Posted by Marc Hodak on July 7, 2010 under Regulation without regulators | 
The WSJ comes up with a story about a novel idea;
Even before a financial-regulatory overhaul takes effect, some big investors are imposing their own rules on risk.
Several public and corporate pension funds are curtailing or revisiting their use of derivatives out of concern for hidden risks they may carry. In Oklahoma, a public pension fund replaced Pacific Investment Management Co., led by well-known investor William Gross, as one of its bond-fund managers, citing the risks of its use of derivatives whose values couldn’t be cross-checked in audits.
In other words, big investors are actually looking for ways to account for risk as well as returns in their investing strategy–without the government forcing them to do it!
For those of us with finance training, which you’d think any major fund could afford and would consider a prerequisite to opening their doors, accounting for risk seems like a logical step rather than a great leap. Reviewing one’s risk management in the aftermath of a financial crisis would seem like something your parents wouldn’t need to remind you about. If the Okies don’t understand what Bill Gross is doing, they should get out of his fund (or hire a Wharton grad who gets this stuff, or both).
In my mind, the real headline would be, “Major investment fund does not change its M.O. after financial crisis.” The would be the story of the only two financial firms not affected by the pending financial reform bill.
Posted by Marc Hodak on June 28, 2010 under Irrationality |
General Motors has an impediment to gaining greater market share:
General Motors Co. is in talks with financial institutions to broaden the availability of auto loans, a strategy that for now sets aside any plans to acquire its own lending arm, people familiar with the situation said.
The car maker has had trouble providing loans to more consumers, particularly those with weaker credit history, and views this as a barrier to winning back U.S. market share.
So, if we can only get loans to people with weak credit, we can sell more! Hmm, where have we heard this before?
In other news, the new financial services overhaul bill–the one designed to never let poor lending practices undermine our credit markets ever again–exempts auto dealer car loans from the same regulations covering bank loans.
Posted by Marc Hodak on June 17, 2010 under Collectivist instinct |
An accident of history places Federal Express and UPS under different federal laws governing labor relations. UPS is under the National Labor Relations Act while FedEx is under the Railway Labor Act, which is slightly more forgiving in enabling one to resist a unions’ organizing campaign. A bill in Congress is looking to level the playing field by allowing UPS to also be governed by the RLA. Just kidding; could you imagine a Democratic Congress doing such a thing?
Of course, the Democrats in Congress, aka, the other union employees, are trying to pull FedEx under the NLRA. It’s easy to see why UPS would be lobbying hard for such a change. They know that they are at a tremendous competitive disadvantage with their unionized work force versus the largely non-union FedEx. One can also see why the Teamsters union would favor a shift that would make it easier to win a cut of a new, large employer’s payroll.
The House bill would place some of FedEx’s drivers and other employees under the National Labor Relations Act, allowing employees to organize locally. UPS drivers are governed by that law. The Teamsters union has said the bill would ensure fairness across the industry.
Fairness? The union’s argument here is a tacit admission that competition is important, and that the union undermines competitiveness. “It’s only fair that we have a chance to degrade the other guy’s operations to the same level we have done with those companies that we already work for.”
The Senators from FedEx’s home state of Tennessee are set to prevent this change with the threat of a filibuster. The Teamsters should have sold their charms with a more compelling pitch than “share the poison.”
Posted by Marc Hodak on under Unintended consequences |
From the WSJ:
Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.
Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.
The actual name of the act was The Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act. That sounds much better than the title of this post.
Posted by Marc Hodak on under Irrationality, Reporting on pay |
I’m still trying to distill the meaning of the following lead:
BP PLC, under intense legal and political pressure from President Barack Obama, agreed Wednesday to put $20 billion into a fund to compensate victims of the Gulf oil spill, and said it would cancel shareholder dividends for the first three quarters of this year to offset that cost.
Here is what I’ve came up with so far: Nothing of economic consequence actually happened.
This is clearly posing as a story of economic consequence for BP, but for it is of relatively little consequence to the company how any portion of the damages actually gets distributed, only what the total damages will be, which this agreement appears to not change at all. As noted in the post below, it is of no consequence to BP’s shareholders whether the cash left over after damages gets paid out as dividends, or gets capitalized into the share price. All that matters to them is what the total damages will be, which this agreement appears to not change at all.
There are political consequences, but I’m not shocked that the MSM didn’t write its story around that:
The Obama administration has personally taken on distribution of $20 billion of the total damages that BP has already pledged to honor instead of letting that sum be distributed via time-tested principles under the rule of law.
If the story were written this way, though, it might not make the victims on the Gulf Coast or their insurers feel as good.
Posted by Marc Hodak on under Economics |
A new symptom of financial illiteracy has been revealed by the obsession with BP’s dividends shown by politicians and the media, no doubt reflecting their readers’ sensibilities. The narrative is that BP’s shareholders should share in the suffering their company has caused by having their dividends suspended.
This attitude reflects what can only be called a pre-war (WWII) view of financial economics, an alternate world where the breakthrough insights of John Burr Williams or the Nobel Prize winning theories of Miller or Modigliani or the resulting empirical transformation of modern finance theory never happened.
On an intuitive level, it doesn’t matter to the owner of a gas station if their cash is in the till at the office or their cookie jar at home. Why would it matter to the shareholders if their cash is still inside the company supporting their share price or mailed out to them in the form of a dividend check?
Of course, the answer is it doesn’t matter.
Read more of this article »
Posted by Marc Hodak on June 16, 2010 under Economics, Invisible trade-offs |
Alan Blinder, former Vice Chair of the Fed and Princeton economist, takes that school’s reputation down another notch in his panting defense of the the government’s performance during the recent financial crisis–particularly since President Obama took office.
The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs…
Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion—which is roughly correct—and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that—or none at all?
Try to imagine an economics department like Princeton giving an advanced degree for any candidate making such a silly argument.
Surely, Prof. Blinder can imagine a government like the Soviet Union spending a significant portion of their country’s GDP without producing any net jobs. Or North Korea. Even less communist countries like France and Greece who have spent public money like drunken sailors have not really created any net jobs. In fact, the amount of jobs a country creates is just about inversely related to the amount of its GDP spent by its government.
Blinder is trying to trick the reader when says “jobs.” He means gross jobs, not net jobs. If I took $10,000 from ten people, and gave it to someone to spend a year digging ditches and filling them up again, that would look like a job “created” in Prof. Blinder’s world. The fact that the $100,000 was not spent by its original owners to support jobs in dozens of grocery stores, clothing stores, car shops, etc. apparently doesn’t enter into his calculation. An economist worthy of the name accounts for such secondary consequences of the policy they are defending. (BTW – The fact that the money is borrowed instead of taxed doesn’t quite save this argument.)
The reality, of course, is that our hapless government did not sprinkle its largess at random, and it did not target its spending toward the areas of highest unemployment. It funneled much of it to its preferred constituents/supporters in the most politically rewarding way, just as any government would do.
Why would an acclaimed economist like Alan Blinder resort to such sophistry? Because the economics profession unfortunately does not distinguish between “economics” as a science, with the maddening circumspection that scientists must display in order to retain their reputations, and “economics” as advocacy, which appears to forgive the most unscientific assertions when made for a partisan cause. Blinder wrote this garbage as an advocate, not as an economist.
Posted by Marc Hodak on June 9, 2010 under Executive compensation, Reporting on pay |
Abercrombie & Fitch lost the shareholder vote for approval of their long-term incentive plan. It wasn’t close. The two comp committee members up for re-election narrowly won with only 57% and 52% of the vote, i.e., 43% and 48% withhold votes. This loss on the plan and closeness of the director election were largely the result of “negative” recommendations by ISS combined with a major union campaign against the proposal and directors.
A&F, in fact, has a lousy compensation plan. One of its main defects is well-encapsulated by this item from their proxy:
Read more of this article »
Posted by Marc Hodak on under Irrationality, Politics |
In the Nevada Republican primary, Sen. Reid got the tea party-backed “opponent he had hoped to face.”
The Reid camp maintains that Ms. Angle holds many views that lie outside the mainstream.
That may be, but at least Ms. Angle doesn’t hold the view that taxes are voluntary.
Posted by Marc Hodak on June 7, 2010 under Government service, Politics |
Most people would agree that the federal budget is a cesspool of waste. The few who disagree are those who directly benefit from the spending, i.e., our members of Congress. The agencies that spend the money know how utterly wasteful some of it is. Some of it is so useless that even the agencies don’t have the stomach to spend it all. Unfortunately, few agencies have an incentive to not spend money. In my brief stint in government, I’ve experienced the last quarter rush to “use it or lose it.” It is an ugly, cynical process.
Now, the White House is asking for an incentive to not spend it all:
The proposed change would let agencies that save money redirect half the savings to other initiatives, with the rest going toward deficit reduction, an administration official said on Sunday…
“The president’s goal has been to change Washington’s focus from figuring out how to spend money to how to save money, and we are going to incentivize savings instead of spending,” Mr. Emanuel said Sunday.
At least the administration understands economics and incentives as it applies to the decision-making right before their eyes.
Alas, the article suggests the source of opposition to this measure:
It is likely to be welcomed by deficit hawks but could attract opposition from members of Congress who appropriate money, as it would take away some of their control of the federal purse…
Brad Dayspring, a spokesman for Rep. Eric Cantor (R., Va.), said the latest plan sounded “too complex” and “constitutionally questionable.”
“If this administration and Congress is serious about lowering the debt, they should start cutting spending immediately,” he said.
Which proves that economic ignorance/political cynicism is not monopolized by Democrats.
