Across the Great Divide

Weekend Reading: Bailing out Banks and Cars.

Today's Strib ran a very long and sympathetic profile of Neel Kashkari, the bank bailout czar who burned out big-time working for the Treasury Department, trying to avert an economic meltdown. As a one-time near workaholic, I thought the account of the stress and Kashkari's enlightenment from his experiences rang pretty true.

However, the rerun doesn't mention the news that broke the day after the profile originally appeared in the Washington Post — and that the Strib did report last week — that Kashkari has taken a job with PIMCO, an investment firm that was deeply "enmeshed in the recovery effort he helped lead."

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I don't think Minnesota's titan of finance, Rep. Michele Bachmann, is impressed with what Kashkari thinks his team helped pull off.

She seems to think that the lack of a total economic meltdown is proof that no intervention was needed. The failure of lax regulation of runaway financial risk proves that regulation doesn't work, in her book.

Giving more power to government bureaucracies that have failed in the past* will do nothing to stabilize our markets.

This statement sounds a ringing note of principle that doesn't actually have to cash its check in the aftermath of now-stabilized markets. I shudder to think where we'd be had Bachmann been in Neel Kaskari's job.

* Presumably this does not apply to the Departments of Defense or Immigration

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The Minnetonka City Council is restricting a parking lot expansion proposed by the high school. Too many students drive to school and can't park on the campus, so they park along a nearby frontage road or in a K-Mart lot. These conditions are unsafe, school officials insist, and they must cut down 110 trees to make room for more cars.

[Minnetonka High School Principal Dave] Adney said it's troubling for the school to be portrayed as "not good guardians of the site."

"We are all environmentalists. We don't want anyone to think that parking lots are more important than trees.''

But parking lots are more important than sidewalks or other measures that might reduce traffic and improve safety.

There's irony upon irony in this tale of students who need more car-enabling infrastructure built because the car-enabling infrastructure around the school makes it unsafe for them to walk to school. More parking will mean more students can drive instead of having to car pool or (gasp!) take the bus, walk or cycle to school, making it more dangerous for those who try not to drive.

Financial PAC Money to Democrats — Less Than Meets the Eye?

Here's the kind of transparency report that annoys me because it seems to come with a point of view attached.

The House Financial Services Committee voted yesterday to give regulators the authority to break up large financial firms that create too much systemic risk, in an effort to prevent future financial crises. The vote passed by a 38-29 margin, but three Democrats joined with all Republicans voting no. Those three Democrats--Melissa Bean (D-IL), Dan Maffei (D-NY), and Gregory Meeks (D-NY)--received an average of $99,483 from banks' PACs in the last two years, 119% more than the average of $45,358 received by the 38 Democrats voting for tougher regulation.

Comparing the averages implies that the financial industry exerted a disproportionate influence over the three Democrats voting against the regulation.

But the top three Democratic members who voted for the legislation collected more than $435,ooo from the banks PACs, versus only $298,000 for the three Democrats voting against. Committee Chair Barney Frank and bill co-sponsor Paul Kanjorsky together took more PAC money than the breakaway three.

And when you look at the total dollars paid out by the industry to the top 15 recipients — which includes all three "no" voters — the 12 Democratic supporters of tougher regulation among that group collected almost $1.126 million. The other "yes" voters got another $1.384 million.

It's just possible the three Democrats voted the interests of their districts or their consciences. Looking at the money alone doesn't tell us that, but the analysis makes a dark inference.

As for the Republicans, we don't know how much they got. The analysis doesn't tell us the average amount that "bought" the GOP votes.

Was Give to the Max Day a Success?

Bob Collins at News Cut talks about yesterday's Give to the Max Day in Minnesota, which raised more than $12 million for local nonprofits yesterday. Commenters there and at this story weighed in with their confusion (and in some cases, disappointment) over the fact that $500,000 can't be a dollar-for-dollar match if there's more than $500,000 in contributions.

Duh.

The blame for this confusion is largely laid on the GiveMN organizers, but I fear it really reflects the weak state of financial acumen and development sophistication at too many non-profits.

I can't speak for the sponsoring foundations, but I think all the discussion about the match and whether the day attracted new money misses the larger point. I'd argue the day was about creating statewide awareness and increasing donor comfort with giving online.

Organizations and the members upset about their tiny match need to look at the bigger picture. GiveMN.org handed these organizations a new fundraising tool that otherwise might have been beyond their ability to implement. It spurred many of them to use the web in new ways to reach donors and considerably raised the profile of online giving.

For years, I've been using and recommending Network for Good — which appears to be affiliated with the "giving marketplace" that provides the GiveMN platform — as a way to manage one's charitable giving. For people who write just a few checks a year, a tool like this may be more than you need, but as more transactions of all types move to the web, non-profits must be able to move there, and use it effectively. This is tough to do on your own, especially in small, very resource-constrained organizations.

GiveMN also harnesses social media in ways that go beyond Network for Good, allowing donors to declare their support for organizations and share it with their personal networks — which is really how non-profits need to build their donor base.

I doubt that many organizations found new donors or raised much new money through Give to the Max Day. For most, I suspect that the annual appeal dollars and year-end giving from people figuring out their taxes might have just moved up in time.

But the dollars raised should not be the measure of success. Smart organizations will be using this day as a learning opportunity and this platform as a way to move their donor relations into a new realm.

UPDATE: A comment by Bruce at the News Cut post sheds some more light on how the confusion arose.

In their webinar presentation to charities some weeks ago, GiveMN.org reps said the $500K they secured from local foundations and other funding "partners" was to be allocated for underwriting the 4.75% fees charged by their processing "partner" Networkforgood.org until the money ran out. Then it was changed to a 1:1 match, then 1:2, then (and finally) proportional. The move to proportional came too late to effect the "buzz" of the 1:1 or 1:2 matches that were communicated prior to Nov. 17th. As late as Tuesday afternoon non-profits that one would think would know better were still representing "double your gift to us" through blast e-mails.

And the Strib comes out with a "Charitable Giving Guide" supplement on November 18th, the day after GTM Day!

How Do Communities Thrive: By Maximizing Wealth or Redistributing it?

The comments at This Road is Designed to Kill You have drifted a bit off topic — from the safety effects of traffic roundabouts to incentives for people to live closer to work to flight from city schools to the influence of school district size on student achievement. (Go ahead and read them if you haven't. I won't make many explicit references here.)

Running through the discussion is a divide that often surfaces here, and in fact simmers under most of what passes for debate in politics today. Whether the topic is health care, schools, the economy, taxes or infrastructure, it boils down to the merits of government intervention versus free market solutions as ways to solve big problems.

Another, less common way to put it is this: Communities thrive by redistributing wealth or by maximizing opportunities to accumulate wealth.

For example, Mark and Jeff had a back-and-forth over whether a single, large school district that allocated dollars first to lagging schools would help improve student performance, especially in inner city schools.

Mark says: "Turn all contiguous metropolitan areas into a single school district, with funding prioritized so as to deal with the lowest performing schools first."

Jeff responds: "The measure that shows the greatest correlation with school performance isn't funding, and it isn't class size. It's school district size. Kids in smaller school districts do far better."

Jeff is correct that studies show smaller school districts tend to have better student achievement, but size matters only insofar as it negatively affects the factors that really produce learning outcomes.

It's worth noting that school districts usually are large because a) they were formed to encompass large city boundaries with their diverse populations and the education challenges that go with them. Or b) they were consolidated from smaller districts experiencing enrollment declines, substandard offerings or funding issues that led them to seek economies of scale. In both cases, upsized districts are a consequence of factors other than pure pursuit of improved student achievement.

Mark is talking about disparity of income between districts, not size; a super district would be just one way to redistribute money to aid lower-performing schools. Of course, a similar move — giving more responsibility for school funding to the state — was tried and then has been slowly dismantled by Gov. Pawlenty. But redistributing school aid dollars isn't really the whole answer, either. Living in economically advantaged communities tends to be accompanied by other factors that relate to school performance, and these advantages are more difficult to export — or to benefit students who are bused in to those communities.

Growth & Justice delivered a research-based report last year that summarized three factors that were most critical for getting students from pre-K all the way through college. Each of these has financial implications, not necessarily tied to what we think of as "school funding."

Quality academic preparation and alignment. Children receiving sustained quality instruction, rigorous curriculum, and meaningful, ongoing assessments are more likely to succeed at the next education level.
Social supports. Relationships between children and adults in early childhood, school, and non-school settings are significant to academic success. Parents contribute to a child’s educational success when they are involved with care providers, teachers, mentors, and tutors.
Access and financial support. Access to quality providers, programs, and institutions places children and students in a position to take advantage of learning opportunities. But limited financial means can be a barrier to access. Subsidized childcare, preschool, and post-secondary tuition grants expand access to quality learning experiences for students at all income levels.

To over-simplify my point, I'd say the education discussion drifted toward comfortable positions for Mark and Jeff, but got richer as they shared the research and the complexities became more evident.

In another post, I'll discuss one other angle their discussion raised — taking personal credit for successes and blaming government for failures.

Large Donors Analysis Understates Business Tilt.

Smart Politics has an analysis of individual donor giving to Minnesota's U.S. House members, based on the latest Federal Election Commission (FEC) reports. Large donor individual donations accounted for $827,881 — about half the money contributed for the most recent quarter.

We can be thankful for Eric Ostermeier's willingness to do the scut work of combing the data and presenting it, but we should be leery of concluding that his findings represent the full impact of business owner and executive giving. He states:

Not surprisingly, most large donor contributions to the Minnesota U.S. House delegation came from business owners and executive officers, tallying 35.1 percent of such donations.

[...]

However, a significant amount of large donor contributions came from retired individuals (#2, 10.6 percent) and homemakers (#4, 7.5 percent). Donations by these individuals were directed overwhelmingly towards Minnesota's Republican representatives.

No duh.

Another useful bit of analysis would have been to match "homemaker" names and addresses with other donors. I have a hunch many of those large donor contributions might align with business owners and executives.

Further, I suspect that many retirees making donations, particularly in this economic environment, might also derive their discretionary income from business ownership or CEO retirement packages. Then throw in the 5.7 percent who listed "finance/investors/banking." The total for the four categories is 58.9 percent.

Certainly, based on how the FEC reports categorize donors, the data surely understates the influence of business executive interests. Ostermeier's post tells the story, but he doesn't come right out and say it.

Friend of the Debt Collectors Comes Under Fire.

The Minnesota attorney general's office filed suit yesterday against National Arbitration Forum, saying the company violated state consumer fraud, deceptive trade practices and false advertising laws.

[Attorney General Lori] Swanson said that credit card companies, banks, retail lenders and cell phone companies increasingly place mandatory arbitration clauses in the fine print of their consumer agreements. [Note: So do securities dealers.] The consumer agrees -- often without realizing it -- to have any dispute resolved by an arbitrator chosen by the credit card company or another creditor, waiving the right to have it heard in a court of law.

In bringing together consumers and creditors to settle credit-card debts, the company purports to be independent, but the AG's office says National Arbitration Forum has hidden its ties to debt-collection law firms.

In a separate lawsuit, the city of San Francisco said the company arbitrators ruled in favor of consumers in just 30 of 18,075 credit-card cases over a four-year period.

That's the way it works all over. Poor and debt-strapped people pay higher interest rates and are nicked constantly by fees and charges, while I earn miles and get a free float each month. We both deserve what we get, right?

And if you think that's not fair, just ask my friends here.

When I heard about the suit yesterday, two conservative political affiliations immediately came to mind. One was Minnesota First Lady Mary Pawlenty, who, to her credit, quit after a month, declaring the job not to be a good fit.

The other, which was not reported, was between Edward C. Anderson, managing director and chief executive officer of the National Arbitration Forum, and Mitch Pearlstein's Center of the American Experiment. Anderson sits on the conservative think tank's Board of Directors.

In March, CAE sponsored a symposium entitled, "How Can Conservatism Better Allay the Economic Fears of Working-Class and Middle-Class Americans?" [PDF]

The only advice on this topic I could glean is that low-income people should manage their money more like I do.

Tales of Corporate Efficiency.

Years ago my mother followed the suggestion of some investment advisor to give her grandchildren gifts of stock in consumer companies. The idea was that owning a piece of some recognized brands would get them interested in the market and grow up to be more savvy investors.

As a result, my son came into a few shares of K-Mart, Pepsi, Wendy's and Tim Hortons, which Wendy's spun off a few years back. I can attest it had none of the desired effects.

Today, two quarterly dividend checks came to him from Wendy's Arby's Group — one for 84¢ and one for 38¢.

And yes, they arrived in separate envelopes with 44¢ postage. 

I think we may have sold off the other stocks, but the small lot programs of Wendy's and Tim Hortons still haven't rolled up his shares. We have no particular interest in selling a small amount of stock or wasting our time to stop the company from barely breaking even (or even losing money after printing the checks and paying the transfer agent) on the tiny dividend checks. And the company apparently would rather do it this way, too. 

If somebody tells you this is a cute and inexpensive way to turn kids into investors, forget it. 

Greed is Good. Lax Oversight is Better.

Former Labor Secretary Robert Reich says the Obama administration "should stop worrying about Wall Street. Worry about American workers."

Every lost job has a multiplier effect throughout the economy. For every person who no longer has a job and can't find another, or is trying to enter the job market and can't find one, there are at least three job holders who become more anxious that they may lose their job. Almost every American right now is within two degrees of separation of someone who is out of work. This broader anxiety expresses itself as less willingness to spend money on anything other than necessities. And this reluctance to spend further contracts the economy, leading to more job losses.

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Compensation experts say

“Congress has gotten into the business of dictating executive pay now, and they shouldn’t be in that business. What they should be doing is turning the light on the [company board] committees.”

Boards of Directors, through their compensation and governance committees, are responsible for setting executive pay as well as their own. But much of the work is done by internal executive comp departments and external consultants, who frequently justify pay packages by linking them to the levels at "peer companies" of similar size or scope.

Even if Chairmen and CEOs aren't actively pressing for higher pay, there are plenty of influences within the company and among relationships on the Board that encourage these overseers to be good Germans. I wrote about this during the William McGuire options backdating furor.

The "market for executive talent" provides some of the rationale for out-sized pay, independent of performance. Then, as each board bumps up pay for anything remotely resembling average performance, the executive compensation tide rises for the next analysis by the consultants — and all yachts are lifted some more.

And, Board members who are active CEOs are subject to such reviews back home. So their actions as directors to raise executive pay indirectly benefit them, too.

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Frank Rich compares the parallels between General Motors and Wall Street firms like Citigroup, where former Treasury Secretary Robert Rubin took home $126 million in cash and stock for eight years as a Citigroup director, advisor and chairman of its executive committee. During the period when he combined oversight and management duties, the bailed-out bank lost more than 70 percent of its value.

Rich says "Detroit’s chief executive [Rick Wagoner] had to be beheaded so that the masters of the universe at the top of Wall Street’s bailed-out behemoths might survive."

Though [Wall Street character Gordon] Gekko’s most famous line is “Greed is good,” even more emblematic is his defiant summation of his brand of capitalism: “I create nothing. I own.” At least Wagoner, unlike the sultans of finance, created cars, clunkers though they often were.

But Rich also points out that GM was not just an auto company. It was part of "the larger financial culture."

GM's Board had overlap with boards of bailed-out banks. It financed its own auto sales through its financial affiliate, GMAC, which built large real estate sales and lending franchises that, through the late 1990s and early 2000s, helped hedge losses in car the business. Rich does not explicitly mention that a GMAC subsidiary, now called ResCap, was one of the major players in the mortgage securitization industry that contributed to the financial markets collapse.

The Flight of the Unseen Twenties: The Rest of the Story.

As I waited for news about the fate of my lost twenties, I began to consider my options for replacing the loaf of bread that I would not be able to buy for myself in 2027. Suppose I had it all to do over? Would it be smarter for me to buy 30 loaves today and freeze them for the future rather than save for retirement?

Given the energy required to maintain the bread inventory, perhaps the payback would be better if I bought at today's prices and withdrew a loaf every nine months, freeing up freezer space for more high-value foodstuffs. Or, I could practice bread-cost averaging, buying an additional loaf each year. Perhaps I should diversify and allocate some money to frozen, unbaked loaves, which would offer future freshness while better utilizing my freezer assets. Or I could simply spend it on beer and count on the free market inventing a bread substitute, eliminating the need to buy any bread in the future.

But that way lies madness.

The first response on www.itsyourmoney.com came from "Denise," who confirmed that she had snagged a twenty blowing through the library parking lot as she walked to her job at McDonalds. She had not yet spent the money, she said, but planned to apply it toward her college tuition at St. Cloud State in the fall, unless the promised reward stamped on the bill was for more than $20.

I told her education was its own reward and advised her to take an economics class.

Respondent number two was not technically the finder of the bill, but was responding on his behalf. She had been given the money with instructions to send it to the Norm Coleman Recount Fund, but was having trouble finding a mailing address. As for where the bill was found, she would only divulge: Vicinity of Golden Valley Country Club.

I pass several group homes on my way to the bank. An attendant at one of them found the bill plastered against the base of a Duluth Street bus stop bench. So he'd stopped at Walgreen's and bought bags of Peeps for the residents and a pack of Marlboro Lights for himself.

The next report had likely skipped a generation, since the respondent said the bill was passed to him through a car window at Lowry and Queen, which in case I didn't know, was still open for bidness.

A laid-off teacher found one in her yard and asked where she should return it. When told she was only supposed to report how she spent it, she said she'd have to let me know, but I never heard back.

As time went on, the five sets of serial numbers moved around the city and across the country. They purchased gasoline, porn videos, novels, frozen lasgna and haircuts. They were dropped in collection plates and on dinner tabs. They helped finance dental work and paid for the return of a lost cat. 

Once, I received a report from a bank teller informing me the bill would be destroyed because it had been defaced. And since I haven't heard about any of them for awhile, I suspect that's been the fate of all my  bills — not just the lost five, but every bit of cash that has come into my hands and under my stamp.

Which is as it should be, because no one will ever be able to spend my money better than I can.

Stewart Takesdown Cramer and the "Business News" Network.

Jon Stewart's Daily Show episode with CNBC's Jim Cramer last night was a worthy reminder of how so much of our business news is neutered — because of laziness and incomprehension, a preference to entertain and/or plain worship of money and power. And what a smart, impassioned interviewer can accomplish when he has a point of view and does his homework.

Cramer, who strikes me as the world's most high-functioning celebrity with Asperger's, came onto the set wearing his trademark blue dress shirt, sleeves rolled into donuts above his elbows. He should've brought  Randy "The Ram's" forearm pads.

Stewart brought preparation and sense of everyman outrage at the financial games Cramer and other supposed news analysts enabled. Yet his attack took down Cramer as a representative of the system rather than as a bad human being, allowing him to leave with a remaining shred of dignity.

Cramer plays a smart guy on TV, but he could only respond weakly to Stewart's onslaught. He probably took the only route available to him, admitting his shortcomings and not making too many excuses. When he tried — for instance, that the Bear Stearns CEO had lied to him about how healthy the company was — Stewart's comeback was immediate and withering.

Gee, a corporate head lies to you, he said. Don't we expect news networks to try to figure out if people are lying before they report it as news?