Posted by Marc Hodak on July 8, 2007 under Invisible trade-offs | 
Isn’t it ridiculous that homeland security funds are being taken away from New York and given to terror targets like Louisville, KY, or Omaha, NE? That’s the understandable reaction of New York politicians.
“Why do they persist in giving money to places that need it a lot less than New York City?” said [New York Senator Charles] Schumer, a Democrat.
“They still just don’t get it,” said [New York Rep. Peter] King, the ranking Republican on the House Homeland Security Committee. “New York is by far the No. 1 terrorist target in the country, and no one else is even a close second.”
As a New Yorker, here is what I don’t get: Why should I expect people from Nebraska or Kentucky to pay for my security in New York any more than one should expect me in New York to pay for security in Nebraska or Kentucky? In other words, why should these tax dollars be funneled through Washington at all? It’s not like New York is a poor state. It’s not as if New Yorkers don’t choose to live there, acutely conscious of the risks of terrorism. It’s not like God said that New Yorkers and non-New Yorkers in middle America are bound to cross-subsidize each other on matters of local protection, even from foreign enemies. Politicians playing God have decreed that, but it doesn’t mean it has to be that way.
Everyone knows that the only reason Kentucky or Nebraska is getting Homeland Security funds at all, which include taxes collected from Kentuckians and Nebraskans as well as New Yorkers, is that (1) every state has representation in Congress, (2) Congressional representatives are in the business of getting the most for their respective constituencies, and (3) by just saying the right thing like, “Hey, terrorists can strike ANYWHERE,” congressmen can enlarge that tax pool, then dip into it to spread the wealth around. That’s what politicians do.
Now, I can see that if New York, or any state, were being attacked by a foreign army then, yeah, we all chip in for the common defense. I’m sure President Bush and the fear-mongering hawks on both sides of the aisle will say, “Well, Hodak doesn’t get it. This IS a war! Anyone who wants to treat terrorism as a criminal matter is basically surrendering to the enemy.”
Hmm, “war” or “criminal matter?” Politicians benefit from eliminating useful distinctions, like the possibility that the fight against terror could be viewed as both a war and a criminal matter. If they bought into that distinction, then they could allocate money to the military for the “war” aspect of this fight, i.e., hitting terrorist bases in Afghanistan or wherever, and allow the states to carry on the domestic, “criminal” aspects of the fight, like car bombs and shootings, ideally coordinating with the Feds rather than getting into pissing matches over turf.
In other word, they don’t have to funnel all that homeland security money through Homeland Security in Washington. Congress could allow local politicians to raise what they need locally to defend their localities from acts that are materially indistinguishable from crimes. In other words, we don’t have to impose a beggar-thy-neighbor system for local spending. Congress doesn’t have to bribe us with our own money to do what we need to in order to defend ourselves.
Posted by Marc Hodak on July 6, 2007 under Patterns without intention |
New York, the bluest city in the among the bluest states, whose people love taxes, is phasing out taxes on apparel and footwear by next year.
Interestingly, just a couple months ago the NY Times had an article about how popular destinations like New York were socking it to their tourists in the form of out-of-control hotel and rental car charges, telling visitors in essence to, “suck it up, you don’t vote here.” But even New York got embarrassed by their 20 percent tax rate on hotel rooms when the joke among travel agents became, “stay for four days, pay for five.” New York has since backed down to about a 14 percent rate, at the lower end of the range among major cities. Tax competition.
Now, politicians seem to be singing a very different tune:
The repeal of this tax will enhance the City’s attractiveness as a tourist destination, particularly to individuals from outside the United States who wish to take advantage of the current exchange rates. Eliminating the city’s portion of the sales tax will encourage consumer spending, which will help to stimulate economic activity and create and preserve jobs in New York.
Tax competition.
Where will it end? I predict, in the distant future, a uniform rate on consumption and earnings–all in–somewhere between 10 and 15 percent. That’s the rate that would justify a political entity’s ability to secure the rights of those transacting and owning property within its territory, and ancillary services most efficiently produced by a polity rather than a market. Everything else will be competed away–the graft, the logrolling, the favors to special interests that come at everyone else’s expense, the looting of those who can afford to pay. Tax competition. The very people who hate it will be disciplined by it, as surely as water runs downhill.
Posted by Marc Hodak on under Executive compensation |
First Chanos, the short-seller made famous by his Enron call, and now ISS. Chanos is concerned that Macquarie might be creating a false impression of high and growing earnings which may not be sustainable. ISS’s complaint is that Macquarie’s executives don’t have the right incentives to sustain those earnings. I can’t evaluate Chano’s concern, but I can shed some light on ISS’s:
Should the gains prove fleeting, an executive would have little exposure to that future downside risk…
ISS also criticizes the company for giving executives 74.2% of their total pay as cash. ISS argues that corporate executives should receive a bigger chunk of [it] in company stock that can’t be sold right away — an incentive for them to keep earnings growth brisk.
Of the US$25.6 million that Macquarie Chief Executive Allan Moss was paid in the fiscal year that ended on March 31, 87% was in his bonus check and 4.2% in Macquarie stock. By contrast, of Citigroup Chief Executive Charles Prince’s $25.98 million, nearly 44% was in Citigroup stock.
And what, exactly, is driving Mr. Moss’s bonus? According to Macquarie’s Remuneration Report, their executives’ bonus plan is based on “growing net profit after tax and sustaining a high return on equity.” ISS’s concern is accountability for future earnings, but Macquarie’s incentive plan has been relatively unchanged since 1985; their performance standard is highly likely to be net profit and ROE for the foreseeable future. Sounds pretty shareholder-friendly to me. In fact, such a results-focused plan is exactly what research shows yields the best results for shareholders. And Macquarie has done extremely well with their plan, better than Citigroup or any of it’s major peers.
Macquarie’s bonus plan stands in stark contrast to Citigroup’s. Prince’s bonuses are based on multiple financial and non-financial criteria, subjectively assessed by the board. The criteria and performance thresholds get reviewed each year and are subject to change. This is the type of unfocused, discretionary, shifting plan that the same research shows to be of least value to the shareholders. Furthermore, unlike Mr. Prince’s bonus, a good portion of Macquarie’s is deferred and forfeitable. Mr. Prince may elect to defer some of his cash, but he can’t lose any of it, even if he leaves involuntarily.
Perhaps ISS’s qualm is that Macquarie’s executives should have more equity. So how much equity does a CEO need? Macquarie’s chief has nearly one million shares and options. Is that enough? A five percent gain or loss in Macquarie’s stock price would swing his personal wealth by about $4 million. Citibank’s Prince has 2.6 million shares. So, how much difference does it make to his alignment that he got another 0.2 million last year?
By the way, most of Prince’s equity grant was not performance-based. The board awarded it to “increase retention.” I suppose that means they needed to give him that award to keep him at the helm versus, say, jumping over to JP Morgan, or retiring. As if. And, unlike Citibank, Macquarie’s guidelines prohibit hedging of executive’s shares.
So what exactly does ISS have against Macquarie’s incentive compensation that they might want it to look more like Citigroup’s?
Posted by Marc Hodak on July 4, 2007 under History |
How many people know what the Declaration of Independence actually says? My son, who just got back from a course at FEE (he loved it) read it yesterday because he figured it was probably worth knowing first hand.
Much of what we know about the drafting of the Declaration comes from John Adams. Adams had agitated for a formal declaration. He pushed through the formation of a subcommittee to write it and the quiet, young Jefferson as a member of that subcommittee. Here is his famous recollection of the argument with Jefferson over who should draft it.
The subcommittee met. Jefferson proposed to me to make the draft.
I said, ‘I will not,’ ‘You should do it.’
‘Oh! no.’ ‘Why will you not? You ought to do it.’
‘I will not.’
‘Why?’
‘Reasons enough.’
‘What can be your reasons?’
‘Reason first, you are a Virginian, and a Virginian ought to appear at the head of this business. Reason second, I am obnoxious, suspected, and unpopular. You are very much otherwise. Reason third, you can write ten times better than I can.’
‘Well,’ said Jefferson, ‘if you are decided, I will do as well as I can.’
Most schoolchildren, who these days are often told that Jefferson was just another white slaveholder, don’t know that some of the most impassioned rhetoric in his original draft included an invective against “negro slavery.” Jefferson was bitterly disappointed (though not surprised) that this passage was struck by the South Carolina and Georgia delegates.
The Declaration ends with the famous pledge by the signers of “our Lives, our Fortunes, and our Sacred Honor,” but few people understand how dangerous the Declaration really was for it’s signers. Up until July of 1776, members of the Continental Congress could hold out some hope for a negotiated settlement with the Crown, whereby they might get the King to see the errors of his ministers in provoking the colonies, and perhaps be spared from hanging for treason. The colonies were in a state of rebellion for over a year by then. The Continental forces had lost every battle thus far, and was steadily approaching desperation.
Against this backdrop, the Declaration was drafted and passed, personally calling the King a “tyrant” and completely severing the bond to England. This was the point of no return. To every practical person alive that day, each signer of the Declaration had basically signed his death warrant. It wasn’t until the following Christmas eve that there arose the first glimmer of hope among the colonists to be free of the Crown, and among the signers of living to an old age, when General Washington would win his first battle in his surprise attack on Trenton after crossing the Delaware.
The Declaration was originally passed on July 2nd when most delegates were in a rush to get out of Philadelphia. John Adams sent a letter to his wife the next morning predicting the celebrations that continue to this day, kind of:
The Second Day of July 1776 will be the most memorable Epocha, in the History of America. . . . It ought to be solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfires, and Illuminations from one End of this Continent to the other from this Time forward forever more.
As it turns out, the Congress debated a few more changes in the final draft on July 3rd and 4th before finally approving the document. Thus history fixed the date joining Adams and Jefferson in history forever as the 4th of July. Adams and Jefferson both died on July, 4, 1826.
Posted by Marc Hodak on July 3, 2007 under Collectivist instinct |
Check out this lede:
The government regulates real-world commerce and crime. But as virtual worlds become more complex, should the government regulate virtual life?
Did it come from The Onion or the MSM?
Posted by Marc Hodak on July 2, 2007 under Executive compensation |
Instead, I’m concerned.
The adversary is Towers Perrin, the embodiment of everything that is wrong with compensation governance. Towers’ outmoded, feel-good HR model places too much emphasis on “competitive” pay and too little on aligning managers and owners. They’re responsible for entire HR bureaucracies focused on rewarding strategies instead of results. They don’t offer shareholder-friendly incentives.
The government suspects this failure is the result of the corrupting influence of managers who resist the accountability of such incentives, but I believe that suspicion is misplaced. No, Towers fails to offer useful incentives because their clients, including the most conscientious boards of directors in America, don’t want them. Useful incentives require innovation, and boards are not in the mood. Instead, HR firm clients rely on their consultants’ experience to give them an incentive plan just like everyone else’s. No one will pay Towers, or Mercer, or Hewitt, or Watson Wyatt–what you might call Big HR–for any incentive plan that will differentiate their company, so Big HR doesn’t develop them.
Consequently, Big HR is intellectually stunted with regards to leading edge, value-focused incentives. Their consultants are uninformed in modern financial economics–the main vein of research relating incentives to shareholder value. Their analysis is schlock, based on reticent hypotheses, yielding conclusions of questionable validity. To the extent they keep up with developments in incentive compensation at all, it’s by stealing the ideas of people who bridge the gap between research and practice. Some of us have a foot in academia and a hand on the pulse of actual clients. Firms like Towers Perrin have both arms around their clients, and legs, furiously shaking to loosen up some more dollars to meet their shareholders’ quarterly expectations.
So, I should be happy that Towers is feeling the heat of a congressional committee seeking all of their sensitive client information. But, I’m not. Perhaps it’s my sense of history. Perhaps it’s because, for all their faults, Towers Perrin doesn’t scare me.
Posted by Marc Hodak on July 1, 2007 under Executive compensation |
For those of us who study executive compensation, you’d think that the new disclosure rules would have been a boon. It’s not. In fact, I am becoming convinced that the only beneficiaries of the the new disclosure rules are the story writers of our so-called business press.
As I predicted in my note to the SEC (pdf file), the new rules provide very little for the serious analyst that wasn’t already provided under the old disclosure rules. I was particularly skeptical of the need to disclose specific perks down to $10,000 when the total value all perks was already required to be disclosed. At the time I wrote that:
greater detail in the disclosure of perks would serve little purpose beyond the voyeuristic interests of those opposed to executive “privileges” of any sort.
I doubt my note would have been cited so often by the SEC in their final rules if I had included the term “business porn,” but I can see now how Larry Ribstein, who coined that term, got it right in characterizing the new rules.
Yesterday’s front page story in the WSJ, for example, notes that the CEO of Occidental Petroleum “received compensation last year valued at $416.3 million.” It makes no mention about what the shareholders got for this pay (in other words, the business story). No, this front page story is about $0.06 million of that amount for his wife’s flights on the corporate jet.
The critics ask, couldn’t someone who makes $416.3 million pay for his wife’s use of the jet? Of course he could. But that would mean taking the time to perform an actual administrative process that wouldn’t normally be necessary when simply using an existing corporate asset, like paying to use the bathroom on your floor. Of course, administrative costs are borne by pulling together all this tedium for corporate disclosure. It’s hard to see how the shareholders benefit from any of this, until one accepts that the shareholders were never intended to be the real beneficiaries of such disclosures.
I think a more interesting story is how Journal author JoAnn Lublin arrived at the $416.3 million she says the CEO got “last year.” The new disclosure rules properly distinguish “granted” versus “realized” compensation. Equity granted in prior years would not be counted as “last year’s” pay. Prior year grants that were realized last year would merely be a reflection of company performance under the CEO over the period from grant to realization. If that number is large, it’s a reflection of the terrific job done under that CEO.
Someone like Lublin who has covered business and compensation issues over the years–she is, in fact, the Journal’s main writer on compensation issues–would, one might think, avoid the error of counting realized income as “last year’s” pay. And under no circumstances, one might think, would she count both realized (i.e., historical) and unvested (i.e., future) compensation as “last year’s” pay–a double counting flaw intended to be corrected by the new compensation disclosure rules. Alas, one would be bitterly disappointed. Lublin counts all of it as “last year’s” pay. Why? Because that makes the number as BIG as possible, which happens to serve the interests of story writers.
Fortunately, there are no disclosure rules for journalists.
Posted by Marc Hodak on June 27, 2007 under History |
On this day in 1893, the price of silver lost 15 percent of its value. This collapse triggered a panic that would eventually engulf over 600 banks and 15,000 businesses in bankruptcy, and lead to fifteen percent unemployment for the next several years.
What would cause such a drop in silver? How could a drop in one commodity have such a devastating effect? Just a few years earlier, the country was on a gold standard, which meant that the government had to keep gold reserves against which federal certificates could be redeemed. Since federal certificates were the basis for credit throughout the banking system, the gold standard, had the effect of keeping a lid on commodity prices and restricting the amount of credit that banks could issue. The resulting price stability and sound banking practices were beneficial to the East Coast money centers, but put a crimp on farmers and miners (i.e., commodity producers) who were subject to the tender mercies of fluctuating demand and (for the farmers) uncertain supply. This created the feeling among the western and southern population that the gold standard was mainly for the benefit of the urban bankers in the Northeast. Populist politicians fanned this suspicion, and in 1890 Congress passed the Sherman Silver Purchase Act which required the government buy 4.5 million ounces of silver per month, a dramatic increase from its earlier pattern of purchases.
This Act had several effects that would set the economy up for the Panic of 1893 and ensuing depression, including:
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Posted by Marc Hodak on June 25, 2007 under Unintended consequences |
Today’s WSJ had this story about the effects of “mainstreaming” children with learning disabilities. The original idea was that such children learn more and socialize better if they are placed in regular classes with ‘normal’ kids. Notwithstanding the weak empirical basis for this idea, those responsible for imposing mainstreaming on our schools clearly did not consider the collateral damage it might cause to the rest of the kids’ learning, or to the morale of teachers trying to educate them all. In fact, the article points out that:
the rush to mainstream disabled students is alienating teachers and driving some of the best from the profession. It has become a little-noticed but key factor behind teacher turnover, which experts say largely accounts for a shortage of qualified teachers in the U.S.
As with many social experiments with unintended consequences, this one has its basis in a federal law with a cute name–IDEA, the Individual with Disabilities Education Act–which required schools to bring disabled kids into regular classes.
Despite this federal mandate, mainstreaming was slow to take off. That’s because many districts tried it and quickly saw the problems it would cause. In Pennsylvania, it took a lawsuit by the Public Interest Law Center of Philadelphia to get that state to finally push “inclusion” in a serious way. Public interest lawyers have little patience for the real-world results of their ideas, and little tolerance for results that get in the way of their agenda. They want equality, and they want it now.
Now that the challenges of mainstreaming have become a key reason for teachers leaving their jobs, you’d think the proponents might be having second thoughts. Instead, they blame this failure on a lack of resources to support the teachers. Most school districts have tough choices when it comes to finances. Public interest lawyers, of course, aren’t there to help make the trade-offs, and don’t believe in having to make trade-offs, besides. Apparently, $11,485 per student is not enough. They want equality, they want it now, and they want you to pay for it, regardless the cost.
After all is said and done, it’s likely that the kids who were intended to be most helped by this law, the most problematic cases, have likely derived no net, positive benefits from inclusion. I’d love to see the studies. You’d think that serious policy-makers would, too.
Posted by Marc Hodak on June 24, 2007 under Invisible trade-offs |
You’d think that the financial press would understand, you know, finance…until you read stories with headlines like “Blackstone IPO Rallies 13% On a Down Day.”
First, what happened: Blackstone’s investment bankers priced their shares at $31 to those subscribers lucky enough to be let in on the IPO, pre-trading price. At Friday’s open, those shares immediately began trading at $37. They jumped up to $38, before quickly settling down to about $36, finally easing down to $35 by the end of the day. The rest of the market also started with an upward blip shortly after the opening, only to meander down over the course of the day, finishing down about 1 percent.
Next, the story around what happened: Most of the press counted the IPO subscription price as the starting point, and the final price after the first day of trading as the end point in their calculation, yielding the aforementioned 13 percent gain. They noted this gain in contrast to the decline in the overall market.
Here’s my version of the story: The investment banks under-priced Blackstone’s IPO, distributed to their favored clients, by about 15 percent. The floated shares subsequently lost about 5 percent of their actual market value on the first day of trading. This loss was greater than the overall market decline, suggesting either a high beta or significant disappointment.
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