Hedge Fund

Bill Moyers: The Rich Are Different From You and Me — They Pay Lower Taxes

by Bill Moyers on April 16, 2012

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Benjamin Franklin, who used his many talents to become a wealthy man, famously said that the only things certain in life are death and taxes. But if you’re a corporate CEO in America today, even they can be put on the backburner — death held at bay by the best medical care money can buy and the latest in surgical and life extension techniques, taxes conveniently shunted aside courtesy of loopholes, overseas investment and governments that conveniently look the other way. In a story headlined, ” For Big Companies, Life Is Good ,” the Wall Street Journal reports that big American companies have emerged from the deepest recession since World War II more profitable than ever: flush with cash, less burdened by debt, and with a greater share of the country’s income. But, the paper notes, “Many of the 1.1 million jobs the big companies added since 2007 were outside the U.S. So, too, was much of the $1.2 trillion added to corporate treasuries.” To add to this embarrassment of riches, the consumer group Citizens for Tax Justice reports that more than two dozen major corporations — including GE, Boeing, Mattel and Verizon — paid no federal taxes between 2008 and 2011. They got a corporate tax break that was broadly supported by Republicans and Democrats alike. Corporate taxes today are at a 40-year-low — even as the executive suites at big corporations have become throne rooms where the crown jewels wind up in the personal vault of the CEO. Then look at this report in the New York Times : Last year, among the 100 best-paid CEOs, the median income was more than $14 million, compared with the average annual American salary of $45,230. Combined, this happy hundred executives pulled down more than two billion dollars. What’s more, according to the Times “… these CEOs might seem like pikers. Top hedge fund managers collectively earned $14.4 billion last year.” No wonder some of them are fighting to kill a provision in the recent Dodd-Frank reform law that would require disclosing the ratio of CEO pay to the median pay of their employees. One never wishes to upset the help, you know. It can lead to unrest. That’s Wall Street — the metaphorical bestiary of the financial universe. But there’s nothing metaphorical about the earnings of hedge fund tigers, private equity lions, and the top dogs at those big banks that were bailed out by tax dollars after they helped chase our economy off a cliff. So what do these big moneyed nabobs have to complain about? Why are they whining about reform? And why are they funneling cash to super PACs aimed at bringing down Barack Obama, who many of them supported four years ago? Because, writes Alec MacGillis in The New Republic — the president wants to raise their taxes. That’s right — while ordinary Americans are taxed at a top rate of 35 percent on their income, Congress allows hedge fund and private equity tycoons to pay only pay 15 percent of their compensation. The president wants them to pay more; still at a rate below what you might pay, and for that he’s being accused of – hold onto your combat helmets — “class warfare.” One Wall Street Midas, once an Obama fan, now his foe, told MacGillis that by making the rich a primary target, Obama is “[expletive deleted] on people who are successful.” And can you believe this? Two years ago, when President Obama first tried to close that gaping loophole in our tax code, Stephen Schwarzman, who runs the Blackstone Group, the world’s largest private equity fund, compared the president’s action to Hitler’s invasion of Poland. That’s the same Stephen Schwarzman whose agents in 2006 launched a predatory raid on a travel company in Colorado. His fund bought it, laid off 841 employees, and recouped its entire investment in just seven months — one of the quickest returns on capital ever for such a deal. To celebrate his 60th birthday Mr. Schwarzman rented the Park Avenue Armory here in New York at a cost of $3 million, including a gospel choir led by Patti LaBelle that serenaded him with “He’s Got the Whole World in His Hands.” Does he ever — his net worth is estimated at nearly $5 billion. Last year alone Schwarzman took home over $213 million in pay and dividends, a third more than 2010. Now he’s fundraising for Mitt Romney, who, like him, made his bundle on leveraged buyouts that left many American workers up the creek. To add insult to injury, average taxpayers even help subsidize the private jet travel of the rich. On the Times ‘ DealBook blog , mergers and acquisitions expert Steven Davidoff writes, “If an outside security consultant determines that executives need a private jet and other services for their safety, the Internal Revenue Service cuts corporate chieftains a break. In such cases, the chief executive will pay a reduced tax bill or sometimes no tax at all.” Are the CEOs really in danger? No, says Davidoff, “It’s a common corporate tax trick.” Talk about your friendly skies. No wonder the people with money and influence don’t feel connected to the rest of the population. It’s as if they live in a foreign country at the top of the world, like their own private Switzerland, at heights so rarefied they can’t imagine life down below. Moyers & Company airs weekly on public television ( check local listings ). See more features — including our all-new TAKE ACTION page — at BillMoyers.com

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Bill Moyers: The Rich Are Different From You and Me — They Pay Lower Taxes

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Robert Teitelman: Stray Thoughts on the Rise of Shareholders

by Robert Teitelman on April 16, 2012

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A post earlier in the week about a Gretchen Morgenson column in The New York Times continues to bug me. Morgenson was once again thumping the tub for “say on pay,” that is the ability of shareholders to have a greater say on corporate compensation schemes. The big takeaway here, to me, is that Morgenson and the corporate governance crowd continue to believe that some day, somehow, shareholders will take up their democratic responsibilities as owners and actively participate in corporate monitoring. I’m skeptical on empirical grounds, but whatever. More interesting is a stray thought that wandered through the post. From a certain perspective, governance arrangements — today that means shareholder hegemony — take on a kind of foundational importance, just as in democratic politics the constitution serves as a kind of governance operating system or source code. Rising from that model should theoretically flow a variety of either virtues or sins: alignment or misalignment of incentives; rough equality or inequality of pay; efficient or inefficient use of resources; good results or bad, which are then reflected in rising or falling shares; and, ultimately, in an economy that provides mobility, job creation and innovation — or the opposite. Historically speaking, we saw a shift somewhere in the ’70s from an earlier model that emphasized stakeholder interests — workers (often unions), communities, customers and shareholders — and that was embodied in a class of relatively large and stable corporations that dominated the landscape. This is often viewed as the bad old days of governance; and stakeholder governance, with its agency issues and separation of ownership and control, is the defective model that current governance theory has long defined itself against. The question then is a simple one, reflective of a complex historical situation: Why were many of the virtues we now seek — relative equality, lower CEO pay (relatively and objectively), global competitiveness, nearly full employment, considerable innovation (a difficult subject to pin down, of course, though there was little talk of technological stagnation in the ’60s, which stagnationists like Tyler Cowen look back on with nostalgia ) — more associated with that era of retrograde stakeholders than, say, the shareholder model of today? In short, if CEOs and boards used stakeholders to entrench themselves so effectively, why didn’t their pay go through the roof? Again, these are complicated and dynamic historical circumstances. It’s very true that American corporations existed in a kind of protected and hegemonic position in the three decades after World War II. With the rest of the industrial world trying to recover from the war, American corporations could do nearly anything they wanted. Globalism existed for American multinational companies, but it was relatively limited, hedged in by protectionism at home and abroad and restrictive regulations, particularly on the flow of capital and credit. It was also the last decades of high industrialism: Economies of scale prevailed, which allowed efficient output and plentiful jobs at relatively large and dominant companies. Even innovation was viewed as something best done on an industrial scale: It was the age that recalled not the Manhattan Project, but it was the heyday of Bell Laboratories which Jon Gertner lays out so well in his new book . It was also an era that came to a sudden and wrenching end with the stagflation of the ’70s. Still, while all those factors help explain relative equality and the dominance of large companies, they don’t begin to explain compensation and the destructive practices that are supposed to flow from “entrenched” management. So it’s intriguing. But now, like a dog chasing a stick, we head a little deeper into the weeds. Earlier this week, JW Mason, who normally posts on his own econoblog, The Slack Wire, wrote an essay as a substitute for Mike Konczal at Rortybomb. Mason explored the tensions and contradictions between two causal explanations of the financial crisis: The notion that the Federal Reserve had spawned the mispricing of assets (like mortgages) by keeping interest rates too low, and the argument, often made, Mason points out, by the very same economists, that global trade imbalances (well, mostly China) flooded the developed world with too-cheap capital. The post is well worth reading carefully, but what piqued my interest was Mason’s provisional conclusion that the real problem might not have been either of those phenomenon, but rather that the crisis represented a failure of the private financial system to optimally match up savings and useful investment ideas. Near the end of a fascinating comment discussion, Mason refers back to an earlier post on The Slack Wire on the subject of nonfinancial corporations and intermediation, that is banking. That post, in October 2011, opens up with one of the more fascinating graphs I’ve seen lately. It tracks nonfinancial corporate after-tax profits, dividends and total payouts from 1950 to 2011. I’ll let Mason lay it out: In the neo-liberal era, up until 1980 or so, nonfinancial businesses paid out about 40% of their profits to shareholders. But in most of the years since 1980, they’ve paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 [billion] in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion and net stock repurchases were $790 billion. Mason goes on to compare what those numbers suggest about corporations to homeowners using residences as piggy banks: That is, a steady disinvestment has taken place. He then goes on to make a series of political arguments that you can accept or not. (A side note: Mason’s graph also casts a light on all the handwringing about companies hoarding cash after the crisis. In fact, while profits did plunge, the total payout mostly remained above that level — and for a time in 2009 the two ran together. Those very cries that companies must pay out more may suggest how far we’ve come in terms of shareholder expectations. It also points up the split between shareholder interests and workers. Companies were continuing to pay out to shareholders, not using the cash to rehire.) But what are the numbers really saying? Well, clearly something has changed (we should also be careful to note that the period 1950 to 1980 was not exactly “normal,” if normal means anything in this context). Here we take refuge not in economics as much as in economic history. If there’s any powerful trend that defined the shift in finance that was first strikingly evident in the ’70s, it was the rise of institutional shareholders, accompanied by the cult of performance and portfolio management. The historical context here is complex too — and it undermines some of the more reductionist arguments of the neo-liberal critique from the left — but it does trace a remarkable shift from equity markets that are sideshows for individual investors to institutionally dominated equity markets that have, since the ’70s, made a series of demands and arguments for their own prescience, efficiency, rationality and supremacy. The shift of governance from stakeholders to shareholders is only the most obvious sign of this demand for hegemony by shareholders. The track of rising corporate payouts is another piece of evidence. The question all this stirs up I’m in no position to answer: Are we better or worse off economically, socially and politically with shareholders in that pre-eminent a role? Is there a balance point? Have we, in a world of activist hedge funds and high-frequency trading, overshot that point? Has the cult of share performance, once such a tonic to a closed, inefficient and cartel-like Wall Street, devolved into rampant speculation? Is there — God forbid — a role for stable, even entrenched managers at, say, companies like Facebook or Google? (Felix Salmon goes after an entrenched Google floating an “evil” two-class share scheme here. ) Have we gotten corporate governance wrong? It’s easy to ask these questions but difficult to answer them. That said the ascendancy of the shareholder is a topic worth pondering. The original post can be found here . Robert Teitelman is editor in chief of The Deal magazine.

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Robert Teitelman: Stray Thoughts on the Rise of Shareholders

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‘I’m Always The One Drinking Diet Coke At Happy Hour’

April 15, 2012

NAIEL IQBAL’S co-workers couldn’t figure him out. Ms. Jukaku, a former analyst at Goldman Sachs, prayed in her Manhattan apartment. He’d just started at a Midtown Manhattan hedge fund — the kind of elite enclave where overachievers in button-downs go to make a few hundred grand before heading off to Harvard Business School. But Mr. Iqbal, 27, a graduate of the Wharton School, wasn’t acting like a typical finance guy. He didn’t introduce himself around the office. Nor did he grab lunch with the other traders.

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Sheila Bair: ‘Look Out 1 Percent, Here We Come’

April 13, 2012

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore. For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them. So why not let everyone participate?

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Renting Out Foreclosed Homes Ready To Become Big Business

April 13, 2012

The business of turning foreclosed homes into rentals is set to boom. The practice could be a $100 billion industry this year, according to a report from real estate tracker CoreLogic . That’s equivalent to $125 for every Facebook user , the cost of halving global poverty for two years and 250,000 times the salary of the President of the United States, according to The Guardian . Why is the market for foreclosed properties-turned-rentals poised for a boom? In the aftermath of the housing bust, demand for owning homes has fallen, pushing rents up and home prices down . In response, everyone from big banks to smaller firms are increasingly taking advantage of the disparity by turning foreclosure properties into rental homes. Bank of America is currently running its own pilot program to rent homes to families that have been foreclosed on, called Mortgage to Lease . In addition, private equity firms and hedge funds are now spending hundreds of millions of investment dollars and racing to buy up foreclosed properties. In turn, Bank of America and government mortgage giants Fannie Mae and Freddie Mac are responding to the demand, selling off their holdings of foreclosed homes by the hundreds. Just this week, Bank of America announced a bulk offering of 500 foreclosed homes in six different states, following up on an offering of 200 properties late last year. Meanwhile, Fannie Mae and Freddie Mac have sparked a bidding war when it put up 2,500 of the 200,000 foreclosed homes it currently owns for sale. That’s because Wall Street firms say they’re interested in buying up the properties and renting them out. The practice of turning foreclosed homes into rentals is becoming so popular that the Federal Reserve issued guidelines earlier this month for banks to use when they’re flipping foreclosures into rentals. But the practice also faces criticism: Namely, some are concerned that the very banks and agencies responsible for the housing crisis in the first place will now benefit from their own questionable practices.

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Traders Took Their Heads Out Of Their Hands Today

April 11, 2012

NEW YORK — Investors on Wednesday all but forgot the previous day’s burdens and sent stocks soaring. It was a stark turnaround from the day before, when they’d pushed the market into a free-fall on worries about European debt and corporate earnings in the U.S. Those fears about problems festering on both sides of the Atlantic were calmed thanks to a surprising profit from Alcoa and news that borrowing costs in Spain had edged down, a potential sign that investors have more faith – for now, anyway – in that country’s financial health. The result was a U-turn on Wall Street. The Dow Jones industrial average climbed as much as 129 points in early trading before settling at 12,805.39, up 89.46 points. The previous day, it had lost 214 points, the cap to its biggest and longest losing streak this year. European markets rose, too. Stocks climbed roughly 1 percent in major capitals, excluding Greece, after losing 2 to 3 percent the day before. Treasury prices fell, signaling that investors are more willing to put money in stocks. Other U.S. indexes also erased much of the previous day’s losses. The Standard & Poor’s 500 rose 10.12 points to 1,368.71 after losing 24 points the day before. The Nasdaq composite climbed 25.24 points to 3,016.46 following a 56-point loss Tuesday. Alcoa rose more than 6 percent after reporting late Tuesday that it turned a profit in the first three months of the year and handily beat the expectations of Wall Street analysts, who were predicting a loss. Since Alcoa is the first company in the Dow average to report earnings, its results have a greater ability to move the market compared with companies that report later. More first-quarter results will be released over the next few weeks. Market watchers were divided over how long the gains would last and whether Alcoa’s profits actually mean anything for the rest of the earnings season. “I’m not predicting we’re going to have a blowout earnings quarter,” said David Armstrong, managing director of Monument Wealth Management in Alexandria, Va. “But I think if people thought earnings season was going to be bad, they may be pleasantly surprised.” “One earnings report?” countered Uri Landesman, president of the New York hedge fund Platinum Partners. The boost “will last until the first bad number.” For Europe as well, investors seemed anxious to latch onto any piece of good news. They were cheered that the rate on Spain’s 10-year bonds dropped slightly after nearing 6 percent on Tuesday. Seven percent is generally considered the rate at which it becomes too expensive for a country to borrow money. Investors chose, largely, to ignore other signs blaring that problems in Europe are only hibernating and not solved. Spain’s borrowing costs are still dangerously high. Italy sold 12-month bonds but was forced to pay more than double the interest rate it paid last month. Even Germany, whose bonds are considered a safer investment, failed to sell all the 10-year bonds it had intended to. In Greece and France, upcoming elections threaten to unravel the uneasy peace that has been reached between the weak and strong countries in Europe. New leaders could unwind hard-fought deals that require Greece and others to cut spending in order to get bailout loans. Greece’s unpredictability rose to a new level Wednesday when the country announced it would hold parliamentary elections months ahead of schedule. Landesman described the dealmaking as “Band-Aid after Band-Aid,” rather than a real solution addressing Europe’s deep-rooted problems of overspending. “You can’t do that forever,” Landesman said. “There is a day of reckoning.” If it is hard to predict news out of Europe, it’s equally difficult to guess how investors will react to it – panicking one day and shrugging off similar developments on another day. There are plenty of days the market swings on news out of Europe that is merely incremental, or even when there’s no news at all. “A possible European recession? I don’t really think that’s new,” said Armstrong. “For people reacting as if this is new news, I think that’s poor discipline as a (long-term) investor.” Europe’s debt crisis and concerns about U.S. earnings haven’t been the only problems for the market in recent weeks. There are also signs that job growth is slowing and that the Federal Reserve is disinclined to pump more money into the economy. Wednesday’s gains still don’t make up for the market’s second-quarter losses. Wednesday was just the second gain for the Dow in the seven trading days so far this quarter. The Dow was up 8 percent at the end of the first quarter, but it’s down 3 percent so far for the second. From a longer-term viewpoint, however, the market’s recent swings have been relatively mild. The Dow plunged nearly 550 points in the five days ending Tuesday, a molehill compared to the mountain of last summer’s frightening drops. Those included an 858-point, eight-day plunge in July and August, as Congress bickered over government debt limits and the S&P prepared to downgrade the U.S. debt rating. In fact, the market’s steady rise from Thanksgiving to the end of March has kept the losses of the last few days from being any worse, said Frank Fantozzi, CEO of Planned Financial Services in Cleveland. “It’s like a person,” Fantozzi said. “If you’re feeling good overall and a couple negative things happen, you just shrug it off. If you’re feeling lousy and you get some good news, you still feel lousy.” Among stocks making big moves: _Titan Machinery, which sells agricultural and construction equipment, jumped nearly 17 percent after reporting a big increase in quarterly profit. _Cell phone maker Nokia plummeted nearly 16 percent after warning that heavy competition will hurt first-quarter results. _Travelzoo, the online travel company, soared more than 28 percent after reports that it plans to sell itself to private firms.

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Two More Private Equity Firms Ready To Go Public

April 11, 2012

Two more private equity companies are going public, as a once-secretive industry continues to make its way into the sunlight. Carlyle Group, the third-largest private equity firm in the world, is expected to offer a 10 percent stake in its company as early as next week, according to a Reuters report late Tuesday . The private equity firm, which invests in a wide variety of companies around the world, including everyday consumer brands like Hertz Corporation, is reportedly looking to raise $750 million to $800 million, giving it a total market valuation of up to $8 billion. According to Reuters, JP Morgan Chase, Citigroup and Credit Suisse are leading the 21 financial institutions underwriting the deal. At the same time, Bloomberg reports that Oaktree Capital Group, the Los Angeles-based private equity firm, is looking to sell $517.5 million of its company in its own public offering this week. The two firms, among the 20 largest in the world in 2011 , according to the research group and trade publication Private Equity International, join a growing list of large private equity operations that have offered stakes to the public in recent years. In 2007, Fortress Investment Group became the first hedge fund and private equity firm to go public. That was followed a few months later by the Stephen Schwarzman-led Blackstone Group filing a massive IPO . In 2010, private equity giant KKR went public, followed, last March, by Apollo Global Management . For those who follow the private equity world closely, it’s all part of a much larger trend: a mainstreaming of the industry. Traditionally, some in the private equity world have had an uneasy relationship with public scrutiny. Many firms were simply private pools of money investing in private companies, with little need or incentive to interact with the outside world. Now, though, the biggest PE firms are beginning to look and act like the rest of Wall Street. “This is part of the trend of private equity becoming a regular industry, not a collection of obscure boutiques,” said David Snow, CEO of private equity trade publishing company PrivCap. Snow pointed out that these private equity firms that turn public often have businesses that stray beyond the traditional private equity model and into territory occupied by Old Wall Street, including offering investment advice and hedge funds. These firms, Snow said, are almost like “old world merchant banks.”

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Raymond J. Learsy: The New York Times Sheds a Tear for Wall Street Paydays

April 8, 2012

Andrew Ross Sorkin, The New York Times ‘ and CNBC’s subtle apologist for Wall Street, Goldman Sachs et al slinks again –this time in a featured babble on the growing difficulties being encountered by the Wall Street folk to strike it big time. Mr. Sorkin presents us with a laundry list of why the cascade of wealth that has been showered on Wall Street players is coming to an en end. That henceforward times are going to be tough with its implication that we should all be more charitable and understanding in our judgments of the errant behavior that has done so much to bring our economy close to its knees. He plaintively intones, “It is harder than ever to become one of the world’s wealthiest individuals by working on Wall Street.” He then goes on to draw a distinction between the Wall Street Poobahs such as JP Morgan’s Jamie Dimon, Goldman’s Lloyd Blankfein being the poorer cousins of the hedge fund crowd, a bit like saying they all belly-up to the same bar, but one set is drinking scotch, the other ordering gin. Then, brimming with a subtext of the unfairness of it all, that the Wall Street types haven’t reached the herculean heights of wealth such as the likes of a Bill Gates. Without any qualifier, thereby implying Bill Gates’ billions were achieved by the same razzle-dazzle as the Wall Street players and their speculative excesses. No mention that Bill Gates earned his billions by his exemplar of American meritocracy, thanks to his entrepreneurial vision and courage through which we have all realized richer lives — this, in stark contrast to the largely self-enriching crony capitalism of Wall Street laid bare by the events of 2008 and thereafter. In the meanwhile, working in the trenches, getting their hands dirty on farms, on assembly lines, tending the sick in emergency rooms, driving the trucks or buses, getting splattered with oil working on a rig, or whatever day to day undertaking in which they were engaged, clearly those below were too busy to take heed of Mr. Sorkin’s concerns. Last year alone these hard working souls pulled in the following paydays from their one year’s sweat and labor: Ray Dalio, Bridgewater Associates,$3.9 Billion Carl Icahn, Icahn Capital Management,$2.5 Billion James H. Simmons, Renaissance Technologies Corp,$2.1 Billion Kenneth C. Griffin, Citadel,$700 million Steven A. Cohen, SAC Capital Partners,$585 million If timing is everything, than the timing of Mr. Sorkin’s article becomes ever so curious coming just one week after the publication of these humungous sums. There he was, as so often before, trying to steer our focus from the excesses of Wall Street’s “Big Money” parade.

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Sen. Jeff Merkley: The Wild, Off the Mark Arguments Against the Volcker Rule

April 3, 2012

Big banks are formulating a host of arguments – wild, off the mark arguments – aimed at dismantling the Volcker Rule firewall between loan-making, customer-serving banks and high-risk hedge funds. That firewall is essential for a stable banking system. When hedge funds blow up, and they regularly do, one doesn’t want them taking out our loan-making system that is so vital to our families and businesses. MF Global, for example, blew up just a few months ago due to big bets on currency markets. But those bad bets didn’t damage our banking system, because MF Global wasn’t part of a bank. So why do big banks want to tear down the Volcker firewall ? Quite simply, hedge funds and similar trading buried in legitimate risk hedging and market-making are big business and, often, make big profits. Moreover, hedge funds inside banks have a competitive advantage by benefiting from government subsidies in the form of insured deposits and access to the Federal Reserve discount window. So what are the arguments the banks are making to attack the Volcker firewall? First they argue that the Volcker firewall will hurt retired teachers and cops by decreasing “liquidity” in markets, which is how easy or hard it is to buy or sell securities. They argue that any decrease in bank trading will make it harder for investors to buy or sell stocks and bonds, which they assert will increase the amount that investors will have to pay for transactions, thereby decreasing the profits for pension funds of retired teachers and cops. Wrong . First, the Volcker rule explicitly allows for “market-making” by bank brokers. Banks will continue to be able to serve investors by helping them make trades. Second, if additional trading is truly profitable without the support of the discount window and FDIC-insured deposits, such trading will take place outside of banks as it has for decades. Third, “liquidity” is not a holy grail. Being able to trade ever faster is not always an economic gain, either for investors or for the economy. High speed trading and computerized trading don’t add much to the economy, and they can do massive damage when things go awry. For these and other reasons, pension funds such as CalPERS, the nation’s biggest, support the Volcker Rule because they depend on a stable financial system free from boom and bust cycles. Moreover, they benefit by reducing the conflicts of interest that derives from massive hedge fund trading by multi-trillion dollar banking institutions. A second major line of attack that the banks have opened up on the Volcker firewall is it will raise gas prices even further. They even have a fancy study for their conclusion, financed by Morgan Stanley, where they argue that if a bank cannot make massive bets on the price of oil, then the price of gasoline will go up and 180,000 jobs will be lost. Wrong. The evidence points in the opposite direction. When big banks invest huge sums on the belief that oil markets are going up, it creates an artificial surge in demand that raises the price of oil. A recent Goldman Sachs report estimated that oil speculation increases the price of gasoline by about 56 cents per gallon. Even the chairman of Exxon-Mobil estimated that the true price of a barrel of oil based on supply and demand should be in the $60-70 range at the same time prices were over $100. A strong Volcker firewall, by getting the banks out of the commodities trading market, will reduce excessive speculation, creating a pathway to more stable prices. As Chairman Volcker has emphasized, U.S. markets worked well for sixty years under a much tougher Glass-Steagall separation of commercial banking from investment banking, including strong limits on bank participation in commodities. Similarly, the markets will work very well under the Volcker Rule’s modernized firewall. The big banks aren’t paying for phony studies, and shielding themselves behind teachers, cops, and drivers because they want to actually lower prices for anyone. Rather, they are doing it because the Volcker firewall will force them to give up the hedge fund-like trading that makes them billions of dollars in profits in good times, but billions of dollars in losses when things go south. When the bank’s hedge fund trading blows up the banks, it will deeply damage loan-making for families and business across America causing deep economic destruction. In short, and to paraphrase Warren Buffet’s comments, hedge funds inside banks are instruments of mass financial destruction. The sooner the Volcker firewall is implemented, the better for all of us.

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Tribune Broadcasting: No Deal Reached With DirecTV

April 1, 2012

NEW YORK (AP) — DirecTV Inc. subscribers in 19 U.S. markets have lost access to certain programming, after Tribune Broadcasting said it failed to reach a settlement with the satellite television provider in their contract negotiations. Tribune Broadcasting said late Saturday in a statement that without a deal in place, DirecTV was barred by federal law from carrying the signal of Tribune’s local television stations after midnight, when their agreement expired. The affected markets include New York, Chicago, New Orleans and Philadelphia. Customers could lose TV programs including “American Idol,” ”Gossip Girl,” and Major League Baseball, depending on who owns local affiliates that carry the shows. Tribune president Nils Larsen called the situation “extremely unfortunate.” In its own statement, DirecTV said it had hoped Tribune would allow its programming to remain up while negotiations continue. But as it struck midnight in each time U.S. time zone, Tribune channels carried by DirecTV went blank. Earlier, DirecTV said that it had accepted the financial terms that Tribune’s management offered it by telephone two days ago. But Tribune came out with its own statement shortly after, saying it had not reached a deal or come to terms with DirecTV on any aspect of the contract. DirecTV fired back, saying in another statement that it had a handshake deal with Tribune on Thursday with an agreed upon rate for their channels. “Their actions are the true definition of ‘bad faith’ in every sense of the term,” DirecTV said. The satellite TV provider also wondered whether Tribune was having difficulty negotiating because of its bankruptcy process. “Threatening station blackouts to extract an exorbitant fee for all of Tribune’s content may provide an improved return for certain banks and hedge funds, but is not in the interest of its viewers and is not a cure for bankruptcy,” DirectTV said. Negotiations have been ongoing for months. DirecTV subscribers in the markets where Tribune owns the local Fox affiliate lost access to programs such as “American Idol” and Major League Baseball. Where Tribune owns the local affiliate of The CW Network, DirecTV subscribers are unable to see shows such as “Gossip Girl” and “Vampire Diaries.” Larsen said in a statement Thursday that if an agreement was not reached, DirecTV subscribers would still be able to watch programs on broadcast stations for free in high definition with a TV antenna or by signing up with an alternative pay-TV provider. Tribune’s broadcasting group owns or runs 23 television stations, WGN America on national cable and Chicago radio station WGN-AM. Its publishing arm includes daily newspapers such as the Los Angeles Times, Chicago Tribune and The Baltimore Sun. DirecTV serves 32 million people in the U.S. and Latin America.

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Poker Millionaire Struggles With Fed Shutdown Of Online Gambling

March 30, 2012

To be 23 years old and making a fortune as a poker player sounds like the life, doesn’t it? Brian Hastings isn’t so sure. The money part can be great. Hastings once earned more than $4 million in five hours of online poker as a Cornell student during finals week. The problem is that Hastings wants to put down roots. A Department of Justice shutdown of the major Internet poker sites on April 15, 2011, has turned Hastings and other poker pros into nomads who often set up shop in foreign countries to ply their trade online. “I haven’t had any stability,” Hastings recently told The Huffington Post. “I’m trying to determine where I want to base myself. I want a place I can live in eight months a year. Moving from place to place, it does drag personal relationships.” Hastings currently bounces between an apartment near a tribal casino in Hollywood, Fla., his parents’ home in Hanover Township, Pa., global stops on the pro poker tour, and Chicago. He said Chicago promises him a more connected existence because he works with friends on a fantasy-sports website called draftday.com — but that the city doesn’t have what he deems to be “viable” poker games. Hastings also spent three months in Vancouver, B.C., last fall. He set up a Canadian address and bank account so he could legally compete on a poker website, and pondered setting up permanent residency where cyber-poker is allowed, but has had second thoughts. He is not alone in facing online poker’s upheaval, which is featured in the new Matt Damon-narrated documentary , ” All In: The Poker Movie .” Kristin Wilson of the Poker Refugees placement center said she estimates that of the thousands of U.S. players capable of making a living online, hundreds have moved to Costa Rica and up to 1,000 have relocated to Canada since the DOJ ban was enforced. Millions of amateurs and pros alike have had their deposits frozen on poker websites, according to the Poker Players Alliance, with the site Full Tilt accounting for an estimated $150 million in unpaid refunds . (Hastings was a sponsored player on Full Tilt and said he lost $90,000.) “It’s not a good time, I’ll be honest,” said Chris Moneymaker (yes, his real name), a Tennessee accountant whose 2003 World Series of Poker win is credited with triggering the poker boom . “It’s a bad time cause there’s no place to play.” Hastings is not a household name in casual poker circles, in part because he has never made a splash at poker’s big televised event, the World Series of Poker in Las Vegas. But in Internet poker, he is one of the top three players in the world, according to Bluff Magazine . His penchant for making money at astounding rates has been well-documented. On Dec. 8, 2009, while still a Cornell undergraduate, Hastings played a five-hour game of Pot Limit Omaha against a Swedish wiz named Viktor Blom. Hastings won $4.18 million after starting $1 million in the hole, and took Blom for another $1.5 million in a rematch. He and his colleagues at CardRunners.com studied Blom’s tendencies before the showdown (which caused a kerfuffle about alleged collusion), and Hastings exploited Blom’s habit of becoming more aggressive after losses, according to Cornell Alumni Magazine . Those were the rollicking days of the Internet poker explosion. The winnings are not so easy now, although Hastings acknowledges that many players wouldn’t mind being in his current position. Since his main avenue of earning power was cut off stateside in what poker circles call Black Friday, he has made $700,000, including nearly $214,000 for triumphing in a World Poker Tour event at the Seminole Hard Rock Casino in August. He also won $73,219 in October at the World Series of Poker Europe event in Cannes, France. The extra travel, he says, has not complicated his finances. Every country he plays in has a tax treaty with the United States, meaning that his earnings are taxed as if he made the money domestically, he said. On the portfolio side, Hastings said he invests in stocks, hedge funds, gold and silver and start-up companies. His splurges on fine dining and trips for his parents and friends. “I don’t spend a ton of money relative to my income, but when I do it’s mostly on experiential stuff, since I think that is what is most worth spending money on and leads to happiness,” he said. In the poker’s new economy, Hastings’ bread and butter remains Omaha and Texas Hold ‘Em for high stakes — but he plays them mostly in person. Despite the slower pace of poker in an actual card room, he said his profit averages between $600 to $700 an hour because of the “softer” games he has found. So he tolerates the itinerant life for now. Like many peers, he said he believes online poker will be legalized soon. “Certainly within the year, we expect Americans will be able to play online poker within a regulated jurisdiction through either federal or state legislation,” said John Pappas, the executive director of the Poker Players Alliance. Hastings seems to profit in any environment. Pattern recognition and psychology play a big part, he said, along with bankroll management and tolerating the short-term swings of luck. When he’s stateside, Hastings plays occasionally on a website still operating in the U.S. despite the crackdown. “It’s pretty sketchy to me and is not a site I’d want to keep much money on at all,” he said. The kid may not have a home, but he has his wits.

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See Which Hedge Funders Took Home Billions Last Year

March 30, 2012

* Top managers earned $14.4 bln in 2011, AR says * Bridgewater’s Dalio topped list with almost $4 bln * Icahn, Simons, Griffin, Cohen round out top five * Last year’s top earner, John Paulson, off AR magazine list By Katya Wachtel NEW YORK, March 30 (Reuters) – Three prominent hedge fund managers each made more than $2 billion in 2011, a year when most traders failed to earn money for their wealthy customers, according to an annual survey by AR magazine. Collectively, however, this exclusive group of the 25 richest hedge fund managers took a 35 percent pay cut last year, when the average hedge fund lost 5 percent. AR’s “rich list” of top hedge fund earners showed the group raked in $14.4 billion, down from $22 billion the year before. Raymond Dalio clocked in at the top spot, earning nearly $4 billion as his Connecticut-based Bridgewater Associates was one of the top-performing funds, with returns of about 20 percent. Septuagenarians Carl Icahn, who runs Icahn Capital, and James Simons, who retired from Renaissance Technologies Corp, also had multibillion-dollar earnings, rounding out the top three. Noticeably absent from the AR ladder was 2010′s top earner, John Paulson, who fell off the list entirely after a miserable year in which one of his biggest portfolios lost more than half its value, and his flagship Advantage Fund lost 36 percent. Paulson reportedly earned $4.9 billion in 2010. But Paulson was not the only manager who quite literally experienced a change in fortune. Whipsawing markets last year hobbled many of the previous year’s top earners. Fifteen managers who were part of the AR rich list in 2010 didn’t make the cut in 2011. Activist investor Carl Icahn earned $2.5 billion during a year that his firm made about 35 percent and mathematics professor turned hedge fund founder James Simons made $2.1 billion. Citadel’s Kenneth Griffin and SAC Capital Advisors’ Steve Cohen, long-time top earners, rounded out the top five, taking home $700 million and $585 million, respectively. Dalio, Simons and Cohen cruised into top positions for the second year in a row, though in 2010 each of their paydays was bigger, according to AR’s calculations. Hedge funds managers typically charge investors 2 percent for managing their money, meaning that the industry’s very largest funds often present their managers with the biggest checks. In good years, managers can also skim off 20 percent or more of the profits from their trades. New arrivals to the top 25 in 2011 included Dalio’s deputies at Bridgewater, Greg Jensen and Robert Prince, the firm’s co-chief investment officers. Industry veteran Paul Singer of Elliott Management Corp also scored a place in the exclusive group. AR has been estimating industry compensation since 2011 and the list is always closely watched, especially now that Wall Street paychecks are being scrutinized extra hard after the 2008 financial crisis. FORBES LIST AR’s rankings closely correspond to the Forbes magazine list of 40 highest-earning managers of 2011, though the amount of compensation varies. In that survey the top 40 profit-makers pocketed $13.2 billion. Dalio topped the chart on that list too. However, Forbes estimated his earnings at about $3 billion, about $1 billion less than AR calculated. Determining the earnings of top hedge fund managers requires some amount of guesswork, since funds do not publicly disclose compensation. AR bases its estimates on the fees charged by funds and the percentage of capital a manager is believed to have in his fund. On the Forbes list, Simons was runner-up to Dalio instead of AR’s No. 2 placeholder, Icahn, who placed third.

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More Bad New For BlackBerry Maker

March 29, 2012

By Alastair Sharp TORONTO (Reuters) – Research In Motion on Thursday reported a quarterly loss as BlackBerry shipments slumped again and said former co-CEO Jim Balsillie stepped down as director, part of a shake-up of the company’s senior ranks by its new chief executive. RIM’s shares dropped as much as 9 percent after the company said it would no longer issue financial forecasts and is reviewing “strategic opportunities” such as partnerships and joint ventures licensing, and other ways to leverage its assets. Chief Executive Thorsten Heins, who took from Balsillie and co-CEO Mike Lazaridis in January, would not rule out a sale of the company, though he said the company was still focusing on a turnaround. “I did my own reality check on where the entire company really is. Having had the benefit of going through this process from the vantage point of CEO, it is now very clear to me that substantial change is what RIM needs,” he said in a conference call with analysts. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For RIM graphic: http://link.reuters.com/keb47s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The Waterloo, Ontario-based company shipped 11.1 million BlackBerry smartphones in the fourth quarter ended March 3, down 21 percent from the third quarter, but slightly ahead of analysts’ expectations. Even so it was the first quarterly decline in the period covering Christmas since 2006 and only the second time RIM has reported the metric dropping for that crucial period. RIM sold more than 500,000 PlayBooks in the fourth quarter, a number inflated by deep discounts offered to boost sales of the product. The decline in BlackBerry shipments suggests that RIM, at best, is treading water until it releases its next-generation of BlackBerry smartphones late this year. Most analysts consider that a do-or-die launch for the company as it falls further behind Apple Inc’s iPhone and iPad and devices powered by Google’s Android. “PAYING THE PRICE” The company is now paying the price for failing to heed calls to move quickly to license its operating system and consider other strategies to compete with industry titan Apple, said Peter Misek, managing director of Jefferies & Co. “It’s going to be absolute gong show for the next few quarters,” he said. “They’re going to scramble around now for the next three to six months, and every poor shareholder that had faith in them is going to be potentially impoverished. I’m so angry as a Canadian – every Canadian investor should be angry.” After Heins took over in January, he immediately raised investor doubts about his turnaround chops by declaring RIM didn’t need drastic change, a stance he later clarified as meaning RIM was not going to be split up or sold. But the results issued Thursday showed a major shakeup in the works at the Waterloo, Ontario-based company. RIM said Balsillie – long one of the company’s public faces – had resigned from the board. David Yach, a chief technology officer, and Jim Rowan, a chief operating officer, also stepped down. “Ultimately, RIM is taking half measures, baby-stepping their way to a reorganization and they’re not moving fast enough,” said Ed Snyder, an analyst with Charter Equity Research. “They need a wholesale change in the culture and the management of the company.” RIM has also decided to end the practice of providing specific financial guidance for the current and future quarters, saying only it “expects continued pressure on revenue and earnings throughout fiscal 2013.” That expectation reflects weakness in the company’s U.S. business and competitive pressure in global markets as it sells more low-end devices. RIM historically has provided a forecast for BlackBerry shipments, earnings per share and revenue, but has faced scathing criticism in the past year for missing these targets. BY THE NUMBERS In its fourth-quarter, the company announced a net loss of $125 million, or 24 cents a share, after booking write-downs on its legacy BlackBerry 7 phones and goodwill. On an adjusted basis, profit dropped to $418 million, or 80 cents a share, from $934 million, or $1.78, a year earlier. Revenue slumped to $4.19 billion from $5.56 billion. Analysts, on average, had expected RIM to earn 81 cents a share on revenue of $4.54 million, according to Thomson Reuters I/B/E/S. “They clearly have no fix on when this process will bottom, and until it really does, it’s going to be very difficult for a lot of investors to come back in,” said Eric Jackson, a hedge fund manager at Ironfire Capital in New York. Shares of RIM were trading down 2.4 percent at $13.40 after the bell. Soon after the company released its results, the stock fell as much as 9 percent. The shares have fallen as much as 80 percent since February 2011. (Additional reporting by Susan Taylor, Allison Martell in Toronto, and Sinead Carew in New York; Writing by Cameron French; Editing by Frank McGurty)

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Fledgling Effort To Force Wealthy Super PAC Donors Out Into The Open Is Underway

March 29, 2012

Thanks to Citizens United and other recent rulings, the nation’s ultra-wealthy have a lot more latitude than they did a few years ago when it comes to pouring money into the political system. And, according to the latest campaign filings, they aren’t skimping. During February, Ken Griffin, founder of the hedge fund Citadel, and Henry Kravis, co-founder of private equity giant KKR, each gave $100,000 to the super PAC supporting Mitt Romney, while American Crossroads, the group co-founded by Karl Rove, received $500,000 from the financial services firm S.W. Childs Management Corp.

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Frank McCourt Agrees To Sell Los Angeles Dodgers For $2 Billion

March 28, 2012

NEW YORK — Los Angeles Dodgers owner Frank McCourt has announced an agreement Monday night to sell the bankrupt team for $2 billion to a group that includes former Lakers star Magic Johnson and former Atlanta Braves and Washington Nationals President Stan Kasten. The agreement, revealed about five hours after Major League Baseball owners approved three finalists for the auction, is to lead to a transfer of the team by the end of April. It is subject to approval in federal bankruptcy court. Mark Walter, chief executive officer of the financial services firm Guggenheim Partners would become the controlling owner. The price would be easily a record for a North American sports franchise. As part of the agreement, the Dodgers said McCourt and “certain affiliates of the purchasers” would acquire the land surrounding Dodger Stadium for $150 million. The acquiring group, called Guggenheim Baseball Management, includes Mandalay Entertainment chief executive Peter Guber. “This agreement with Guggenheim reflects both the strength and future potential of the Los Angeles Dodgers, and assures that the Dodgers will have new ownership with deep local roots, which bodes well for the Dodgers, its fans and the Los Angeles community,” McCourt said. McCourt paid $430 million in 2004 to buy the team, Dodger Stadium and 250 acres of land that include the parking lots, from the Fox division of Rupert Murdoch’s News Corp., a sale that left the team with about $50 million in cash at the time. The team’s debt stood at $579 million as of January, according to a court filing, so even after the divorce payment, taxes and legal and banking fees, he stands to make several hundred million dollars. Kasten is expected to wind up as the team’s top day-to-day executive. The other two finalists were: _ Stan Kroenke, whose family properties own the NFL’s St. Louis Rams, the NBA’s Denver Nuggets, the NHL’s Colorado Avalanche and Major League Soccer’s Colorado Rapids, and who is majority shareholder of Arsenal in the English Premier League. _ Steven Cohen, founder of the hedge fund SAC Capital Advisors and a new limited partner of the New York Mets; biotechnology entrepreneur Patrick Soon-Shiong; and agent Arn Tellem of Wasserman Media Group. “I am thrilled to be part of the historic Dodger franchise and intend to build on the fantastic foundation laid by Frank McCourt as we drive the Dodgers back to the front page of the sports section in our wonderful community of Los Angeles,” Johnson said in a statement.

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Don McNay: Injured People and the One Percent

March 28, 2012

Most people perceive my job as strictly helping people make money. What I really do is help injured people. I keep injured people from wasting a settlement. I help them find every government benefit and program that might make their lives better. I find ways for them to minimize taxes and maximize what they keep. I assist in mediations and help them get claims settled. Many of my clients are in the top one percent of income earners. The bracket that some people are marching against. Most of my “one-percenters” are in wheelchairs or had their families wiped out in accidents. I’ve been doing my work for nearly 30 years and would never trade places with any client who got a large settlement or judgment. No sane person would give up their health or their family for money. Thus, going to war against the top one percent is not black and white for me. I’m for making hedge fund managers pay ordinary income tax like the rest of us do. I’m for tying Wall Street bonuses to doing something productive for society, instead of taking a bonus but not creating wealth. I want to see more being done for Main Street and less being done for Wall Street. I want the average American to get a fair shake and not be ignored by Washington. But what I really want is to keep doing things to help injured people with their money. A financial guru once called me a “financial evangelist.” I think I am more like a financial pastor or minister. I want to comfort the injured and help them heal. I also want them to hang on to their money. Thus, when they start going after the top one percent, I want to make sure that my clients are not the one percent of people they are going after. I want Congress to go after Wall Street but have found that Wall Street have a lot better lobbyists than injured people do. I’ve been encouraged that injured people will benefit from health care reform. I’ve spent the past few months becoming immersed in the nuances of the new health care reform act. I’ve read all 1990 pages of the law several times. After months of study, I understand it. I see how it helps people I want to help. If you like the law, you call it health care reform, if you don’t like it, you call it Obamacare. Before I took the time to really study the legislation I called it Obamacare. I encouraged my Democratic Congressman to vote against it, which he did. Now I am calling it health care reform. It is going to turn the medical system upside down. I don’t know how we will pay for it but I see where it truly helps injured people. Some of the reforms are coming to place now, before 2014, and I am learning how to use them to help my clients. When you dig into the details of the law, you see how health care reform empowers people who have been shut out or minimized by the health care system. It promotes wellness and good health. That’s not such a bad thing. I can also see the new law, along with the bailouts and stimulus packages of recent years, putting a huge strain on the federal budget. There have been calls of “tax reform” to pay for the looming larger deficits. I’ve learned one thing from watching Washington. Whenever there is a “reform” or “call to sacrifice” it is the little people who are supposed to do the sacrificing. Wall Street gets paid back 100 cents on the dollar. I can see reforms, aimed at the “one percent,” actually hitting people like my clients who are using their resources for medical care and a better quality of life. I don’t mind taxing a Wall Street banker’s second yacht or third vacation home. I don’t want them taxing a client who wants to buy a lift for his wheelchair. It’s simple to aim focus at the top one percent of income earners and assume they are all doing something wrong. It’s more complicated when you add in people who got to the one percent by having a drunk driver smash into their car and kill their family. When we start talking about the “one percent,” we need to think about the one percent of society who are hurting and need government assistance and help. And make sure that help is provided. Don McNay, CLU, ChFC, MSFS, CSSC is the bestselling author of the book, ‘Wealth Without Wall Street’; McNay, who lives in Richmond, Ky., is an award-winning financial columnist and Huffington Post contributor. You can learn more about him at www.donmcnay.com. He is the Chairman of the Board for the McNay Settlement Group (www.mcnay.com) which provides structured settlement consulting for injury victims, lottery winners, and the families of special needs children. McNay founded Kentucky Guardianship Administrators LLC, which assists attorneys in as conservators and setting up guardianships. It is nationally recognized as an administrator of Qualified Settlement (468b) funds.

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Dems: We’ve Got A Better Tax Cut Plan

March 26, 2012

WASHINGTON — In the battle to claim the mantle of responsible tax-cutters, Senate Democrats offered a plan Monday that competes with a House Republican push to give small businesses a 20 percent tax holiday. The GOP plan, sponsored by House Majority Leader Eric Cantor (R-Va.), would apply to any business that has fewer than 500 employees, including hedge funds, celebrities and, indeed, about half of the 400 richest Americans , who average some $100 million a year in business income. Cantor’s $46 billion proposal would grant a 20 percent small business tax cut for a year. The break would be capped at 50 percent of a firm’s total salary costs or payments to relatives and minor owners, whichever is greater. On Monday, Senate Majority Leader Harry Reid (D-Nev.) and policy maven Sen. Chuck Schumer (D-N.Y.) said that in the coming weeks they would introduce a bill that would give small businesses a 10 percent tax credit for any new hiring or raises in 2012 and would allow them to write off the entire cost of new capital investments that go to expanding their operations. “Our tax cut is targeted to help small businesses, while Republican efforts are just camouflaged handouts to the wealthiest in America,” said Reid on a conference call with reporters. “The House Republican proposal is neither focused on true small businesses, nor does it make the tax cut dependent on the company doing any hiring,” said Schumer. “The House proposal would give tax cuts to sports franchises, celebrity companies that don’t need the help and in some cases have billions of dollars of revenue. “Our proposal is much more targeted at actual job creation by true small companies, rather than giving just tax breaks to millionaires and billionaires who don’t heed it,” Schumer added. “We’re sort of used to this. Republicans think the best way to grow jobs is to help millionaires and billionaires keep more of their dollars.” Democrats pointed to a recent Treasury Department study that suggests investment write-offs, or “bonus depreciation,” dramatically lowers capital costs and spurs investment spending. They also noted Congressional Budget Office estimates that suggest tax credits for new hiring have a positive impact. The Democratic plan would cap the hiring tax break at $500,000, based on a maximum increase in new-hire wages of $5 million per employer. Democrats estimated their overall plan would cost $26 billion for the year. Schumer said it would be “unimaginable” for Republicans to oppose the measures, and Cantor’s office at least hailed the depreciation proposal, which Republicans had flagged as a bit of common ground they could find with President Barack Obama when he offered a similar idea last fall. But Cantor’s office also stood by Cantor’s plan. “We’re glad to see Senators Reid and Schumer agreeing that we need to focus on cutting taxes and red tape on small businesses so that our nation’s job creators can grow and hire again,” said Cantor spokeswoman Laena Fallon. “Leader Cantor’s small business tax cut would allow nearly 22 million small businesses to keep more of their hard-earned dollars to invest, grow and create new jobs.” Fallon added that Republicans had pushed for the depreciation measure in December. Michael McAuliff covers politics and Congress for The Huffington Post. Talk to him on Facebook .

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5 Reasons The Dividend Boom Isn’t About To Go Bust

March 23, 2012

BOSTON — The news keeps getting better for dividend investors. But can it last? The latest sign of a dividend renaissance is Apple’s decision to begin sharing some of its profits with shareholders for the first time in nearly two decades. The world’s most valuable company will start paying a dividend later this year, rather than continue to stockpile cash from iPhone and iPad sales. That announcement came a week after major banks moved to restore their dividends, after cutting them during the financial crisis to conserve cash. At least nine top banks plan to raise their payouts or are considering doing so after the government conducted stress tests to ensure the banks can survive another crisis. It adds up to better times ahead for dividend investors. Payouts by companies in the Standard & Poor’s 500 index are expected to climb 15 percent from last year to $277 billion, according to S&P Indices. That amount would top the previous record of $248 billion, set in 2008. Three-quarters of the S&P 500′s dividend-paying companies are making higher payouts than they did last year. Interest is so intense that hedge funds and many other Wall Street pros who normally avoid dividend stocks have been rushing into them lately, and Apple’s actions can only add to the frenzy, says analyst Howard Silverblatt of S&P Indices. In fact, dividend stocks have been among the market’s strongest performers the past 12 months, a fact that hasn’t been lost on investors. Over that period, they have deposited a net $25 billion into mutual funds specializing in dividend stocks – usually labeled `equity income’ funds – according to industry consultant Strategic Insight. That number wouldn’t normally be impressive, except that the cash came in as investors pulled out of nearly all other types of stock funds. A net total of $136 billion was withdrawn from all other stock fund categories, reflecting investors’ continuing fear of market volatility. It’s fueling talk that a dividend stock bubble might be developing. In one scenario, the economy hits another rough patch, companies conserve cash again by cutting dividends, and dividend stock share prices tumble. It’s dangerous to invest in a hot segment of the market, expecting the rally will continue – just ask anyone who lost big in the dot-com era. But here are five reasons that dividend stocks are still sound investments. 1. Dividends are a long-term approach, not a trading strategy: The income that dividend stocks generate accounts for more than 40 percent of the total return of the S&P 500 since 1926, according to a study by Ibbotson Associates. The rest of the market’s return came from rising stock prices. Companies can cut or eliminate dividends, as many did in 2009. But payouts usually are restored to their old levels in time. Dividends among S&P 500 companies are back to record levels now, thanks to the moves by banks and Apple. 2. Dividend-paying stocks are less volatile: Dividend-payers tend to rise more slowly during market rallies, but suffer smaller losses when stocks decline. So if a market downturn is around the corner, dividends will offer some protection. That’s why they’re so appealing to retirees, and any investor wanting to limit risk. “In the stock market, dividends are sort of the kids’ end of the swimming pool. They’re not too volatile for the average investor,” says David Kelly, chief markets strategist at JPMorgan Funds. 3. Boomers will remain yield-hungry: Expect demographic trends to continue fueling demand for income-generating investments. Baby boomers are beginning to retire in large numbers. That trend is still young, and those retirees will need regular cash flow. Many will rely on dividends, creating demand that could help drive dividend stock prices higher. 4. Corporate cash is at record levels: Profits have risen so sharply the past couple years that the cash held by S&P 500 companies totaled a record $1 trillion in the fourth quarter. With such a big stash, the ratio of dividends being paid relative to cash on balance sheets remains historically low, Silverblatt says. That puts companies in good position to increase dividends, or follow Apple’s example and initiate payouts. Last year, a record 22 companies initiated dividends, and Apple became the fourth to do so this year. 5. Dividends can survive possible tax hit: Since 2003, tax rates that investors pay on dividend income have topped out at a historically low 15 percent. President Obama’s latest budget proposal would raise the rates on top earners to as high as 39.6 percent. That means the wealthiest could lose a quarter on every dollar of dividend income, compared with their tax hit under current rates. Yet it’s hard to say whether Obama’s proposal can clear Congress in an election year. Current rates are due to expire at year-end, unless Congress extends them. Higher rates would make dividends less appealing to many investors, but wouldn’t necessarily cause dividend stock prices to decline. A study this year by Nuveen Investments and Santa Barbara Asset Management found no link between past changes in dividend tax rates and dividend stock prices. It all points to a dividend comeback that still has momentum. Says S&P’s Silverblatt: “In the late 1990s, when tech stocks were the hottest thing, nobody wanted to touch dividend stocks. Now, people can’t get enough of them, and it’s not likely to let up soon.” ___ Questions? E-mail investorinsight(at)ap.org

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Small Business Tax Cut Would Help Stars, Hedge Funds

March 21, 2012

WASHINGTON — House Majority Leader Eric Cantor on Wednesday unveiled a $46 billion economic stimulus bill that would cut taxes for small businesses — and offer a windfall for wealthy celebrities and hedge funds. The Small Business Tax Cut Act would grant a one-year 20 percent cut on taxes paid by small businesses, defined by the federal government as companies that employ fewer than 500 people. “We need to help our small businesses. That’s what this does,” said Cantor (R-Va.) at a Capitol Hill news conference. “We hope it will go forward in a bipartisan manner, just like the JOBS Act went through the House, because I don’t think any of us can disagree that right now especially is the best time to help small-business men and women.” Cantor’s bill removes a restriction that, in previous versions of the legislation, would have barred certain highly compensated professions — such as finance, law and health — from receiving the tax cut. The change allows people such as hedge fund managers, corporate lawyers, surgeons and celebrities to qualify for the break. Donald Trump and Oprah could qualify, for instance. “In the first version, they were kept out, but in this one, they’re in,” said Chuck Marr, a director at the left-leaning Center on Budget and Policy Priorities. “This is really just a tax cut for the richest people in the country.” In fact, of the 400 richest taxpayers in the United States, 202 would qualify for the break, according to 2008 statistics from the Internal Revenue Service . Those 202 taxpayers averaged an adjusted gross income of $21.5 million. But Cantor defended the move. “As far as excluding businesses, which one may or may not approve of their legal activities, we don’t make those distinctions when we’re talking about corporate rates or individual rates,” Cantor said. He argued that businesses with few employees would not be able to take too much advantage because the tax break is capped at 50 percent of what the company pays to its workers or to its minor owners and family members who work for the business, whichever is greater. “So there’s not going to be a potential for that kind of abuse,” Cantor said. “We’re really about trying to help the small business owners who are out there working every day, and it just seems the government has got in the way. And we’re just trying to provide them with some relief.” Cantor also defended proposing a $46 billion bill that would not be paid for. “We in our budget provide for trillions of dollars in mandatory savings that help resolve the budget deficit and increasing debt in this country,” he said. “We don’t feel it’s appropriate to burden small businesses, and that’s why we are going forward with this bill.” Michael McAuliff covers politics and Congress for The Huffington Post. Talk to him on Facebook .

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Harlan Green: We Should Raise Corporate Taxes (Not Lower Them)

March 21, 2012

When Warren Buffet says corporate taxes are too low, we should listen. “It’s a myth that American corporations are paying 35 percent or anything like it,” Buffett said, referring to the top marginal corporate tax rate in a CNBC interview. “Corporate taxes are not strangling American competitiveness.” Corporate taxes are too low for several reasons. Firstly, they are doing little to improve our economy to warrant such favorable treatment. As Buffett said, his corporation pays less in taxes than his Secretary. Yet corporations have record profits, and hirings are at multiple year lows, while hoarding a record $2.3 million in cash. What are they doing with their cash? Most large corporations are either boosting already record executive pay that disregards performance incentives, buying back their stocks to increase the value of their stock options, or looking for Merger and Acquisiton opportunities. There is very little investment in either plant or equipment for organic growth that would boost employment. Graph: St. Louis Fed Corporations are no longer the productive core of our economy, as economists such as Rutgers economic historian James Livingston points out — in fact, haven’t been for the last century. Rather they have used their economic clout to buy legislation that limits or eliminates regulations to control them, and even the Supreme Court, since the Citizens United ruling that allowed unlimited corporate contributions. Professor Livingston says: “Between 1900 and 2000 real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.” Their power was at one time balanced by both government regulations and labor unions, the countervailing power pronounced by J.K. Galbraith in The Affluent Society . That was before they were able to systematically decimate labor unions. Corporate ‘leadership’ councils succeeded in eroding union bargaining and organizing rights, while lobbyists flooded Congress to write anti-union legislation. This is while 23 state legislatures to date have enacted Right-To-Work laws that are really right-to-not-pay union dues, even though union members enjoyed union benefits. Corporations have become too powerful, in other words, overriding the balance of powers enshrined in our constitution and laws that limited the power of any one economic sector over American lives. The result has been successive asset bubbles since 2000, as well as record income inequality. It is now well-known that since the 1970s wealth has been shifted from workers — mainly the 80 percent who are wage and salary earners — to the ‘rentiers’; major investors, as well as Wall Street and corporate executives who control most of the wealth. It is time to downsize their power, and raising the corporate tax rate is a good place to start. We now know how this happened. This is well documented in such books as Jacob Hacker and Paul Pierson’s Winner-Take-All Politics . It began in the 1970s, as Big Business began to organize to oppose what they saw as too much government — in reality regulations (including tax codes) that restricted their profits. Their main tool is of course their lobbying largesse. Officially, say Hacker and Pierson, more than $3 billion per year is spent or donated to influence just federal legislation, a figure that has doubled over just the last decade. Two of the most visible lobbying entities are the U.S. Chamber of Commerce that advocates abolishing corporate taxes altogether, as well as the National Federation of Independent Business representing small businesses, which tends to lobby against any government regulation of business. Both organizations’ memberships doubled during the 1970s. So corporate profits do not drive economic growth, says Livingston — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. “In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.” There is another way to level the playing field between workers and corporations. And would be to increase the incomes of employees, which have fallen for so many years. But that would require the roll back of the many anti-labor laws that have blossomed since the 1970s. Graph: St. Louis Fed But then is it any easier to close the tax loopholes that have allowed Warren Buffett’s taxes to be lower than his secretary’s? Raising corporate taxes — or closing all the loopholes — is a first step if we want to create a sustainable recovery, rather than more busted bubbles. The alternative is more economic uncertainty which will certainly cause a further decline in our global competitiveness.

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Goldman Staffer Allegedly Leaked Apple Secrets

March 17, 2012

By Grant McCool NEW YORK (Reuters) – A person at Goldman Sachs Group Inc, who has not been identified or charged in a broad U.S. insider-trading probe, was caught on a wiretap leaking secrets about Intel Corp and Apple Inc, a lawyer for former Goldman board member Rajat Gupta said in court on Friday. Lawyer Gary Naftalis, in a heated exchange with U.S. prosecutor Reed Brodsky during a pre-trial hearing, said the Goldman person leaked confidential information about the two companies to Raj Rajaratnam, the Galleon Group hedge fund founder convicted of insider-trading charges last year. Gupta, the best-known corporate executive accused in a sweeping prosecution of insider-trading at hedge funds in recent years, denies criminal charges that he tipped Rajaratnam with Goldman Sachs and Procter & Gamble Co secrets between 2007 and 2009. His trial is scheduled to begin in May. “In a letter he (Brodsky) said the government had a person who provided confidential information to Raj Rajaratnam about Apple and Intel,” Naftalis said. “There is also wiretap evidence, substantial evidence of another source at Goldman Sachs.” Naftalis told U.S. District Judge Jed Rakoff that the defense believed “there is a much more circumstantial case that person should be sitting in the box rather than us” and “the wrong man is on trial here.” A theme of Gupta’s defense is that the charges brought by U.S. prosecutors last October are circumstantial and that Rajaratnam had a host of sources tipping him with information. A jury convicted Rajaratnam largely on wiretaps, which traditionally have been used in organized crime and narcotics cases, not white-collar investigations. Rajaratnam, once a friend of Gupta’s, is serving an 11-year prison sentence. Gupta was onetime global head of McKinsey & Co and sat on the boards of several companies. The judge ended the late afternoon hearing in Manhattan federal court, but Brodsky and Naftalis continued to argue. Brodsky declined to comment. A Goldman Sachs spokesman, Michael DuVally, declined to comment. Goldman has been in the spotlight this week with the public resignation of employee Greg Smith, who said in a New York Times op-ed that Goldman had become “as toxic and destructive as I have ever seen it” and was a place he no longer wished to work. A person familiar with the Gupta case said in early March that prosecutors are investigating David Loeb, a managing director of Goldman Sachs. Loeb works with technology hedge-fund employees, including an Asia-based analyst, Henry King, who is also under investigation, according to another source briefed on the case. The sources declined to be identified because the matter is not public. Neither Loeb nor King has been accused of any wrongdoing and neither responded to emails asking for comment. The insider-trading case has drawn in Goldman Sachs Chief Executive Lloyd Blankfein, who was interviewed under oath on February 24 as a witness, according to court documents. Blankfein testified for the government at Rajaratnam’s trial. He is also expected to be called as a witness by the government at Gupta’s trial. The cases are USA v Gupta in the U.S. District court for the Southern District of New York No. 11-907 (Editing by Andre Grenon, Gary Hill)

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Robert Reich: Why Republicans Aren’t Mentioning the Real Cause of Rising Prices at the Gas Pump

March 15, 2012

Gas prices continue to rise, which is finally giving Republicans an issue. Mitt Romney is demanding the President open up more domestic drilling; the super PAC behind Rick Santorum just released a new ad in Louisiana blasting the President on gas prices; and the GOP is attacking the White House on the Keystone XL Pipeline. But the rise in gas prices has almost nothing to do with energy policy. It has everything to do with America’s continuing failure to adequately regulate Wall Street. But don’t hold your breath waiting for Republicans to tell the truth. As I’ve noted before, oil supplies aren’t being squeezed. Over 80 percent of America’s energy needs are now being satisfied by domestic supplies. In fact, we’re starting to become an energy exporter. Demand for oil isn’t rising in any event. Demand is down in the U.S. compared to last year at this time, and global demand is still moderate given the economic slowdowns in Europe and China. But Wall Street is betting on higher oil prices in the future — and that betting is causing prices to rise. The Street is laying odds that unrest in Syria will spill over into other countries or that tensions with Iran will affect the Persian Gulf, and that global demand will pick up as American consumers bounce back to life. These bets are pushing up oil prices because Wall Street firms and other big financial players now dominate oil trading. Financial speculators historically accounted for about 30 percent of oil contracts, producers and end users for about 70 percent. But today speculators account for 64 percent of all contracts. Bart Chilton, a commissioner at the Commodity Futures Trading Commission — the federal agency that regulates trading in oil futures, among other commodities — warns that too few financial players control too much of the oil market. This allows them to push oil prices higher and higher — not only on the basis of their expectations about the future but also expectations about how high other speculators will drive the price. In other words, a relatively few players with very deep pockets are placing huge bets on oil — and you’re paying. Chilton estimates that drivers of small cars like Honda Civics are paying an extra $7.30 every time they fill up — and that money is going into the pockets of Wall Street speculators. Drivers of larger vehicles like the Ford Explorer are paying speculators $10.41 when they fill up. Funny, but I don’t hear Republicans rail against Wall Street speculators. Could this have anything to do with the fact that hedge funds and money managers are bankrolling the GOP as never before? Wall Street isn’t bankrolling Democrats nearly as much this time around because the Street is still smarting from the Dodd-Frank Wall Street reform law pushed by the Democrats, and from the president’s offhand remark in 2010 calling the denizens of the Street “fat cats.” The Commodity Futures Trading Commission is trying to limit how much speculators can bet in oil futures — a power it was given by Dodd-Frank. It issued a rule in October, but it won’t take effect for another year. Meanwhile, Wall Street has gone to court to stop the rule. It’s already won a stay. As rising gas prices start wagging the election-year dog, the President should let America know what’s really causing prices to rise. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Goldman Sachs? Just Fine, Thank You

March 15, 2012

For those wondering whether the bad press that has plagued Goldman Sachs in recent weeks is likely to affect the firm’s bottom-line, industry insiders say probably not. “Goldman’s reputation is that they’re tough and rapacious, and that they’re out to get as much money for Goldman as possible,” Dick Bove, an analyst at Rochdale Securities told The Huffington Post on Wednesday -– echoing a point he’d made earlier on Bloomberg News . “I can’t remember a period in which people have said, ‘you know, I really love Goldman Sachs.’ It’s usually Goldman with a curse attached to it.” On Wednesday, The New York Times published an explosive op-ed by a Goldman Sachs executive named Greg Smith, who accused the firm of fostering a culture that consistently places its own interests above those of its clients. “I can honestly say that the environment now is as toxic and destructive as I have ever seen it,” Smith wrote. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” That op-ed comes just a few weeks after the Times reported the firm had positioned itself on both sides of a merger where it served as financial advisor -– telling one company to accept a takeover offer from another company Goldman had a stake in. The recent press has been so bad that after the op-ed ran Wednesday, Forbes magazine demanded the ouster of the firm’s longtime CEO Lloyd Blankfein. But some of those who follow the bank closely, said the headache is likely to be little more than that. “I don’t even think this op-ed will tarnish Goldman’s name [on Wall Street],” said Bove. The problem, according to Bove and others, is that Goldman Sachs, despite its increasingly bad reputation on main street, is still something of a gatekeeper in the financial world. The firm remains a marquee name with access to some of the most lucrative deals on Wall Street. “If Goldman Sachs comes along with some big deal… how can you just walk away from the firm?” said Marc Pado, an investment advisor at DowBull who previously worked at the bond trading firm Cantor Fitzgerald. “[Goldman Sachs] clients have a fiduciary duty to their shareholders to get the best value. They’re going to say ‘we really don’t care about this. We know Goldman is going to get [us] the best price.” That sentiment echoes a point Goldman clients have made in response to the The New York Times op-ed piece. Forbes reported in an email circulated after the op-ed ran that Whitney Tilson, managing partner of hedge fund T2 Partners, (both a client of and an investor in Goldman) wrote, “Our investment thesis on Goldman is simple: when all the dust settles, it will remain the premier investment banking franchise in the world.” Goldman, for its part, responded to Smith’s condemnation in an internal email, according to Bloomberg Businessweek . “We were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients,” Blankfein wrote his employees. As for the question of Blankfein’s fate, Forbes’ call for his ouster came on the heels of earlier reports that his departure was already in the works and could happen as early as this summer . Bove, however, thinks otherwise. “If they fire him, Goldman will look like they’re admitting that this article is correct,” he told The Huffington Post. Greg Smith is “giving Mr. Blankfein a longer term in his job.”

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Why Goldman’s Quitting Exec May Have A Point

March 14, 2012

An executive at Goldman Sachs left the firm today with a bang, penning a New York Times op-ed accusing the company of increasingly putting profits ahead of clients . Greg Smith started as an intern 12 years ago and last headed a derivatives department. Not surprisingly, Goldman quickly and strongly disagreed with his take. There have obviously been plenty of unflattering headlines about Goldman in the past few years. We decided to look at just one aspect of their record: SEC charges levied against Goldman and its employees over the past decade. April 2003: SEC charges Goldman Sachs over conflicts of interest among its research analysts. The company eventually settled for $110 million in fines and disgorgements. November 2003: Former Goldman economist John Youngdahl pleads guilty to insider trading . The firm had to pay the SEC $4.2 million over profits it gained from the illegal dealings. July 2004: Goldman settles with the SEC for $10 million over charges it improperly promoted a stock sale involving PetroChina . January 2005: Goldman settles with the SEC for $40 million over charges that it violated securities law in promoting initial public offerings. April 2006: Two former Goldman employees are charged with running an international insider-trading ring while they were at the firm. Eugene Plotkin and David Pajcin, both in their 20s, paid off insiders at other firms and stole early copies of Business Week to get an edge . They also tried (unsuccessfully) to use strippers to get information. Both eventually served jail time . March 2007: A Goldman subsidiary, Goldman Execution and Clearing, settles with the SEC for $2 million over allegations that faulty oversight that allowed customers to make illegal trades . March 2009: Goldman Execution and Clearing settles with the SEC for $1.2 million over improper proprietary trading by employees. July 2009: The SEC charges a former Goldman Sachs trader Anthony Perez and his brother with insider trading based on information Anthony Perez obtained through his job at Goldman Sachs. He was fined $25,000 and his brother more than $150,000. May 2010: The SEC hits Goldman Execution and Clearing with a $225,000 fine for violating a rule aimed at regulating short selling . July 2010: Goldman settles with the SEC for $553 million over allegations that it misled investors about the collateralized debt obligation ABACUS 2007-AC1 by not disclosing the involvement of a hedge fund in its creation, or the fact that the hedge fund stood to benefit if the CDO failed. Goldman executive Fabrice Tourre was also charged. March 2011: The SEC charges Goldman board member Rajat Gupta with insider trading. Gupta allegedly passed on information he learned as a board member to the hedge fund Galleon Group. In October, 2011, he was arrested and hit with criminal charges by the FBI. The case is pending . September 2011: The SEC charges a Goldman employee , Spencer Midlin, and his father for insider trading based on information Spencer Midlin gained from his position at Goldman Sachs. The two men were ordered to pay $92,000 . February 2012: Goldman Sachs receives notice from the SEC that the agency may bring charges related to mortgage backed-securities.

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Brother, Can You Spare A Dime?

March 14, 2012

I have no idea what ” 25 or 6 to 4 ” means, but I do know that you need to know seven and a half things each day. Here they are: Thing One: Tried And Truthy: In post-crisis America, bank stress tests are an annual and somewhat embarrassing thing now, like Groundhog Day and prostate exams. This year’s round of tests, the results of which were announced Tuesday afternoon , were a little more rigorous than others have been, resulting in four of the 19 too-big-to-fail banks being ordered to do remedial work on their capital plans. But the big takeaway for most newspapers and investors this morning is that the banking system generally appears healthy enough to survive a major shock. Bloomberg suggests most of the too-big-to-fail banks have built up “fortress balance sheets,” and The Wall Street Journal argues that the test results show the unpopular bank bailouts were a good idea. Ah, but there’s a reason those bailouts were so unpopular: The public assumes, not unreasonably, that the government is still supporting these banks in many ways . Meanwhile, though banks are taking some of the cash they’re piling inside their fortresses and giving it back to shareholders or starting to pay their executives big salaries , they aren’t really lending it out to consumers much. They may start to do that if the economy keeps improving, but for now that’s still just a hope . Thing Two: Dow 36,000, Here We Come: Speaking of hope, the stock market had its best day of the year on Tuesday, pushing the Dow to its highest level since December 2007 and the Nasdaq Composite index to its highest close since November 2000. Stocks got off to a good start on a report that February retail sales beat expectations. A modestly less dour Federal Reserve also helped. But they really took off when JPMorgan Chase, reportedly by accident , announced a plan to raise its dividend, which made the market think it and all other banks had passed the Fed’s stress tests. After the results actually came out, stock futures flattened, and they’re still flat this morning. The question about the stock market remains: Does anybody care? Is anybody buying these stocks besides hedge funds, robots and hedge-fund robots? Thing Three: Finicky Fed: As I mentioned, there was a Fed meeting yesterday! It was maybe the most boring Fed meeting in history. The Fed really did nothing interesting, except to ever-so-mildly upgrade its view of the economy , but it still doesn’t think the economy is strong enough to get off the Fed’s life support of super-cheap money yet. The lack of news in the Fed’s statement had Fed watchers resorting to somewhat ridiculous Kremlinology to justify their existences. The Fed used the word “moderate” instead of “modest” to describe its growth forecast, for example, which is totally more optimistic. Thing Four: Less Cheap In China: For years now, American workers have grumbled about how cheap labor in Asia took all our jobs. That labor is getting less cheap by the day, The Wall Street Journal reports . Workers in China and throughout Asia have started demanding higher wages, looking for a bigger share of their countries’ growing wealth. That’s pushing companies to look for even poorer places on earth to find workers willing to work for peanuts. Thing Five: Apple Scalpers Scalped: Things are tough all over in China, in fact. The Los Angeles Times reports that scalpers of Apple products are suffering in China as Apple is finally starting to meet the blistering demand for its devices there. The LA Times writes: “the company’s expansion is dealing a blow to a unique part of China’s Apple experience: a thriving underground system of smugglers and unofficial resellers who had unwittingly become key players in the brand’s still-growing distribution network.” Thing Six: Encyclopedia Gone: Also going the way of the dodo: The Encyclopedia Britannica, which announced it will stop publishing a print edition, ending a 244-year tradition. It will now do battle with Wikipedia online. The Financial Times writes : “The emergence of the web decimated sales of Britannica. From a peak of 120,000 sets sold in 1990, sales fell sharply, with just 8,500 sets of the 2010 edition shipped.” Thing Seven: Just Default Already, Seriously: You may have heard that Greece is totally out of the woods, now that it has tightened its belt to the very first notch and gotten approved for its latest round of bailout money. You heard wrong! A new European Commission report suggests Greece will need to take even more austerity measures to meet budget targets in the years to come, Reuters reports. They’re going to wish they’d just defaulted two years ago. Thing Seven And A Half: Happy Birthday, Einstein: Albert Einstein was born on this day in 1879 in Ulm, Germany. He died on April 18, 1955.

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The Shadow CIA: WikiLeaks Trove Shows How Companies Gather Intel

February 27, 2012

Past WikiLeaks document dumps have offered peeks at how governments gather intelligence. The latest promises a look at how private companies do it. One key difference: While governments are often gathering intel on national security threats, companies are gathering intel on such threats as People for the Ethical Treatment of Animals (PETA). WikiLeaks is slowly unveiling what it says are about five million emails , obtained by way of the hacker group Anonymous from an Austin, Texas, geopolitical intelligence firm called Stratfor. In the past, Stratfor has been dubbed a ” Shadow CIA .” The emails released Monday show big companies, including Dow Chemical and Coca-Cola, using Stratfor to gather information that could affect their images and how they do business around the world. Stratfor has refused to comment on specific emails and has warned that it can’t be sure some of the emails being hosted on WikiLeaks weren’t altered or forged. Earlier Monday, an email made the rounds that seemed to show Stratfor CEO George Friedman planning to announce his resignation, but that email has since been debunked as an apparent forgery. The emails released so far have caused little stir among analysts of both foreign policy and business news. As of yet they don’t seem to reveal much more than what is likely a normal course of business for many companies and the intelligence and consulting firms they employ. Some scoff at the idea that Stratfor deserves billing from WikiLeaks as some shadowy private spy agency. But even if some of these emails are forgeries or mostly detail mundane, relatively innocuous practices, they still do offer a flavor of how big companies use consulting firms like Stratfor to gather intelligence — whether it’s good intelligence or not. For example, a June 2, 2009, email from a Coca-Cola executive to Stratfor asks for the intelligence firm’s help monitoring the animal-rights group PETA, which it thinks will protest at the 2010 Winter Olympics in Vancouver, British Columbia. “We are now looking at PETA and the potential for protests at the Vancouver Olympics and related events,” the Coke executive writes. “We’d like to schedule a time for a conference call with you and/or your analyst(s) on this topic.” According to the email, Coke wanted to know how many PETA supporters were in Canada, how many might travel from the U.S. to Canada to join a protest, PETA’s methodology and structure and other information. Other emails show Stratfor employees discussing Coke’s request, including one who writes, “The FBI has a classified investigation on PETA operatives. I’ll see what I can uncover.” In a statement emailed to The Huffington Post, Coca-Cola responded: “We consider it prudent to monitor for protest activities at any major event we sponsor, as such activities may affect our partners, customers, consumers or employees.” In other emails, an analyst at a separate consulting firm, Allis Information Management in Midland, Mich., provides frequent and detailed updates to Stratfor and Dow Chemical executives of press coverage of the Bhopal disaster . In 1984, a gas leak at a Union Carbide plant in Bhopal, India, killed thousands. Dow Chemical bought Union Carbide 15 years later. At first look, WikiLeaks may have overstated Stratfor’s involvement with at least one company, Goldman Sachs. In its press release on Monday announcing its email trove, WikiLeaks said it had evidence that Stratfor and Goldman Sachs had worked together to form a hedge fund, called StratCap, to cash in on Stratfor’s intelligence-gathering expertise. Based on a study of the emails released so far and conversations with sources familiar with the matter, it appears that StratCap, which is still in its formative stages, involves just one former Goldman employee, Shea Morenz, a former regional manager overseeing Goldman’s private-wealth business in Houston. Goldman spokesperson Andrea Raphael said Morenz, who is now an officer at Stratfor, left the firm in July 2011. Goldman declined to comment on the WikiLeaks allegations. It also declined to comment on the question of whether it was involved with discussions to form StratCap, or on whether it had been a client of Stratfor, as some of the leaked documents suggest. Goldman Sachs was listed as a Stratfor client in a 2006 Excel spreadsheet included among the WikiLeaks documents, but its name was struck through in another client list from 2007. Multiple calls to Morenz were not returned.

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Robert Kuttner: The Volcker Rule: Return to Sender

February 27, 2012

Paul Volcker deserves better. In the hands of Tim Geithner’s Treasury, the Rule named for Volcker supposedly limiting speculative mischief by government-guaranteed banks is fast becoming a cumbersome parody of itself. Financial regulatory officials, at the behest of Wall Street, have turned a simple bright line into a convoluted monstrosity. The questionnaire alone, inviting comments, runs 530 pages . The bankers and their allies in government have succeeded once again in making their financial engineering too complex to regulate. The Volcker Rule, in the spirit of the 1933 Glass-Steagall Act, was supposed to simplify matters. But the regulators are helping Wall Street by adding to the complexity. See Jesse Eisenger’s analysis from Propublica. The capacity of Wall Street to create new mutations of derivatives that are not quite explicitly covered by this or that sub-sub-sub rule is of course endless. In the absence of a clear line, Wall Street can always field more lawyers than the government can spare regulators, and what an awful waste of taxpayer money. It reminds you of Mad Magazine ‘s Spy vs. Spy, an infinite regress of move and counter-move, giving regulation itself a bad name and providing fodder for Wall Street Journal editorial mockery. Unless the Treasury and the other agencies reverse course and drastically simplify the regulation, Volcker should return the Rule to sender and refuse to have his still honorable name attached to this travesty. Better to call it the Geithner Rule. The back story: In the infighting of late 2008, President Obama’s incoming economic team of Larry Summers and Tim Geithner marginalized Volcker as a senior official of the new administration, despite the fact — no, because of the fact — that Volcker had been one of Obama’s earliest supporters and understood the dynamics of the financial collapse far better than either of them. They gave Volcker a ceremonial advisory position with no real power. Volcker was a menace because he was counseling more constraints on bank powers than Summers and Geithner wanted. It speaks volumes about this administration that the most radical person in the room on the subject of banking reform was usually the former chairman of the Federal Reserve. Then in early 2010, Scott Brown stunned Washington with his upset win of Ted Kennedy’s former Massachusetts senate seat. The White House political team desperately needed a populist pivot and an emblem of tough financial regulation. Obama quickly sent for a surprised Volcker, who had never before been in the role of populist (but then everything is relative.) The White House, using Volcker as a prop, conjured up a “Volcker Rule,” in the spirit of the Glass-Steagall Act (which Summers and Geithner in their Clinton-era roles had helped repeal). Despite Volcker’s gracious endorsement, the proposed rule was not as elegantly simple as Glass-Steagall, or as tough as Volcker’s own counsel. The thrown-together Rule was vague; it did not propose to separate investment banking from commercial banking. It constrained but did not entirely prohibit proprietary securities trading by government-guaranteed banks. By the time the industry got through with its legislative lobbying, the version that passed Congress as part of the Dodd-Frank Act was tough in principle but left room for mischief in the administrative rule-making. As Joseph Stiglitz and Robert Johnson observe in a letter to the regulators that is must-reading if you care about this stuff: To the extent the Volcker Rule is too complex, that is at best a reflection of the incredible complexity that banking itself has created, and at worst a reflection of the proposed rule’s timidity: it attempts to protect the complexity of the status quo and implement a law that directs a reduction of trading by banks without reducing trading by banks or trading overall. These contradictions must be rejected. For the U.S. to rebuild a healthy financial system — one where savings go to productive investments, and the returns go back the investors — the Volcker Rule’s mandate to reduce bank involvement in complex trading activities must be implemented. Naturally, banks are resistant to these demands because they have taken refuge in complexity to extract massive margins and fees that generate bonuses, while avoiding the harsh sunlight of competition and the risk-reducing incentives of the threat of failure. Or as Paul Volcker himself declared , in his own comments on implementation of the rule that bears his name: In essence, proprietary trading activity, hedge funds, and equity holdings should stand on their own feet in the market place, not protected by access to bank capital, to the official safety nets, and to any presumption of public assistance as failure threatens. Amen. Most of the financial engineering that caused the collapse was not about innovation to improve economic efficiency. New creations such as collateralized debt obligations or credit default swaps had two core purposes — to disguise the real amount of hidden leverage and risk; and to protect outsized bank profits from the sunlight of real competition. There is no good reason to allow a commercial bank to trade for its own account. The bank is likely to trade on inside information, creating a blatant conflict of interest between the bank ands its customers, as well as a moral hazard that the bank’s extreme leverage will put the larger economic system at risk — in just the way creation and trading of opaque derivatives caused the collapse. How, after all, did the banking system function without these innovations, which only date to the 1990s? Answer: with a lot more efficiency, more modest profits for bankers, and far less potential to wreck the rest of the economy. What the banking system needs now is drastic simplification. Commercial banks should take deposits and make loans. Investment banks, risking only their own money, should underwrite securities. Anybody who wants to gamble in securities trading should not also enjoy the privileges of being a banker. The great unfinished remedial business of the post-crash reform is to study which innovations, if any, are worth keeping and how to carry out the overdue simplification of the financial system. The original Glass-Steagall Act ran only 37 pages. Investment banks and commercial banks were strictly separated, end of story. A properly fashioned Volcker Rule should be just that straightforward. Back to the drawing board. Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril .

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Robert Teitelman: Stephen Bainbridge’s Corporate Governance After the Financial Crisis

February 23, 2012

The new Economist has a leader that decries the surfeit of “excessive and badly written regulation” swamping the U.S. The magazine tries to be mature about all this. But on the subject of Dodd-Frank, it can’t contain itself. “Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end ‘too big to fail’ by authorizing regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the ‘Volcker rule,’ which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.” The Economist , quaintly familiar to those in the know as “this newspaper,” then goes on to ask how this occurs in the land of laissez faire. It offers several answers. First, for all the political blathering, the blame seems to fall on both sides of the aisle. Second, the rules proliferate because of political hubris, notably in Congress, which thinks it can come up with a rule for every contingency. Then there’s lobbying. “The government’s drive to micromanage so many activities creates a huge incentive for interest groups to push for special favors.” It’s difficult to deny this reality, although for anyone who’s not been paying close attention, it is counter-intuitive: After all, wasn’t the financial crisis of 2008 the result of a broad deregulatory push? Well, in part, yes, certainly in practice. But that doesn’t mean that the sheer jungle of rules necessarily got much smaller. Over time, it simply layered on more new rules on top of old rules; as the magazine says, such complexity tends to spawn loopholes that facilitate bad or risky behavior. Such complexity also makes regulation to the letter of the law impossible; it actually creates space for regulatory maneuvering (for good or bad) while giving Congress the freedom to blame regulators when things, as they have a tendency to do, go awry. This is a profound dysfunction. Such complexity may serve to create more complexity, as practitioners innovate to either avoid the rules or exploit them. This is a cycle that is clearly a race to the bottom. But there is more to it than just that. In his new book, Corporate Governance after the Financial Crisis , UCLA law professor and popular blogger Stephen Bainbridge provides a longer historical perspective on one aspect of this choking proliferation of rulemaking. (The book doesn’t mention his blog, ProfessorBainbridge.com , in his bio, which is interesting.) The title of the book is mildly misleading. While Bainbridge is describing how we got to what he calls “quack corporate governance” after the financial crisis, he is really dealing with the post-2000 period, when Congress reflexively reacted to the Enron and WorldCom scandals with Sarbanes-Oxley, a significant increase in micro-managing boards and managers, and, after 2008, with Dodd-Frank. Bainbridge is pursuing several important themes here. He is skeptical of the so-called monitoring model of governance’s ability to function effectively and argues that the model’s inherent limitations have created a frenzy of federal rulemaking that attempts to “fix” it. He identifies “quack” corporate governance by several tendencies: lobbying by special interest, usually activist investors, or “policy entrepreneurs pursuing an agenda unrelated to the financial crisis”; very little empirical support as to effectiveness; and a strong impulse toward federalization through specific rulemaking, which has tended over time to expand the power of the federal government in corporate law over state courts, meaning mostly Delaware. Bainbridge writes clearly, but this is not a book for non-lawyers or for those who (happily, perhaps) haven’t spent much time mired in the governance wars. Although this “quack” label does add a polemical edge, he also provides a considerable amount of fairly straight discussion of the details of Sarbanes-Oxley and Dodd-Frank, on say-on-pay, proxy access and compensation, not to say the rise of the shareholder-monitoring model. He has read much of the literature pumped out by the law and business schools on the topic, which is fine by me, since so much of it is tedious, tendentious and dreadfully written. He is polemical; he candidly favors the more traditional board-centric model of governance. But beyond that, Bainbridge, like The Economist, seems to be viscerally angry at this vast expenditure of effort, much of which seems to be a waste, even counterproductive. Simply on the face of it, the increasing prevalence of crisis and meltdown over the past decade would suggest that many rules are not working. One can certainly argue with Bainbridge on specifics — that the decline of U.S. market share in initial public offerings was a result of Sarbanes-Oxley, for instance, as opposed to more fundamental economic reasons — but not on the larger trend: that a plethora of rules has not been able to guarantee effective and rational governance in corporations. In fact, the inescapable reality is that this rulemaking tendency when faced with downturns only makes corporations increasingly resemble the bureaucracies designed to watch over them. If you read Bainbridge’s blog, he makes his political leanings pretty clear: He’s a Republican. In this book he’s a bit more circumspect. Like the Economist , he clearly recognizes that the rulemaking tendency, the drive to federal over state purview of the corporate law, is not about Democrats and Republicans. His book thus raises a fascinating question: How do you map the politics of governance onto a “conventional” political landscape. For a number of decades now, arguably back to the New Deal, shareholders have been viewed as a proxy for the people. This was particularly the case as middle-class retirement plans got pumped through institutional investors, like Fidelity, or through corporate or union pension plans. The Ur problem here in corporate governance, of course, is that these institutions, with their widely diversified portfolios, generally had no particular interest or ability to closely monitor all their holdings. Like so much else in this world, ideas and circumstances had to coincide. Activist investors, which grew dramatically as hedge funds exploded (many of them swollen with institutional money), arose and embraced two separate, if related set of ideas, both propounded in 1976: the legal notion, articulated by University of California, Berkeley law professor Melvin Eisenberg in ” The Structure of the Corporation ” of the monitoring model and the theory of agency costs from financial economists Michael Jensen and William Meckling. Here’s where we begin to get strange political paradoxes and unintended consequences. Jensen and Meckling are usually viewed as proponents of allowing markets, particularly for change of control, to operate freely. But the combination of Eisenberg’s notion of shareholder monitoring and Jensen and Meckling’s ideas of agency costs (broadly suggesting that management and boards are almost inevitably entrenched) produced, after the dot-com crisis, an increasingly prevalent federal rulemaking response in Congress: Sarbanes-Oxley. In short, an attempt to clear the market produced ever-greater rulemaking. (Bainbridge doesn’t deal with this, but the fact is that even earlier, around 1990 or so, a state response to the hostile takeovers of the ’80s served to strengthen managers and boards for a time. That did not sweep Delaware, which dominated state corporate law, and which, as Bainbridge shows, has incrementally adjusted itself to the shareholder-monitoring model that continued to advance. One way to see this is the rise and gradual decline of Marty Lipton’s poison pill.) Thus, what began as an attempt to clear away obstacles to efficient and effective governance has become increasingly buried in almost unfathomable collections of rules and guidelines, some contradictory, some wasteful, some ambiguous or absurd — effectively obscuring what might be right, proper and efficient, such as greater transparency or rational limits on size or risk. The result: Advocates of the prevalent shareholder-monitoring model of governance now find themselves arguing for increased federal rulemaking and increased regulatory bureaucracy. Proponents of what Bainbridge calls the board-centric model — Lipton’s Wachtell Lipton is certainly on that side of the field — would argue for fewer rules and more principles, not unlike Delaware’s business judgment and duties of care and loyalty principles, and a somewhat different attitude toward shareholders as owners. This effectively splits both political parties into camps: shareholders and boards. This is similar to the establishment versus populist split that is currently fracturing both parties. This kind of speculation goes beyond Bainbridge’s argument about quack governance. But his book does suggest deeper problems of democracy when trying to cope with a complex, global, extremely innovative corporate and financial sector. The populist response to troubles tends to be inflammatory, emotional and reflexive; the establishment response, granted, may end up buried in studies and committees. There’s never enough time, or enough knowledge, to step back and make more calculated, empirically based judgments (if such calculations are even possible), particularly with entrenched interests hammering away. These crisis situations demand new rules, as if they were magical talismans and despite the fact that they’re attempting to capture elusive, fast-changing and subtle realities, often anchored in human psychology and behavior. Such crises that demand response are not good moments for a legal system like Delaware’s built on precedent and principles. But they are politically popular, indeed satisfying, even if, in the long run, they tend to be both ineffective and destructive of prudent and intelligent regulation itself. It’s like the tax code. Complexity begets complexity; dysfunction spawns more dysfunction. And soon you get a proliferating mass that begins to resemble a cancer. Robert Teitelman is editor in chief of The Deal magazine.

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Daniel Dicker: Here Comes $5 Gas!

February 22, 2012

Here we go again: With gas prices spiking so early in the new year, it’s easy to predict that the United States will see $4 gas sometime this summer. I would even put the chances of $5 gasoline at one in three. And it’s not the pure fundamentals that are driving prices higher right now, which makes this situation even more frustrating. Gasoline demand in the US is at 10-year lows, and we are today literally swimming in refined products. In fact, the United States has become a net exporter of gasoline for one of the few times in our history. Our cars continue to get more efficient and we’re even driving less — our total miles on the road have been dropping steadily for the past three years. So wait a minute — more supply, less demand — why are prices headed upwards then? It doesn’t seem to make much sense. The truth is that supply threats combined with the overwhelming influence of money chasing the oil trade is driving the price of fuel higher. Let me try to map out this ‘perfect storm’ of rising energy prices. Middle East tensions are the kindling for the fire of rising prices. Every day seems to ratchet up the war of words between Iran and the West. The United States continues to add pressure to their financial sanctions, now helping to crater the Iranian rial. They have limited access to any international banks that continue to do business with Iran and have gained tremendous cooperation in the plan to boycott Iranian oil supplies. While the EU has pledged to end imports of Iranian oil as of July 1, even the Chinese have cut their imports of Iranian oil by more than 10% as have the Indians and Japanese, by far the three largest customers of Iranian barrels. Of course, the specter of Israeli military action against Iran continues to loom. And the Iranians have continued to rattle their own sabers, threatening to close the Strait of Hormuz, intimating their own preemptive military actions and cutting off oil exports to Britain and France. There is a very strong threat of Iran’s 3mln barrels a day coming out of the global supply chain. Now, throw a little gas on this kindling of geopolitical unrest and you’ve got a recipe for steadily rising prices — and that gas is the unfettered access to financial oil products. One correlation that no one bothers to look at, but has become vital to oil prices are the levels of equity indexes, now reaching again to their highest levels since June of last year and since the Spring of 2008. My book, Oil’s Endless Bid describes this in detail, but the most simple truth is that money flows as easily into hard assets like oil as it does through the stock market. So it’s not just speculators buying oil on the prospects of continuing tensions in the Mideast and the removal of Iranian barrels from the global market, it is the hedge funds, money managers and institutional funds adding to their commodity holdings as they continue to buy stocks. It sounds bizarre, but it’s true — asset investments — bets on oil — are costing us every time we fill up. And with the Iranians refusing to back down on their nuclear aspirations, and stock markets around the world in recovery mode, only a major financial setback in Europe or China is likely to derail this oil rally. And perhaps cost you $5 a gallon at the pumps this summer.

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Ellen Brown: How Greece Could Take Down Wall Street

February 21, 2012

In an article titled “Still No End to ‘Too Big to Fail,’” William Greider wrote in The Nation on February 15: Financial market cynics have assumed all along that Dodd-Frank did not end “too big to fail” but instead created a charmed circle of protected banks labeled “systemically important” that will not be allowed to fail, no matter how badly they behave. That may be, but there is one bit of bad behavior that Uncle Sam himself does not have the funds to underwrite: the $32 trillion market in credit default swaps (CDS). Thirty-two trillion dollars is more than twice the U.S. GDP and more than twice the national debt. CDS are a form of derivative taken out by investors as insurance against default. According to the Comptroller of the Currency, nearly 95 percent of the banking industry’s total exposure to derivatives contracts is held by the nation’s five largest banks: JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs. The CDS market is unregulated, and there is no requirement that the “insurer” actually have the funds to pay up. CDS are more like bets, and a massive loss at the casino could bring the house down. It could, at least, unless the casino is rigged. Whether a “credit event” is a “default” triggering a payout is determined by the International Swaps and Derivatives Association (ISDA), and it seems that the ISDA is owned by the world’s largest banks and hedge funds. That means the house determines whether the house has to pay. The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an “event of default” declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15, that explains what happened at MF Global, and why the 50 percent Greek bond write-down was not declared an event of default. If you paid only 50 percent of your mortgage every month, these same banks would quickly declare you in default. But the rules are quite different when the banks are the insurers underwriting the deal. MF Global: Canary in the Coal Mine? MF Global was a major global financial derivatives broker until it met its unseemly demise on October 30, 2011, when it filed the eighth-largest U.S. bankruptcy after reporting a “material shortfall” of hundreds of millions of dollars in segregated customer funds. The brokerage used a large number of complex and controversial repurchase agreements, or “repos,” for funding and for leveraging profit. Among its losing bets was something described as a wrong-way $6.3 billion trade the brokerage made on its own behalf on bonds of some of Europe’s most indebted nations. Avizius writes: [A]n agreement was reached in Europe that investors would have to take a write-down of 50 percent on Greek Bond debt. Now MF Global was leveraged anywhere from 40 to 1, to 80 to 1 depending on whose figures you believe. Let’s assume that MF Global was leveraged 40 to 1, this means that they could not even absorb a small 3 percent loss, so when the “haircut” of 50 percent was agreed to, MF Global was finished. It tried to stem its losses by criminally dipping into segregated client accounts, and we all know how that ended with clients losing their money… However, MF Global thought that they had risk-free speculation because they had bought these CDS from these big banks to protect themselves in case their bets on European Debt went bad. MF Global should have been protected by its CDS, but since the ISDA would not declare the Greek “credit event” to be a default, MF Global could not cover its losses, causing its collapse. The house won because it was able to define what ” winning” was. But what happens when Greece or another country simply walks away and refuses to pay? That is hardly a “haircut.” It is a decapitation. The asset is in rigor mortis. By no dictionary definition could it not qualify as a “default.” That sort of definitive Greek default is thought by some analysts to be quite likely, and to be coming soon. Dr. Irwin Stelzer, a senior fellow and director of Hudson Institute’s economic policy studies group, was quoted in Saturday’s Yorkshire Post (UK) as saying: It’s only a matter of time before they go bankrupt. They are bankrupt now, it’s only a question of how you recognise it and what you call it. Certainly they will default… maybe as early as March. If I were them I’d get out [of the euro]. The Midas Touch Gone Bad In an article in The Observer (UK) on February 11 titled “The Mathematical Equation That Caused the Banks to Crash,” Ian Stewart wrote of the Black-Scholes equation that opened up the world of derivatives: The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended. As Aristotle told this ancient Greek tale, Midas died of hunger as a result of his vain prayer for the golden touch. Today, the Greek people are going hungry to protect a rigged $32 trillion Wall Street casino. Avizius writes: The money made by selling these derivatives is directly responsible for the huge profits and bonuses we now see on Wall Street. The money masters have reaped obscene profits from this scheme, but now they live in fear that it will all unravel and the gravy train will end. What these banks have done is to leverage the system to such an extreme, that the entire house of cards is threatened by a small country of only 11 million people. Greece could bring the entire world economy down. If a default was declared, the resulting payouts would start a chain reaction that would cause widespread worldwide bank failures, making the Lehman collapse look small by comparison. Some observers question whether a Greek default would be that bad. According to a comment on Forbes on October 10, 2011: [T]he gross notional value of Greek CDS contracts as of last week was €54.34 billion, according to the latest report from data repository Depository Trust & Clearing Corporation (DTCC). DTCC is able to undertake internal netting analysis due to having data on essentially all of the CDS market. And it reported that the net losses would be an order of magnitude lower, with the maximum amount of funds that would move from one bank to another in connection with the settlement of CDS claims in a default being just €2.68 billion, total. If DTCC’s analysis is correct, the CDS market for Greek debt would not much magnify the consequences of a Greek default — unless it stimulated contagion that affected other European countries. It is the “contagion,” however, that seems to be the concern. Players who have hedged their bets by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets. The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player — such as Bear Stearns or Lehman Brothers — go down. What is in jeopardy is the derivatives scheme itself. According to an article in the Wall Street Journal on January 20: Hanging in the balance is the reputation of CDS as an instrument for hedgers and speculators — a $32.4 trillion market as of June last year; the value that may be assigned to sovereign debt, and $2.9 trillion of sovereign CDS, if the protection isn’t seen as reliable in eliciting payouts; as well as the impact a messy Greek default could have on the global banking system. Players in the future may simply refuse to play. When the house is so obviously rigged, the legitimacy of the whole CDS scheme is called into question. As MF Global found out the hard way, there is no such thing as “risk-free speculation” protected with derivatives.

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SEC Official: Common Wall St. Conversations Carry ‘Troubling’ Potential For Abuse

February 16, 2012

The Securities and Exchange Commission might be taking a closer look at common Wall Street practices that occupy an ethical gray area. Certain routine conversations in the business world carry the potential for abuse , and can often be “troubling,” David Rosenfeld, co-head of enforcement at the SEC’s New York office, told a group of legal and financial practitioners earlier this month, according to Fox Business News. Some see the comments as a hint that the SEC may consider “expanding the definition of insider trading,” according to the report The SEC has been taking an aggressive stance against insider trading in recent months, with Chairman Mary Schapiro calling it a ” problem of tremendous magnitude ,” and the agency filing more than 100 cases related to insider trading between 2010 and 2011. Among the SEC’s highest-profile cases ever was the successful prosecution of Raj Rajaratnam , a hedge fund billionaire who thanks to inside information made lucrative trades of Goldman Sachs and Google stock, among others. At the same time, critics of the SEC say the agency’s focus is misplaced , and that it has done little to punish the people and institutions that helped bring about the financial crisis of 2008 — a near-meltdown of the national banking system in which insider trading played a relatively minor role. For its part, the SEC says it has shifted its approach to financial-crisis prosecution cases in order to generate more charges that might stick. Meanwhile, the agency has pointed to its own record on insider-trading cases as proof that it is serious about stamping out financial misconduct. SEC representatives have also complained that the agency simply doesn’t get enough federal funding to be as effective as it could be. In 2011, the budget for the SEC was $1.185 billion . A spokesman for the SEC has indicated that Rosenfeld’s remarks this month don’t necessarily point toward an expansion of the agency’s definition of insider trading.

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Alan Fein: It’s Time to Lead on Tax Equity

February 15, 2012

One of the criticisms President Obama has faced is that he tends to wait patiently, sometimes too patiently for some, for the public to reach conclusions that seem so obvious. With the release of his proposed 2012-13 budget, the president is now continuing to use his influence to support what has now, finally, become a consensus opinion: our historically low tax rates on the very rich are unsustainable and are destroying our middle class. It’s now time for him to bang the bully pulpit, and time for Congressional Democrats to put aside their timidity and join the fight. Last October, I posted a blog entitled ” What Took Them So Long ,” in which I asked why it had taken so long for people to actually focus on America’s three decade-long trend toward financial inequality. After all, the slide had been constant and seemingly inexorable for so long. By last fall, the most fortunate 1% of Americans controlled 40% of the nation’s wealth and collected 24% of the nation’s income, about triple of what it was just 30 years ago. That share of income is the highest it has been since the Roaring 20s, and for the richest of Americans, that income is now often taxed at capital gains rates which are less than half of ordinary income, and about half of what the rates were when Ronald Reagan was president. The Democratic Congressional leadership and rank-and-file, so fearful of being accused of actually raising taxes, have been bullied into submission, and have gone along with the greatest redistribution of wealth in history. Since October, a lot has happened to bring the issue of tax fairness to the forefront, and to reveal a remarkable consensus of people accross the spectrum that our most fortunate citizens need to pay their fair share of taxes. It would be nice to think that the breadth of the consensus would inject Congress, and more specifically President Obama’s allies on Capitol Hill, with some backbone on this issue. Senate Minority Leader Mitch McConnell seems pretty convinced that the backbone deficit has not been cured, as he threatens to introduce the president’s budget himself, safe with the knowledge that Democrats would never support it. McConnell assumes that no Democrat would dare back raising taxes on “job creators” in an election year. Democrats should now have the guts, and the good sense, to call McConnell’s bluff. Over the last six months, it has been clear that noone really believes this “job creators” baloney. Look at what has happened: First, God love them, the “Occupiers” brought the debate to the forefront, helping people realize that “we are the 99 percent.” Around the same time, Warren Buffett reprised his earlier commentary about how he pays a lower tax rate than his secretary. Back in 2006, Buffett had noted that there was already class warfare in the United States, and, he noted, “my side’s winning.” More billionaires have joined Buffett. Just last week, venture capitalist billionaire Nick Hanauer, who made a fortune with Amazon, argued that the policies of ultra-low taxes on the mega-rich won’t boost economic growth or lower the jobless rate. To the contrary, a decade of historically low taxes on the rich had done just the opposite and continued the downward trend of the middle class. “We are systematically destroying our customer base in this country by undercutting the middle class,” Hanauer says . “If it was true that the rich and business were job creators, we’d be drowning in jobs today.” Why is Hanauer right? Why has the economy struggled even though the system is full of cash? Because the cash isn’t getting in the hands of Hanauer’s customer base — regular people who buy the things that a healthy economy makes, like refrigerators and ranges and air conditioners and cars. So, as I noted in my October blog, the stock of Tiffany’s has quadrupled since the spring of 2009, while business at Sears has been relatively flat. People who don’t need the cash or the credit have lots of it. People who buy refrigerators? Not so much. With relatively little demand, cash-rich companies have been hesitant to hire people to build more things that customers might not be able to buy. More tax cuts for rich people won’t solve this problem. Hanauer rejects the idea that he’s advocating higher taxes on the rich “because I’m a good person or because I love you. Let me just be very clear. I do not love you. I value you as a potential customer and we’ve rigged the economic system in a way to destroy my customer base.” The other development that has brought this inequity into focus has been the release of Mitt Romney’s tax returns (well, at least one tax return). Romney has now become a living, breathing example of the inequality, as he revealed that he paid federal taxes at a rate below 15%. Again, as I noted in October, those of us who work hard and have had some success — but who work for money, as opposed to having our money work for us — have a hard time understanding why the system rewards the governor’s efforts so much more than ours. As Hanauer noted last week, if you are a small businessman earning $350,000 a year, your tax rate is 35%, while hedge-fund guys pays 15%. It’s tough to get your arms around that. The Speaker of the House continues to tell us that we need to have lower tax rates for capital gains and for “carried interest,” because, without these gimmicks, the job creators won’t invest. This is hogwash. Mitt Romney didn’t turn down any investment opportunities in the 1990′s, when capital gains were taxed at 28%, because taxes were too high. Investors will invest when there is money to be made. Even more to the point, there is no equity in taxing people who invest at a lower rate than people who work for a living. In fact, it used to be that Republicans felt this way. It was recently noted that in the 1920s, Andrew Mellon, the Republican Treasury Secretary, forcefully argued that income from labor should be taxed at a lower rate than investment income. Mellon argued that wages are uncertain and limited by sickness or death; money will always make more money for people who have it in the first place. It’s not surprising that, in light of the debate over the last few months, sizeable majorities of just about every interest group believes that part of our long-term debt solution should be higher taxes on the people who can most afford them. Even a majority of Tea Partiers believe this. President Obama has included tax equity, and the basic tenets of the Buffett Rule, in the budget he has now sent to Congress. The Republican congressional leadership is convinced that the Democrats in both houses are too craven to do anything about in an election year. How refreshing it would be if Democrats actually had the President’s back on this.

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Obama Campaign To Wall Street: We’ll Go Easy On You Guys

February 15, 2012

President Obama’s campaign manager has a message for Wall Street: This time around, we’ll lay off. Jim Messina, Obama’s campaign manager, told the hosts of a $38,500 per-plate fundraiser geared towards investment bankers and hedge fund managers that the president wouldn’t make Wall Street look bad during his re-election campaign , Bloomberg reports. The assurance follows Obama’s call to raise taxes on the rich in his latest budget proposal. The current attempt at appeasement also comes as Obama attempts to win back the donors that provided him with so much last election. Despite criticizing Wall Street during a 2007 speech at the Nasdaq stock exchange, financial industry donations to Obama outpaced Wall Street cash to his GOP rival John McCain two-to-one at certain points in that campaign, according to the New York Daily News . This time, Wall Street donors are instead favoring Republican candidates, their dollars going to the GOP by a five to one margin . And Mitt Romney, the Republican front runner and a former Wall Street man himself, is netting most of that cash , according to campaign finance data. In addition, an October fundraiser geared towards Wall Street donors and headlined by billionaire investor Warren Buffett had a “disappointing” turn out , according to the New York Post . Wall Street may be having a change of heart after Obama has repeatedly slammed the industry during his first few years in office. The president criticized the financial industry in a December 2009 CBS 60 Minutes interview for giving themselves big bonuses — calling them “fat cat bankers” — after U.S. taxpayers bailed them out. In April 2010, he chided a group of Wall Street leaders for their “reckless practices,” according to The New York Times. Another Wall Street bugaboo may be Obama’s push for more financial regulation — some Wall Streeters said Obama’s support for the Dodd-Frank financial reform act turned them off from the president. Obama’s repeated calls to raise taxes on the wealthy may also be ruffling the financial industry’s feathers. The president’s budget proposal for 2013 included a provision — dubbed the “Buffett rule” — that would require households making more than $1 million to pay at least 30 percent of their income in taxes.

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Harlan Green: Corporate Austerity Not the Answer in 2012

February 2, 2012

Why so much doom and gloom about U.S. economic growth when all the indicators are looking up for 2012? For instance, the Conference Board’s Index of Leading Economic Indicators again showed positive growth ahead. It rose 0.4 percent with seven of its 10 indicators positive. Graph: Econoday And the Q4 ‘advance’ estimate of GDP growth was 2.8 percent, almost double Q3. Equipment and software, which includes autos and exports, was the largest component. Growth would be even higher, if corporations would begin to invest more of their cash hoard in job creation, rather than in speculative investments and excessive CEO compensation. Graph: Econoday The euro’s problems shouldn’t be much of a threat to U.S. growth. “This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam,” said Ken Goldstein, a Conference Board economist. “Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe.” But JP Morgan’s President Jamie Dimon said even the damage from a default of Greek debt would be “negligible,” in a CNBC interview at the Davos, Switzerland economic summit. So what’s the problem? The austerity (meaning deficit) hawks have their hands around the throats of European commerce. Why? They have the mistaken belief that more stimulus spending will increase debt without actually causing enough growth to pay for it. Professor Robert Shiller, co-author of Animal Spirits with Nobelist George Akerlof, calls it debt delusion. When the private sector, including households, becomes over indebted, they begin to save more and spend less. But if governments do it at the same time, it causes a downward spiral towards deflation and recession — even depression. This comes from the belief of fiscal conservatives that public borrowing takes money away from private users. That, however, isn’t the case, because the private business sector has plenty of funds, but is hoarding them (more than $2 trillion cash holdings), rather than creating more jobs. So if governments are also hoarding their monies — in the form of trade or currency surpluses, excess bank reserves and the like as is happening in most of Europe today, then the bottom falls out of the economy; i.e., if no one is buying and everyone is saving, then no business gets done. This should be self-evident, because such a truth has been known since the Great Depression and New Deal that established our modern safety net, and ultimately put so many people back to work. What underlies that truth is that Great Depressions and Great Recessions only happen when there is a wrenching transformation of whole economies. It was transformation of a mostly rural economy to manufacturing in the 1920s that brought on the Great Depression, and now it is wholesale migration of manufacturing jobs overseas and transformation to the Information Age, when little needs to be manufactured in the U.S. Rutgers Econ Professor Richard Livingston has explained this transformation best in recent papers and articles. The great wealth shift away from wage earners-consumers to corporate profits began in the 1920s, according to Livingston: The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production–and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s. And in a recent New York Times op-ed, ” It’s Consumer Spending, Stupid “, Livingston expands on the reasons for our current prolonged malaise: As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth. This, to put it mildly, explodes that rationale used by Wall Street and corporations to justify not passing on more of their profits to consumers — 80 percent of which are wage and salary earners. The reasoning being that it is their profits that drive growth. Professor Livingston says: Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth… … But history shows that this is wrong. Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor. In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.” Much has been written already about the record profits of both financial and non-financial corporations that have drained consumption, and that is the main reason why average real household incomes have actually declined over the past 30 years. In fact, corporate profits today are highest in history as a percentage of GDP. Graph: Trading Economics And this could be actually endangering economic growth by causing rampant market speculation, rather than productive investments, say many pundits, including Professor Livingston: So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble. How to cure the record income inequality that has resulted from so much power going to Wall Street and the corporations? At least, let us return to the income tax brackets that brought so much prosperity to the middle class during the 1960s and 1970s. What were they? The maximum bracket has fluctuated from 91 percent for those earning more than $400,000 in 1960, to the current low of 35 percent for those earning more than $379,150 today. And this has coincided with the astronomical increase in both household and government debt. It should be a no-brainer, if we want to see American growth restored to historical levels. Higher taxes have meant more growth, because public revenues are invested in growth-inducing infrastructure, better public safety, and upward mobility inducing education, for starters. Whereas lower taxes mean higher debts, with less growth and more speculative risk-taking to show for it. Why is that so hard to understand should be the question, or maybe even more apropos is why do so many chose to remain stuck in the last century?

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James Altucher: The 10 Keys to Selling Anything

February 1, 2012

Someone I don’t know at all just wrote me with the worst selling technique of all time. He wrote, “I really need to talk to you. Can I have 20-30 minutes of your time?” The answer is, “no.” Not that I think I’m so great. Or my time is so valuable. But his message sort of suggests that my time is worth zero. He is offering me nothing, even less of nothing since there’s opportunity cost to 20 to 30 minutes of time. I could be watching half an episode of Mad Men , for instanace. There are some variants on this horrible technique. Like, “I have a great idea I’ll give you equity in if you give me 20-30 minutes of your time.” I don’t know if his equity is worth anything yet so it’s the same problem as above. Another sign of a bad salesman is a good negotiator. This might not always be true but it’s true for me. I am horrible at negotiation. If I say “this car is for sale for $10,000″ and they say, “$8,000″ I shrug my shoulders and say “ok.” When you’re negotiating you have to say “no” a lot. When you are selling, you are always trying to find the “yes.” Everyone has a “yes” buried inside of them and a good salesman knows how to find where that “yes” is buried and then how to tease it out. Great salesmen know it instinctively. When you’re a negotiator you have to be willing to say “no,” regardless of what the other side says. So although they aren’t total opposites, the goals are completely different. But big picture: Negotiation is worthless. Sales is everything . Why? Because when someone says “yes” to you, you are in the door. Eventually then, you’ll get the girl in bed (or guy, whatever). If you negotiate right at the door, then you might have to walk away and try the next house. That takes time, energy, and still might not work out. In fact, often “bad negotiation” will result in great sales. (I’d rather be in the bed then walking door to door.) Some examples of my bad “negotiation” that have worked out for me. A) I sold my first business for much less than other Internet businesses were going for at the same time. But it was 1998, the Internet was about to go bust, but first all the stocks went up, and many businesses in the same category held out for more and ended up going bust. Even the guys who sold for a lot more, went broke when they didn’t sell their stock. B) I gave 50% of Stockpickr to thestreet.com for no money. Blogs were written about how bad my deal was. But when someone owns 50% of your business, they care about what happens. They had to buy my company four months later rather than risk someone else owning 50% of it. For companies they only owned 10%, they gave up on them. I was able to sell about four months before the market peaked. After that, it never would’ve happened. My one employee quit on me because he was so disgusted with the deal I did. [See, How I Sold Stockpickr, Osama Bin Laden, and the Art of Negotiation] C) I sold Claudia’s car for $1000 less than she wanted to. But now the car was gone. We didn’t have to worry about it. That was worth $1000 to me. D) I got my old company to do websites for New Line Cinema for $1000 a movie . That was 1/200 what we got for doing The Matrix even though some of the sites were the same size. Why did I do that? The best designers wanted to be hired by us to work on those movies. Meanwhile, they stayed late on Saturday night to work on Con Edison sites that paid a lot better. I didn’t negotiate at all. E) I’m selling my last book on Kindle for almost nothing instead of a higher price. But this got my ideas out more and 20,000+ people have downloaded the book. F) I get offers every day to advertise on my blog. I say “no” to every one of them. Not my big picture. The key is, only negotiate with people you really want to sell to. Else it boils down to money. You don’t want to be stupid. Only sell something you love to someone you love. Always think “what is the bigger picture here?” In many cases in the bigger picture, the negotiation is not as important as the “sale.” Hence, the rise of models like “freemium.” Ten Keys to selling: A) Ask what’s the lifetime value of the customer? When I give away a book for free, it gets my name out there. That has lifelong value for me that goes way beyond the few dollars I could maybe charge. B) Ask, what are the ancillary benefits of having this customer? When we did Miramax.com for $1000, we became the GUYS THAT DID MIRAMAX.COM! That helped get 20 other customers that were worth a lot more. I would’ve paid them money to do that site. C) Learn the entire history of your client. You need to love your client. Love all of their products. Infuse yourself with knowledge of their product. I wanted to work at HBO because I loved all of their shows and I studied their history back to the ’70s before I applied for a job there in the ’90s. D) Give extra features. Do the first project cheap. And whatever was in the spec, add at least two new cool features. This BLOWS AWAY the client. Don’t forget the client is a human, not a company. That human has a boss. And they want to look good in front of their boss. If you give them a way to get promoted, then they will love you and always hire you back. THE EASIEST SALE is worth a current customer. ALWAYS. E) Give away the kitchen sink. One of my biggest investors in my fund of hedge funds had just been ripped off in Ponzi scheme. They almost went out of business. I introduced them to reporters at every newspaper to help them get the word out about the Ponzi scheme. They were infinitely grateful and even put more money in my fund. Whenever the main guy was depressed about what had happened I would talk to him for an hour trying to cheer him up. I wasn’t just an investment for him but a PR person and therapist. Go the extra mile. F) Recommend your competition. Think about it this way: what are two of the most popular sites on the Internet? Yahoo and Google. What do they do? They just link to their competition: other websites. If you become a reliable source then everyone comes back to you then your knowledge has value and they can only get that by having access to you. They get access by buying your product or services. [See, 10 Unusual Things I Didn't Know About Google, Plus my Worst VC Experience Ever ] G) Idea machine. There’s that phrase “always be closing.” The way that’s true is if you are always putting yourself in the shoes of your client and thinking of ways that can help them. When I sold stockpickr.com to thestreet.com the superficial reason was that they wanted the traffic, community, and ads my site generated. The real reason was that they needed help coming up with ideas for their company. I was always generating new ideas and talking to them about it. Often the real reason someone buys from you is not for your product but for you. H) Show up. When I wanted to manage some of Victor Niederhoffer’s money I read all his favorite books. I wrote articles for him. At the drop of a dime I would show up for dinner wherever and whenever he asked me to. If he needed a study done that required some programming beyond what he or his staff was capable of doing, I would offer to do it and would do it fast. Nobody was paying me, but ultimately he put money with me (at ridiculously low fees but I did not negotiate), which I was able to leverage into raising money from others. Plus, I really liked him. I thought he was an amazing person. I) Knowledge. When I was building a trading business I must’ve read over 200 books on trading and talked to another 200 traders. No style of trading was off limits. This helped me in not only building a trading business, but building a fund of hedge funds, and ultimately building stockpickr.com. I knew more about trading and the top investors out there than anyone else in the world, I felt. Creating value was almost an afterthought. When I was building websites I knew everything about programming for the web. There was nothing I couldn’t do. And the competition, usually run by businessmen and not programmers knew that about me. And knew that I would always come in cheaper than them. J) Love it. You can only make money doing what you love. If you work a nine-to-five job that you hate , then you’re on a leash and you’ll only make enough to get by and you won’t be happy. If you love something, you’ll get the knowledge, you’ll get the contacts, you’ll build the site with the features nobody else has, you’ll scare the competition, you’ll wow the customers. I didn’t enjoy writing finance articles. I’d write a finance article for some random finance site and then repost this on jamesaltucher.com. I had zero traffic. Then I decided to write articles I enjoyed. To get back to my true roots where I loved writing and reading. I also l wanted to really explore all of my failures, my miseries, my pain. In public. I love being honest and intimate with people. I love building community. I love emailing with readers. That was about a little over a year ago I decided to make the shift where I was just going to open the kimono at jamesaltucher.com and say everything I wanted to say, and at the same time indulge in my love of writing, art, creativity, and reading. 4mm+ “customers” later, I’m enjoying more than ever doing what I love.

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Bill Moyers: The Party People of Wall Street

January 30, 2012

A week or so ago, we read in the New York Times about what in the Gilded Age of the Roman Empire was known as a bacchanal — a big blowout at which the imperial swells got together and whooped it up. This one occurred here in Manhattan at the annual black-tie dinner and induction ceremony for Kappa Beta Phi. That’s the very exclusive Wall Street fraternity of billionaire bankers and private equity and hedge fund predators. People like Wilbur Ross, the vulture capitalist; Robert Benmosche, the CEO of AIG, the insurance giant that received tens of billions in bailout money; and Alan “Ace” Greenberg, former chairman of Bear Stearns, the failed investment bank bought by JPMorgan Chase. They got together at the St. Regis Hotel off Fifth Avenue to eat rack of lamb, drink and haze their newest members, who are made to dress in drag, sing and perform skits while braving the insults, wine-soaked napkins and petit fours — those fancy little frosted cakes — hurled at them by the old guard. In other words, a gilt-edged Animal House , food fight and all. This year, the butt of many a joke were the protesters of Occupy Wall Street. In one of the sketches, the bond specialist James Lebenthal scolded a demonstrator with a face tattoo, “Go home, wash that off your face and get back to work.” And in another, a member — dressed like a protester — was told, “You’re pathetic, you liberal. You need a bath!” Pretty hilarious stuff. The whole affair’s reminiscent of the wingdings the robber barons used to throw during America’s own Gilded Age a century and a half ago, when great wealth amassed at the top, far from the squalor and misery of working stiffs. Guests would arrive in the glittering mansions for costume balls that rivaled Versailles, reinforcing the sense of superiority and the virtue of a ruling class that depended on the toil and sweat of working people. That’s consistent with the attitude expressed by several of these types after Occupy Wall Street sprung up; bankers told the Times on the record that they could understand the anger of the protesters camped on their doorstep; but privately, a hedge manager said , “Most… view [it] as ragtag group looking for sex, drugs, and rock ‘n’ roll.” So sayeth the winners in our winner-take all economy. The very guys who were celebrating at the St. Regis because they were too big to fail. Even when they fell flat on their faces, the government was there to dust them off, bail them out and send them back to fight the class war with nary a harsh word or punishment. Talk about a nanny welfare state. None of this was by accident. The last three decades have witnessed a carefully calculated heist worthy of Robert Redford and Paul Newman in The Sting — but on a massive scale. It was an inside job, politically engineered by Wall Street and Washington working hand-in-hand, sticky fingers with sticky fingers, to turn the legend of Robin Hood on its head — giving to the rich and taking from everybody else. Don’t take our word for it — it’s all on the record. The biggest of the big boys was Citigroup, at one time the world’s largest financial institution. When the meltdown hit in 2008, the bank cut more than 50,000 jobs and you and other taxpayers shelled out more than $45 billion to save it. And how are Citigroup executives doing? Nicely, thank you. Last year, its CEO, Vikram Pandit, took home $1.75 million in base salary, and was awarded $3.7 million in deferred stock. According to the Times , “Citigroup is expected to disclose the rest of his pay, cash, be it upfront or deferred, in March. In addition, while not necessarily for work performed in 2011, Mr. Pandit last year was awarded a $16.7 million retention bonus, plus stock options that could add $6.5 million to the package’s overall value.” Makes you want to cry out, “Retain me! Retain me!” To be fair, Vikram Pandit was at the World Economic Summit in Davos, Switzerland last week, where he told Bloomberg News , “It’s important for the financial system to acknowledge that there’s a great deal of anger directed at it… Trust has been broken. Banks have to serve clients, not serve themselves.” What’s more, he has said that the “sentiments” expressed by Occupy Wall Street demonstrators were “completely understandable.” This, in contrast to the financial industry official who told a reporter that the protesters’ issues were “a lot of sound and fury, signifying nothing.” Or, as they used to say while partying down at the court of Louis XVI and Marie Antoinette, let them eat petits fours. See more at BillMoyers.com , including his most recent full show on how big banks are rewriting the rules to our economy , featuring a candid interview with former Citigroup CEO John Reed.

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John R. Talbott: The End of Romney, Part 2

January 28, 2012

In Part 1 of this story, I said that Mitt Romney had made aggressive use of loopholes in IRA legislation to accumulate $20 to $100 million of his assets in an IRA “retirement” account and thus avoid any taxation on this compensation and its future earnings until it is withdrawn which must begin when he reaches 70 ½ years of age. If one can defer paying taxes on compensation for decades and it compounds tax free, it is almost as good as not paying them at all on a present value basis. And, it has recently been reported that Romney made extensive use of off-shore vehicles in places like the Cayman Islands that traditionally have been centers for tax avoidance . It was also disclosed that Romney had a Swiss bank account that he closed in 2010 on the advice that it might look bad if he were to run for president. Romney has said that he has paid every dollar of tax that he owed, and not a dollar more. His supporters have said that he never entered into aggressive tax shelters that were structured to avoid paying his fair share of taxes. And Romney has argued that his assets are held in a blind trust managed by Goldman Sachs, and not himself, so he is not responsible for the investment decisions that led to his having a Swiss bank account or monies held in multiple offshore funds. But the New York Times today is

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Miles Mogulescu: You Can Bet Romney Doesn’t Stash Millions of Dollars in Cayman Islands to Work on Its Tan

January 27, 2012

Mitt Romney’s tax returns and financial disclosures reveal that Romney has millions of dollars stashed in Cayman Islands funds. According to ABC News , Romney has as much as $8 million invested in at least 12 Cayman Islands funds, and another investment worth between $5 million-$25 million domiciled in the Caymans. There are many places in the world — including the United States — to safely park millions of dollars in assets. People don’t seek out a P.O. Box in the Caymans to stash their cash to help their money get a deeper tan. The generally do so to lower their taxes, to take advantage of bank secrecy, or both. This is almost certainly true of Romney. According to the Wall Street Journal , Romney has tax-deferred IRA retirement accounts valued at between $20.7 million and $101.6 million which hold stakes in 13 investment entities run by Bain Capital. The most likely reason for Romney investing substantial amounts in Cayman Island funds is to legally launder millions of dollars in Romney’s IRA retirement money to avoid or defer paying an obscure 35% US tax called the Unrelated Business Income Tax (UBIT). Taxes can be pretty boring, but stay with me a minute. Although income from IRAs are generally tax deferred, the 35% UBIT tax is an exception. A 35% UBIT tax is assessed on retirement accounts which invest in an unrelated trade or business, and/or which uses debt. Since the Bain funds in which Romney’s IRA put much of their money often invest in ongoing businesses, and since to increase returns they are likely highly leveraged through the use of debt, a substantial amount of Romney’s IRA income could be in danger of losing its tax deferred status and being taxed at 35%. But smart, highly-paid tax lawyers and accountants have come up with a neat trick to shelter to 0.01% individuals like Romney who invest their IRAs in Bain-type hedge funds and private equity funds from paying this 35% American tax. Romney’s IRA may, as his trustee claims, be set up in the US. But Romney’s filings suggest that many of the Bain entities in which it invests are likely set up offshore in the Caymans. The Cayman entities (called offshore blocker corporations by tax experts) may invest in ongoing businesses and use leverage without owing US taxes. When the earnings on the Cayman-based funds are repatriated to Romney’s US IRA as dividends, they’re no longer treated as taxable Unrelated Business Income. The US IRA investment may be legally laundered through the Bain funds in the Caymans and the 35% US UBIT tax avoided. Presto Chango! Oh, and then there’s the question of Romney’s Swiss bank account, which his trustee closed in 2010 as Romney was preparing to run for the presidency. Was Romney’s money parked in Switzerland to work on its skiing? Or is it that you wouldn’t want to have money in a Swiss bank account when you’re running for President, for Pete’s sake? The deeper you drop down the rabbit hole of Romney’s fortune, the “curiouser and curiouser” things become, as Alice in Wonderland famously said. POSTSCRIPT: An interesting question for further investigation by an enterprising reporter is how Romney accumulated $20.7 million-$101.6 million in his tax-deferred IRA account in the first place. The annual IRA contribution limit for ordinary Americans is $4,000-$5,000, and , if part of Romney’s IRA was rolled over from a 401(k) account when he left Bain Capital, the annual limit on 401(k) employee and employer contributions, depending on the year, is $30,000-$35,000 plus some potential further matches for “highly compensated” individuals. Even with the deferred income in Romney’s IRA compounded at extremely high rates, it’s hard to imagine how the IRA grew to tens or hundreds of millions of dollars… Curiouser and curiouser.

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David Morris: The Five Republican Myths About Inequality

January 27, 2012

Recent comments by Mitt Romney, still the probable Republican nominee for president, all but guarantee the inequality issue will remain front and center this election year. When asked whether people who question the current distribution of wealth and power are motivated by “jealousy or fairness,” Romney insisted , “I think it’s about envy. I think it’s about class warfare.” And in this election year he advised that if we do discuss inequality we do so “in quiet rooms” not in public debates. A public debate, of course, is inevitable. And welcome. To help that debate along I’ll address the five major statements that comprise the Republican argument on inequality. 1. Income is Not All That Unequal Actually it is. Since 1980 the top 1 percent has increased its share of the national income by an astounding $1.1 trillion. Today 300,000 very rich Americans enjoy almost as much income as 150 million. Since 1980, the income of the bottom 90 percent of Americans has increased a meager $303 or 1 percent. The top 1 percent’s income has more than doubled, increasing by about $500,000. And the really, really rich, the top 10th of 1 percent, made out, dare I say, like bandits, quadrupling their income to $22 million. Meanwhile a full-time worker’s wage was 11 percent lower in 2004 than in 1973, adjusting for inflation even though their productivity increased by 78 percent. Productivity gains swelled corporate profits, which reached an all time high in 2010. And that in turn fueled an unprecedented inequality within the workplace itself. In 2010, according to the Institute for Policy Studies, the average CEO in large companies earned 325 times more than the average worker. 2. Inequality doesn’t matter because in America ambition and hard work can make a pauper a millionaire. This is folklore. A worker’s initial position in the income distribution is highly predictive of how much he or she earns later in the career. And as the Brookings Institution reports , “there is growing evidence of less intergenerational economic mobility in the United States than in many other rich industrialized countries.” The bitter fact is that it is harder for a poor person in America to become rich than in virtually any other industrialized country. 3. Income inequality is not a result of tax policy. Nonsense. A painstaking analysis by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva found “a strong correlation between the reductions in top tax rates and the increases in top 1% pre-tax income shares from 1975-79 to 2004-08.” For example, the U.S. slashed the top income tax rate by 35 percent and witnessed a large ten percent increase in its top 1% pre-tax income share. “By contrast, France or Germany saw very little change in their top tax rates and their top 1% income shares during the same period.” 4. Taxing the rich will slow economic growth An examination of 18 OECD countries found “little empirical support for the claim that reducing the progressivity of the tax code has spurred economic growth, business formation or job growth”. Indeed, Piketty, Saez and Stantcheva’s rigorous analysis came to the opposite conclusion. Our economy may be growing more slowly because we are taxing the rich too little, not too much. Economists Peter Diamond and Saez estimated the optimal top tax rate, that is the tax rate that would maximize revenue without slowing economic growth, could be as high as 83 percent. Redistributing income stimulates economies in part because when 1% make more they save whereas when the 99% make more they spend. As a result, according to Mark Zandi, chief economist for Moody’s, a dollar in tax cuts on capital gains adds .38 cents of economic growth while a dollar in unemployment benefits gives the economy a boost of $1.63 and a dollar of food stamps adds $1.73. 5. Taxing the rich would not raise much money Of course it would. If only the richest 400 families, whose average income in 2008 was an astounding $270 million, actually paid the statutory rate of 39 percent (revived as of next January 1) an additional $500 billion would be raised over 10 years, putting a substantial dent in the projected deficit. In 2010 hedge fund manager John Paulson made $5 billion. That year, according to Pulitzer Prize winner David Cay Johnston, Paulson paid no income taxes. Am I envious, Mr. Romney? You bet I am. But I’m also angry at the stark injustice of it all. And terrified of the power such wealth can wield in a country that allows billionaires to spend unlimited sums influencing legislation and elections. A recent survey by the Pew Research Center found that two-thirds of Americans now believe the conflict between rich and poor is our greatest source of tension. I agree. It is a conflict that deserves to be aired fully and in public.

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‘Warren Buffett Of The North’ Comes To BlackBerry Maker’s Rescue

January 25, 2012

By Cameron French and Alastair Sharp TORONTO (Reuters) – The arrival of the man known as “the Warren Buffett of North” on Research In Motion’s board this week offers a ray of hope to the BlackBerry maker’s impatient shareholders after their disappointment that an insider was named new chief executive. That’s not to say the reclusive Watsa – who heads Fairfax Financial, now RIM’s fourth-largest shareholder – has a reputation as a turnaround artist who will agitate for radical change at the struggling company. But his 2.25 percent shareholding and new role as director suggest Watsa sees real value in the withered share price, even though some say the company has fallen hopelessly behind its rivals in the hyper-competitive smartphone and tablet markets. Based from the Indian-born Canadian’s track record, fellow shareholders have good reason to be optimistic. “Prem is attracted to companies that are out of favor and unpopular with the market,” said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg, which holds Fairfax bonds. “He likely believes RIM is salvageable and that the market is unfairly punishing the stock now. His investing acumen has helped shares of Fairfax Financial, technically an insurer but also his investment vehicle, rise more than 100-fold in just over 25 years. Watsa is chairman and CEO of Fairfax and controls its voting shares. Watsa’s appointment to RIM’s board was part of a head office shuffle in which Mike Lazaridis and Jim Balsillie gave up their shared chief executive role to Heins, a company insider. RIM investors, who have watched their stock drop 84 percent in the last three years, sent the shares down sharply after the change in leadership was announced. They’re concerned that Heins, with his close association with the pair who presided over RIM’s swoon, may not have what it will take to reverse the decline. Heins reinforced that impression when he said he saw no need for a seismic shift at the BlackBerry maker, even though its market share has tumbled. BUFFETT OF THE NORTH Watsa started receiving comparisons to Buffett – the best-known proponent of investing on the basis of a company’s value – back in the 1990s. He’d already shown his investment chops by selling stock ahead of the 1987 stock market crash and buying Japanese puts – or rights to sell stocks at guaranteed prices – ahead of the Tokyo market’s collapse in 1990. But it was his call on the U.S. mortgage crisis that cemented his reputation as a savvy investor. Watsa began raising alarms on the U.S. mortgage industry in 2003, and Fairfax began selling or hedging its equity holdings, and buying credit default swaps that it later sold when the market began to collapse. A CDS enables the holder to be compensated in the event of a loan default. The move initially didn’t pay off, as stock markets churned higher in the mid-2000s. But when the market crashed in 2008, Fairfax notched a profit of $1.5 billion on the back of a $2.7 billion investment gain. In late 2008, with markets still reeling and other investors licking their wounds, he started to plow money back into equities, notching another strong year in 2009. Since then Watsa has changed gears again, hedging the company’s equity portfolio in 2010, and making more contrarian investments such as buying a 9 percent stake in troubled Bank of Ireland last year. “He’s gotten very very strong investment returns, I don’t think you can argue with that,” said one portfolio manager who holds RIM shares. “Whether he’s being brought on the board to support his existing equity positions or maybe ascertain whether value is there for a potential takeover and what that level would be at, I think there’s a lot that can be taken from his being added to the board,” said the manager, who requested anonymity because of his firm’s policy on speaking on the record. To be sure, not all of Watsa’s moves have been golden. Fairfax was forced to write off most its investment in Winnipeg-based media company Canwest in 2009 as the company filed for bankruptcy protections. It also wrote down a significant investment in publisher Torstar in 2008-09 and took losses on its holding of forestry company Abitibi Bowater. LOW PROFILE Born in 1950 in Hyderabad, India, and trained as a chemical engineer, Watsa has maintained a public profile that has at times bordered on the reclusive since he took over Fairfax in 1985. For his first 15 years at the company, he barely spoke to a reporter, and only started holding investor conference calls in 2001. Fairfax has generally not been known as an activist investor, but Watsa has hardly shied away from a fight, launching a $6 billion lawsuit against a group of hedge funds in 2006, accusing them of conspiring to the drive the company’s shares down so they could be shorted. A short position enables an investor to profit when a stock drops. With a board seat, Watsa will have a prime position to make sure his RIM investment is a winner. “He sees the value in this company, he sees where sentiment is, he sees where the asset value is and the cash value is and he sees the strategy. By joining the board he’s giving a vote of confidence and perhaps can have more hand in overseeing this transition,” said Matthew Thornton, analyst at Avia Securities in Boston. “That doesn’t mean it’s going to work.” (Editing by Frank McGurty) Copyright 2012 Thomson Reuters. Click for Restrictions .

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Broadway Technology Appoints Jonathan Fieldman as Chief Operating Officer

January 18, 2012

NEW YORK, NY and AUSTIN, TX–(Marketwire – Jan 18, 2012) – Broadway Technology, LLC, the emerging leader in high-performance trading solutions for top-tier global banks and hedge funds, announced today the appointment of Jonathan Fieldman as Chief Operating Officer. In this capacity, he will oversee global business operations, finances, corporate sales, marketing, recruiting and business development as well as spearhead strategic initiatives.

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Startup Evisors Bets On E-Advice

January 17, 2012

By Deborah L. Cohen CHICAGO (Reuters) – As a student at top U.S. universities, Norwegian entrepreneur Fredrik Maro quickly learned it’s not always what you know but who you know that can advance your career. So he and three fellow Harvard business school alumni set out to build a company based on the premise that everyone should have a shot at reaching advisors with direct knowledge in their field at an affordable price. Their online startup, Evisors , provides a range of consulting expertise for aspiring students, entrepreneurs and others. “I realized there could be a business model here built around democratizing the access to all these great people with all this great know-how, making the people you need to know available to everybody, not just a select group,” said Maro, who was introduced to costly and exclusive consulting networks in niche areas such as hedge funds during his own stint at the global management consulting firm McKinsey & Co. Maro and his cofounders began developing Evisors as MBA students, eventually bootstrapping the venture with less than $25,000 of their own money. To keep costs down, they outsourced site development to engineers in India. “We were very focused on a lean startup model,” said Maro, noting that much of the online platform had to be rebuilt once the venture began scaling up. Realizing they couldn’t start off being all things to all people, the cofounders focused first on what they knew best: helping aspiring students with admissions strategies for elite schools and career moves. The topic had particular resonance for Maro, who spent countless hours studying for the SATs during mandatory army service in Norway. “I got into Penn (University of Pennsylvania) despite what must have been a terrible, terrible application,” he recalled, adding that Evisors consultants are enlisted to help with everything from mock admissions interviews to resume reviews. Expert advice, bargain price New York-based Evisors, which launched in beta in September of 2010 and went live about a year later, has amassed about 1,200 experts who charge anywhere from $30 to $700 an hour for advice in the form of a phone consultation or email. The average rate is about $100, far below elite consulting networks, Maro said. The venture has to date sold more than 1,000 sessions. Evisors takes a cut of the proceeds, typically 30 percent for first-time users, in exchange for facilitating the match and handling details such as toll-free phone calls, file sharing and billing. Michael Mayhew, chairman of Integrity Research, a research advisory firm to institutional investors, said Evisors has tapped an un-served market. Other online consulting networks such as Zintro are focused squarely on financial services, he said. “I do think there is a going to be first mover, branding type advantage,” Mayhew said. Surprisingly, the site hasn’t had to work too hard to recruit advisors, relying instead on its founders’ network and word-of-mouth referrals. Consultants set their own rates and are later evaluated, with their scorecard made public to potential customers. Ben Schumacher, a Harvard business school alumnus and director of strategy for the teachers’ network Teach for America, is among the site’s highest-volume consultants, offering career advice to recent graduates and mid-career executives alike. “When I see clients succeed, I get addicted to their success,” said Schumacher, who recently finished his 90th consultation and typically charges $195 per hour. Access to seasoned alumni from top schools has been appealing to a variety of universities, which have contracted Evisors to develop proprietary consulting networks for their students. The University of Cambridge was the first of some 20 schools, said Maro, whose company gives the universities a break on rates due to volume. Business connections Beyond career advice, Evisors has progressively honed other sweet spots, with entrepreneurial consulting emerging as its second-biggest area. A quick glance at experts in this area revealed a host of startup founders as well as a project director at a large museum. “A conversation or two with the right individual is very valuable,” said Alan Mark, a member of the New York Angels, among the investors that have provided nearly $700,000 in startup capital to Evisors. “This can be really helpful for small business and individuals who otherwise wouldn’t have access to these experts.” Dr. James Maisel, a retina surgeon and serial entrepreneur, found an advisor with specialized venture capital expertise in medical technology to help with a pitch to potential VC investors. The total cost: less than $500. “We got the IT advisor from a New York venture capital firm that has been in the business for a number of years and was familiar with our space,” said Maisel, whose venture, ZyDoc, uses speech recognition to aid in medical transcription. “He could not have been more well-suited to help us.” Those are the types of success stories Evisors is betting on for growth. “We’re getting these people into schools,” Maro said. “We’re getting startup funding. We’re getting people into their jobs.” Copyright 2012 Thomson Reuters. Click for Restrictions .

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Merkel: Mass Eurozone Downgrade Highlights Need For Strong ‘Fiscal Compact’

January 15, 2012

* Leaders see downgrades as wake-up call * Italy seen as problem child number one * Merkel says decision should not impede EFSF * S&P says France could fall further, no euro break-up By Robin Emmott and Brian Rohan BRUSSELS/BERLIN, Jan 14 (Reuters) – European leaders promised on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut the ratings of several euro zone countries’ creditworthiness. In a conference call with reporters and analysts after downgrading nine of the euro zone’s 17 countries, Standard & Poor’s said it saw continued risks from the debt crisis that has overshadowed Europe for the past two years and said the single currency area was heading towards recession. It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit. “The policy response at the European level has in our view not kept up with the rising challenges in the euro zone,” S&P credit analyst Moritz Kraemer said on the call, forecasting a 40 percent chance of euro zone gross domestic product contracting by up to 1.5 percent in 2012. The downgrades were delivered hours after talks between private bond holders and the Greek government aimed at restructing Greece’s vast debts broke down, pushing Athens closer to default, an event that would tarnish euro zone unity and pose a contagion threat which could engulf the bloc. In Germany – whose top AAA rating survived unscathed – Chancellor Angela Merkel said the downgrades underlined why a so-called ‘fiscal compact’ must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon. “We are now challenged to implement the fiscal compact even quicker … and to do it resolutely, not to try to soften it,” she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel. “We will also work particularly to implement the permanent stability mechanism, the ESM, so soon as possible — this is important regarding investor trust,” she added. European Central Bank policymaker Joerg Asmussen warned that Europe’s drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a “substantial watering down” of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported. Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments. S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititveness. “We think that the diagnosis of policymakers regarding the crisis is only partially recognising the origin of the crisis,” said Kraemer, mentioning the focus on budget austerity. “The proper diagnosis would have to give more weight to the rising imbalances in the euro zone in terms of the external funding positions, current account positions, much of it is based in diverging trends of competitiveness,” he said. WAKE-UP CALL Austria, which was downgraded one notch from AAA, called S&P’s decision a wake-up call for the country to cut debt and deficits, and for Europe to move more quickly on reforms. “The downgrade is bad news for Austria but it should wake everyone up when such a thing happens,” Finance Minister Maria Fekter said. “Now everyone recognises that this … is a matter of debt and deficits, not primarily of the economy.” The ratings decision hit some countries harder than others, with France, Austria, Malta, Slovakia and Slovenia suffering single-notch downgrades, but Italy, Portugal, Spain and Cyprus falling two notches. Portugal’s debt is now rated junk. ECB policymaker Ewald Nowotny, an Austrian, said Italy in particular would now face problems given large refinancing needs this year in that country and its banks. Asked in an interview broadcast by Austrian radio if Italy – now rated at the same BBB+ level as Kazakhstan – was “problem child number one”, Nowotny agreed. “In a certain sense, yes, because we know this year Italy has a very significant refinancing need. Italian banks also need refinancing,” he said. “In normal times this is all possible, in very nervous and difficult times it can be a problem and in my view this sharp downgrade of Italy is probably one of the most difficult and problematic aspects of this sweeping blow from the ratings agency.” NO TORPEDO Long-standing frustration with ratings agencies echoed across Europe after the S&P decision. While Germany and France downplayed the decision and called it expected, Spain’s finance minister was more alarmed. “The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro,” Treasury Minister Cristobal Montoro said on the radio. “It’s important that the European institutions understand that it’s time to do everything possible to build and reinforce the euro,” said Montoro, whose highly indebted country has the highest unemployment level in the euro zone. Meanwhile, in a move to circumvent their influence, Germany’s Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies, which some of her allies say are politically driven. The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the U.S.-based agencies. “I think it is very useful to look at this and see where if necessary we can make changes to legislation,” Merkel said at her party meeting. European leaders are set to meet at a summit on Jan. 30 to discuss how to boost growth and jobs, and Merkel’s words on Saturday suggest she will also be looking for faster progress on tighter common fiscal rules. But now, policymakers at the meeting may have bigger fish to fry. The downgrades threaten the top rating of Europe’s current bailout fund — the European Financial Stability Facility — as contributors France and Austria are no longer rated AAA. A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc’s weaker members. S&P said it would deliver its view on the impact to the EFSF from the sovereign downgrades “shortly”.

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Hedge funds hunker down for Greek debt standoff

January 14, 2012

(MENAFN – Saudi Press Agency) Hedge funds are positioning to profit from a plan to slash Greece’s towering debt pile as Athens enters final talks that could sway the country’s membership of the …

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Cordray Dialing CEOs Of Major Banks To Win Support

January 13, 2012

* Top bankers among scores of introductory calls * Says protecting consumers and supporting honest businesses * Tells reporters: 20-yr member of local Chamber of Commerce By Dave Clarke WASHINGTON, Jan 12 (Reuters) – New consumer financial chief Richard Cordray has been calling the heads of some of the top U.S. banks in an effort to build support for his agency, which is viewed skeptically by the financial industry. In a controversial decision, President Barack Obama installed Cordray as director of the Consumer Financial Protection Bureau on Jan. 4 to get around Senate Republicans’ efforts to block his nomination. Since that time, an agency spokeswoman said Cordray has reached out to about 100 people at banks, trade associations and consumer groups to make introducations and get feedback. Among those at the top of the banking food chain he has chatted up are Bank of America CEO Brian Moynihan, Citigroup CEO Vikram Pandit, JPMorgan Chase chief Jamie Dimon, US Bancorp CEO Richard Davis and PNC Financial Services Group’s James Rohr. Cordray has also spoken with leaders of consumer groups such as the Consumer Federation of America and Public Citizen and trade groups like the American Bankers Association and the Consumer Bankers Association. The bureau was created by the 2010 Dodd-Frank financial oversight law to police financial products like mortgages and credit cards. Consumer groups have heralded its creation while the business community has warned an overzealous regulator could hurt the economy by making it harder to get loans. Through his outreach and public statements Cordray has been eager to show that he is not a wild-eyed activist but a level-headed regulator who will seek feedback from all sides. Cordray, a former Ohio attorney general, told reporters on Thursday that he has belonged to the Chamber of Commerce in his hometown of Grove City, Ohio for 20 years. He said his pitch to the business community is that his goal is to go after those breaking the law or abusing consumers and that will help the majority of lenders who are on the up and up. “They should embrace the bureau because not only are we going to protect consumers but we are going to support the honest and responsible businesses,” he said. Cordray’s elevation to director has kicked up a political sandstorm because it was done through a recess appointment rather than by a Senate vote. Republicans were blocking a vote on his nomination because of concerns about the bureau’s power and they argue Obama may have broken the law by making the appointment when the Senate was technically in session. The administration disagrees and said the president’s decision is on firm legal ground. Cordray is scheduled to appear at a Jan. 24 House of Representatives hearing to discuss his agency’s work. POSSIBLE LAWSUIT The bureau and the Obama administration continue to face questions over whether the appointment will be successfully challenged in court, which could jeopardize rules and any enforcement actions taken while Cordray was in charge. The U.S. Chamber of Commerce held its 2012 kickoff event on Thursday where its president, Thomas Donohue, said the organization was keeping the option of a lawsuit open but tempered any expectation it would come soon. “Let me put that into context – we take decisions on law suits in a big damn hurry,” he said. “On this one we are working our way through it.” (Reporting By Dave Clarke and Alexandra Alper; Editing by Tim Dobbyn)

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Big Bank’s Profit Plunged Last Quarter

January 13, 2012

NEW YORK — JPMorgan Chase’s income fell 23 percent in the fourth quarter of 2011 after the bank set aside a large sum for litigation reserves and its investment banking income declined. The largest bank in the nation said Friday it earned $3.7 billion, or 90 cents per share. The results fell short of the 93 cents per share estimated by analysts surveyed by FactSet. Revenue fell 17 percent to $22.2 billion. For the full year, JPMorgan Chase & Co. posted record net income of $19 billion, compared with $17.4 billion in the prior year. The New York bank set aside $528 million for additional litigation charges in the quarter, the latest sign that the banking industry is still dealing with the fallout from poorly-written mortgages from years past. Volatility in stock and bond markets caused by Europe’s debt crisis also hurt JPMorgan’s investment banking business. Fees declined 39 percent to $1.1 billion. Debt underwriting fell 40 percent, and stock underwriting fell 65 percent. JPMorgan also had to book a loss of $567 million loss from an accounting rule that applies to the value of its own corporate debt. Because the value of its debt rose in the fourth quarter, the bank would theoretically have to pay more to buy it back in the open market. When that happens, accounting rules require that the bank record a charge against earnings. Corporate bond prices recovered in the fourth quarter after declining sharply in the third quarter. In another sign that American households are becoming more stable financially, JPMorgan said more credit card customers have been paying their bills on time, leading to lower losses for the bank. JPMorgan was able to take a profit of $730 million by reducing its loan reserves set aside for credit card defaults. That was good news. As the largest bank in the country serving 50 million customers, JPMorgan’s results provide a pulse for how well the U.S. economy is performing. JPMorgan’s stock fell 2.3 percent to $36.01 in pre-market trading.

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Why Wall Street Bankers Are Fleeing To Main Street

January 13, 2012

Shane Robinson celebrated his Merrill Lynch job offer over lunch and cocktails at a trendy Manhattan restaurant. His bosses toasted him and asked what he planned to do with the $10,000 end-of-internship bonus. Robinson, then 24, in late 2007, said he would probably save it. “Why?” he recalls them saying. “Just go spend it — you’re going to make a lot more.” As the economy started to spiral downward less than six months later, bonuses dried up, layoffs ensued and the young banker was told by his superiors that he might want to begin looking for other opportunities. “It left a bad taste in my mouth,” Robinson says. “Why would I want to have my fate determined by things that are outside my control? If I’m going to fail, I would much rather fail because of my own doing.” Not long after the recession hit, Robinson decided to ditch finance. He contacted A.J. Steigman, a former Merrill Lynch colleague who had quit to start a sneaker store, and the two hashed out plans to create an urban clothing website that was part social network, part e-commerce. For months, they slept on friends’ couches while fundraising in different cities. They spent countless hours online, building the core technology and a community around their streetwear blog . Finally, in 2010, the duo secured $265,000 from investors to make their startup Soletron a reality. Soletron’s founders’ path from high-finance to high-tech is becoming increasingly well-trodden, according to economists, venture capitalists and startup CEOs — especially now, as we see some contraction once again on Wall Street, not to mention the stigma Occupy Wall Street protesters have bestowed on the “1 Percent.” As employee dissatisfaction spreads through the financial-services industry amid waning profits, slashed bonuses and layoffs, New York’s bustling world of tech startups is attracting and absorbing fed-up financiers, offering them jobs, cash and a shot at creating empires of their own. “At the end of 2008, we started seeing more people who graduated from college three or four years before, went to work at a large bank, but became disillusioned with Wall Street and were moving on to tech and entrepreneurship,” says Matt Harris, a managing partner at Village Ventures , a Manhattan-based venture-capital firm. Harris says that over each of the past three years he has seen the flow of talent from Wall Street to Silicon Alley increase. For many Wall Street refugees, a “logical next step is technology and entrepreneurship,” Harris says. That’s because the world of tech startups “has some of the same elements as Wall Street,” including the adrenaline, the high stakes and — for a lucky few — the outsized returns. Bankers “are accustomed to the prospect of being able to earn a really good living,” he adds. “And while entrepreneurship is risky, when it works, it can really pay off.” According to a recent study , an average successful startup raises $25.3 million, sells for $196.8 million and gives its shareholders a 676 percent return. While those numbers represent a small percentage of all startups, they leave bankers, who have watched their salaries shrink and their colleagues get axed, squirming in their penny-loafers. From 2008 to 2011, national employment in the financial services industry fell by 7.3 percent, while high-tech employment excluding manufacturing jumped 7.1 percent, according to the U.S. Bureau of Labor Statistics. In startup hubs like New York, where large numbers of new tech companies have popped up in recent years, the trend is even more pronounced. The number of investment bank and brokerage firm employees in New York dropped by 17 percent from 2008 to 2011 , according to analysis of government data by The New York Times . The number of bankers aged 20 to 34 fell by 25 percent in the same period. Meanwhile, in New York’s high-tech sector, employment shot up by 30 percent from 2005 to 2010, city officials report. While layoffs at large Wall Street banks continue to winnow the number of employees in New York’s financial services sector, the allure of starting or joining technology firms in a city where Internet startup investments are soaring has pushed some bankers to the exits. Glamorized media accounts of financiers turned successful startup CEOs provide added encouragement to professionally frustrated Wall Streeters. There’s the poster-boy in Silicon Valley, Mark Pincus, who began his career as a lowly stock analyst, graduated into private equity, but ultimately dumped finance to launch Zynga, the social-gaming startup that recently sold shares to the public at a $7 billion valuation . Then there are the homegrown New York stories of Wall Street number-crunchers who started some of the city’s hottest startups, including Vinicius Vacanti, the founder of Yipit , Andy Dunn of Bonobos , Alexa Von Tobel of Learnvest and Barry Silbert of SecondMarket . Silbert, for his part, spent the early part of his career as an investment banker selling off pieces of bankrupt Enron. He soon discovered that the way people buy and sell illiquid assets was ripe for disruption, and went on to build an online marketplace that facilitated such transactions. That marketplace, now known as SecondMarket, currently employs more than 200 people in New York, is worth an estimated $200 million and has changed the way private-company shareholders trade their stock ahead of an initial public offering . But for each successful startup that has grown out of a Wall Street hangover, or received a boost from ex-Wall Street talent, there are at least 100 new businesses that flop, creating and then ultimately destroying jobs. Some fear those numbers will grow as the threat of a startup credit crunch becomes more real. As such, some experts believe established tech giants like Google and Facebook — rather than the droves of young New York-based startups — are the drivers of the city’s rising high-tech employment numbers. Facebook, for its part, is opening a large office in New York, the social network recently announced , and Google already employs about 1,200 engineers in the city . It’s at these large technology companies, not at Goldman Sachs, where the new “status jobs” are , a former Goldman analyst recently told The New York Times . Regardless of which group draws more people away from Wall Street — the tech giants or the tech startups — Google and Facebook building engineering talent in New York is a net positive for the city’s startup community, according to John Frankel, a partner at ff Venture Capital , who spent 21 years at Goldman Sachs before he became a full-time venture investor in 2008. “Google and Facebook, much like Goldman, attract a lot of very smart people to New York,” Frankel says. “And many ex-Googlers end up starting their own businesses here. Much like people in finance move from big Wall Street banks to hedge funds after a few years, folks often spend two to three years at Google, get fed up with whatever aspect there, and then go off and do their own thing.” In the past week alone, Frankel says several people currently employed on Wall Street have sought him for advice on transitioning into the tech sector. One, a 55-year-old banker, told Frankel that he’s thinking about creating a group that helps funnel Wall Street refugees into positions at high-growth startups. (Arguably, those mechanisms already exist in the form of New York’s growing network of incubators and accelerators , many of which have seen an increase in the number of applicants with finance backgrounds.) But perhaps the flow of talent from Wall Street to Silicon Alley, and more broadly, from financial services firms to entrepreneurial technology firms nationwide, is just a fad. After all, previous economic downturns have caused the financial services industry to shrink in the short-term. And perhaps this time around, it’s just that the contraction is coinciding with a ’90s-style tech startup bubble that will soon pop and send all the Zuckerberg-wannabes back to their trading desks. Harris, of Village Ventures, who was investing in startups in the immediate aftermath of the late-’90s bubble popping, is concerned about what exactly draws the best and brightest to startups in the age of Facebook. “I think venture capitalists have been guilty of creating a monolithic and, on average, incorrect view of what entrepreneurship means,” Harris says. “If entrepreneurship means building the next Facebook, then 99.9 percent of people involved are going to be really disappointed with the outcomes. “But I don’t think this is just a phase,” he adds. “Entrepreneurship is about building a career for yourself that doesn’t rely on a large corporation and a boss to give you direction and give you security and give you a paycheck. Whether you should raise venture capital is an open question. Whether the outcome is an acquisition or a merger or just a lifetime job in a company that you own part of or all of is another open question. In most cases, the answer is you should not raise venture capital and you should never sell the business — this is just how you live.” “As for going to back to a world in which people just check their own initiative at the door of a large company when they take the job there and don’t reemerge until they’re laid off,” Harris says, “people’s thinking on that has changed.”

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Ex-MF Global CFO Tapped For Board That Oversees Billions In Assets

January 6, 2012

(Adds details about violations in 7th paragraph) By Tim McLaughlin BOSTON, Jan 5 (Reuters) – An exclusive group of funds at Fidelity Investments is seeking shareholder approval to extend the brief tenure of a former executive of MF Global Holdings Ltd on a board that oversees billions of dollars in assets, according to U.S. regulatory filings. Independent trustees for Strategic Advisers Inc, a unit of Fidelity, had appointed Amy Butte Liebowitz, a former MF Global chief financial officer and board member, as a director in September, and want her reelected at a Jan. 20 meeting in Boston. Liebowitz earned plaudits at MF Global for helping raise about $2.9 billion in a July 2007 initial public offering. But just months later, some investors accused the company of misrepresenting its risk management prowess in IPO registration documents she and other top executives signed. Strategic Advisers manages about $98 billion in assets. Its funds are not open to the public, but exclusive to clients enrolled in Fidelity’s customized Portfolio Advisory Service. Liebowitz declined to comment for this story. Fidelity spokesman Vincent Loporchio said she was recruited for her significant experience in business and finance. Liebowitz represents a link to MF Global’s short-lived honeymoon as a publicly traded company. Even before MF Global’s collapse into bankruptcy on Oct. 31, the company had been repeatedly cited for lax risk controls. During her tenure of about 17 months, MF Global and its divisions were ordered to pay more than $75 million in restitution and settlements over regulatory violations. Liebowitz, however, was not personally accused of any violations. In a December 2007 settlement involving the collapse of a Philadelphia hedge fund, the alleged violations happened before Liebowitz joined MF Global and its predecessor company. Just months before Liebowitz became a trustee for Strategic Advisers’ funds, MF Global agreed to pay $2.5 million of a $90 million in a preliminary settlement to resolve a shareholder lawsuit that accused the company of lax risk management over a rogue wheat trader in February 2008. Liebowitz and other former MF Global executives were defendants in the civil case in U.S. District Court in Manhattan. In court papers, they denied any wrongdoing. The dispute preceded Jon Corzine, who became MF Global’s CEO in 2010 and led the company’s collapse with wrong-way bets on European debt. Without explanation, Liebowitz, 43, abruptly quit MF Global in January 2008, just before the rogue trader case helped push the company’s stock down 94 percent that year, wiping out $3 billion in shareholder equity. The trades happened about a month after Liebowitz left the company. But some investors pounced on MF Global with lawsuits, alleging that the company senior management team, including Liebowitz, glossed over a shaky risk management system when they took the company public in 2007. A Wall Street veteran and star financial-stocks analyst at Bear Stearns earlier in her career, Liebowitz joined MF Global in September 2006 to spearhead the spin-off and initial public offering of the former Man Financial from Man Group. As the CFO of the New York Stock Exchange, she helped the Big Board go public with its acquisition of Archipelago Holdings Inc. As part of her separation from MF Global, she received a $3 million transition payment and IPO-related restricted stock worth about $11.5 million at the time, according to filings with the U.S. Securities and Exchange Commission. About a month after Liebowitz left the company, MF Global’s credibility as a risk manager suffered a major blow. On Feb. 27, 2008, an MF Global broker made more than 100 trades from his home computer, placing a bet of nearly $1 billion to buy thousands of wheat futures contracts, according to a lawsuit by several investors. The next day, MF Global said it would take a $141.5 million loss from those trades. At MF Global, Liebowitz’s base salary was $1 million. At Strategic Advisers she would receive about $80,000 a year to attend a handful of meetings for the funds. After leaving MF Global, Liebowitz founded TILE Financial Inc, a financial education firm in Manhattan. The company’s biography on her says she is a new mother and has four stepchildren. (Reporting By Tim McLaughlin; Editing by Richard Chang, and Carol Bishopricu)

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Big Year Awaits In Atlantic City

January 1, 2012

ATLANTIC CITY, N.J. — You know that all-in moment, when you push most of your pile of chips out onto the table, and wait to see where the little white ball lands, or which card flips from the deck, to know whether you’re a winner or a big loser? 2012 is looking a lot like that for Atlantic City. Pummeled by a five-year losing streak brought on by unrelenting competition from casinos in neighboring states and worsened by the sluggish economy, Atlantic City is anxious for the new year to arrive, and with it, the $2.4 billion Revel casino-hotel that should bring new gamblers and new money to the resort. Hard Rock International expects to break ground for its own new smaller “boutique” casino at the opposite end of the Boardwalk, and this will be the first full year that Gov. Chris Christie’s Atlantic City rescue plan – including state supervision of safety, cleanliness and planning in the casino and shopping zones – will be in place. Yet pitfalls lurk as well: the ramping up of New York City’s Aqueduct casino, the continuing financial fragility of the casino formerly known as the Atlantic City Hilton, which has only committed to stay in business through Halloween, and the almost inevitable psychological blow of Pennsylvania passing Atlantic City to become the nation’s second-largest gambling resort in terms of revenues, which should happen sometime in 2012. “It’s a crucial year,” said Tony Rodio, president of the Tropicana Casino and Resort. “I think it’s the beginning of a turnaround; I really do.” The opening of Revel, set for May 15 but likely to happen sooner than that, will be the best thing that has happened to Atlantic City since the Borgata Hotel Casino & Spa opened in 2003. The resort will likely be Atlantic City’s last huge casino-hotel for quite some time. CEO Kevin DeSanctis said Atlantic City should not look at his project as the savior of the city – though that’s exactly how many are viewing it. “Revel is not a silver bullet. That’s never what we set out to be, or frankly, what we are now,” he said. “Revel is another tool in the toolbox for Atlantic City to be successful. We’re adding product to a market that desperately needs it. This market needs to re-establish itself as a regional destination. We will give people another reason to give Atlantic City another try. “I hear people say, `I don’t go to Atlantic City; I go to the Borgata,’ ” DeSanctis said. “That’s clearly a problem. When we open, it will help expand that to `Borgata and Revel.’ As other folks put a little more capital investment into their properties, that will have a positive effect.” Christie wants that to happen, too, and he thinks many casinos will be forced to follow Revel’s lead. “It is an extraordinary facility and it is going to draw tens of thousands of people to Atlantic City just to see it,” the governor said. “And when they do get there, I hope what they’re going to find is a cleaner, a safer Atlantic City. I’m anticipating 2012 to be a comeback year for Atlantic City. “Now it has been on the decline for years so we are not going to come back entirely in 2012, so let’s set appropriate expectations here,” Christie said. “But I think you should start to see a turnaround.” Revel will add 5,000 full-time jobs to a market desperate for them, and has put thousands of construction workers to work at a time when little else was being built. The casino-hotel also plans to make an aggressive play for conventions and group meetings, and will have a 5,000-seat concert hall capable of attracting the biggest names in entertainment. A big question leading up to Revel’s opening has been whether the mega-resort will bring new business to Atlantic City, or merely siphon it off from existing casinos who can ill afford to lose any customers. DeSanctis expects some combination of the two to occur. Michael Pollock, managing director of Spectrum Gaming Group, an Atlantic City-area casino consulting firm, said it would not be surprising to see one or two casinos have to close in 2012 due to the cutthroat competition in the industry amid a still-weak economy. ACH, the casino formerly known as the Atlantic City Hilton, appears to be on the shakiest ground. In November, state regulators approved a plan for the casino to stay open with a fresh infusion of capital from its owners, Los Angeles hedge fund Colony Capital LLC, and a cancellation of its debt. But the casino has committed to staying open only through the end of October, and it’s going after the smallest of small fish in a market that prizes whales. It recently got permission to use table game gambling chips worth as little as 25 cents – the first time Atlantic City has let any casino use a chip worth less than $1. Resorts Casino Hotel also has yet to turn a profit in the first year of new ownership, although it expects to at least break even by the end of 2012. Atlantic City’s casino revenue peaked in 2006 at $5.2 billion; it has since fallen to $3.6 billion at the end of 2010, mostly due to casinos opening in neighboring Pennsylvania and New York, and the poor economy. Many expect revenues for 2011 to be in the range of $3.2 billion. Atlantic City desperately needs new money, Pollock says. “The spigot had been turned off on new capital investment and it’s crucial that that spigot get turned back on again,” he said. “Atlantic City was on its way toward reinventing itself with a new business model” when the bottom fell out of the economy. The Seminole Indians, through their Hard Rock franchise, say they are ready to do just that. They plan to break ground by July 15 on Atlantic City’s first so-called “boutique casino,” a smaller, less expensive gambling hall authorized under a pilot program to jump-start the stagnant casino market here. The first phase of the project, with 208 hotel rooms. will cost about $465 million, and eventually grow to 850 rooms. New Jersey’s state government adopted a number of reforms for Atlantic City in 2011 that will have the chance to bear fruit in 2012. It beefed up the Casino Reinvestment Development Authority and put it in charge of revitalizing the resort, including making sure its streets are clean and safe. But the reform likely to have the most immediate impact is the formation of the Atlantic City Alliance, a private casino-financed nonprofit corporation that will spend $30 million a year for the next five years to promote Atlantic City to the rest of the world. That’s money the casinos were required to pony up to the state’s racetracks in return for keeping slot machines out of racetracks, until Christie intervened and killed the arrangement, much to the delight of the casinos. “What did Revel do in its first year, and what did we do with the $30 million we suddenly had at our disposal to market Atlantic City?” said Rodio, the Tropicana president. “That’s what we’ll be debating next New Year’s Eve.” ___ Associated Press writer Beth DeFalco in Trenton contributed to this report. ___

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Could Housing Market Rejoin The Living In 2012?

December 30, 2011

Just as housing was the first bubble to burst, sinking the American economy into crisis, a revived housing market could force some life back into the listless economy. The only questions are if and when the market will improve. Because it certainly didn’t this year. Housing prices hit a low in 2011 not seen since 2002, losing an average of nearly one-third of their 2006 peak value and creating a “double dip” decline, according to the S&P/Case-Shiller National Price Index. As a result, nearly one-quarter of all homeowners are underwater, owing an average of $75,000 more on their mortgage than the home is worth, according to research firm CoreLogic. But one leading real estate analyst thinks 2012 will be better. Tom Lawler, an independent consultant who retired from Fannie Mae in 2006 after 22 years at the mortgage giant — and after predicting the impending end of the housing bubble at the height of the boom — sees potential in the continued dearth of newly built homes, a slowly rebounding job market and a population in need of housing. Lawler is not alone in his optimism. Stocks of homebuilders are trading 30 percent higher since the end of the third quarter and large hedge funds like Blackstone Group are making housing-related investments, reports the Wall Street Journal . Earlier this month, Goldman Sachs stated that “the housing-price bottom is probably in sight,” adding that although home prices could decline in 2012, there should be a 30 percent gain over the next decade. The newly bullish real estate market and analysts like Lawler anticipate increased housing demand in 2012. Specifically, Lawler predicts a rebound in headship rates, defined as the number of people who qualify as the head of a household — which matters to housing economists because each head of household represents a home. In the first half of the decade, roughly 1.3 million new households formed each year , according to Harvard University’s Joint Center for Housing Studies. Since 2005, that number has dropped to less than a million per year. Some of the decrease is due to declining immigration. Another chunk can be blamed on the hesitance of 20- and 30-something Americans to become heads of household. While economists like Freddie Mac’s Frank Northcut have argued that the downward trend in household growth will stifle the housing market in 2012, Lawler believes it represents an opportunity. “The job market has been terrible, and it hit younger people very hard,” he said. “As a result, we’ve seen more young people staying in school, or moving home with their parents, or sharing a place with roommates. But those aren’t permanent situations. Instead, it suggests an emerging, pent-up demand because they are going to ultimately form their own households.” The Joint Center for Housing Studies seems to agree, as the group projects total household growth at about 12.5 to 14.8 million over the decade. When Americans do go looking for housing, the market will be helped by the fact that relatively few new homes are currently under construction, Lawler notes. For 16 consecutive years — 1992 to 2007 — at least a million new single-family homes were built every year , according to the National Association of Home Builders. By 2010, that number had dropped to almost 471,000, and early estimates predict that it fell even further this year. As long as new construction remains low, people will turn to the stock of existing homes, purchasing those now sitting empty and thereby helping to clear the market. In other good news for the housing market, the number of job layoffs has been steadily declining, as reported earlier this week by the Labor Department, while the unemployment rate dropped from 9 percent in October to 8.6 percent in November. Most analysts agree that the job and housing markets are linked. As more people find work, they are better able to qualify for a mortgage and more likely to buy a home. Lawler cautions that there is one large unknown complicating predictions: the “shadow inventory.” That is, homes that are not yet for sale but likely will come up for sale because the current homeowner is seriously behind on the mortgage payments. “In a normal world, which we haven’t been in for so long, those loans would have been dealt with one way or another,” Lawler said. “But in our abnormal world, it’s all unknown.” He added, “If you didn’t know about that shadow inventory, you’d say, ‘My god, it’s a slam dunk that 2012 looks better.’”

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