker and investment bank.

The decline in muni issuance will not shutter existing projects, since they are typically planned and financed far in advance. Last year was a record for the muni market, with $430bn in bonds sold. A federal programme, called Build America bonds, which provided incentives for infrastructure bonds, fuelled issuance and some states accelerated their financing plans to take advantage of the federal aid, which expired at the end of 2010.

“The impact [of this year’s decline in muni issuance] will be felt next year,” says Matt Fabian, managing director of Municipal Market Advisors, a research group. “Diminished ability or interest in borrowing, which may persist, means fewer projects being done in the medium term and ultimately the need for other sources of funding to develop.”

Copyright The Financial Times Limited 2011.

It’s time to name and shame the corporate scroungers

David Cameron has wearied of austerity. Last summer the prime minister took a bucket-and-spade break in Cornwall to show solidarity with middle Britain. This year he has opted for the sumptuous splendour of a Tuscan estate. Mr Cameron has had a turbulent time of late. Aides say he needs the rest.

I cannot see why anyone should worry about his choice of holidays. There is something infantile about politicians pretending to feel the pain of the voter on the Clapham omnibus. People knew when they elected him that Mr Cameron hailed from wealth and privilege.

If the prime minister is to be criticised it is for pretending otherwise. Pace George Osborne, the chancellor, we have never been all in this together. Sure, ministers have taken a pay cut. They have also capped the salaries of senior officials. This is gesture politics. These are not the sort of people who will ever find themselves running short of money on a Thursday.

The problem with pay at the top in Britain is in the private sector. One group has sailed unscathed through the global financial crisis, the recession and the fiscal squeeze: the executives at the helm of UK’s big companies. The banks, still paying hefty bonuses on the back of taxpayer subsidies, provide the most egregious example. Barclays distributes a large slice of its profits to a few hundred employees. Bob Diamond and his colleagues, though, are not alone in their excesses.

As my FT colleague Brian Groom has detailed, the chief executives of FTSE 100 companies saw their pay rise last year by a median 32 per cent. That compares with 2 per cent for most workers. This was not a blip. In 1998, the average pay of these business leaders was 47 times higher than that of employees. By 2010 the multiple had soared to 120. Yet the real value of their companies hardly changed. So much for claims that pay matches performance.

The upshot has been a new plutocracy whose interests and incentives are wholly detached from the rest of society. The share of national income taken by the top 0.1 per cent has returned to the level of the 1940s. Soon we will be back in Victorian times.

The ritual response is that this is all about globalisation. Businesses compete across the world. Unless they pay the going rate, talent will go elsewhere. This is pretty much self-serving nonsense. There are some executives who, in the manner of football players or rock stars, can name their price. But anyone with a passing acquaintance with Britain’s boardrooms knows they are also stuffed with time-servers. Pay levels are set by self-sustaining cartels. Remuneration committees charged with tying rewards to outcomes are hopelessly conflicted. Shareholders cannot be bothered to offer more than token protests.

The inequality is measured not just by the gap between the top and the bottom. The boardroom elite have left behind those at the apex of the professions and entrepreneurs creating jobs and wealth in small and medium-sized businesses.

One scarcely needs to sign up to the politics of envy to believe this is deeply corrosive of the sense of fairness and shared obligation on which liberal democracies depend. It exempts the undeserving rich from the responsibilities borne by everyone else. It erodes acceptance of the role of wealth creation in raising living standards for all.

There is no quick fix. Pip-squeaking tax rates would drive the best elsewhere. Governments cannot set pay. Exhortation takes you only so far in persuading shareholders to clamp down on pay and option packages that reward failure. What’s left is the bully pulpit – a concerted effort to explain that it is as socially unacceptable for these executives to overpay themselves as it is for so-called welfare scroungers to over-claim on their benefits. Now, there’s a useful cause for the tabloid press.

The process has to start with transparency. Companies should be obliged to provide much clearer information about the relationship between performance and pay. Complex “incentive” packages should be decoded. Boardroom salaries should be consistently measured against the rest. Shaming the culprits won’t solve the problem entirely. It will do a lot more good than worrying about where politicians spend their holidays.

It’s time to name and shame the corporate scroungers, © 2011 Financial Times

Inside Match.com

It's all about the algorithm.

By David Gelles; Posted Saturday, July 30, 2011, at 7:12 AM ET

Entering the offices of Match.com is a bit like strutting into a disco. Coloured lights flash from the ceilings, workers lounge on circular banquettes, dance music plays from hidden speakers. Despite being in a mid-rise office tower overlooking a turnpike in the dry, landlocked city of Dallas, Texas, the Match offices are evocative of a racier environment, where anything might happen.

On a hazy Monday in June, I came to meet Mandy Ginsberg, the president of Match.com US, the world's largest online dating site. Petite, preppy and freckled, with long brown hair, Ginsberg was wearing sandals, tight black jeans and a loose blouse. Her jewellery was limited to a diamond bracelet and a wedding band. Confident and casual, she seemed as good a person as any to be the face of online dating. We sat in a conference room overlooking a floor full of computer engineers gazing at their monitors, and with a PowerPoint presentation, she endeavoured to show me how Match uses cutting-edge technology to cultivate age-old emotions.

With the number of paying subscribers using Match approaching 1.8 million, the company has had to develop ever more sophisticated programs to manage, sort and pair the world's singles. Central to this effort has been the development, over the past two years, of an improved matchmaking algorithm. "We had to get more intelligent," Ginsberg says. "If you say you want a guy between 30 and 35 in New York who has a master's degree, you're going to get thousands of matches."

Codenamed "Synapse", the Match algorithm uses a variety of factors to suggest possible mates. While taking into account a user's stated preferences, such as desired age range, hair colour and body type, it also learns from their actions on the site. So, if a woman says she doesn't want to date anyone older than 26, but often looks at profiles of thirty-somethings, Match will know she is in fact open to meeting older men. Synapse also uses "triangulation". That is, the algorithm looks at the behaviour of similar users and factors in that ­information, too.

Until Ginsberg joined IAC, which owns Match, in 2006, she worked at i2 Technologies, a supply-chain management company, also based in Dallas. She was promoted to her current post earlier this year, after former Match president Gregg Blatt was made chief executive officer of IAC. Besides having the right resume for the job, Ginsberg had enough experience in love to know that finding the right partner is tough.

After a divorce shortly out of college, she tried JDate, a site for Jewish singles, but kept coming up short. Then, while still at i2, she became involved with an engineer at the company who was born halfway across the world. They soon married. "If I had laid out a criteria for what I was looking for, it would not have been a guy from south India," she told me. "People are complex. You're constantly making trade-offs about who's too tall, too short, too smart and too dumb. People come in and tell us a bit about what they're looking for. But what you say and what you do can be different."

Academics call this "dissonance". "It's a theme that runs through social psychological literature," says Andrew Fiore, a visiting assistant professor at Michigan State University, who works on computer-mediated communication. "We don't know ourselves very well on a descriptive level."

The same is true for the millions of Match users, says Ginsberg, and she tried to incorporate dissonance into the algorithm. "I might come in and say I'm looking for a nice Catholic guy between 30 and 40 who is non-married," she says. "But after weeks of looking at people, I might get an e-mail from a guy who has kids, and I might accept that. It's all about behaviour modelling. All that data goes into algorithms and affects who we put in front of you."

To sort expressed ideals from actual desires, Ginsberg realised she would need some technical help. After becoming executive vice-president and general manager of Match's North American operations in 2008, Ginsberg initially looked to her old employer, i2, for assistance. "I brought over a bunch of people who I thought could help solve one of the most difficult problems out there, which is how to model human attraction," she says.

A key recruit was Amarnath Thombre, a soft-spoken engineer from Pune, India. Thombre had attended the prestigious Indian Institute of Technology Bombay, then taken an advanced degree in chemical engineering at the University of Arizona. Like his boss, he met the love of his life offline. His wife is also Indian, and they were introduced through family.

Yet Thombre says his experience at i2, where he spent years finding ways to move products around the country more efficiently, was perfect preparation for the online dating industry. And once at Match, he, Ginsberg and a team of nine maths whizzes hired by Thombre, set about updating the Match algorithm. "The one thing I knew was numbers and analytics, so we started building a numbers team here," he told me. "It's just supply and demand. The same principles work, no matter what kind of numerical problem you're solving."

The way the Match algorithm learns, he says, is similar to the way the human brain learns. "When you give it stimuli, it forms neural pathways," he says. "If you stop liking something, those shut off. It's learning as you go." The same principles are powering the recommendation engines at popular sites around the web. Amazon uses similar technology to recommend new products for people to buy, Pandora learns from likes and dislikes to customise its internet radio stations, and Netflix famously offered $1m to anyone who could improve the effectiveness of its algorithm by 10 per cent.

"With Netflix, people are constantly rating movies," Thombre told me. "But there's only one The Godfather, and you rate it once." Predicting preferences in human beings is altogether more complicated. "Even if you like The Godfather, The Godfather doesn't have to like you back," he said. "The whole problem of mutual matching makes the problem 10 times more complicated."

It is a subtle shift, but one with profound implications. "Before, matches were based on the criteria you set. You meet her criteria, and she meets yours, so you're a good match," Thombre explained. "But when we researched the data the whole idea of dissonance came into focus. People were doing something very different from the things they said they wanted on their profile."

As a result, Match began "weighting" variables differently, according to how users behaved. For example, if conservative users were actually looking at profiles of liberals, the algorithm would learn from that and recommend more liberal users to them. Indeed, says Thombre, "the politics one is quite interesting. Conservatives are far more open to reaching out to someone with a different point of view than a liberal is." That is, when it comes to looking for love, conservatives are more open-minded than liberals.

With a mountain of data in its servers from the 75 million users it has had since it was founded, Match has been able to uncover a series of curious trends. Some findings are obvious. Women are less likely to e-mail with men who live far away, men who are older than they are, and men who are short. Other findings are more nuanced. Catholic women are especially unlikely to e-mail a Hindu or atheist male. While men are most particular about hair colour, a woman's income is less important to them. "We are so focused on behaviour rather than stated preferences because we find people break from their stated preferences so often," Thombre says.

The Match algorithm is constantly at work behind the scenes, scouring terabytes of data and working to find possible matches. Likely candidates are suggested when users ask to see "more like this" and are also put forward through the "Daily5", a selection of profiles e-mailed to users each day.

But it is not enough for Match simply to suggest dates without gauging the effectiveness of its efforts. When each Daily5 profile is viewed, the user has to "rate" that profile before he or she can see the next one. The site asks users if they are interested in the suggested match, and gets a reply of "Yes", "No" or "Maybe". Each answer is recorded and logged with the user's profile, becoming another data point for the algorithm to work with.

It's not known how many dates the algorithm has resulted in. Match can't know what happens offline. Yet it is clear that changes to the algorithm orchestrated by Ginsberg and Thombre have had an impact on Match users' engagement with the site. Since the introduction of the improved algorithm, the "Yes" ratings on the Daily5 have increased over 100 per cent. More than half the e-mails sent on Match now originate from ­recommended matches (chiefly Daily5). And during the past year users have logged more than 416 million Daily5 ratings. Says Ginsberg: "If we can get more people going out on dates, it will have a profound impact on our success rate."

On the evening of April 5, 2010, Jonathan Cambry, a muscular professional pianist living in Chicago, switched on his computer and logged on to Match.com. Cambry, then 28, had joined Match a few months earlier. He had recently separated from a girlfriend, but had grown weary of spending time and money trying to find dates at local bars. "That wasn't something I was interested in, and it gets expensive," Cambry explains.

So, for about $20 a month, Cambry maintained an account on Match under the alias "Wrigley-Pianist", where he could browse the online profiles of thousands of women in the Chicago area, and communicate with them through e-mail and instant message. And on this evening, as an unseasonably late hailstorm kept most Chicagoans indoors, he was notified by Match that a user named "soubrette1988" was interested in him, having seen his profile in her Daily5.

Viewing the profile, Cambry, who is black, saw a pretty young white woman who lived nearby and seemed to share his interest in music. He sent her a short e-mail to say hello, and within a day received an e-mail from Karrah O'Daniel, an opera singer. Their first date was a flop, but they made it to a second date, and soon Cambry and O'Daniel were getting serious. It turns out they had attended the same music school, but never met there. They took to playing pieces by Franz Liszt together, recording videos that they would post on YouTube. Six months later, he proposed. The two are to wed on October 1 at a church in Minnesota.

As often happens in love, the woman Cambry fell for is not exactly the woman he thought he wanted. "I wasn't expecting that the person I was going to marry would be a white woman from Inver Grove Heights, Minnesota," he says. Nor did Cambry fit neatly into O'Daniel's idea of who she would marry. According to her Match profile, she was looking for a man between the ages of 21 and 26. Cambry, by O'Daniel's own standards, was too old for her. In fact, Cambry and O'Daniel never really searched for one another at all. They were introduced by the algorithm.

Cambry was included in O'Daniel's Daily5 because he was similar to 11 other men that she had already indicated she was interested in with a "Yes" rating, Thombre told me. So even though he was older than O'Daniel wanted, and described himself as "stocky", while O'Daniel wanted a man with a body type that was "about average" or "athletic and toned", Match correctly assumed she might be interested in him. "We didn't match, but you can't really sum up a person in a check box," says O'Daniel. "Women change their hair colour every month."

Online dating has come of age. Once a seedy corner of the internet, digital romance is today nearly as commonplace as e-commerce. Of the 87 million singles in the US, nearly half of them, or 40 million, have tried online dating, according to the US Census. Some surveys estimate that one in five new relationships, and one in six new marriages, begins online. "This is one of those businesses where scale really matters," says Ginsberg, noting that Match has facilitated 1.2 billion e-mails since 2005, and 110 million virtual winks [a way for members to "break the ice" before e-mailing] in the past six months. She also says there is no reason to expect growth to stall any time soon, as online dating becomes more mainstream and new singles of all ages come online. "With the divorce rate in this country being 50 per cent, we're a reflection of that society," she says.

Internet dating has also matured into a robust business. Match is owned by IAC, the digital media conglomerate. Last year it and IAC's other online dating sites generated $401m, or nearly a quarter of all revenues for the group. Paying users were up by 30 per cent last year, to 1.78 million. Most revenues come from subscriptions, with some extra cash coming from advertising. Diet ads, such as WeightWatchers for Men, are popular on the site.

Online dating is also an international phenomenon. Native language sites flourish in countries around the globe. Match UK is successful, though operated independently. And while Match is the best-known and largest online dating site on the web, it has plenty of competition. Chemistry.com, another IAC property, is growing. eHarmony, a rival, has proved popular with an older crowd looking for serious relationships. Niche sites cater to specific nationalities and religions, such as Shaadi for Indians and JDate for the Jewish crowd. OkCupid, launched in 2004, is free to use and has caught on with the young, ­hipster subset. Its success led IAC to purchase it for $50m earlier this year.

Pressure from new competitors has made Ginsberg and Thombre's work all the more critical for their company's success. "Match's fundamental offering is more vulnerable today than at any previous point," says Frances Haugen, a software engineer at Google who studied Match while at Harvard Business School. "With the advent of improved recommendation algorithms and the implicit compatibility information encoded in social networks, Match must act now or put itself at risk for disruption in the next five years."

So far, Match has not been knocked askance by the advent of social networking. In fact, advertising on Facebook has become a great recruiting tool for Match. "Facebook is about people you know, and Match is about connecting to people you don't know," says Ginsberg. And while there is indeed more competition than ever before, 16 years after Match.com was founded as one of the original online dating sites, it is still positioned as the industry's frontrunner.

Match.com was founded in 1995 by Gary Kremen, an entrepreneur who saw the potential of the web early on. Single at the time, Kremen was using 1-900 number dating hotlines he found in the classified sections of newspapers to meet women. "I noticed I was paying a lot of money for those numbers, and those big bills got me thinking that maybe people would pay the same online," he says.

Kremen was right. He founded a company called Electric Classifieds in 1993, and two years later unveiled Match. It was one of the first sites to use the internet to facilitate dates, and among the first to charge money for a service. "That was the original idea, to do classified ads but make it electric," said Kremen. "I always knew a lot of women; I've done a lot of dating in my life."

Kremen says he designed the site with women in mind. "You have to design the whole system for women, not men," he said. "Who cares what men think? So things like security and anonymity were important. And little things, like talking about body types, not pounds. Never ask a woman her weight."

Yet Kremen was faced with an early problem. In 1995 most people weren't online, and those that were weren't finding dates there. So Kremen got everyone he knew to sign up for Match. He had all Match employees create profiles, and even though he was in a relationship, he signed up and had his girlfriend sign up, too. There was early success. A critical mass started using the site and online dating in the internet era was born. But it backfired in one important respect. Kremen's own girlfriend met another man through Match and left him. It was a painful lesson, but at least he knew the site worked.

Kremen and his board had a falling out soon after Match got going, and the company was sold in 1998 for $7m to Cendant. A year later, Cendant sold it to IAC for $50m. Since then, IAC has grown Match to be the most dominant dating site on the web.

Not all digital romance is as wholesome and picture-perfect as the love between Cambry and O'Daniel, however. There is a dark underbelly to online dating that attracts spammers, con artists and those not suited for modern love. A recent lawsuit filed against Match levelled the claim that more than half of its profiles were inactive or fake, an accusation the company denies. Real-life users can be problematic, too. Stories of dates gone awry abound, ranging from the merely awkward to the truly creepy to the tragically abusive. A California woman sued Match after a sex offender she met on the site allegedly raped her. Match has since begun screening new members against the national sex offender registry.

Nor is the online dating experience universally positive. Plenty of users give up on the service after one too many bad dates. "The Match algorithm should have figured out that I don't want a 45-year-old from New Jersey," said one frustrated thirty-something professional woman from Manhattan. "Every time I log on I feel faintly insulted."

However, every corner of the web has its unsavoury aspects. "I don't know how bad an underbelly it is compared to the rest of the internet," says Andrew Fiore. "There are good and bad operators in every sector." And that people are often disappointed with their dates is no surprise to those who have studied the industry. "People tend to like their dates less on average once they've met them face to face," he says. "They tend to like the online version better."

An online profile, of course, is not an accurate reflection of someone, but a template for them to project their ideal self-image. "Once you meet them in person, it's harder to have as many optimistic illusions about them," says Fiore. "We engage in this kind of idealisation when we're faced with limited information about people online. We fill in the gaps optimistically." Fiore calls this "an illusion of specificity". "It's a way to give someone a sense of control," he says.

And even Fiore acknowledges that for all the utility online dating provides, reducing potential soulmates to pixelated thumbnails and fields of information can be a draining experience. "It can feel a lot like shopping for a blender on Amazon.com," he says. "But these are people we're talking about, not blenders." Not even the most potent computers in the world, it seems, can engineer a panacea for lonely hearts.

Despite these concerns, it is becoming accepted wisdom that any lingering shame around online dating is gone. Familiarity with the internet, a more casual dating culture and verifiable success stories have all helped. By now, most of us are not far removed from a couple who met online. "There's a tipping point happening," says Ginsberg. "There used to be this stigma, or it was 'good for my friends but not for me'. People don't realise how pervasive online dating is."

We don't know another industry that can change people's lives so profoundly, except the medical one

And it is an industry that has evolved. Were Match still the site that Kremen founded in 1995, Cambry and O'Daniel would never have met. While plenty of online hookups still happen the old-fashioned way – by searching based on criteria such as location, age and interests – an increasing amount of digital matchmaking is being powered by sophisticated algorithms like the ones Ginsberg and Thombre conjured up.

With their algorithm, Ginsberg and Thombre have taken the allure of online dating and amplified it. Instead of simply creating a digital disco where it is easy to find lots of potential dates, they have put forward a tantalising promise. By evaluating your stated preferences, mapping your site behaviour and using triangulation, Match.com will get to know you, and what you want, better than you know yourself.

It's not a promise Match can keep with all of its users. But for some, like Cambry and O'Daniel, it can prove transformative. "We don't know another industry that can change people's lives so profoundly, except maybe the medical industry," says Ginsberg. "We often deal with the maths and the statistics, and we have to keep reminding ourselves that this is about helping people find love. There's not that many businesses that can say that."

This article originally appeared in Financial Times. Click here to read more coverage from the Weekend FT.

http://www.slate.com/articles/life/ft/2011/07/inside_matchcom.single.html

© Financial Times 2011

The Would-Be King of Tinseltown

The meteoric rise and possible fall of Relativity's Ryan Kavanaugh.

By Matthew Garrahan|Posted Saturday, July 23, 2011, at 7:05 AM ET

High on the cliffs of Anacapri, overlooking the blue waters of the Bay of Naples, sits Da Gelsomina, a renowned restaurant and hotel. Surrounded by vineyards, it is known for its beautiful swimming pool and fine food: the pickled aubergines are one of its specialties.

The venue was booked a few weeks ago for a lavish private wedding party. Capri used to be the holiday destination of choice for vacationing Roman emperors but at the beginning of July it was the Hollywood elite that descended on the island. Leonardo DiCaprio attended; Bradley Cooper, the star of the Hangover films, was also present, as was Ryan Seacrest, the host of American Idol, and Gerard Butler, who starred in the sword-and-sandal epic 300. They were there to see their friend Ryan Kavanaugh marry his fiancee, Britta Lazenga, a dancer with the Los Angeles Ballet. The guests are household names but it is unlikely you will have heard Kavanaugh's name before—although you may have seen it, or that of his company, as the credits rolled in one of the many films he has produced, such as The Fighter, a winner at this year's Oscars, or Limitless, the March hit that starred Cooper and Robert De Niro. As the founder and chief executive of Relativity Media, a company which has, in only a few years, evolved into a fully fledged movie studio, Kavanaugh is a mogul in the making, his ascent to the upper echelons of Hollywood's hierarchy as rapid as it has been unexpected.

At just 36, the red-headed Kavanaugh has already produced more than 30 movies. He has raised billions of dollars from Wall Street firms, money which has been invested in more than 100 films released by Hollywood studios—Sony Pictures and Universal Pictures, among others. Hancock, Mamma Mia!, The Social Network, Salt, and the upcoming Cowboys & Aliens, starring Daniel Craig and Harrison Ford, have all been partially financed by blockbuster deals that were arranged by Kavanaugh.

Such a meteoric rise has not gone unnoticed: The film trade paper Variety recently anointed Kavanaugh its "Showman of the Year" in a special issue which included 20 pages of gushing tribute ads from friends and business partners. Variety also declared that Kavanaugh "eschews sleep, clocking a mere 90 minutes to two hours a night" and revealed, among other things, that when not producing movies he spends his time "working with sick kids in hospitals," practicing "transcendental meditation," and "closing in on a cure for cancer" through his involvement with a bio-tech venture.

Kavanaugh's is an unlikely path to movie moguldom. After attending UCLA, he started a small venture capital and stock trading firm, which attracted several film-industry clients. The company would eventually collapse, but while pondering what to do next Kavanaugh realized there was money to be made funneling Wall Street funds into Hollywood.

Films have not always been the best bet for Wall Street: They are unpredictable investments and big budget releases can be risky. But in the heady days before the 2008 financial crash Wall Street could not get enough of Hollywood, and Kavanaugh had a ringside seat. Private equity firms and hedge funds poured billions of dollars into movie "slates"—the multiple movies produced and released by Hollywood studios each year. These deals had typically been arranged by big banks but Kavanaugh carved an opening for himself, utilizing his Hollywood connections and financial acumen to perfection.

Kavanaugh was new to the party and spoke openly about how he was going to fix a broken entertainment industry that he claimed wasted too much money. This made him as many enemies as friends yet he struck gold and the studios lapped up the cash he sent their way.

But Kavanaugh was not content to be a financial middle-man. In 2005, he formed a pivotal bond with Elliott Associates, a mammoth New York hedge fund, when it made a small investment in one of his slate deals; within three years it had invested hundreds of millions of dollars in Relativity to help him achieve his dream of starting his own movie studio. Other banks pulled out of Hollywood financing, scarred by the financial crash, but Kavanaugh kept going, backed by Elliott's millions.

Recent events have sorely tested those ties. Kavanaugh wanted more money to expand his company late last year but the hedge fund wouldn't play ball. Barbs were exchanged via the Hollywood press, relations soured and the drama has left Kavanaugh at a crossroads. He has plenty of detractors and many people have told me they think he is heading for a fall. And yet he is close to selling part of his company to new partners in a deal with the potential to power Hollywood's youngest movie studio to new heights. The question is, does he have what it takes to stay in the game as one of Hollywood's most influential players?

Ryan Kavanaugh is young compared with the cigar-chomping studio heads of yore such as Louis B. Mayer, the legendary co-founder of Metro- Goldwyn-Mayer, or MCA Universal's Lew Wasserman, who amassed Hollywood power and influence over decades. "He's in a league with some really heavy-hitting producers but the difference is he's so young and has done it in such a short period of time," says one person who knows him well.

He doesn't dress like a movie mogul and usually wears jeans, Converse trainers and a shirt with a black tie askew. His grandparents were Holocaust survivors: His father Jack changed his surname from Konitz to the Irish-sounding Kavanaugh when he began practicing dentistry. Jack has also started several companies—and seems to have given his son the entrepreneurial bug.

The latter manifests itself in restlessness and endless energy: Kavanaugh, who declined to be interviewed for this article, works and parties hard, friends say. A number-cruncher adept at structuring complex financial deals, perhaps his biggest talent is his charm, with few in Hollywood rivaling his skill as a salesman. He has earned notoriety in the business for his lavish spending: At one dinner at the Ago restaurant—Robert De Niro is one of the owners—Kavanaugh left a $20,000 tip, according to someone who claimed they saw the credit card receipt. Relativity would not comment on the terms of Kavanaugh's remuneration package but the company's growth has given him access to perks enjoyed by other studio heads such as use of a corporate jet for some of his personal outings.

The millions he has earned brokering the Hollywood investments of Wall Street firms has also allowed him to indulge a passion for helicopters. A recent story in the Los Angeles Times revealed that Kavanaugh had earned the ire of some West Hollywood residents for using a local helipad as a private landing spot in order to avoid gridlocked traffic. The helipad was supposed to be for emergencies. In the past, Kavanaugh has suggested that flying gives him a degree of peace. "I think about work 24 hours a day," he told the Hollywood Reporter. "But when you fly a helicopter, for that hour or two you can't think about anything else."

When he began raising money from Wall Street to invest in the groups or "slates" of movies produced by film studios each year, Kavanaugh hit upon a formula which did much to position him as a Hollywood kingpin. Each time a movie was produced using financing arranged by Relativity, Kavanaugh's company would pocket a $1 million fee paid by the studio and investors in the slate and Kavanaugh would receive an executive producer credit. Executive producers typically have little or nothing to do with the technical aspects of a film's production, but Kavanaugh was able to capitalize on the association with films that his partners were making.

"Here was a guy who was a broker," says one person with intimate knowledge of Kavanaugh's company. "The smartest thing he did was demand a credit in each of the films. It looked like he was a producer, and he played that up. It became very valuable currency."

An associate of Kavanaugh's insists that he used this early period to educate himself about the production process. He started to develop projects of his own, buying scripts and striking deals with actors. "He was acting as an executive producer but he was on the set learning from the people making the movies." But sitting in on movie productions that were being financed and controlled by other companies was only appealing for so long. Kavanaugh wanted his own seat at the table—but that meant he needed his own money.

Kavanaugh first met executives at Elliott Associates—the New York hedge fund founded 35 years ago by the Republican donor Paul Singer—in 2005, when he persuaded them to make a small investment in one of his slate deals. The slate did not perform particularly well but the deal was structured well enough to convince them to do more work with Kavanaugh.

In 2008, Elliott was the only investor in a big slate deal with Universal Pictures—a deal that was arranged by Kavanaugh and Relativity. Elliott invested about $600 million in the fund—dubbed Beverly 2—and followed up with an investment in Relativity itself. The hedge fund realized early on that the real opportunity lay in owning a piece of Relativity—especially if it could turn the company into a studio capable of producing and distributing its own titles. How much it has invested is a matter of some debate, with both Elliott and Relativity declining to comment. However, a person close to Elliott says the firm invested $20 million at first and gradually increased the amount to about $250 million—a mix of debt and equity—in return for about half of Relativity. But an informed source close to Relativity says Elliott has invested more for its stake, putting about $700 million in debt and equity into the movie studio.

Whatever the real number, Relativity "has developed into a real operating business," according to Jesse Cohn, a portfolio manager at Elliott—and one of the first people at the firm to work with Kavanaugh. With Elliott's backing, Kavanaugh acquired a distribution network so Relativity could release its own films in cinemas rather than pay a rival studio to distribute them on its behalf. He struck a lucrative pay-TV deal with Netflix, the online streaming movie service, which guaranteed additional cash for the films he produced, and he signed a DVD distribution deal with the Fox studio.

Relativity doesn't exactly fit the mould of a typical Elliott investment. The firm has $17.5bn of assets under management and specializes in distressed debt: when Lehman Bros. collapsed in 2008, Elliott stepped in and began buying bonds. Still, the firm found Relativity to be a compelling investment. "The Elliott guys are analytical, not emotional," says one person who has worked closely with them. Referring to clashes between the hedge fund and Kavanaugh, he says the two sides have "had their moments … Ryan's a colorful guy and the one thing you can say about the Elliott guys is they're not colorful."

The contrast in styles hasn't, however, stopped Kavanaugh benefiting from the firm's backing. Over the years, he has received as much as $100 million, which includes money he received for the share of the business he sold to Elliott, according to a person familiar with the two companies. Once Elliott was on board, Kavanaugh also became a heftier presence at international film festivals such as Cannes, where he began competing with the likes of Harvey Weinstein, the co-founder of Miramax, for the best new projects. With his company flush with cash he had become a force to be reckoned with.

But Kavanaugh wanted Relativity to grow more quickly. While his relationship with Elliott progressed well for the first couple of years after the hedge fund bought into Relativity in 2008, it has recently threatened to come unstuck.

At the end of last year Kavanaugh was rebuffed by Elliott when he tried to garner support to buy a film library—a large collection of films that could provide a steady flow of cash, thanks to their availability on DVD or pay TV. Elliott was unwilling to back any more deals. "They just didn't have the appetite for it," says a person familiar with the situation. "They wanted the company to make good films, get its distribution in place … you don't run before you can walk."

There have been other bumps in the road on Kavanaugh's journey from broker to head of his own studio. He is no stranger to the courtroom and has had several high-stakes legal battles over the years. In 2008, he sued Citibank after it tried to change the terms of a five-year slate deal Relativity had arranged with Sony Pictures; Citi launched a counter suit and the case was eventually settled out of court: Citi and Relativity continue to be partners but the decision to sue was damaging, according to other bankers active in entertainment lending. "None of the bigger banks would go near him after that," one told me. "You just don't sue your bank."

More recently, he has been embroiled in a dispute with Harvey Weinstein, a rival who is no stranger to legal action. A flurry of lawsuits was triggered by Weinstein, who alleged that Kavanaugh had breached a contract regarding the global distribution rights to a remake of The Crow. Relativity sued back, alleging that the Weinstein Company had made a mess of its release of Nine, the flop musical starring Daniel Day-Lewis—and a film in which Relativity had invested $20 million. The dispute is now to be decided in private arbitration.

Kavavanaugh has had his own scrapes with the law. He was arrested in Malibu in 2006 and charged with driving under the influence of alcohol: He was later convicted on a lesser charge of being slightly above the legal blood alcohol limit. Kavanaugh's lawyer submitted a video testimonial to the court, which included a character endorsement from, among others, former U.S. president Jimmy Carter—a fan of Kavanaugh's charity work. Then, in another incident in 2008, he was stopped by police who alleged he had violated the terms of his probation. The allegation was withdrawn following a petition, but Kavanaugh pleaded no contest to a traffic offence of reckless driving.

He may be a colorful Hollywood character, yet none of the noise that surrounds Kavanaugh has stopped him building his company into a competitive studio. His relationship with Elliott Associates, however, has grown even more strained recently. This is largely due to an ill-timed leak to the Wrap, a Hollywood news site, which claimed that Kavanaugh was planning to sell Elliott's stake in Relativity to a consortium led by JPMorgan. JPMorgan declined to comment but several well-placed sources with knowledge of the deal told me that the story, published in May, was correct. When Kavanaugh took on investment from Elliott he negotiated a clause that allowed him to sell the firm's stake in the company if he found a buyer willing to pay $700 million. Now, after several months of talks, a deal is close, according to those sources.

Relations between Kavanaugh and Elliott soured further two days after news broke about the talks with JPMorgan, when Elliott took over the management of its $600 million slate fund at Universal Pictures. Until that point, Kavanaugh and Relativity had been jointly managing the Beverly 2 slate fund, deciding which Universal films to invest in. The fund, which covers all movies put into production by Universal until the end of 2012, has not performed well so far—one person intimately familiar with the situation said it had lost $100m although this was disputed by another source who said it was "marginally" breaking even.

The real problem with Kavanaugh's role managing the fund arose when Relativity—backed by Elliott's money—began producing and releasing its own films. As a new studio it suddenly found itself competing with Universal for hot scripts, access to the biggest stars and key release dates. Matters came to a head when both Relativity and Universal began developing new film versions of the Snow White story; Relativity's version, which is due to star Julia Roberts, will hit cinema screens before Universal's. The latter declined to comment but Kavanaugh's evolving role clearly rankles. "If I was running Elliott's Beverly 2 fund but I was also running a competitive studio, I wouldn't want the same person running both," says a film financier. "If the guy managing Beverly 2 at Universal is also trying to date his own films … that creates a big problem."

Michael Joe, an Elliott executive who, until recently, worked with Kavanaugh at Relativity, appears to agree. "The big change was when Relativity decided to move into distribution," he told me. "Prior to that Relativity distributed movies through Universal [but] they would compete when Relativity decided to move into distribution. Here was a company that had a partner which was now a competitor."

Several people told me that Joe and Kavanaugh sharply disagreed with each other about the management of Relativity when they worked together at the company. Joe left after less than a year but he had only nice things to say about Kavanaugh. "He's a very hard-charging entrepreneurial guy … he's one of the few people to bring a truly analytical perspective to the movie business."

Relativity has several possible hits on its upcoming slate, including Immortals, a 3D epic set in ancient Greece, due for release at the end of the year. But Kavanaugh needs to conclude the JPMorgan-led deal if he is to keep developing projects and expanding into new areas.

Elliott Associates and Relativity declined to comment on talks with JPMorgan and other investors. However, the guest list at Kavanaugh's wedding this month may offer a clue to the progress of negotiations. Alongside the Hollywood stars at the celebration on Capri were two senior JPMorgan executives: Greg O'Hara, the head of JPMorgan's Special Investments Group, and Ina Drew, the bank's chief investment officer. She is one of the most senior executives at the bank, reporting directly to Jamie Dimon, its chief executive.

The presence of two of JPMorgan's executives in Italy is an indication of the close ties that have developed between Kavanaugh and the bank. Their attendance also has broader implications for Hollywood which, since 2008, has not had the best relationship with Wall Street. After the financial crash most banks and other lenders opted to give the film business a wide berth, with several banks closing their film finance units. But after not being on speaking terms for a few years Wall Street and Hollywood seem to be interested in each other again, judging by the behaviour of JPMorgan.

It is unclear if the deal will go through, and the rest of Hollywood is watching closely, keen to see if renewed Wall Street interest in owning entertainment companies is real or, like so much else in Hollywood, a carefully crafted mirage. But Kavanaugh has worked in the movie business long enough now to know that a good film has to have a compelling third act. If he succeeds in closing the deal he could not have scripted a better finale.

© Financial Times 2011