Posted by Marc Hodak on February 8, 2011 under Uncategorized | 
A coda on the Toyota scare:
A lengthy investigation by NASA into last year’s Toyota Motor Corp. recalls found that engine electronics played no role in incidents of sudden, unintended acceleration of its cars, U.S. officials said Tuesday.
The report, released by the Transportation Department to settle persistent questions over the Toyota recalls, concluded that the auto maker had identified the only two causes of the incidents: defective gas pedals and interfering floor mats.
I’m waiting now for the apologies from all those officials who jumped ahead with their public condemnations, and chased an honest company down the rabbit hole of congressional and media outrage, costing them (and ultimately all of us) billions of dollars.
Posted by Marc Hodak on February 5, 2011 under Executive compensation, Reporting on pay |
A story about Steve Eckhaus, who negotiated some of the Wall Street pay packages that made the news during the reaction to the meltdown:
Among the pay packages with Mr. Eckhaus’s fingerprints is Tom Montag‘s May 2008 deal to join Merrill Lynch, now part of Bank of America Corp. The package, which according to an SEC filing included a $39.4 million guarantee, was among those that caught the eye of regulators in the fury over pay after the financial crisis.
“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”
Unfortunately for Mr. Eckhaus, “a confluence of economic, political and historical factors” is a difficult story for a journalist to write, an uninteresting story for the average citizen to read, and does not yield an obvious scapegoat to throw to the seething mob.
So here it is one more time: highly paid people get what they can negotiate, just like any of us would in their place. The fact that we aren’t in their place is less their fault than ours.
Posted by Marc Hodak on January 28, 2011 under Politics, Reporting on pay |
In one of the more bizarre articles on bankers pay, we read:
U.S. regulators haven’t yet settled on rules governing pay. Since they don’t yet exist, U.S. rules are perceived as much more lenient than those across the Atlantic.
and:
Despite the griping over Bank of America’s compensation structure, the company seems sensitive to the coming regulatory rules. Even though some bankers are receiving more cash, the total bonus pool for investment bankers and traders was down in 2010 as compared to 2009, said people familiar with the situation. In 2009, the pay for investment bankers and traders was more than $4 billion.
It’s as if any sentences strung together with “pay” and big figures is good enough to get published.
To the extent this article has any substance, it appears to be about the “grumbling” and “sniping” among banks due to differences in how they pay their bankers.
Bank of America Corp. intends to give some investment bankers a greater share of their bonuses in cash, the latest Wall Street compensation move roiling banking chieftains as they meet in Davos, Switzerland.
Still, multiple bankers gathered at the World Economic Forum in Davos grumbled that Bank of America would increase the cash portion of bonuses—news that traveled fast once the bank’s employees were told…The rancor is symptomatic of the heightened sensitivity to the issue of compensation, which took center stage at Davos. European bank executives gathered in the Alps this week are up in arms over the lack of similar rules governing payouts by their U.S. rivals.
“It’s not a level playing field,” said William Vereker, co-head of global investment banking at Nomura Holdings Inc.
If you know about HSBC’s marketing campaign, I.E., about how one thing can be viewed in distinctly different ways, then the following might seem ironic:
U.K. based HSBC Holdings PLC has threatened to move its headquarters elsewhere because of regulations that include compensation rules. The bank said it lost roughly a dozen employees to competitors with more lax rules on pay.
In other words, where some people see an overpaid banker whose pay needs to be curtailed, someone else might see talent ready to slip away. As usual, the Europeans see anyone making too much money too soon as a social threat:
Such complaints are particularly acute from European bankers, which have to comply with new European Union requirements that bonuses be comprised primarily of stock or other noncash instruments and must be deferred for at least three years. The most cash that can immediately be rewarded is 20% of the overall payout.
Of course, anything that makes payouts more deferred or uncertain makes them less valuable. If you’re serious about competing, your only alternative (besides changing continents) is to offer even higher compensation.
As the regulators squeezing the balloon on pay, it’s becoming clear that banks will increasingly have to go to their local legislators, with cash in hand no doubt, to plead for competitiveness. If you think that home country legislators would be sympathetic to such pleas without campaign cash support, you’ve never been greeted by a big guy in an ill-fitting suit saying, “Nice business you got there. I’d really hate to see anything happen to it.” And as long as the mob is driven more by personal envy than common interest, these wise guys will keep getting elected, and keep playing chicken with the banking system.
Posted by Marc Hodak on January 23, 2011 under Executive compensation |
…performs the best. At least that was the surprise finding about Morgan Stanley in 2010:
Morgan Stanley, the come-from-behind champion of 2010 league tables, was one of the few bulge-bracket banks to swell both ranks and pay last year.
The firm added 2,048 workers, a 3.4% increase, while setting aside an additional $1.6 billion, or 11%, to pay its staff, according to its earnings release this morning.
The average Morgan Stanley employee took home $256,596, up 7.5% from $238,602 in 2009. The bank was more generous than analysts had expected. Rivals Goldman Sachs and JPMorgan trimmed per-worker pay in 2010.
Obviously, one can’t generalize to say that any firm that bumps up its pay is bound to bump up its performance. But in a year where the competition for talent in financial services took a back seat to looking good for the regulators and media, Morgan Stanley competed more aggressively, and, well I’m just saying…
Posted by Marc Hodak on January 10, 2011 under Unintended consequences |
The horrible shooting in Tucson this weekend predictably took over the airwaves. A multiple shooting may have garnered national headlines in any case, but the fact that a congresswoman was a victim added huge momentum to the story. It turns out that she was specifically targeted by the shooter, but that wasn’t known at the time that the incident made national headlines. Targeting a public official, of course, raises bigger issues about political violence, the integrity of our democratic institutions, etc. (It also enables people to politicize the shooting, although many such people apparently didn’t need any facts about the shooter’s intent to proceed down that path.)
In all the hand wringing about violence to public officials, no one seems to be questioning the role of the press in making such incidents more likely (least of all the press). A free society does not constrain the press even if massive press attention to the shooting of a member of congress might, in fact, creating more such shootings or attempts. A truly free press can even, if indirectly plant the idea in the head of some deranged person looking for instant fame by publishing this:
“I hate to put this in the newspaper, but we don’t have any security,” [Congressman] Sherman said.
I think it likely that publishing such an ironic comment, combined with the over-the-top coverage given to the shooting of a congresswoman, creates a greater security risk for congress members, and ultimately contributes to the larger problems that this coverage highlights. Is freedom of the press worth such a risk? I happen to think so. Given the lack of attention this issue has gotten in the media, the media clearly thinks so, and probably so does most everyone else. I just wonder how people decide which freedoms are worth a risk of violence, institutional integrity, etc., and which are not.
Posted by Marc Hodak on January 5, 2011 under Unintended consequences |
Apparently so:
Though horse lovers cheered when the last slaughterhouses were shuttered, some now say they may not have thought through the consequences.
The slaughterhouses disposed of the thousands of horses abandoned or relinquished each year by owners who find them too old or temperamental to be useful or who simply can no longer afford to care for them. Now, many of those horses are sold for $10 or $20 at low-end auctions and packed on crowded transports to be slaughtered in Mexico. Animal-welfare experts say the horses often suffer greatly on the journey.
In 2006, just 11,080 U.S. horses were shipped to Mexico for slaughter. In 2008, after the American industry shut down, that number jumped to 57,017, according to the U.S. Department of Agriculture.
So, the net effect of this slaughter ban was to transport the horses, and the profit from selling their meat, south of the border. The ban was put into place in large part because of apparent mistreatment of some horses on their way to slaughter. I doubt the mistreatment applied to 46,000 horses, or was equivalent to spending several days starving on a hot train to Mexico.
“Every day, I’m turning horses away. I feel like I’m playing God, because I have to pick and choose,” said Whitney Wright, director of Hope for Horses, a rescue group in Asheville, N.C. She worked to shut down slaughterhouses but now would like to see a few reopen under strict guidelines for humane handling.
If you think killing is tricky business, try bringing something back from the dead.
Posted by Marc Hodak on January 3, 2011 under Unintended consequences |
Todd Zywicki scores a great example of how the one law that will always accompany Congressional action is the law of unintended consequences. In this case, the Dodd-Frank restrictions on bank intended to help poorer users of credit resulted in:
As the chief financial officer of a national payday-lending chain, Advance America, put it: “We believe that we’re starting to see a benefit of a general reduction in consumer credit, particularly . . . subprime credit cards.”
Which is happening because:
In his letter to shareholders last spring, Jamie Dimon of J.P. Morgan Chase reported that, “In the future, we no longer will be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client’s risk profile changes.”
Which is happening because the liberals in Congress care so much about the welfare of poorer users of credit that they figured they could compel the banks to provide it cheaper with a mere show of hands, as if the market for credit acted as arbitrarily as non-market institutions–like Congress.
By the way, unintended consequences doesn’t mean unforeseen consequences. And if the consequences could be foreseen, but Congressmen disregard them anyway, could they really be called unintended?
Posted by Marc Hodak on December 24, 2010 under Politics, Reporting on pay |
U.S. regulators are considering new or expanded curbs on bonuses in accordance with regulations created by Chris Dodd and Barney Frank to prevent another financial crisis (I will never get over the irony that). The law generally prescribes that compensation plans should be designed so as to not encourage excessive risk taking. One of the key design elements to implement that mandate is the deferral of bonuses. The nominal theory is that deferral of awards will create an incentive for the traders to think beyond current period performance, thus avoiding the “swing for the fences” bets that the comp critics insisted were central to the financial crisis.
The assumption that perverse incentives contributed to the financial crisis is reasonable. It does not logically follow that changing those incentives is either necessary or sufficient to prevent another financial crisis, but seeing that would require understanding the root causes of the crisis which, perversely enough, neither Dodd nor Frank had any incentive to do.
But this law assumes two other things that challenge reason:
Read more of this article »
Posted by Marc Hodak on December 16, 2010 under Unintended consequences |
For the second time in a month, I received the following note from Dun & Bradstreet:
Dear Hodak Value Advisors:
We are contacting you regarding a change in your D&B business credit file. Our records indicate your suppliers and vendors have reported a change in the way your company pays its bills.
Please call 1-866-487-xxxx immediately to learn more about the information in your business credit profile.
The note then proceeds to tell me about the benefits of a credit monitoring program they are selling.
Hodak Value Advisors has very modest credit needs. We know exactly who our creditors are, and our relationship with every one of them is stronger than ever, reflecting our perfect record on bill paying. So, it’s plain to me that this message is bunk.
It’s worse than bunk. My assistant was concerned enough when she got this that she had to spend about five minutes checking up on whether there was anything for us to be worried about before being reassured that there was nothing to it. I want D&B to pay me back for that wasted time. The irony is that this note was signed
Sincerely,
Dun & Bradstreet Credibility Corp.
This note, of course, has blown their credibility with me.
Posted by Marc Hodak on December 8, 2010 under Invisible trade-offs, Patterns without intention |
Here’s an article about the use of a new technology to treat prostate cancer:
Roughly one in three Medicare beneficiaries diagnosed with prostate cancer today gets a sophisticated form of radiation therapy called IMRT. Eight years ago, virtually no patients received the treatment.
The story here is about what is behind that trend, i.e., the fact that some groups stand to gain financially from the adoption of a new treatment that has proven at least somewhat effective.
Taking advantage of an exemption in a federal law governing patient referrals, groups of urologists across the country have teamed up with radiation oncologists to capture the lucrative reimbursements IMRT commands from Medicare.
Under these arrangements, the urologists buy radiation equipment and hire radiation oncologists to administer it. They then refer their patients to their in-house staff for treatment. The bulk of Medicare’s reimbursements goes to the urologists as owners of the equipment.
While I’m obviously a big fan of perverse incentives stories, I know enough about them to be wary of narratives that only look at surface incentives and behaviors without getting down to the root causes. This story, in particular, blames doctors for rationally reacting to the pricing structure created by Medicare, which is like blaming children for chasing a Good Humor truck down the street that is accidentally dropping ice cream boxes out the back. This becomes a story of “self-referral,” with greedy doctors pushing patients into more expensive treatments. One doctor whom the writers place in the role of “defense” encapsulates his position as: “Our credo in medicine is not, ‘spend the least money,’ It’s, ‘first do no harm.’ ”
The story then goes after the politicized decision making on how reimbursement rates for these treatments were set, and how congressmen caught between physician and patient groups have no incentive to control costs. All those costs, of course, are ultimately born by the taxpayer. The story ends with the plaintive quote: “how are we going to pay for that?”
Then it stops.
I once recall reading a story about profiteering in shoes in the Soviet economy. For the benefit of its western readers, the story began with the fact that in the Soviet system the supply and distribution of shoes were largely controlled by the state. It described how bad the shoes were, how hard it was to get them, how the state blamed “profiteers” for the shortages. It described how bureaucrats were continually coming up with more and more rules to circumscribe the increasingly dysfunctional behaviors in shoe distribution, and how the scoundrels in the supply chain were continually working around those rules for their own enrichment.
What struck me was how a reader outside of the Soviet system, one who understood how a market-driven system could create an entirely different set of incentives and constraints, would read that story and say, “What a hopeless case. They need to dismantle the state-controlled system,” but a reader from inside the Soviet system would react by blaming the scoundrels and bureaucrats.
It occurs to me now that any description of our current medical system has us blaming the scoundrels and bureaucrats, not the central planning system in which they operate. And that is why journalists have taken up that narrative, even in the WSJ, and stopping before they question the system of treatment prices set by central planners, and paid for by anyone but the patients.
