Tuesday, September 29, 2009

Banker Bonus Bashing Continues...

Based on the attention on banker bonuses at the G20 meetings, you would have thought banker bonuses were the root cause of all our global problems - financial meltdowns, expensive oil, global warming, poverty, nuclear proliferation, Kanye West’s behaviour and the Wiggles.

The G20, a collection of the most powerful men and women on the planet, have spent a huge amount of time and conjuring up bonus restrictions to curb the “fat cat bonus” culture.

As usual, these “leaders” are way behind the curve as most banks have already changed their compensation structures, including limiting the use of guaranteed bonuses, increasing the proportion of compensation received in stock, etc. So, this work serves no purpose other than to generate hollow headlines that will resonate with the general public.

In fact, the only real impact on these restrictions is to make government investments in financial institutions worth less, and therefore, yet another drain on taxpayer resources. Restricting compensation at companies still under the government umbrella eliminates the last tool they have to attract the best talent in order to make the most money. If you can’t pay the good bankers/traders who are very successful and profitable, they will leave as there is no shortage of competitors who will be more than willing to pay them what you are not permitted to pay them.

Ask any economist, or anybody that knows anything about the financial system, what they believed caused the financial crises, and I doubt the banker bonus issue would be in anyone's top 5 causes. It’s even debatable whether bonuses had any material role in the crisis at all – a point highlighted in a good op-ed here.

Governments have a vested interest in ignoring the real causes because if they did even a cursory review of the causes of the crisis, they would end up looking in the mirror more often than not (Congress requiring loose standards for low-income mortgages via Freddie/Fannie, very low interest rates, tax credits for mortgage interest, etc.). Governmental policies had just as big or an even bigger role in the crisis than any group of bankers, traders, homeowners, mortgage brokers, etc..

Typical populist politics - why would governments criticize themselves when smashing bankers for working hard and making a good living works so well at the polls?

Thursday, September 17, 2009

You Made Your Bed, Now Sleep In It

I have no particular interest in Massachusetts politics, but a recent story coming out of the Massachusetts legislative bodies highlights why the general public perception of elected representatives is at an all-time low.

Democratic Senator Edward Kennedy passed away recently (R.I.P.), vacating one of Massachusetts’ seats in the US Senate. Given the slim super-majority held by the Democrats in the US Senate, the vote attached to this seat is hugely important in the success or failure of various proposals before the Senate (health care, energy, card check, etc.). As such, Democrats are eager to fill that seat with one of their own as soon as humanly possible.

However, current Massachusetts law requires a special election to be held before the seat can be filled (undoubtedly by a Democrat – this is Massachusetts after all), and the earliest that election could be held is in January 2010.

In order to immediately fill this vacancy, the Massachusetts legislative bodies are in the midst of proposing legislation that would change the states succession law to permit the Governor to name an interim Senator to fill the vacancy until the special election is completed.

Sounds reasonable, right? What state wouldn’t want to make sure it has its full representation in the US Senate? That’s what Illinois did when Senator Obama became President Obama, so what’s the problem?

Prior to 2004, the Massachusetts Governor had the ability to name a temporary replacement, but in the run up to the 2004 Presidential Election, when Massachusetts Senator John Kerry was up against President Bush, the Massachusetts House and Senate (currently 90% and 88% Democrat, respectively) passed a bill that removed the Governor’s ability to immediately appoint a temporary replacement.

Why did they do that?

In 2004, Mitt Romney, a Republican, was Governor of Massachusetts and the Massachusetts legislature (again, mainly Democrats) was concerned that if Senator Kerry won the Presidential Election, his vacated US Senate seat would be filled by Romney with a fellow Republican. To alleviate that concern, they simply changed the law, removing the Governor’s power to appoint a temporary replacement, and requiring the seat to remain vacant until filled by the winner of a special election, which would unquestionably be won by a Democrat.

Fast forward to today. Deval Patrick, a Democrat, is now Governor of Massachusetts and the Massachusetts legislature has changed their tune.

Both bills remind me of the scene in Big Daddy when the 5-year old, Julian, is playing poker with the delivery guy and just changes the rules on each had so he always wins:

Julian – “I got a 2, a 4, a 10, an 8, and a 6. I WIN!!!”
Delivery guy – “WHAT??”
Julian – “I WIN!!!”
Delivery guy – “HEY I got the same hand as that last time and I didn't
Julian – “WELL I WIN!!!”

The Massachusetts Democrats are doing the same thing as 5-year old Julian – changing the rules on the fly to suit their current needs. What’s next, changing the law to say that only Kennedy’s or heirs to enormous ketchup fortunes can be elected to the US Senate in Massachusetts?

Unfortunately, this is just business as usual - politics for politics sake - and is a complete waste of government time and taxpayers money.

Wednesday, September 16, 2009

Kanye West IS a “jackass”

In this age of instant information dissemination by Twitter and Facebook, there is nowhere to hide for those in the public spotlight, and no such thing as an “off-the-record” comment. Nobody is more susceptible to this than the most powerful man in the world – The President.

Apparently someone overheard President Obama calling Kanye West a “jackass” when asked, off-the-record, about how his daughters reacted to the recent events on the MTV Music Awards. As is the case so often today, this information was immediately passed on to the world via Twitter.

I haven’t said, or even thought, this very often lately, but President Obama’s assessment is absolutely, 100% spot on. In fact, I wish he had gone further. What would have a bigger impact on Mr. West, and the legions of kids who idolize Mr. West, than the President calling him out for his disrespectful and egomaniacal behavior?

Should the President be concerned with such things? Probably not, but clearly he was aware of the situation, and a one-liner aimed directly across Mr. West’s bow could send the powerful message to young American’s that this type of behavior is unacceptable, and cannot be forgotten simply because he apologised on Jay Leno’s new show.

A quick comment like the following could be very powerful and would likely get the attention of young Americans – and probably in a more efficient and effective manner than his recent speech broadcast to schools across the nation:

“Kanye West’s actions at the MTV Music Awards were, once again, inappropriate and disappointing. He has embarrassed himself, his family, his fans and as a world-wide superstar, our great country. I’m glad he’s apologised to Ms. Swift, but apologies cannot erase the permanent damage he’s done to himself and his fans.

On the positive side, shout out to my girl, Beyonce, for stepping up and giving Ms. Swift the stage she rightfully deserved, this is the real story of that evening, not the ridiculous behaviour of Mr. West.”

Maybe the “shout out to my girl” part is a bit much, but you get my drift. It may sound like he’s acting as Mr. West’s Father-in-Chief, but you couldn’t dream up a better “teachable moment” for young Americans.

Back to the issue of President Obama using the term “jackass”. I love it. I have absolutely no problems with his choice of words. I want a real person in the White House who occasionally drops an f-bomb here and there when needed (in private settings), not a politically correct robot that is only capable of spouting off stump speeches or, as James Brown said, someone who is “talking loud but ain’t sayin’ nothin.” I want a President who has a beer after a long day, or as a peace offering to bring people together. I want a President who takes vacations, spends time with his family and suffers through a terrible round of golf. These things are important to keep the most powerful man on the planet fresh and grounded in what makes real people tick.

Now, if he could just change his destructive policies on health care, foreign affairs, taxes, energy, trade, labor and the financial industry, he might just be my kind of President!

Tuesday, September 15, 2009

Potential Short-Term Gain vs. Certain Long-Term Pain

With the re-emergence of bashing Wall Street employees for their “short-term” compensation practices, I wonder why legislators don’t heed their own advice.

A member of Congress is at most two (House) or six (Senate) years away from their next election, therefore, short-term gains help them keep their job, and long-term consequences are largely ignored. Unlike Wall Street, there is no governing body examining the long term consequences of legislation like a Board of Directors, or Senior Management team (in theory this should be the President, but he is only, at most, four years away from losing his job).

Unfortunately this short term view is present in almost all legislative initiatives in front of Congress.

Typically, these short-term gains consist of immediately giving away something for nothing - cash for clunkers is the perfect example. The long-term consequences take an extra layer of thought that the voting public, and frankly, their elected representatives, are generally uninterested in discussing much less understanding.

Sticking with the cash for clunkers example, what are the long-term consequences of this relatively modest program? While they cannot be determined with certainty today, it doesn’t take a PhD in economics to understand at least two impacts:

  1. US Deficit will be increased by at least $3 billion – $3 billion out the door and into the pockets of those fortunate enough to have an old car sitting around and in a position to fund the remaining purchase of a new car (i.e. not the poor , unemployed, or otherwise underprivileged), with zero offset in revenue.
  2. Short term auto sales will be up but long-term sales trends will be unaffected by the program – why would a one time subsidy on cars create future demand?

This leaves taxpayers with a bill that makes Congress look great in the short term (“Thanks guys, I just got a $4,500 discount on my new Lexus SUV!”), but will ultimately be forgotten in the long term, except by those who will need to pay for this piece of legislation when our debt comes due – our children.

Cash for clunkers is one vivid example, but there is no shortage of other examples:

Sarbanes-Oxley Act – As an accountant this one was near and dear to my heart – and one of the main reasons for getting out of the field of public accountancy. Enron was bad, so Congress put in place onerous regulations that have soaked our job creating businesses of resources and money for little to no benefit to the investing public. This is not a case of increasing the deficit by spending, but it’s an equally dangerous, but less obvious, increase in the deficit by reducing tax receipts (i.e. expensive compliance efforts reduced corporate profits, which in turn reduce income tax revenues).

Consumer Product Safety Improvement Act – Lead in children’s toys is bad! Nobody could argue with that, which is why this terrible piece of legislation passed with flying colors off the back of the Chinese toy lead scare. However, Congress decided to explode a nuclear bomb on the issue rather than make some surgical strikes that would have had a much lower amount of casualties while accomplishing the same objective. Again, Congress can grasp the immediate effect of the ban on lead in children’s toys (Yea!), but fail to grasp the effect the nuclear bomb would have on the millions of small business/libraries/schools/thrift stores, etc. that would be disproportionately disadvantaged by the bill. The WSJ has done a good job of chronicling this mess - its latest op-ed is here.

The Stimulus – the bill was sold on short-term benefits, despite only a fraction of the expenditures expected to hit in the short-term (and even fewer actually hit in the short term). However, any short-term gains will be dwarfed by the negative burden this will place on future generations. Additionally, this bill also features a huge issue that is often overlooked – providing needy parties with food instead of teaching them how to farm or hunt. Throwing money at a problem only masks the underlying weakness, and without addressing the underlying weakness, the money is wasted. This leads perfectly to my next example.

Using TARP funds on the US Auto Industry – The short-term benefits were clear – auto union members would continue to receive their bloated pay checks and benefit packages (as a kickback for their votes), funded by the taxpayers, and our auto industry will have yet another chance to try and reorganise into something that resembles competitive car manufacturers. To continue with the metaphors, our government is acting like a problem gambler who just lost big in the Sunday football games and is about try and make it up with huge bets on the Monday Night game – throwing good money after bad. Without significantly renegotiating union contracts and fundamentally changing the operating model which has produced losses for years and years, Detroit has no chance of becoming profitable enough to repay the US taxpayer.

Medicare/ Medicaid / Social Security – Even these hugely popular programs are nothing more than enormous Ponzi schemes that make Bernie Madoff look like a small time purse thief. And we’ve only seen the beginning. These programs will become even more insolvent (if that is even possible) once all the baby boomers hit the Medicare books and start collecting Social Security. Of all the elephants sitting in the hallowed halls of Congress, this is by far the largest, and instead of addressing our current entitlement issues, we’re looking to create more.

Aside from my last example, these bills all have one thing in common – they were all short-term knee-jerk reactions to a crisis, written in a panic and insufficiently debated (and in some cases, not even read before a vote). Therefore, it’s no surprise that these have all backfired. Looking back, these examples have, at best, solved a short term problem while creating bigger long term problems, or, at worse, failed to solve the short term problems, created bigger long term problems all while adding huge amounts to the federal deficits.

After all of this, the President and Congress are at it again with the proposed Health Insurers are Evil Bill, er, the proposed health insurance reform bill. Our children and grandchildren deserve a full and complete debate on the issue, with logical and incremental reform that makes sense - not hurried proposals, backroom dealing and procedural shortcuts to jam through radical, ill-conceived change overnight.

Friday, September 4, 2009

My Health Care Czar Nomination - David Goldhill


A brilliant article that highlights the issues with the US health care system with an eloquence and insight than this site could never match. Solutions based on facts and free market principles, not on politics. Enjoy.