Wildhawk

CDS Regulation: Just One Simple Rule

Maybe I'm either a tad naive or just ill informed, but how is buying a CDS contract without any insurable interest any different than purchasing a put option on the company's equity without actually owning the equity? No one is seriously going to say we need to ban naked put buying, so why would we ban naked CDS buying? It's simply a way for a third party (whether "interested" or not) to purchase protection on the main elements of the company's capital structure- debt (CDS) and equity (put option). Just as the put option cannot drive a company out of business, neither can a CDS contract.

The New Version of Depression Apple Selling

Tom- while I agree with your point that the number of day laborers standing outside Home Depot has surely increased of late, is there any reason to point out explicitly that there are starting to be "Anglo" day laborers competing with illegal immigrants? What does race have to do with it? Isn't it simply a tragedy to have so many day laborers standing there in the first place regardless of race? I normally like your writing and your no-nonsense perspective, but the implications here could certainly be construed as racist in nature. Nothing says that illegal immigrants are automatically something other than Anlgo in this country (point of fact, in my area of the country there are significant numbers of illegal immigrant day laborers who are from Eastern Europe and would appear Anglo to anyone looking). Better to just stick to the numbers rather than racial characteristics in the future.

How Did the Wage / Benefit Gap Between Public and Private Sectors Get So Huge?

The apples-to-oranges comments are absolutely correct, and those that argue otherwise either don't understand statistics (averages versus medians) or don't have the foggiest idea about the types of jobs that are being compared in public versus private sectors.

Here's a link to the 2009 federal pay grade scale:
www.opm.gov/oca/09tabl...

There deserves to be considerable discussion over whether or not the types of jobs the government employs are really necessary, and there deserves to be considerable discussion about the richness of government benefits in comparison to private sector workers. However, the pay debate is completely misguided. Most government "professionals" make orders-of-magnitude less pay than they could otherwise make in private industry. If you truly compare comparable professional jobs in the private sector versus the public sector, the debate is not even close: private sector jobs make laughably more money on a total compensation basis than public sector jobs, even when you factor in benefit loads.

Goldman Sachs: This Is an Investment Bank?

So "principal trading" is a full 81% of revenue and investment banking is only 7%? How could they NOT do well in this environment? They have full access to the discount window, had TARP funds until very recently, and effectively have a 0% cost of funds with which to work. The US taxpayer is effectively backstopping the largest hedge fund in the world (81% of revenue) masquarading as an investment bank (7% of revenue). And GS is set to now pay out the largest bonus pool in its history. Is this not the biggest thievery of the American taxpayer by a single private entity in the history of the country? And why, exactly, does the largest hedge fund in the world deserve all the advantages of a bank and none of the regulation when only 7% of its revenue comes from banking activities? This is institutionalized theft by GS employees of the American taxpayer, and it is a crime.

Banks Don't Intentionally Overcharge Credit Card Customers… Or Do They?

Finally a breath of much-needed pragmatic realism in Seeking Alpha commentary! Mark, thank you for posting this entertaining commentary on your personal situation (your wife sounds like a pretty sharp lady, by the way).

What drives me nuts about so much of the commentary on both this site and the broader media is that government is automatically assumed to be incompetent and the free market (such as it is, which it ISN'T in American banking) is automatically assumed to be supremely omniscient in finding the perfect solution to everyone's problems.

What most commentators fail to realize, and which you've alluded to here, is that large banks in the US do not operate as part of a free market- they are oligopolies, which are antithetical to free market capitalism. They receive innumerable competitive advantages (e.g. the near-free borrowing from the Fed window; government guarantees of their debt, etc.) that bank alternatives like money market funds and peer-to-peer lending (e.g. Prosper) institutions do not have. In addition to the transparent advantages, they also clearly have the less transparent advantage of enormous influence in Washington, which has shown a propensity to do whatever big banks ask them to do, regardless of consequences. This, my friends, is not a free market, but crony capitalism where the oligopoly has all the advantage over the consumer. This is a classic situation where government MUST step in to break up the oligopoly and restore balance to the relationship between banks and consumers where none currently exists. It's precisely why anti-trust and consumer protection laws were enacted.

The Middle Ground with Global Warming

The closet environmentalist in me feels the need to decry the effects of global warming, but I realize that the science is just not clear, and may never be. The earth does seem to go through natural warming and cooling cycles, and while we may impact that at the margins via human activity, it's lunacy to suggest we can control the outcome through our actions.

That having been said, it's clear to anyone who cares to look that we are squandering our natural resources. The calls to simply drill more on US territory miss the point: our natural resources are finite and we're burning through them (literally) now at a faster rate than ever before. Regardless of what resource to which you refer, ultimately they are going to run out, and possibly in our lifetimes for some resources. To me, that says it's incumbent upon us to conserve and find ways to do as much as we can to recycle what's used into something usable again and spend aggressively on research into renewable sources of energy (wind, solar, hydro, geothermal, etc.). It doesn't mean we stop using what natural resources we have, especially here in the US, but anything we can do to slow the pace of that usage is something we should be pursuing wholeheartedly.

It's good for the human race broadly because it makes our planet a safer and more enjoyable place to live, and is good for Americans specifically because we would have to rely less on foreign sources of energy (e.g. oil).

An Open Letter to Kenneth Feinberg (and American Taxpayers)

Please tell me why the argument that Mr. Hall deserves to get nothing because without government intervention C would have gone bankrupt, effectively invalidating the contract, is "inane drivel"? That's is absolutely what would have happened had the government not stepped in with bailout funds. The simply fact that Mr. Hall has his current job at all is due to government funds.

I'm as much (maybe more) a proponent of ensuring the sanctity of contract law as the next guy, but the argument of paying him in order to uphold contract law rings hollow when he shouldn't have an enforcable and contractual right to a job at all right now, much less a $100 million bonus. If we are so concerned about upholding contract law, we never should have stepped in with the bailouts to begin with.

And speaking as a compensation consultant, the fact that Mr. Hall has a contract that even allows for such outlandish upside potential is mind-numbingly anti-social and creates incentives to do nothing other than take spectacular risk for personal gain with all the downside taken on by shareholders if he fails (or in this case, taxpayers). If I were a shareholder, I'd be livid at this kind of compensation arrangement, only because there appear to be no safeguards in place to protect the very existence of the company if he fails (remember, there is no shortage of high profile banks going out of existence in the recent past because of "rogue traders", e.g. Barrings). I don't begrudge someone making huge profits if they deliver shareholder value, but without clawbacks or offsets in the contract for losses/failure, Mr. Hall's natural incentive is to take as much risk as possible in order to reap the greatest personal reward possible, with little or no downside if he fails.

Unfortunately, this type of compensation structure is largely the norm on Wall Street, and the biggest reason why so many banks blew up and needed taxpayer funding to begin with.

Income Tax, Not Wealth Tax: That's Another Story

Dividends: someone has got to set the record straight on the corporate tax blather, so I guess it'll have to be me.

There is an enormous difference between corporate tax RATES and corporate taxes PAID. You are correct that the US has the second highest RATE of corporate taxes in the developed world. However, the US is middle of the pack when it comes to corporate taxes actually paid as a percentage of total revenues when compared to the rest of the developed world.

While we may have a high marginal rate of income for corporations, we also have inumerable loopholes allowing for reductions of taxable income that many other countries do now allow. While I don't have the source readily available, I read last year (perhaps two years ago now) that while the highest marginal tax rate for US corporations was 35%, the total effective tax rate which US corporations PAID was approximately 7%, which puts US corporations somewhat less than median for corporate taxes paid in the developed world.

The corporate tax rate is a joke- no corporation actually pays 35% tax rate on income- they either don't repatriate foreign-earned income or defer the taxes to a later date. And it they are paying an effective 35% tax rate, the CFO should be fired tomorrow because he isn't doing his job effectively.

Money Market Funds: Basically Unregulated Banks

How do money market funds loan money? To whom are they loaning money to? Aren't they simply purchasing short-term securities on the secondary market and paying out the interest on those securities, earning a management fee in the process?

The Scandal of Overdraft Fees

I think there is a fairly simple solution to NSF fees- go to an overdraft line of credit model.

I bank with US Bank, having switched from TCF because of several $35 NSF fees a few years ago when I was buying a home (long story, boils down to a check being held for 2 weeks to clear and TCF whacking me with fees every day until it cleared). When I signed up with USB, I asked for a way to avoid NSF charges, for which they suggested an overdraft line of credit.

The overdraft line works like a credit card, and has a $3,000 limit. If I overdraft my account, USB automatically transfers money from the credit line to my checking account (in increments of $200) to cover the overdraft. No transaction fee is charged, but I pay a fairly usurious level of interest on the credit line balance (last I checked, it was something like 21% annualized, prime plus 18% or something to that effect, with a 25% cap).

This serves to eliminate the aggravation of a $35 fee being completely out of proportion to the potential transaction size (e.g. the $6 lunch noted above), but still serves as a profit center for the bank, as I'm paying a credit card-like interest rate until I shift money back from checking to cover the credit line balance.

It works for me, makes me very leary of overdrawing the account due to the usurious interest rate, is completely transparent, and allows me to avoid overdraft fees. What's not to like, as long as I'm informed about the high interest rates, just like with a credit card?

Just 5 ETFs and You're Set? Buy-n-Hold Silliness Still Carries On

Gary- not to get all technical on you, but you might want to change your disclosure statement at the bottom of the article.

I can assure you that you are not a Registered Investment Adviser with the SEC, but that your firm may be. People are not Investment Advisers- firms are. You are an Investment Adviser Representative, a representative of your firm, which is an Investment Adviser, registered with the SEC. It's a nit, but it's the kind of nit that can get you fined by FINRA (if you are member of a B/D) or the SEC for false advertising. It's also the kind of thing that the CFP Board of Standards looks very unkindly at.

Just a word of advice from a former industry guy who spent several years having to look at disclosures and the like...

Morningstar CEF Ratings: Worse Than Random

You'd think that the author would have gone to the trouble of actually attempting to understand how Morningstar rates closed-end funds before writing an entire article about how bad the rating system has been. The Morningstar closed-end fund rating system is NOT akin to the way they rate stocks (based on their long-term future investment merit), but instead uses the same methodology as open-end mutual funds (where the rating system is based purely on a backward- looking measurement intended to compare similar funds based on their past performance). All the Morningstar ratings system for CEFs is doing is telling you what funds have performed well in the past relative to funds with similar portfolios. It is not intended to be predicted, like their stock ratings are.

Since, to my knowledge, all closed-end funds are actively managed, rather than indexed, all the above data shows is that managers of closed-end funds were consistently inconsistent in their ability to outperform their peers- the top managers in one time period became the worst managers in a later time period, not unlike what other studies have shown are similar results from open-end actively managed funds.

Anyone who's read a prospectus understands that past performance is not indicative of future returns. If fund investors are using Morningstar's open-end and closed-end fund ratings systems as forward-looking, predictive measures, they're barking up the wrong tree.

Shooting for 100% Return in One Month

"I think that if you’re a professional money manager and you don’t make 100% return in 1 year starting today --- you should look into other forms of employment."

So you're saying that if professional money managers can't double their money by this time a year from now, they're not worth being money managers? And what, bychance, is your yardstick for this determination? Why 100% and not, say, 112%?

And at what expected level of risk (feel free to use either beta or standard deviation, whichever you'd prefer)? Should money managers who target a market neutral strategy, or those managing, say, municipal bond portfolios, also leave the business if they can't achieve the "easy" 100% return over the next year?

It's that easy, is it? Right.

The primary point your comment misses is that there are a whole host of professional money managers out there whose investable universe consists of something other than just 100% long-only smallcap equities with an expected portfolio level beta of at least 1. Even those who do have that singularly focused mandate are likely to find it challenging to achieve the sorts of returns you apparently think are so easy without taking positively laughable amounts of risk.

Comments from ignorant commentators like this detract from the real value of these blogs on what is generally a reasonably respectable site...

10 Highest Paid CEOs for 2008: Unbelievable

MMarrkk- your comment about the BOD being voted out in the next election doesn't hold water. Over 50% (and I believe the number is something like 70%) of shares are held either by institutions directly or indirectly on behalf of shareholders, rather than by individual shareholders themselves. Those institutions vote proxies in favor of management in virtually all cases, unless explicitly instructed otherwise by attentive individual shareholders.

So why are shareholders letting the institutions vote their proxies for them? Because most individual investors don't have the foggiest notion of how to read a 10-K or a 144A (proxy statement), and so couldn't even begin to tell you what the senior management teams of the companies they own make each year, much less what metrics those execs are paid on. Call it laziness, call it ignorance, call it what you will, but BODs don't get voted out because shareholders don't take the time to read disclosures or have the skill set to interpret those disclosures without it being spoonfed to them by the mainstream media. Even then, most have no idea that they even have an ability to vote on it, and when they do, virtually none of those votes are binding to the company (see all the drama and discussion around "say on pay" proposals, which also wouldn't be binding to companies).

Our current regulatory framework isn't in place to make this stuff easily accessible and understandable to the individual shareholder; it's set up to cater to ramming through whatever BODs want to do with a minimum of supervision and consequences from the true owners of the companies. Heads they win, tails we lose.

Not every company acts this way, but the ones that don't are the exception, not the rule.

I still think the solution to all of this is to institute fiduciary responsibility for everyone who handles the money or financial assets of others as an intermediary (it basically requires financial intermediaries of any kind to follow the "prudent person" rule, and to always act in the best interests of the end client). That would include C-level execs and BODs. I venture to say you wouldn't see this sort of negligence and recklessness from BODs and management teams if the consequences of their decisions could result in jail time. Incentives just would not be this out of whack if the decision makers might go to jail as a result.

Elizabeth Warren: Unqualified Advocate

Rosey99, I couldn't agree more with your comments. Whatever she has had to say throughout her service as Chair of the Oversight Panel, it's been straightforward, honest, and forthright. That's more than you can say about virtually every other participant in this crisis, from Wall Street, to Congress, to the Fed and Treasury.