brainiac conspiracy

Wealth Creation Strategies

Looks like I picked a good time to yank the cable:

While wages for US workers have remained stagnant, cable bills have quietly climbed 6 percent a year and will pass $200 a month by 2020, according to an alarming industry forecast released yesterday.

“As pay-TV costs rise and consumers’ spending power stays flat, the traditional affiliate-fee business model for pay-TV companies appears to be unsustainable,” said Keith Nissen, research director at research firm NPD Group, which issued the forecast.

NPD blamed the TV price-spiral on a perennial tug-of-war between cable operators and creators of programming over who gets the bigger share of ever-rising cable payments.

That, of course, is horseshit. The reason they're constantly hiking their monthly rates is Because They Can. If you want cable TV where you live, you don't get to comparison-shop between competing cable providers because they're government-sanctioned mini-monopolies in every market they service. If I wanted cable in my apartment, for instance, the choice was Time-Warner or nothing. I was willing to settle for that for a number of years, but eventually discovered less-expensive alternatives, i.e., satellite/Internet. That's the beauty of competition---it actually forces companies to stay abreast of changes in market dynamics and continually adjust their business models to adapt. Of course, that costs money for market research, product planning and development, etc., and that's why most mega-corporations like Time-Warner hate competition and will do everything in their power to stifle it---because it inhibits their ability to extract money from the enterprise, and from their clients, to redistribute to shareholders/executives. How to fix? Well, stronger antitrust regulation would help, as would ending perks in the tax code like "carried interest" that reward rent-seeking and discourage innovation. Not holding my breath waiting for this to happen, but it would be nice if our political leadership started insisting that our job creators abide by the principles of actual market competition instead of merely paying lip service to them.

---Baron V

Sound Investment Strategies

Go long Nestle-Purina:

[W]hile few expect a fiscal reform agreement before the November election, we should not discount the value of a declaration by congressional leaders of both parties, as well as President Barack Obama and former Massachusetts Gov. Mitt Romney, that Simpson-Bowles will be the basis of future reform. Simpson-Bowles presented a serious, responsible and bipartisan effort to improve the long-term fiscal outlook. Embracing its broad conclusions will send the right message to investors and corporate managers that we will make progress on our long-run budget challenges---and that now is the right time to commit capital and invest in the U.S.

Also too, infrastructure investment.

---Vitelius

The 2.5 Percent Solution

It's a fairly standard transaction fee for our leading job creators:

Visa Inc. (V), MasterCard Inc. and some of the biggest U.S. banks agreed to a settlement of at least $6.05 billion in a price-fixing case brought by retailers over credit-card swipe fees.

The total value of the settlement is $7.25 billion to a class of about 7 million merchants in the U.S. that accept Visa and MasterCard credit cards and debit cards, a law firm for the merchants, Robins Kaplan Miller & Ciresi LLP, said in a statement [...]

The agreement, which provides for a temporary reduction in rates for merchants and allows them to impose surcharges on customer purchases, follows a seven-year legal battle with U.S. retailers that accused the two largest payment networks of conspiring with banks to fix swipe fees, or interchange.

Wow, that's a lot of money. Break out the calculators, kids!

The dispute began in 2005, a year before MasterCard’s initial public offering and three years ahead of San Francisco-based Visa’s. Merchants alleged the companies violated antitrust law by fixing the swipe fees, which average about 2 percent of the purchase price. Proceeds generate more than $40 billion a year for U.S. banks.

---Vitelius

Wealth Creation Strategies

We used to call it "stealing", but now it's better known as "entrepreneurism":

The FSA has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn’t care and . . . [the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings . . . With traders, if you don’t actually nail it down, they’ll steal it.”

---Vitelius

Self-Correcting Wisdom

It is only a matter of time before our Job Creators go kablooey!!!!

Barclays, like other lenders that help set key rates for $360 trillion in securities, has given investors scant guidance on the liability they face for alleged market manipulation. More than a dozen banks are being probed by U.S., Asian and European regulators for collusion in setting interbank lending rates. The others have mirrored Barclays on minimal disclosure.

“The automatic reaction from investors is: ‘Who’s next?’” said Todd Hagerman, a New York-based analyst at Sterne Agee & Leach Inc. who recommends investors remain “cautious” on the biggest U.S. banks. “It’s fair to assume that legal and related professional fees and associated reserves are going to continue to remain elevated, if not increase.”

Bank of America Corp., Citigroup Inc. (C), Royal Bank of Scotland Group Plc and UBS AG (UBSN) are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.

“I believe that Barclays had previously reserved for only about one-third of their ultimate liability” in regulatory fines, Charles Peabody, a banking analyst at New York-based Portales Partners LLC, said in an e-mail. Other banks’ reserves “will probably prove inadequate.”

Taxpayers, however, have unlimited reserves, so there's no great problem here, so long as they're willing to forgo their public pensions in exchange.

As an alternative, our leaders might, just might, consider an intervention, assuming receivership, writing off those worthless trillions of derivative nonsense, and restructuring the institutions as either, oh, commercial banks or investment banks. Granted, a lot of deeply dishonest and extremely rich people would lose a lot of money, so that's why we'e not likely to see this happen. But it just might work for everyone else.

---Vitelius

Under The Mattress

Honestly, it's the only prudent investment option unless you enjoy getting swindled:

Barclays and its subsidiaries will pay more than $450 million to settle charges that they tried to manipulate interest rates that can affect how much people pay for loans to attend college or buy a house.

Barclays is one of several major banks reportedly under investigation for such violations.

The incidents occurred between 2005 and 2009 and sometimes took place daily, the U.S. Commodity Futures Trading Commission said Wednesday in announcing the settlement [...]

The CFTC said Barclays' senior management and multiple traders tried to manipulate data used to determine the London interbank offered rate---known as LIBOR---and Euro interbank offered rates, known as Euribor rates.

The LIBOR is an average rate set by banks each morning that measures how much they're going to charge each other for loans. That rate, in turn, affects rates on many loans for consumers and businesses, as do Euribor rates.

The CFTC said Barclays' efforts to manipulate rates sought to benefit itself and other banks.

---Vitelius

Better Late Than Never

But at least it appears as though some members of our press corps are finally figuring out how Capitalism in America™ actually works these days:

In the case of Cambridge Industries, Bain first acquired a stake in the manufacturer of plastic automotive parts in 1995. Bain employees personally invested $2.2 million, according to bankruptcy records, alongside $15.7 million from outside investors.

Bain immediately collected $2.25 million from Cambridge as a transaction fee for investing in the company. Cambridge then acquired several companies in rapid succession, and each time, Bain earned 0.75 percent of the purchase price as a transaction fee. The rest of Bain’s $10 million in fees came through advisory fees and payments for a debt refinancing completed by Cambridge in 1997.

By then, interest payments from the company’s expansion were outstripping operating income. As part of the refinancing, aimed at lowering interest payments, Cambridge repaid $17 million it owed to a debt fund run by Bain. This involved paying it a $2 million prepayment penalty.

Cambridge was finally forced into bankruptcy in 2000, when Bain declined to provide the company with an infusion of capital needed to fulfill a major new order, according to former company officials. During bankruptcy proceedings, lawyers for some of Cambridge’s creditors leveled scathing criticism at Bain, zeroing in on the fees extracted while they said Cambridge was insolvent, as well as the prepayment to Bain’s debt fund.

Sweet! They made back their investment the minute the deal was signed. Everything after that was pure profit. Nice work if you can get it! The other investors, well, they made poor decisions with their money, they lacked sufficient moral virtue, etc.

If all this near-constant Bain refrain sinks Willard's presidential hopes, that's fine with me. But bigger picture, Bain is just the tip of the iceberg. Really, they're a metaphor for a kind of heads-I-win, tails-you-lose capitalism that relies on dirt-cheap credit and a steady stream of gullible/greedy investors who can be lured into gambling big sums of money on risky ventures (on the promise of absurdly high margins, of course) while at the same time, you structure the deal so it immunizes you against any potential losses. Want a good recent example? Look at how the ECB structured the Spanish bank bailout last week: the bondholders of toxic private-sector bank debt got made whole, while the Spanish government, i.e., taxpayers got saddled with covering the losses.

Now there's nothing technically illegal about any of this (although willfully defrauding investors is, though that's also difficult to prove), but on the macro-level, this kind of financing serves no meaningful social utility, and the entire raison d'etre of finance---the efficient allocation of capital---doesn't even factor into the equation. And so long as the deal brokers are collecting their management fees, why should they care one way or the other if investors, workers or taxpayers lose out?

Of course, there are ways the government could help to change the corporate culture of outfits like Bain---but that would involve a wholesale rewriting of the tax code that makes the kind of business model that companies like Bain adopt much less lucrative for themselves and their investors. That's what will eventually put these people out of business, or force them to adopt other models of finance to make their money, and until that happens, all the regulatory band-aids like Dodd-Frank won't attack the root cause of our financial system's cancerous condition: Namely, that it's just too easy to amass huge fortunes by making reckless bets with other people's money. Make that activity less profitable, or not profitable at all, and our Job Creators will have to find another line of work. Until that happens, the looting will continue, whether Willard wins or loses in November.

---Vitelius

$30 a Head

It's the new going rate for moral hazard:

Bank of America Corp.’s Merrill Lynch wealth-management unit was fined $2.8 million by the Financial Industry Regulatory Authority for overbilling customers by $32.2 million over an eight-year period.

Merrill Lynch charged the fees to about 95,000 accounts between April 2003 and December 2011, FINRA said in a statement today. New York-based Merrill Lynch, which was acquired by Bank of America in 2009, lacked an adequate supervisory system to ensure that customers were billed in accordance with their contracts and disclosure documents, the regulator said.

In our Age of Austerity, it would seem we are worth even less than cattle. Good to know!

---Vitelius

Regressing Toward the Mean

You know, if you really think about it, our 200-year-plus experiment in self-rule has been something of an aberration. For most of humanity's existence, our governments operated on a very crude principle of reciprocity where you, as subject, swore fealty to some unelected emperor, priest-king, warlord, etc., who usually claimed to be operating under some divine or Papal mandate. In exchange for loyalty, you received personal security. Failure to swear fealty was seen as an affront to the sovereign's divine authority, and was met with harsh punishments to rid society of dangerous doctrines. You, the subject, had no rights per se, other than a right to exist in filth and squalor so long as you paid some measure of tribute to the sovereign---and for centuries, knowing that your lands wouldn't be overrun by hostile hordes of Visigoths and Vandals was apparently sufficient to satisfy the meager expectations of the peasantry.

This was, basically, a model of governance based on fear, with all power and wealth concentrated in the hands of a single bloodline or tribe.

It's only been very recently in the grand timeline of history that our collective philosophy of government has changed, and while many of us have heralded our civilization's post-Enlightenment optimism, with its democratization of wealth and its accompanying material progress, as a harbinger of a new day where moral arcs of history are ever bending toward justice, we shouldn't be surprised to discover that the older, fear-based Authoritarian Impulse has never completely gone away, that its hierarchical, top-down command structure holds great appeal to a great many people, and if we're not mindful and vigilant, we can easily revert to a nastier, more brutish time where the masses simply could not be trusted to govern themselves and must be punished should they deign to do so.

In a way, you can make a pretty good case that this has already happened to us over the past 40 years, and that it is happening now across Europe, the main difference between the Old Authoritarianism and the New Improved version being that our sovereigns no longer claim divine authority but instead portray themselves as humble servants dedicated to allaying "market uncertainty" and bolstering "investor confidence". Our punishments, likewise, are no longer inflicted with the intent of ridding society of heretics, but to improve the moral fiber of the lower social orders; our punishment is actually good and uplifting for us, and we should welcome it as a virtuous shareholder welcomes a quarterly dividend check---as just rewards for our appalling moral deficiency.

---Vitelius

Prisons Are Unnecessary, Too

But that doesn't mean some people don't belong in them.

---Vitelius

Funny The Way That Works Out

Our leaders hail the arrival of a New Dawn of Freedom™ while our Job Creators keep the meter running:

Spain will ask for a bailout for banks felled by bad real estate loans, in an about-face that European officials welcomed Saturday and said could cost up to €100 billion ($125 billion) [...]

The Spanish acceptance of aid for its banks is a big embarrassment for Prime Minister Mariano Rajoy, who insisted just 10 days ago that the banking sector would not need a bailout.

---Vitelius

America's Job Creators

Turning your Tweets into shareholder value. Too bad you don't get a cut of the action.

---Vitelius

Don't Just Sit There, Do Nothing

Serves them right, honestly:

Arthur Beasley of the Irish Times asks Mario Draghi for his views on the Irish referendum vote last week. Will Ireland now get some relief on the terms of its aid package from Europe?

Draghi says that he welcomes Ireland's decision to vote in favour of the EU Fiscal pact, but insists there is "no horse trading" between the ECB and national governments. He adds:

"There has never been a quid pro quo between monetary policy and government policy."

As a general rule, corrupt and dishonest people tend to behave corruptly and dishonestly. So when the corrupt and dishonest people promise you lots of free money in exchange for your willingness to impoverish millions of your fellow citizens, you shouldn't be surprised when the corrupt and dishonest people tell you (corruptly and dishonestly) that there's no free money for you after all.

It's a sign of our times that the people with no morals are the ones dictating the terms of the morality play. Perhaps the underserving poor should threaten their betters with default?

---Vitelius

Third Way Economics

Been thinking about the Soros speech from the other day (which is really quite accessible, even for an economic dunderhead like me), and it seems to me there are two basic cures our leaders could undertake to get the global economy out of its current liquidity trap. Either:

1. The central banks, working in concert, all print out a bunch of money and inject it into their respective economies via quantitative easing, checks mailed to taxpayers, etc., the idea being to make it easier for people to buy things, which should stimulate aggregate demand, which in turn should create new jobs. Potential drawbacks, of course, are currency devaluation, which makes imported goods more expensive and which might---repeat, might---spark inflation, and absent regulations aimed at preventing the banks from flushing all this free money down the toilet, you're looking at an endless "rinse-repeat" cycle. Or,

2. Governments nationalize their banking systems and write down all their outstanding debt, essentially setting trillions of dollars of worthless credit derivatives on fire and hitting the financial "reset" button. The idea here is massive de-leveraging, which relieves many millions of people from underwater mortgage debt, makes their pensions and 401(k) funds whole again, etc. Downsides? Large institutional bondholders will have to take a bath, and a great number of rich people will be rendered destitute. A desirable outcome, obviously, but that's also why we're not seeing it being implemented. Unfortunately,

3. Our leaders seem intent on combining the worst elements of steps (1) and (2) by handing out free money to the banks without restrictions, and paying for it by forcing people who have no money to pay more for things that the government used to provide as public services. How this approach accelerates de-leveraging or stimulates demand is never explained because, frankly, it can't be. So why are they doing it? Beats me, but sooner or later one has to conclude that our elected leaders view us as spoiled little children who need to be taught a lesson. Not sure how to get them to adjust their attitudes, but the longer they dig in their heels, the uglier the eventual public backlash will be.

---Vitelius

Self-Correcting Wisdom

As today's must-read reminds us, it's a singular virtue of free markets everywhere:

At the mortgage-processing factory in O’Fallon, Hunt was working on an assembly line that helped inflate a housing bubble whose implosion would shake the world. The O’Fallon mortgage machinery was moving too fast to check every loan, Hunt says.

By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses.

Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012.

In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve---more in total than any other U.S. bank---Jeffery Polkinghorne, an O’Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting. The encounter with Polkinghorne was brief and tense, Hunt says. The number of loans classified as defective would have to fall, he told them, or it would be “your asses on the line.”

Good to see that Dodd-Frank has exerted such a strong influence on our corrupt financial system.

I think it's reasonable to assume at this point that our Job Creators have simply worked out a formula that budgets in a certain amount of fines to be paid out of accounts receivable to the Federal government each year while still allowing them to post solid margins and pay out dividends. Call it the cost of doing business, I guess, but if you or I tried to do it, we'd be hauled in front of a judge for mortgage fraud.

Meanwhile, recovery.

---Vitelius

Nice Work if You Can Get It

It's hard work trying to impose a little discipline on the freeloaders:

Lagarde, predicting that the debt crisis has yet to run its course, adds: "Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax." She says she thinks "equally" about Greeks deprived of public services and Greek citizens not paying their tax.

"I think they should also help themselves collectively." Asked how, she replies: "By all paying their tax."

Asked if she is essentially saying to the Greeks and others in Europe that they have had a nice time and it is now payback time, she responds: "That's right."

Especially when one leads by example:

Christine Lagarde, the IMF boss who caused international outrage after she suggested in an interview with the Guardian on Friday that beleaguered Greeks might do well to pay their taxes, pays no taxes, it has emerged.

As an official of an international institution, her salary of $467,940 (£298,675) a year plus $83,760 additional allowance a year is not subject to any taxes.

---Vitelius

Income Redistribution We Can Believe In

Might want to entertain the notion that the financial innovations of America's job creators

may have permanently dented America’s productive capacity. If so, the “output gap” between the economy’s current level of production and its potential level is much smaller than expected. Unemployment has fallen because there are fewer people available to work. Inflation is stable because there is less idle capacity to restrain prices. This would be bad news all round. America would be permanently poorer than would otherwise have been the case. The Federal Reserve would have less room to ease policy before inflation revives. More of the budget deficit would be structural, rather than the temporary result of a depressed economy. (Emphasis added.)

Policymakers do not embrace this scenario.

Of course they don't. If they did, it would be a tacit admission that they're either (a) incompetent, or (b) accessories to the looting. Since we're basically talking about Tim Geithner's Rotary Club lunch buddies here, my bet's on the latter. Not that Glen Hubbard's lunch buddies would be preferable (they wouldn't), but we shouldn't paper over the fact that our policymakers thus far have succeeded in one thing only: Preventing a global Great Depression for the last three years by pumping trillions of dollars of taxpayer liquidity into the vaults of otherwise insolvent nonbank Job Creators, which have expressed their gratitude by either hoarding or hedging the money. Other than that, really, nobody's done much of anything to solve the actual problem.

---Vitelius

Colonialism We Can Believe In

Riffing off the previous post, yet another reason why, in the realm of foreign/military policy, our leaders must be either neoliberal or neoconservative interventionists dedicated to upholding the primacy of Empire: Because, frankly, there's a lot of money riding on it:

The New Alliance was announced in conjunction with the G8 meeting last Friday. Under the scheme, some 45 corporations, including Monsanto, Syngenta, Yara International, Cargill, DuPont, and PepsiCo, have pledged a total of $3.5 billion in investment in Africa. The full list of corporations and commitments has just been released, and one of the most notable is Yara International's promise to build a $2 billion fertilizer plant in Africa. Syngenta pledged to build a $1 billion business in Africa over the next decade. These promises are not charity; they are business.

---Vitelius

Seems Counterintuitive

To think you can raise revenue and reduce deficits by lowering wages, promoting mass unemployment and spurring capital flight, but heck, I'm no economist or a central banker so what do I know. Good thing, then, that our real-life economists and central bankers know exactly what they are doing:

Clearly alarmed by plummeting budget revenues, attributed in part to the country's political instability following inconclusive elections earlier this month, Greece's caretaker government has decided to take action. Figures released by the state general accounting office show revenues down by almost a third---some €1.35bn---compared to May last year.

The dramatic decline will be the focus of an emergency meeting called by Finance Minister Giorgos Zannias to discuss ways of plugging the budget black hole. Officials have blamed the precipitous fall on the failure of tax authorities to collect revenues---partly because of the uncertainty that has followed Greece political limbo and partly because of cuts to salaries and wages. Ministry officials say they are now considering extending the deadline for the submission of tax returns from 15 June to the end of the month.

---Vitelius

Why We Need to Reform Entitlements

We simply cannot afford them going forward:

Profits at big U.S. companies broke records last year, and so did pay for CEOs.

The head of a typical public company made $9.6 million in 2011, according to an analysis by The Associated Press using data from Equilar, an executive pay research firm.

That was up more than 6 percent from the previous year, and is the second year in a row of increases. The figure is also the highest since the AP began tracking executive compensation in 2006 [...]

Profit at companies in the Standard & Poor's 500 stock index rose 16 percent last year, remarkable in an economy that grew more slowly than expected.

CEOs managed to sell more, and squeeze more profit from each sale, despite problems ranging from a downgrade of the U.S. credit rating to an economic slowdown in China and Europe's neverending debt crisis.

Still, there wasn't much immediate benefit for the shareholders. The S&P 500 ended the year unchanged from where it started. Including dividends, the index returned a slender 2 percent.

I am willing to bet that decades hence, historians will view our era as a kind of turning point: Either as a second "Gilded Age" which eventually spawned a New Progressivism that predominated in the second half of the 21st Century; or, as I suspect, as the point where the American Century officially came to a close, and the empire descended into irreversible decline. Would love to be proved wrong, of course.

---Vitelius