Across the Great Divide

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.

*****
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.

*****
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?

The Flight of the Unseen Twenties.

Dear Readers:

Many years ago, after shooting a few of god's creatures and deciding I liked it only slightly less than the creatures themselves, I resolved to find some new entertainments. One of the most enduring has been making up stories, or, as I like to call it, seeing the unseen.

Over the coming days, I will tell you a story that goes something like this...

Once upon a time, I arrived at the bank to discover that my intended deposit was $100 short. As best I could reconstruct, it happened because my renter pays me in cash. He is one of those first-decile poor people who can't be counted on to pay taxes, so as you can imagine, collecting rent is an adventure, too, and when I do, it arrives in small bills.

You may want to ask why a relatively prosperous individual such as myself is taking money from a poor working man, but that is not my story, and you can't stick me to it. I am actually a quite honorable and generous soul who is trying to recoup what he can of a sunken investment.

But anyway, I did not secure my jacket pocket and, as I cycled to the bank, five $20 bills apparently escaped along my route, leaving me $100 poorer than when I started. Naturally, the first thing I did upon discovering the shortage was to blame it on the bank clerk who counted my deposit. Once I confirmed the money was indeed missing, I whipped out my TI Business Analyst Calculator to determine the true extent of my loss.

Since I was planning to put the money in my retirement savings, I was able to calculate almost instantly that in 2027 when I go to buy a loaf of bread, I will have to pay for it with other funds. I was distressed by this news, of course, but somewhat mollified by the fact that I had stamped each of the bills with this message:

Reward: Please go to www.itsyourmoney.com
and report what you did with this money.

After all, I had become very concerned about my money falling into the wrong, unworthy hands and thereby causing economic decline and perhaps an irreversible calamity. I'm sure you will be enlightened by the reports I received.

For Roots of the Crisis, Look at a Culture of Privilege, Not Just Greed.

There's an interesting interview with anthropologist Karen Ho, who studied the culture of investment banking and found that Wall Street capitalism tends to operate based on the culture, values and relatively privileged circumstances of the bankers — and not so much according to the even hand of the free market.

Ho says of the investment bankers, who are finally getting a taste of what they have wrought:

Investment bankers are structured toward the next bonus. They're compensated on how many deals they can push through, not on the quality of the deals or long-term strategy. Investment bankers have tons of job insecurity; they are a total revolving door. But what's interesting is that because of their fairly elite biographies and kind of privileged networks they move in, as well as their lavish compensation, the way they experience downsizing is very different from that of the average worker.

Restructuring and downsizing looks different when operating on a substantial social and financial cushion, she says:

They can say, "Hey look, I have a really risky job, but that's why I just got paid $1 million last year." They'll actually recommend this kind of churning for other workers who have a very different experience. This actually affects corporate America, how other industries are operating.

Ho's research adds more evidence that the financial meltdown was driven by compensation practices that rewarded quantity of deal making, not quality. She has a forthcoming book, some of which may be foreshadowed in her chapter in The Anthropology of Globalization, which contains this quote from Anna Tsing:

Several features attract and engage an expanding audience for imagining the globe: first, its futurism, that is, its ability not only to name an era but to predict its progress; second, its conflations of varied projects through which the populist and the corporate, the scientific and the cultural, the excluded margins and the newly thriving centers, all seem wrapped up in the same energetic movement; and, third, its rhetoric of linkage and circulation as the overcoming of boundaries and restrictions, through which all this excitement appears positive for everyone involved.

The world is flat, indeed.

Zombie Bank Money Crawl.

Paul Krugman said the N-word a few days ago — what Calculated Risk calls “preprivatization.”

Arguably, the only reason [Citibank and Bank of America] haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

[...]

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

Can you imagine the howl from the GOP and the chihuahua chorus if Pres. Obama actually advocated nationalization as a way of stabilizing the banking system? And from the banks and their shareholders if they actually had to accept the consequences of the risks they took?

So given the choice between a big play and no play, the feds seem to be taking the middle play, which is pretty much a hope and a prayer while continuing to put money in the collection basket.

*****

Oh, yeah, and the banks aren't the only ones shielding their big investors.

Madoff & Co., Meet Abess.

This blog expends some time on corruption, moneyed amorality and ethical blindness, but many business people of my acquaintance are good, honest souls. And so it is a pleasure to link to stories about business owners who are not simply focused on moving to a state with no income tax.

In November, I mentioned an Illinois manufacturing family that distributed $6.6 million in bonuses to 230 employees when they sold the business. In this example, a Florida banker who grew up with the business sold out most of his interest and gave $60 million to 399 workers, plus 72 former employees.

"I saw that if the president doesn't come to work, it's not a big deal," he said. "But if the tellers don't show up, it's a serious problem."

Benefactor Leonard Abess Jr. said,  "I sure as heck don't need (the money)."

Big Bonuses and Big Plans Don't Always Yield Big Results.

Reuters reports that Merrill Lynch secretly accelerated bonus payments as it was running up billions of dollars of losses and preparing to be acquired by Bank of America, which was about to receive $25 billion from the U.S. Treasury.

The top four recipients received a combined $121 million; the next four received a combined $62 million; and the next six received a combined $66 million, according to [New York Attorney General Andrew] Cuomo. The top 149 executives received a total of $858 million, and 696 received at least $1 million each, he wrote.

Meanwhile, Bank of America Corp CEO Kenneth Lewis says he and other top bank managers went without bonuses for 2008 and other executives had their incentive payments cut "by an average of 80 percent."

The new Secretary of the Treasury gets beat up in the press, shortly after starting the job, for not yet having the big solution for a crisis that the previous administration had plenty of time to miss and then bungle.

Guess what? We're being delusional if we expect miraculous fixes that occur in one fell swoop — especially coming from the top with billion-dollar price tags.

Here's an interesting perspective from an educator on how very small influences can have very big effects, and big interventions may disappoint. The problem with big economic plans is we have a lot more theory operating than focused studies on cause and effect.

Tax, not Cap, CEO Pay?

Netflix CEO Reed Hastings says, don't put caps on the pay of public company CEOs. Raise their taxes instead.

He proposes creating a new 50% marginal tax bracket for income over $1 million. Then average taxpayers could start cheering high executive salaries.

Pay caps provide some after-the-fact window-dressing for the government handouts and may discourage more companies from seeking subsidies, but they're unlikely to last. Like it or not, risk-averse corporate boards compete for proven talent — even if it's the best of a bad lot — and will find some other way to pay for it.

Of course, it’s galling when a chief executive fails and is still handsomely rewarded. But with the concept of “tax, not shame,” a shocking $20 million severance package would generate $10 million for the government. That’s a far better solution than what we have today, not least because it works with the market rather than against it.

Another advantage is that it would also cover the sometimes huge earnings of hedge fund managers, star athletes, stunning movie stars, venture capitalists and the chief executives of private companies.

If only it were that simple for the states facing budget problems.

Minnesota may also consider raising its top income tax rate, but as Al Franken recently demonstrated, collecting state income taxes from traveling entertainers can be a bit more complicated.

Minnesota — which served as the model for a number of other states — already taxes income earned here by non-resident entertainers at 2%. So when a former president, comedian or musician from New York gets paid more than $2,000 for a gig in St. Paul, the local promoter or sponsoring organization is supposed to withhold the tax. (That's also true in California where Franken failed to pay state taxes.)

But professional athletes like Roger Clemens, Kurt Warner and LeBron James are considered employees of their teams, so their income earned for playing here is taxed at regular rates...

Unless they are full-year residents and play for pro teams from Wisconsin, Michigan or North Dakota.  Minnesota has reciprocity agreements with those states not to collect income taxes from their entertainers. (Okay, maybe not likely from North Dakota, but it's still the law.)

According to a Detroit Free Press columnist, other states have similar deals:

Michigan has reciprocal agreements with other states not to charge taxes on athletes who play here in return for the same treatment when pro teams from Michigan play in those states. Michigan has such deals with Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin -- meaning we don't collect a dime from the Bears, Vikings or Packers when they come to Detroit to beat the Lions.