Tuesday, March 24, 2009

Holed up in the tower

I haven't been following the news the last 24 or 48 hours. It is kind of nice. Instead working my arse off to prepare my paper for AEA submission....

Friday, March 20, 2009

My tax fantasies

It seems that the consensus is that the punitive tax passed today is not the right response to AIG. I don't know the details of the bill and I don't have strong feelings about it. It isn't what I have been dreaming about, when my dreams turn to taxes.

For a host of complicated reasons, reasons that I have instincts about but haven't thought very carefully about yet, it seems that our economy has gotten off kilter. And I don't mean the financial crises--though that is a consequence of the imbalance. But even prior, way too much of our productive energies were going into finance. The idea that the financial sector hired more physicists than other sectors is crazy. Finance is important, but only because it facilitates the really important business of providing the goods and services that allow us to live our modern lives. Too much energy in finance acts as a drain on the really productive energies of our life (not to mention becoming a political economy nightmare).

So one way to help nudge us back to a better distribution of talents is using the tax code. I have been thoroughly convinced that Dean Baker's idea of a 0.1% transaction tax on trades makes lots of sense, and would slow the worst types of trades (i.e. speculation). But on top of that tax, lets have a much smaller than the 90% bonus tax but still significant surtax on gross income exceeding some threshold ($100,000? $250,000? Who knows?) when that income is earned in the finance sector. Let's be agnostic about the reason for that pay (bonus versus salary--congress has a bad trackrecord when it comes to legislating the proper form of compensation), but something on the order of an additional 5% or 10% on earnings above the threshold. Perhaps adding several high brackets with progressive increases.

I want it to be less attractive to be a supernova in finance than it is to be one in another, more productive field. And let's be explicit that the surtax is in place until Treasury is repaid for all of the costs of the bailout. (Let the transaction tax on trades go towards covering the stimulus.) I think that if such a tax were enacted simultaneously with additional bailouts (assuming those bailouts are needed to avoid more catastrophes) I think that the politics will go down much more smoothly. Not to mention that it would be fair and maybe even good policy....

Thursday, March 19, 2009

Quick thoughts about AIG and John Stewart

There is a lot I want to say and it is all fairly inchoate. Maybe this blog will help me grow in my ability to be articulate about the cultural/emotional side of corporate fraud and misdoings as well as the policy wonk stuff.

But I have been watching with interest the AIG blow up over the last few days (mostly via TPM), and am very upset by the Obama administration and Geithner, along with the usual suspects. I had hoped (still hold some hope) that Obama would get on a visceral level some of the "emperor's clothes" aspect of the problems with the modern corporate world, but so far he (through his support of Geithner) is not expressing it. Let me see if I can explain.

John Stewart's interview with Jim Cramer struck such a chord, because Stewart finally articulated the essence of what has been so wrong for so long. He said "you all knew. You knew." (I am writing this from memory, and yes, too lazy to check a transcript.) Every scandal the people at the center play dumb. "How could anyone have known?" But they just can't be. Not down deep in the recesses of their brain. Their justification for their existence rests on a fundamental cognitive dissonance: they are important and smart and better, but they do not bear commensurate responsibility.

It is the same at root as the auditor's "expectations gap" (which I am sure I will rant about lots in the future). Auditors all know, because they are more sophisticated than you or me, that they are simultaneously critical to the functioning of the capital markets but not responsible for finding fraud. It has been a hundred year headache that they can't get through the public's thick skill that it is unfair to expect anything of one's auditors.

Similarly, AIG executives are the best and the brightest and AIG cannot contribute to the wellbeing of the American economy without these particular people, and it is impossible to find people this good for anything south of several million a year. BUT how could they possibly be expected to understand systemic risk? Or think about the possibility of house prices falling? How could they--anyone--ever have known?

The rest of us work very hard for much less. And a big chunk of what we work hard for goes to pay these people their fees. We pay in our 401 k plans, we pay in bank fees and mortgage rate. We pay and pay and pay. And now we are paying in our taxes too.

And yet, since we don't grant them their full due, we are unsophisticated. I think that using attitudes towards corporate executives as a measure of sophistication is what is deadly and is the trap that Obama and particularly Geithner are falling into. And why this blog has the title it does. Until Obama in no uncertain terms is able to come out and say, these people are silly piggish crooks, no matter their nice manners, he is going to fail to reign in the oligarchs. (I wish I were half as articulate as Simon Johnson on this matter.)

More on the infrastructure pyramids

This is from the intro to the Risk Metrics Group white paper on the subject linked in the earlier post:
As an extreme example, Babcock & Brown Wind Partners (‘BBW’) had operating cash flow of $14.2 million in the 2006 financial year, but paid distributions totaling $48 million in relation to that year. The distributions were equivalent to 54 per cent of the total cash receipts from customers during the year. Even the most mature infrastructure fund of all, Macquarie Infrastructure Group (‘MIG’), is no exception. It had operating cash flow of $306.9 million in the 2006 financial year, but paid distributions totaling $512.9 million in relation to that year. Furthermore, the distributions were equivalent to 116 per cent of the total toll revenue received during the year.
It makes me ill.

And worst of all, these schemes are built on critical infrastructure, which one can be fairly confident that Macquarie and B&B don't give a rat's ass about. Some of the infrastructure includes London's water and sewage services, along with Spain's emergency radio network. What happens to them when this all blows up?

Tuesday, March 17, 2009

Aussie optimism

Australia is not suffering to the same extent as the US or Europe in today's economy, but man, these guys' optimism is a little scary. I was just browsing through the neighborhood circular, and saw a story about a house being sold in Stanmore, a nice, up-and-coming inner west area:

View Larger Map

But get this: the selling price was AUD620,000 and the description of the two-bedroom house includes
the property has polished floors and period features, but needs a lot of work, particularly as its only toilet is outside.
An okay 2 bedroom in an okay neighborhood with no inside plumbing!!!! 620K!!!!!

(Not to mention the idea of no plumbing in Sydney 2009 is a little mind blowing, if you haven't spent time looking at real estate here.)

(cross posted at Yankee Sydneysider)

My favorite ongoing Ponzi scheme

Bernie Madoff is small potatoes and oh so yesterday. The biggest and best Ponzi scheme began life Down Under and is still flourishing. Where else, after all, can you get steady high returns in this bear market?

Not to mention that this scheme (schemes?) has the world's infrastructure as hostage.

These Ponzi schemes are masked as the safest possible type of investments: the infrastructure fund, particularly those sponsored by Macquarie Bank. Infrastructure (tolls, bridges, airports) are safe, steady streams of revenue, right? So why wouldn't my returns also be safe and steady?? Well, in a good world, they would be safe, steady and very low. In our world, they are steady, ridiculously high, and, I am afraid, not safe at all.

I learned about these funds back in April 2007 at the Global Finance Conference, hosted by LaTrobe University in Melbourne. So this has been at least semi-public for a long time (as was, apparently, the Madoff scheme). Apparently, the reason they are so problematic is that the funds have: an opaque governance structure, management fees that on occasion exceed the revenue stream from the underlying assets, and dividend payouts that come, in part, from new investors...

And it is all documented here, though you have to log in to get the report. And a very scary thing: Australia's superannuation funds are apparently very invested in these buggers. Low volatility and all. So when it all comes tumbling down, the Aussie privatized pension scheme could well come down (even further) with it.

Saturday, March 14, 2009

Why the title?

I came to the world of financial services very naively. Prior to getting my PhD, I was a singer and had no serious experience with the corporate world (though one learns a lot of a particular sort of thing as evening receptionist for Skadden Arps). I stumbled into a project on auditors post-Enron and did not expect to have earth shattering insights into the problems of the world.

I don't think I ever did, either. I just didn't have enough credibility to worry about defending it, and therefore didn't worry too much if I was asking stupid questions. And it seemed to me, when I went to a dog and pony show that the Big 4 put on for us, that there were a lot of naked emperors walking around. And when I asked, people didn't come up with some terribly impressive or brilliant explanation for why the emporer was naked. Instead, they said, "hush, dear. Don't say anything about that. It just shows you don't understand."

And when I didn't stop asking, they started lying to me in silly ways or calling me names (arrogant, naive, silly). I have a stubborn streak (I am a stubborn streak) and so here I am, 5 years or so into asking silly arrogant and naive questions about the financial world. And I am starting to think I am right. The emperor is naked, and that big old closet of his is empty.

I would love to be proven wrong. I would love to learn that the adults are adults and serious and sensible. But I am not so optimistic anymore.

Friday, March 13, 2009

Hello world

Welcome to "The Emperor's Wardrobe," which I hope will become a repository of my reactions to and thoughts about the financial meltdown, regulation, economics, and whatever else seems appropriate to post to a "professional" blog.

I am currently a post-doc in a school of finance and economics in Australia. I'm an American and my PhD is in Policy Analysis, so I sometimes chafe at the industry friendliness of a finance department and at the remoteness of Australia at the most exciting time to be a policy person who cares about the financial services world.

But blogging is geography-free and I get to say what I want. So here I am.