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Michael Cutler
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"If in an unknowable world, none of your bridges fall down, you are building them too strong. Similarly, if in an unknowable world none of your investment looks foolish after the fact, you are staying too far away from the unknowable." -Richard Zeckhauser, "Investing in the... More
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  • Mr. Cutler Goes To Washington

    Every time I file my taxes (I filed for an extension, so they are now due this October 15), I find myself daydreaming for long periods about having my own 'Mr Smith Goes to Washington' moment. Don't get me wrong. I am a law-abiding patriot. I have no problem paying taxes to support this great country and to protect the freedoms that our forefathers paid for dearly, even with their own lives.

    That said, my daydream is a recurring variation of a theme along these lines:


    "I am the founder and CEO of a great American company, or a well-respected business man who has risen up from poverty by means of decades of hard, honest work.

    My company, under pressure from shareholders, the Board and my own doubts about my country's direction, decide that a tax inversion is in the best interest of all involved. We will merge with a foreign company and effectively move our headquarters oversees to massively reduce our taxes, legal complexity and burdensome regulations. I become convinced that this action is even in the best interest of this great country that made my success possible, to make a clear statement about runaway, complex special interest taxation, spending and the political disaster we find ourselves in. Maybe we can make a difference. While it is my fiduciary duty, I secretly want to do it more for the political statement it might make. I really want to make a positive difference to my country, which is falling away from the founding ideas that made it great.

    So we hire numerous, expensive consultants: accounting, tax, legal, international, etc., to ensure our actions are legal and appropriate. After millions of dollars of expenditure we know the law and how to act within its bounds to accomplish the change, better than any IRS, SEC or other government official will ever attain to defeat our action in court.

    Confidently, we publicly announce the tax inversion. To avoid any doubt, we state clearly why we are doing it: our country's taxes have become complex and burdensome to the point of violating basic human rights. We have a duty to our shareholders and to the American public who have purchased our products and returned to us these profits to ensure the profits and the taxes are used for good. As a result, we are moving to a nation with a government that respects us, the taxes we pay, and the people it serves.

    The next day the newspapers run damning headlines about our decision. How could this great American company/businessman turn on its/his country that made it/him so successful? Politicians are up in arms. Occupy Wall Street fans are interviewed about how evil corporate America has become, and how greed runs business. Interestingly, none of these Occupiers have ever actually run a business, made a profit at what they do, nor contributed much in the way of taxes to our nation. Yet they are certain they understand business and all its motives.

    Interestingly, the general American middle-class public doesn't pay much attention. They get it. Right thing to do. They would do the same. They don't blame us.

    The politicians meet with their advisors: "How can we stop this madness? Surely what they are doing is illegal! They are hurting our constituents. They are tax dodgers! This country made them great and now they turn their backs on this country? I'll never get re-elected if I don't make a public shame of this company!"

    Unfortunately for the politicians, our actions are well within the law. We spent millions ensuring that was the case, in spite of the massively complex red tape we live in. No one can stop it. At least not legally.

    So within a week Congress calls us up and demands a hearing. This will be stopped. They demand answers. Humiliation will work where legal process fails. They expect me to show up tail between my legs like so many before me, cowering to the popular elected officials.

    I expected this; hoped for it! I show up before Congress that morning fully prepared not to answer the ridiculous questions often asked in such situations, but rather to pose intelligent answers back to Congress. Many questions I've heard posed on that floor should never have been given the dignity of an answer.

    I wait patiently in my lowly seat; video cameras rolling; Congress finance committee and other members sitting elevated looking down at me disgustingly. The standard, respectfully-worded yet so sarcastically-toned introductions are spoken.

    Then comes the first question. It's not really a question, but rather a condemnation with a question mark at the end:

    "Mr. Cutler, this great nation and people have provided you and your company all the benefits you needed to get to where you are today. It would be an understatement if I called you a traitor for what you plan to do. You are robbing the American people! Our tax laws clearly do not allow this action. You take the American people's money and send it to another country. You think you are above the law. But you are the lowest greedy scum criminal in this room. How do you explain your actions? How do you justify this before the American people?"

    I put my head down to feign embarrassment (and to hide the hint of smile and determination I cannot hold back). I rotate my head up slowly, responding directly, confidently, with a stern look on my face:

    "Senator, I will explain my actions as you have requested. I will explain simply to the American people. To answer your questions, I need to present the motive for our actions, and the irrefutable evidence that you will so properly demand."

    I then motion my hand, whereby wheelbarrows of books, documents, papers and binders are brought in and dumped between me and the elevated members of Congress. They have to lean forward to see it all below their high platform. These have been pre-approved prior by security. They are printouts of Congress's created tax laws, the IRS's own mountains of explanations of those laws, and the many books and papers written on how to interpret those laws.

    (click to enlarge)

    The Senator makes some ugly comments and demands that I explain what this is about, among all the fuss. Which I do:

    "This is the tax law that Congress has imposed on our great nation. Hundreds of thousands of pages of it. Our company has paid lawyers, accountants, tax specialists and consultants millions of dollars to ensure what we are doing is fully legal. We are quite confident in our actions. What we are doing is fully supported by the laws that you and your Congress passed, even in spite of them. Our tax inversion is perfectly in sync with the very actions that founded this great nation; just as Congress's actions mirror the crimes committed by the British government on our founding fathers. Our only regret is that we did not do this sooner.

    You know as well as I do that I am here today because you cannot legally stop us in a court of law. So you bypass due process and try to shame us into submission before the American people. But the American people are more intelligent than that.

    It is because of the shear complexity, size, and special-interest bias of these laws, not to mention the usurious tax rates charged and wasteful money spent by this Congress, that we have come to the conclusion that it is our fiduciary duty, even our obligation as citizens, to move our business to another country where we are treated more fairly and reasonably and where our hard-earned taxes are utilized for a more noble cause. We have not turned on our country. Our country has turned on us."

    To which the Senator stands in outrage and yells in anger: "You are in contempt of Congress!"

    To which I calmly respond: "No, Senator. It is you and Congress that are in contempt of the American people."

    You know the rest of the story. The room and the entire nation cheer and applaud until the Senator loses all credibility. News stations, talk shows, comedians, the entire media establishment quickly realize what their viewers really want and give it to them.

    A modern, peaceful revolution takes place over a matter of weeks. Nothing like it has happened before. Our tax laws are re-written as a simple increasing percent of personal income. Everyone pays in something, even if a small token amount, so that we all participate in supporting our way of life. Corporate taxes are re-written simply as a percent of income. Special deductions are thrown out (ALL OF THEM). Millions of tax lawyers and accountants and IRS agents are out of work. The economy does so well that they quickly find better, respectable jobs that get them up in the morning and allow them to live a more fulfilled life. Initially revenues and social programs are kept constant and then over a number of years spending is rationalized and brought into control, social programs are tied to measurable results and taxes are reduced.


    Oh crap, my taxes are due next week! I have 200 pages to read to make sure I'm not 'lying' and liable for penalties or even jail time after paying a sizable part of my income to my accountant to get it right. And he's not even sure if it's correct. Back to reality...

    Oct 05 7:02 PM | Link | Comment!
  • Bill Clinton 'Likes' Adam Smith And The Invisible Hand, Not So Much Hillarynomics

    So I post a comment on a Wall Street Journal (WSJ) article about student loan defaults recently, and I get a 'like' from none less than William J Clinton. I guess Bill is of like mind.

    The following is copied/pasted directly from my personal email. The WSJ sends you an email when your comments are liked telling you who liked it. As far as The WSJ only allows use of real subscription names, someone subscribed as William J Clinton liked it. No kidding, this is for real:

    On Sunday, August 23, 2015 4:06 PM, "" <> wrote:

    "School-Loan Reckoning: 7 Million Are in Default"

    WILLIAM J CLINTON liked your comment

    It's great to know that our former president and potential future 'First Man' agrees with Adam Smith and the invisible hand. I hope Bill and his significant other avoid political/economic discussions in the home...

    Quote from the article: "Ms. Labanara said. "It's like, 'What comes first? Does my mortgage come first or my student loans?' "

    My comment that Bill liked: Ms. Labarana - why would someone take out a mortgage when they already cannot afford to pay their student loan? Priorities, please. The problem began long before they had to make a decision whether to pay their student loan vs. mortgage. It began when they bought a house before paying off their student loan! Or at least ensuring they could afford both before entering into a 30 year mortgage contract. There's also a need to assess college debt compared to employment and salary prospects in a given field before pursuing it for 4+ years. Where is personal accountability in all this? And who loaned them money for a house when they couldn't afford that much debt? Oh yeah. Our government wants everyone to go to college free and own a home (and take on MORE debt by making mortgage interest tax free) regardless of whether it makes sense for everyone, because that wins votes.

    When everything is free for everyone, nothing is free, because we all pay for it. And when something is free (or too easy to borrow money for it), people don't make economic opportunity cost decisions to value that free thing appropriately. Increasing demand by helping pay for it also increases its underlying price (simple supply demand curve). Worse, some people spend years going to college when they would be better off using those years to learn a trade or start to build a career that is better suited to their abilities and desires.

    My wife and I lived in a cheap one bedroom apartment for many years after college, even with 2 kids, until we had paid off our prior debts and could save enough for a 20% down payment on a low cost home. We waited until we could find employment in a low cost city to buy a home, so we would be well beneath our financial means.

    My parents and grandparents appreciated working hard, being patient, and living beneath their means. But they didn't learn that by being coddled with free, no questions asked, no credit check loans, free college and a promise of prosperity. They learned it in their own personal, freely chosen and fully risked 'pursuit of happiness.'

    For most who are able and willing to learn and work long term in a career in demand (colllege education or not), it's not how much you make, but how much you spend, that determines your financial well being.

    And to be clear, if someone takes out too much debt (e.g., college loans AND then buys a house they cannot afford!), there is an appropriate process to help them get out from under that burden and start over fresh. It's not forgiving the loans and putting that cost on the responsible taxpayer. It's a very effective process called bankruptcy and it has worked for hundreds of years.

    Aug 31 7:36 PM | Link | 2 Comments
  • Greece - How Far From Reality Can You Get? When Lessons Are Not Learned

    For the injustice of the year, Greece is upset about how they are being treated. For those without an FT subscription, Syriza's energy minister stated in the above link:

    "Our so-called partners led by the German establishment, behaved towards our country as being their colony and they are nothing more than brutal blackmailers and financial assassins "


    Poor Money Management (and Sometimes Bad Luck) Have (Appropriate) Consequences

    Personal bankruptcy is unlikely given how I manage my finances and how frugal I learned I can be while living 2 years in Uruguay on $150/month (some of the best years of my life, by the way). But I always figured that if I ever did have to declare bankruptcy, I would be at the mercy of creditors and anyone else whom I owed; that I would have to accept a red mark on my future financial prospects for 10+ years and deal with the fact that I had mismanaged my finances, had bad luck, or both, and therefore was not to be trusted with other's money going forward.

    Unless You Are Greece, a Too Big To Fail Bank, or A Successful Bully

    But if I were Greece, I would not only demand more credit (and get it) for years on end. I would also refuse to sell or offer any of my belongings as collateral, demand that my salary not be garnished so that I can continue to enjoy luxuries not afforded most middle-class households, and I would demand that no one slander my good name by saying I was financially irresponsible or by lowering my credit score. I would demand more financial benefits than my credit-worthy neighbor who lived below his means, regardless of how much I lived above mine.

    When the bank refused to pay my outrageous credit card bills for luxury items, I would call them my:

    "so-called financial partner, behaving towards me as being their peasant and they are nothing more than brutal blackmailers and financial assassins."

    Although without the Greek to English translation I would say it more properly and succinctly.

    Simple Math

    In our modern society for most well-employed people when it comes to managing their finances: It's not how much you make; it's how much you spend that matters.

    While Keynesian economists may disagree with the comparison, I assert that the same can be said about any modern country in financial trouble: it's not how much you make; it's how much you spend that matters when trying to keep your head above water. Often their pride and desire to keep up with neighbors (or political and social undesirability to cut back social programs) prevents them from appropriate and necessary controls on long-term spending to be in line with long-term revenues. Even the Brits, some of the most proud nationals, were not above belt tightening. While this will be controversial, I also assert that Keynesian economics are often used as an excuse not to cut back: not for us in our time.

    Credit: The Sunday Times, Sri Lanka

    We can go down lots of economic theory rabbit holes. But reality is simpler than that: spend less than you make and you won't get in trouble.

    Bankruptcies Are An Essential (And Good) Part of Capitalism

    Bankruptcies, even for countries (Greece is tiny), are a healthy necessity in open markets. Occasional bankruptcies keep other counter-parties (leaders, democracies, countries and businesses) appropriately cautious vs. reckless with their trading partners, teach important lessons about what not to do and about risk management, and allow for experimentation with appropriate risk to innovate. Preventing bankruptcy at all costs weakens the whole. When bankruptcies are openly allowed, solvent counter-parties quickly learn that financial stability depends both on those who lend and those who borrow.

    When Few Is Good But Too Few is Very Bad

    I never liked the term 'moral hazard', as if saving a failing entity were a moral decision that must be followed regardless of the cost. Bankruptcy is a necessity for the health of economies and countries. I compare bankruptcy to unemployment - low is good, but too low is very bad. Zero unemployment would mean zero employee mobility and no ability for companies to downsize when required. Some amount of unemployment is good for employees (think free agents), good for employers and good for the economy. See Europe's employer restrictions on firing and consider how that has impacted the Eurozone's economies and employee mobility and growth. Same goes for bankruptcies.

    Lesson Learned

    As a consultant for 18 years I always had to personally submit, justify and collect on my and my teams' invoices. While there were occasional timing issues and post-invoice negotiations, I had a 100% payment track record. Then in 2005 my biggest client filed for bankruptcy. We had a sizable amount of invoices outstanding. The outstanding balance hit our bottom line and my own compensation, as it should have. In the end we were able to collect most of the payments (we sold to debt collectors with a 10-15% haircut to get out quickly and they ended up collecting most everything after waiting). It was a big wake-up call to me personally about how to manage counter-party risk. Needless to say I was much more cautious about invoicing, payment cycles and risk management after that. Those are REALLY IMPORTANT THINGS TO DO!

    Later on, I was at Bear Stearns when things went bad. JP Morgan had been cautious with the housing boom and was able to scoop up an incredible deal. I don't have the exact figures. But as I recall, the value of either the Bear commodities group (where I was consulting) OR the Bear real estate, were each alone worth more than what JP Morgan paid for Bear Stearns. Yes, there were many liabilities and risks too, but what a great lesson about being careful and prepared with billions of dollars on the sidelines.

    Broker Risk

    Today I keep my broker's public ticker on my screen. I have a close friend who used MF Global for his futures trading when things went bad for the firm (that's too kind, they did it to themselves). It took him more than a year to get 90% of his capital back. If my broker's stock were to take a dive, I have prepared to act quickly with backup plans to ensure my capital is as safe as possible. I wouldn't do that if I hadn't witnessed one counter-party shorting the other's stock in order to protect themselves in the face of a default, given the outstanding balances they had. Some may say that's ruthless, that the government should have intervened. I say that's smart business: Bear and MF Global should have never gotten themselves in that position in the first place.

    The long-term lessons learned are far more valuable than the short-term cost of a bankruptcy. Greece, its neighbors, counter-parties and other countries considering going down similar paths could all use a lesson in reality.

    Lesson learned.

    Tags: GREK, NBG
    Jul 14 3:14 PM | Link | Comment!
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