Posts filed under ‘Government’
Insider Trading: Raj Rajaratnam vs. Pete Rose
A recent Wall Street Journal article written by Donald J. Boudreaux, a professor of Economics at George Mason University, makes the case that insider trading is actually healthy for the operations of the financial markets. The arrest of Galleon Group founder and hedge fund manager, Raj Rajaratnam, is a tragedy according to the article’s author. Specifically he says, “Insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.”
Oh really? Then I suppose Professor Boudreaux would be fine with all-time leading hitter and former Cincinnati Reds Manager betting on his own baseball team to win or lose.
Another disputed aspect of insider trading by Boudreaux is the inability to monitor the crime. “Insider trading is impossible to police and…parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors.” Maybe heroin and cocaine should be legalized too, since we can’t completely police these crimes either? Seems to me the insider trading laws are pretty clear what insiders can and cannot do with material information. The digital world we live in today only empowers investigators more than ever to discover clear electronic footprint trails connecting trading and banking accounts. Certainly, there will be creative crooks like Bernie Madoff that can slyly succeed for a period of time, but those that grasp too far will eventually get caught.
Professor Boudreaux goes on to describe the scenario of an unscrupulous CEO at a hypothetical company (Acme Inc.) driving a company into bankruptcy. He argues employees, creditors, and investors would be better served by a CEO enriching himself with insider trading in the name of price efficiency. Capital productivity would be enhanced for creditors/investors thanks to information efficiency and employees could manage their job hunting effectively.
Sounds great Don, but in a legal insider trading world, don’t you think inefficient, unscrupulous behavior for siphoning information from executives might lead to distracting and wasteful corporate actions? If I’m an employee at ACME Inc. and I can make more money trading ACME stock, rather than being a productive employee making widgets, then it doesn’t take a genius to figure out where my 40 hour work week concentration will reside. Moreover, how is a sabotaging CEO, who is raking in millions by shorting his company’s stock ,supposed to be a good thing for stakeholders? I strongly disagree. Stakeholders will be jeopardized more by an unfocused, greed-absorbed workforce than by the current enforcement structure, which strives for an even playing field of information.
After forcefully arguing trading on insider information should not be prohibited, the professor hedges his stance by saying there are exceptions: “There are, of course, situations in which it is in the interest of both a company and the public for that company to delay the release of information.” For example, he describes a merger situation where early information leakage could “jeopardize the prospect of achieving greater efficiencies.” If according to Boudreaux, policing of insider information is impossible, then determining what he calls “proprietary” versus “non-proprietary” information is only going to stir up a worse hornet’s nest.
In the end, if price efficiency (see story on market efficiency) and cheaper cost of capital is Professor Boudreaux’s central aim, then perhaps disclosing inside information, rather than selfishly profiting from trading on inside information, is a more suitable approach. For Pete Rose, I recommend sticking to legalized sports betting in Las Vegas as a superior strategy.
Read Full Professor Boudreaux WSJ Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Now You See It, Now You Don’t: TARP
Elizabeth Warren, who oversees the TARP (Troubled Asset Relief Program), along with being the Chair on the Congressional Oversight Panel and a professor at the Harvard Law School, goes out on a limb and candidly states, “ We not only don’t know [where the TARP money is], Maria, we’re not ever going to know.”
Ms. Warren is quick to blame former Treasury Secretary Henry “Hank” Paulson for not implementing accountability for the TARP funds handed to the large commercial and investment banks (see my earlier TARP article). How do you prove the money handed over to the banks was used for non-lending activities, such as marketing, compensation, television advertising, dividends, acquisitions or other corporate purposes other than lending? The short answer…you can’t! Even if TARP capital tracking was instituted, I think it would have been a fruitless effort since even legitimate use of the TARP funds would only free up additional capital for other suboptimal purposes. If my mom gave me $100 while I was struggling for money in college and told me to use it for food – well I, like a good chunk of students, would have eaten anyways without the handout. The windfall $100 bailout would likely be used for a guys trip to Las Vegas or some Laker basketball tickets. The banks will certainly lend, but not at the same pre-Lehman bankruptcy levels, regardless of whether TARP tracking was instituted or not. Ms. Warren correctly points out that regulators are speaking out of both sides of their mouths. The government wants banks to lend more (which reduces the bank’s capital base) and also raise their sickly reserve levels at the same time.
See TARP commentary on CNBC video interview at minute 2:48
Maria Bartiromo also probes the topic of executive pay compensation given a recent Congressional proposal that TARP recipients cut salaries of the top 25 executives by -90%. Seems like a reasonable request given the circumstances. However, having the government force banks into making bad loans is probably not the right answer. This stance will only force the banks to take higher loan deliquency provisions and recognize more potential writedowns in the future. Eventually the Fed will cut interest rates paid to banks on the reserves held at the central bank, thereby invcentivizing the banks to take advantage of the steeper yield curve and make handsome spreads on loans.
Until then, some of the banks will sit patiently on their TARP capital (not lending) while Ms. Warren and government officials will wonder how the billions of TARP bailouts magically disappeared.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and its clients had a direct position in VFH and BAC shares at the time this article was originally posted. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Spitzer the Pot Calling the Fed Kettle Black
Eliot Spitzer, whose job as the former Attorney General of New York was to convict criminals, was forced to quit himself as Governor for his illegal solicitation of prostitutes that he funded with secretive ATM withdrawals of government funds. Now, Mr. Spitzer is getting on his soapbox and telling others the Federal Reserve has been committing a Ponzi Scheme.
There are a lot of conspiracy theories floating around regarding the Fed’s motives and questions relating to the benefits of those receiving government bailout funds. Dylan Ratigan’s interview of Mr. Spitzer on MSNBC feeds into these conspiracy views. I can buy into conflicts of interests and the need for more transparency arguments, but let’s be realistic, this is not the DaVinci Code, this is the slow, bureaucratic Federal Government. Even if you buy into this skeptical belief, the Fed isn’t exactly a “black box.” The Fed proactively provides the minutes from its private meetings and systematically releases a full accounting of the Fed’s balance sheet (assets).
Mr. Spitzer and other critics point to the egregious benefits handed down to the banks and financial institutions through the bailouts and monetary system actions. Well, wasn’t that the idea? I thought our banking system (and the global banking system) was on the verge of collapse and we were trying to save the world from impending disaster? So, I think most people get the fact that our financial institutions needed a lifeline to prevent worse outcomes from occurring.
Should the Fed have carte blanche on all financial system decisions? Certainly not, but extreme situations like this generational financial crisis we are slogging through now, requires extreme measures.
Accountability I believe is even more important than the micro-managing transparency details Ron Paul (Republican/Libertarian Congressman from Texas) and others are asking for. If indeed it is the Fed’s job to remain an independent body, then maybe it’s not Congress’ job to question every word and minor decision. However, when it comes to these massive bailouts (AIG, Fannie Mae, Freddie Mac, etc.), additional details and accountability should be provided and seems fair. What we don’t need are more regulatory bodies and committees creating more inefficiencies in an already tangled system of regulatory fiefdoms.
Before Mr. Spitzer starts pointing his finger at the black Fed-kettle, perhaps he should get his illegal decision making pot in order first?
Read Full Daniel Tencer Spitzer-Ponzi Scheme Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Maher Cheerleads No Profit Healthcare
Bill Maher, shock-comedian and host of Real Time with Bill Maher on HBO, has made up a new rule in a recent article, “Not Everything in America Has to Make a Profit.”
Hey Bill, that sounds intriguing. I’ve got an idea – how about you decide to work for no profit? If free healthcare is a right for every American, then why should people pay for your stupid jokes? If I have a right to free healthcare, then why not a right to free laughs?
Don’t get me wrong, our system is broke and needs to be fixed. The real question, is insuring an additional 50 million uninsured, by the same bureaucratic healthcare system leading the Medicare train-wreck, our best approach in solving our healthcare crisis? Sure, doing nothing should not be a fallback, but I’m not sure a trillion dollar healthcare plan with Washington bureaucrats is the best idea either? I’m not against government involvement, but before we dive headfirst into the deep-end with additional deficit exploding plans, why not wade in the shallow end and slowly roll-out success-based models that prove their superiority first.
I’m no medical expert, but let’s take the best structures, whether it’s the Mayo Clinic, Cleveland Clinic, or other leading structures and have the government manage a steady roll-out. If the government can prove a lower-cost, more efficient way of serving higher quality care, then by all means…let’s see it. Some argue we don’t have time to test new models, well unfortunately our disastrous system took decades to create and a pork-filled bill through Congress is not going to be an immediate silver-bullet for our dire healthcare problems.
Getting back to Mr. Maher’s profit objections on healthcare, I wonder if he’s ever complained or contemplated the innovations created by the profit-laden healthcare system. Whether it’s an MRI, hip replacement, cholesterol drug, cancer test, glaucoma treatment, ADHD medication or the hundreds of other beneficial advancements, maybe Mr. Maher should ask and understand where all these innovations came from? The answer: good old profits that were invested in critical research and development. Without those profits, there would be fewer and less impactful healthcare innovation for millions of Americans.
As for the firemen who do not “charge” or make a profit, I would like to remind Mr. Maher who is paying their fair share for those services consumed by hundreds of millions of Americans – it’s those same “soulless vampires making money off human pain” that you castigate. Profitable corporations are funding those essential government services with tax dollars derived from, you guessed it, profits. If we can find a lower-cost, more efficient way of serving the public services by the government, then as Phil Knight from Nike (NKE) says, “Just Do It!” Unfortunately, I prefer to see some tangible proof first, before spending hundreds of billions of tax dollars.
Healthy Incentives
From an early age, even as babies, we are incentivized for certain behavior. Whether it’s offering M&Ms to potty-train a two year old, or submitting six-figure bonuses to a fifty-two year old for hitting department profit targets, incentives always plays a central role in shaping behavior. Figure out the desired behavior and create incentives for your subjects (and penalties for non-compliance).
As the government comes up with a public solution, I have no problem with Washington pressuring insurance companies and the medical industry to become more efficient and provide a higher threshold of care. I’m confident that structures can be put in place that mitigate conflicts of interest (i.e., pure profit motive), while increasing the standard of care and efficiency. Rewarding the healthcare industry with incentives, rather than just simply beating them over the head with lower reimbursements under a single-payer system, may produce longer-lasting, sustainable benefits.
In certain areas of society, such as policemen/women, firefighters, national defense, and doctors there has always been a view that government is better suited for handling certain services. However, sometimes government does not implement the proper incentive plans, which then leads to bureaucracy, inefficiency, and excessive costs. Eventually, these negative trends overwhelm the system into failure, much like sand grinding engine gears to a halt.
Bill, I appreciate your viewpoint, and I like you would love if everything was free. For starters, I’ll look for your press release announcing the cancellation of your multi-million contract with HBO, closely followed by the revelation of your pro-bono comedy work. Here’s to profitless prosperity.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in NKE, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
PPIP Becomes Miniaturized “Mini Me”
Mini-Me and Dr. Evil from famed Austin Powers movies
In two of Mike Myer’s Austin Powers movies, Verne Troyer plays Dr. Evil’s miniature clone, Mini-Me. At a “breathtaking” one-eighth the size of the fully-sized villain, Mini-Me didn’t quite pack the same evil punch as his surrogate daddy, Dr. Evil. The same can be said of the government’s PPIP (Public Private Investment Program), which was originally designed to unclog the financial system by removing toxic and illiquid investments from owners desiring liquidity.
Unfortunately, the PPIP size has been reduced to ppip dimensions. The Fundamental Analyst (FA) blogger (www.fundamentalanalyst.com) points out that the program’s scope has likely shrunk to $100 billion from the original goal of $1 trilllion – a proportion even smaller than Mini-Me’s relative size to Dr. Evil. Treasury Secretary Timothy Geithner’s explanation for the decline in program size is due to the improving financial market conditions and the capital raising activities of the banks. Perhaps partially true, but “not so fast” says FA – he blames the suspension of mark-to-market accounting as the driver for positive overstated banking earnings, which allowed the banks to hoodwink investors and raise capital under false pretenses.
Read the Fundamental Analyst’s Article on PPIP Here
FA goes onto highlight what little skin the participants (including, AllianceBernstein, BlackRock, Invesco, Oaktree Capital Management, TCW Group, and Wellington Management) have in the game relative to the other 93% of capital fronted by the taxpayers. I agree – the surplus taxpayer exposure is evil. Time will tell how effective the Mini-Me ppip program will be…
Original PPIP plan drawn up by the Financial Times
TARP: Squeezing Blood from Banking Stones
Collecting Bank Dividends Will Become Tougher
There was a sense of relief in the financial markets when it was announced that 10 banks repaid Troubled Asset Relief Program (TARP) funds in the amount of $68 billion back to the federal government. The ten banks included JPMorgan Chase, Goldman Sachs, Morgan Stanley and American Express. Timothy Geithner, the Treasury Secretary, said the repayments were encouraging, but warned that the crisis in the banking industry was not over yet (Economist).
Unfortunately, the falling tide has left some banks stranded, unable to repay TARP loans or the dividends on the preferred shares issued to the government.
The Wall Street Journal reported the following:
At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program. Pacific Capital Bancorp, a Santa Barbara, Calif., lender that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Pacific Capital said … that it suspended dividend payments on its common and preferred stock as part of a wider effort to save about $8 million per quarter. A bank spokeswoman confirmed that the U.S.’s preferred shares are included in the dividend freeze.
With around 40 bank failures already in 2009, these TARP dividend suspensions may be more the trend rather than the exception. Maybe next time the Treasury will ask for a deposit or driver’s license to guarantee dividend payments before they fork over more TARP money?
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), American Express (AXP), or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
California the Golden State Turning Brown
California is facing a significant cash crunch as the state attempts the narrowing of its $24 billion budget deficit. The crisis will come to a head now that the fiscal year, June 2009, budget deadline has passed. Without a budget resolution and in order to fill the budget gap, the California government will need to start issuing billions of government IOUs to contractors and vendors, local agencies handling health programs, as well as some receiving state aid.
Moodys rates the Golden State as the lowest rated state of all 50 at A2. The average rating for all states is AA2 and only two other states besides California are rated below AA. At the beginning of 2009 the state bought some breathing room by delaying cash tax refunds, but that cushion has rapidly deteriorated as the economy and employment outlook have deteriorated. Making things worse for the state, relative to other states, is the state constitutional inflexibility requiring voter approval for deficit borrowing.
Time will tell if Governor Schwarzenegger can gather the votes necessary to prevent bond defaults. President Obama and other states are watching closely as the actions (or inactions) will have a ripple through effect for everyone. At 13% of the nation’s GDP, California’s economy impacts the overall country in a significant manner.
Let’s hope the state maintains its “golden” status and does not get burnt.
Healthcare Reform: The Brutal Reality of Aging Demographics
The global population is aging and that is a bad trend for healthcare costs.
There’s no question healthcare reform is required. The Economist’s cover story, This is Going to Hurt, addresses this problem head-on:
“Even though one dollar in every six generated by the world’s richest economy is spent on health—almost twice the average for rich countries—infant mortality, life expectancy and survival-rates for heart attacks are all worse than the OECD average. Meanwhile, because health insurance is so expensive, nearly 50m Americans, an obscene number in such a rich place, have none; those that are insured pay through the nose for their cover, and often find it bankruptingly inadequate if they get seriously ill or injured.”
The real question is not whether we have a problem, but rather how are we going to approach it? Estimates of the current healthcare congressional plans put estimates for reform between $1.2 trillion and $1.6 trillion over 10 years. I tend to side with George Will when discussions center on costs, “If you think health care is expensive now, just wait until it is free.”
One of the reasons healthcare costs are exploding is because of our aging demographics. The 76 million “Baby Boomers” are entering their golden years, and as a result are consuming more healthcare products and services. Because our system is so convoluted and opaque, true healthcare competition cannot flourish. Rather, patients expect a cheap “all-you-can-eat” smorgasbord of services without consideration of cost. Unfortunately, the aging trend of our global population (especially in the developed countries like the U.S.) has put our economy on track for a disastrous train-wreck.
The Economist’s article, A Slow Burning Fuse, crystallizes the aging trend into proper perspective by providing some interesting statistics. At the beginning of the last century, in 1900, the average life expectance at birth was approximately 30. Today, the average life expectancy has more than doubled to 67 years (and 78 years in richer developed countries).
Read Full Economist Article, A Slow Burning Fuse
A second major cause of aging societies is the decline in number of children families are having. During the early 1970s, women on average were having 4.3 children each. Now the average is about 2.6 children (and 1.6 children in developed countries). What these statistics mean is that the taxable younger workforce is shrinking (growing slower), therefore unable to adequately feed the swelling appetites of the aging, healthcare-hungry global populations.
My solution would focus on the following:
Technology: Yes, chopping down trees, wasting years of our lives filling out and storing library-esque piles of medical forms is so 20th Century.
Consolidation of Insurers: And do we need dozens of different insurers on different billing platforms? Reducing inefficient and undercapitalized competitors down to a common technological digital record and billing platform makes common sense to me. Although I love competition, if I look at things like cell phones, cable, or even local grocery stores, there is a law of diminishing return whereby inefficiencies eventually outweigh benefits of competition.
Fewer Late Life Benefits: Nearly 30 percent of Medicare spending pays for care in the final year of patients’ lives, according to George Will. Does it really make sense to pay such a high proportion of costs for the last 1-2% of our lives? Other countries, including European ones, deny certain costly services for elderly patients. Does spending over $50,000 on certain cancer treatments for a few extra months of life seem equitable? If elderly ill patients are in the financial position to pay, then that’s great. Otherwise, at some point, the ethical question has to be faced – what is an extra month of human life worth?
Not really a rosy subject, but an important one. I’m confident we can solve these problems, if addressed immediately, or else future generations will be saddled with a more disastrous problem to heal.
Wade W. Slome, CFA, CFP® www.Sidoxia.com
Cap and Tax Passes in the House
The U.S. House of Representatives passed The American Clean Energy and Security Act of 2009 (ACES), also named the “Waxman- Markey” bill, by a 219-212 vote. The masses are calling it the “Cap and Trade” bill, while detractors are blasting it as the “Cap and Tax” bill.
Joe Petrowsky, CEO of Gulf Oil, sees this bill costing businesses $50-100 per ton of carbon created, which will be passed through as a tax to energy consumers in the form of an annual $1,000+ tax (about $250-$350 per individual). Robert Murray, CEO of Murray Energy Corporation, calls it a $2 trillion tax on consumers over 8 years.
The House passed this bill just as the economy is shuttering on its knees and a rising skepticism is brewing over the validity of global warming – see Kimberley Strassel’s, journalist at The Wall Street Journal, article entitled, The Climate Change Climate Change dated June 26, 2009. Australia is in the process of killing its “Cap and Trade” proposals and many critics point to Spain’s failing carbon initiatives and 18% unemployment as evidence for the program’s shortcomings.
Despite one’s views on the validity of global warming, what cannot be disputed is our reliance (addiction) to oil as we import 70% of our oil demand. Is the time and scope of this bill the silver bullet for our crude dependence as we try to survive through this “Great Recession?” I think not.
Billions of humans across the globe are aspiring to achieve our standard of living here in the U.S., so even those against a “Cap and Trade” system, including myself, need to appreciate the massive energy investment we need to make. The U.S. is considered the “Saudi Arabia” of coal due to our vast reserves, and therefore we must find efficient and cleaner ways to use this abundant commodity. We need to throw the kitchen sink at nuclear, wind, solar, hydrogen, bio-fuels and other alternative energy technologies, even as we look to expand our fossil fuel resources.
But rather than forming randomly created silos of hoarded research across hundreds of universities, why not create domestic centers of excellence that collaborate with both academic and private sector participants. By integrating monetary incentives (i.e., exclusive commercial patent rights), incredible advancements and breakthroughs can be achieved. Historically, when the United States has focused on a task, we’ve been able to achieve greatness – for example sending a man to the moon. Heck, recently NASA mastered the art of converting urine into water!
Bold new steps need to be taken to solve our energy crisis, but I’m afraid this “Cap and Tax” bill is not the right answer.
The Governator: Terminate the Deficit or the Pooches?
Picture Source: Clusterstock
The only way you get to save dollars is by saving nickels and dimes, so if saving overpaid bureaucrat wages requires Governor Arnold Schwarzenegger sending pooches to doggy heaven a little early, then so be it. California’s Legislative Analyst’s Office seems to believe $23 million can be saved by accelerating the pet euthanizing process for sheltered pets by three days.
Riding the California housing train was an enjoyable ride in California as home prices more than tripled from the late 1990s until the beginning of 2007. However, after rolling in piles of house tax collection receipts from exploding prices, the bubble based binge of tax revenue has now come to a screeching halt as home prices have declined by more than 50% from peak levels a few years ago (see chart below). Facing an 11.5% unemployment rate, the state is being kicked while it’s down on the ground – income tax collections are declining and businesses dealing with the relatively high cost of operations forcing businesses to run for the hills and leave the state.
Things obviously appear gloomy in California, but the Governator is showing his resolve to get the job done – as evidenced by his contemplation of the pet destruction option. My dog is sleeping inside tonight.
Home Prices Down Dramatically from Peak
Wade W. Slome, CFA, CFP www.Sidoxia.com
Investing Caffeine 
