Clash of the Regulators

Short quiz: all answers will be either a) Elliot Spitzer, b) William Donaldson, or c) None Of The Above.

1. Who is the current head of the Securities and Exchange Commission?

b) William Donaldson took the position in February of 2003, taking over from embattled Harvey Pitt, who was generally regarded as ineffective.

2. Who is the Attorney General for the State of New York?

a) Elliott Spitzer has had the position since 1999, and in all likelihood has done things that benefit you, even if you don’t live in New York.

3. Who recently reached a settlement with several major brokerages regarding alleged analyst hyping of overpriced stock for the benefit of the company?

a) Elliott Spitzer conducted a damning probe of brokerage research practices, resulting in massive settlements. None of the firms involved wanted to face criminal charges in the matter, as that would have been a corporate death sentence.

4. Who led charges against Dennis Koslowski, whose trial for essentially robbing Tyco Corporation blind while employed as its CEO began today?

c) None of the above. He is being prosecuted by the District Attorney of Manhattan (not this one, the real one).

5. Who is prosecuting all the Enron executives?

c) None of the above. A consortium of State Attorneys General and the Department Of Justice are handling the various criminal cases. The SEC continues to investigate Ken Lay, who has yet to be charged with any crime whatsoever.

6. Who recently brought charges against several mutual funds and hedge funds for illegal trading practices, despite being a hedge fund investor himself?

a) Elliot Spitzer charged that some hedge funds were able to (among other things) buy and sell stocks to mutual funds at the previous day’s prices. That’s like being able to make a bet on yesterday’s sporting events. It is a well known fact that Mr. Spitzer has been an investor in a hedge fund formerly (and legally) run by noted commentator Jim Cramer.

7. Who is prosecuting noted banker Frank Quattrone for obstruction of justice?

b) William Donaldson’s SEC, although a) Eliot Spitzer is trying to determine if there is enough evidence to bring state charges against Quattrone.

8. Who is prosecuting the fraud case against various WorldCom executives, including former CEO Bernie Ebbers?

c) None of the above. It is being prosecuted by the Oklahoma Attorney General. The Feds are not happy about it.

9. Who has recently been in the Congressional hot seat?

b) William Donaldson has been grilled by the Senate several times recently.

Bonus extra credit short answer question
Given the answers to the questions 1-8, are you surprised by the answer to question 9?

Not at all.

The Rich Get Richer, the Poor Get Poorer

It’s not just a proverb, it’s not just a Johnny Rotten lyric, it’s the undeniable truth.

At the beginning of the week, Forbes was proud to announce that the 400 richest Americans got 10% richer over the last year. Indeed, each of the 25 richest Americans saw an increase in net worth. These people are all Billionaires with a B.

Meanwhile on the other end of the economic spectrum, an authority no less credible than the United States Census Bureau reported at the end of the week that not only are there more people living in poverty this year than last year, not only is the median American income declining, but it is the second year in a row that poverty has increased and wages have decreased. The income gap between the highest and lowest paid Americans is also growing. Now, 12.1% of Americans earned less than the poverty level. That’s just short of one in every 8 Americans. About 13 million of them are your neighbors in suburbia — about 8.9%. These aren’t those people living under the bridge downtown; they are regular people like you. The change in suburban poverty is the lion’s share of the national increase. More than 1 in 4 single mothers and 1 in every 20 married couple live in poverty. Over 16% of American children live in poverty. There’s something to think about next time you drive past a public school.

It is oh so easy to blame the President, his tax cuts, and his economic “plan” for this divergence. He is the obvious target, the low hanging fruit. After all, it happened on his watch. There are also sound arguments to support the kneejerk reaction. Jackson Thoreau has written an excellent discussion of the ways Bush Administration policies have contributed to the poor getting poorer. It is worth a read, and although there is an insult to Kelsey Grammer, he does not resort to mindless Bush-bashing. Some members of Congress are not so circumspect, accusing the administration of “burying” the data by quietly releasing it on a Friday morning, a time when few people expect new economic data. The administration blames the increasing poverty on the economic slowdown — you remember, the one that supposedly ended almost 2 years ago.

There are more voices speaking about why the rich are getting richer. Forbes points out that much of the change is due to tech stocks rising. This does not explain Warren Buffett. Buffett, number 2 on Forbes’s list, has been against the repeal of the estate tax despite the fact that his heirs would greatly benefit. Furthermore, he called Bush’s dividend tax break “voodoo.” Although Mr. Buffett has not commented on today’s news, it is a pretty good bet that he would ascribe some blame to the Bush tax agenda. Others have come out and said so.* Another man who stood to gain a lot from Bush tax cuts, a man with more money than I am ever likely to have, Jim Cramer,* suggests that it is not the dividend tax cut that was the problem, but coupling it with a capital gains cut.

When the rich claim they are not paying enough taxes, you know something is wrong.

*Please forgive the links to abstracts. They were the only free way to present you with the relevant information.

Don’t Call Us, We’ll Call You

Yesterday, a Federal District Court ruled that the Federal Trade Commission does not have the authority to run the National Telemarketing Do-Not-Call list. The ruling appears to hinge not on First Amendment free speech issues, but rather on issues of formal jurisdiction. Thus, my comments may be obsolete by the time you read them. As an example of how popular the Do-Not-Call list is, there are 50 million numbers registered compared to 46 million dial-up internet customers in the United States. Please keep in mind when comparing these figures that some households have registered multiple phone numbers, and that some broadband internet customers have a dial-up account as backup connectivity. Nevertheless, this list clearly has popular support and is already being funded by a tax on telemarketers themselves. Expect Congress to act quickly.

I fully support the idea of a Do-Not-Call list. Like many people, I refuse to buy products from some stranger who calls me on the phone. I frankly don’t understand why anyone would whip out the credit card for some unknown person who calls claiming to be a representative of some business that he or she did not first call personally. Furthermore, the idea that I would set up an appointment for an unknown salesman to visit my home on such a basis is ludicrous.

The Direct Marketing Association should not be fighting this list in court; they should be embracing it. It represents a comprehensive list of people like me, who will not do business with their clients under any circumstances. By properly using such a list, they increase productivity of their employees by sharply reducing the number of failed sales calls. That’s right. By not calling people who will not buy, they increase odds of reaching someone who will. The people who make a living as telemarketers should not see this as job threatening; they should see this as potentially improving their close ratio and thus increasing their bonuses.

Unfortunately, the list is useless. Exempted are “political organizations, charities, telephone surveyors, the business of insurance (to the extent that it is regulated by state law), or companies with which you have an existing business relationship.” Apparently, the FCC ceded authority to the FTC to regulate “telemarketers from financial institutions, telecommunications companies and others.” In my case, at least 90% of the telemarketing calls I have received in the last 3 years are exempted from Do-Not-Call list restrictions.

In the immortal words of Bugs Bunny, “What’s all the hubbub, bub?”

A Yen for Dollars

Unless you really like financial news, you may not have noticed that the value of a dollar has been sharply declining this week. The dollar has been declining for quite a while, but the pace has started to alarm investors, economists, politicians, and businessmen both here and abroad.

The good news — if it can be called that — is that a weak dollar makes American goods more competitive overseas. For example, a Volkswagen will cost more relative to a Ford in the states, while the Ford will seem to have a price cut in Germany. Unfortunately, this logic applies to everything Americans buy that is imported: fruit, meat, clothing, computer chips, Canadian lumber, Italian leather sofas, Bosch spark plugs; frankly Americans import most of what they buy. That is the definition of a trade deficit. That is where this policy will hit you in the wallet. The theory is that a weak currency will make it more cost effective to manufacture things here in the Good Old U. S. of A. and cause companies to hire back those 3 million or so factory workers whose jobs have evaporated during the Bush II Administration. This assumes several unrealistic things, not the least of which is that companies that have moved manufacturing overseas to take advantage of cheap labor and brand new factories are willing to move back.

The same devaluation that makes it desirable for foreigners to buy American cars makes it undesirable for foreigners to have American assets, such as stocks and bonds. Big deal, you say? Asian banks own over $1 Trillion (with a T) of the United States’ national debt. Imagine what happens if they decide to sell just a tenth of their positions.

Furthermore, the weak dollar makes it undesirable for foreigners to travel to the United States, as if current visa policies do not do the job. Has anyone told the Treasury Secretary that the Commerce Secretary is trying to encourage tourism? Secretary Snow, who replaced the largely ineffective Paul O’Neill,* has made a series of statements that make sense in a vacuum, but not in reality-land.

For example, back in June, Snow defined a “strong currency” as follows: “You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities.” This may be his personal definition, and it may even be the Administration’s official definition, but it is not the definition most people use. It’s like defining all computers as using Microsoft Windows; saying it does not make it so. As CNN’s Justin Lahart put it, “Most currency traders had thought that the “strong dollar” policy had something to do with fostering economic policies — like low inflation, reduced debt and strong growth — which lead to a higher exchange rate for the dollar.”

In a more recent example of Bizarro-World Economics, just yesterday Snow proclaimed before an international audience of leading bankers and economists that the United States’ budget deficit would be cut in half by 2008. He went on to say that would take place due to growth and “disciplined spending” without tax increases. I fail to see how this is possible without hiring accounting experts from Enron and Worldcom. The fact that an expert from the International Monetary Fund thought this was reasonable should raise big red flags. Granted, it only took 2.5 years to go from budget surplus to an over $400 Billion deficit. But that was before the War on Terror, nation building in Afghanistan, overthrowing the albeit oppressive government of Iraq, two massive tax cuts, adding an entire new Department to the Executive Branch, proclaiming that No Child should be Left Behind, and giving sweeping new powers to the Department of Justice. We haven’t even figured out how to make Social Security work out after the Baby Boomers start retiring, and we’ve had since 1946 to work on that.

In the end, the currency devaluation is a high stakes game of chicken with China and Japan. The primary aim is to force China to de-link it’s currency with the dollar.** This link is one of the reasons Chinese goods are so darn cheap you almost can’t avoid buying them in the States — well, that and slave labor. The secondary aim is to force Japan to stop artificially lowering the value of the Yen, making Japanese goods cheaper overseas and stimulating Japanese manufacturing.

Should prices of Asian goods rise, inflation will result. That will force Greenspan to raise interest rates. That in turn will effect mortgage rates, the availability of investment capital, and the amount of interest the United States has to pay on the National Debt.

No matter who blinks, you lose.

*O’Neill was a good CEO, lousy Secretary of the Treasury. When he was nominated, Wall Street was pleased, thinking it meant someone competent and clueful would be running the show. It is unknown why exactly the administration thought another good CEO would succeed where another failed.

**Linking a currency may be a good short term idea. For example, certain South American nations did it to halt hyper-inflation. However, in the long term, Alan Greenspan is paid to care about how monetary policy effects America, not any other nation whose currency may be linked to our own.

A Message to Madison Avenue

I’d like to take a moment to talk about advertising. I begin with the basic premise that advertising is supposed to make the people who see it do something.

This appears to be a radical concept.

There is a lot of really lousy advertising out there. It’s not just misleading banner ads on websites, or spam that promises low mortgages. Be honest, have any of you actually bought anything based on a pop-up ad? Television and radio ads are quite awful these days. Here are some examples of basic ad types that I can’t imagine being effective.

Hey kids! Adults are idiots! Make Mom and Dad buy this product for you! Mistake one, forgetting where the money to buy things comes from. Mistake two, insulting that source of money. That “idiot” adult is where kids get their revenues. You don’t see kids counting up their allowance money to buy breakfast cereal and hyper-mega sugary snacks.

“Wow, that was a funny commercial for…. what was it again?” Stop me if this is too logical, but if your customer can’t remember your product from the time he sees the commercial to the time he buys something, it wasn’t a very good commercial. Remember those “Ernest” commercials back in the late 80s? Very funny. What were any of them for? Darned if I remember. By contrast, we all know that Gilbert Gottfried’s characterization of the Aflac Duck is supposed to remind us to ask our employers about supplemental insurance. Those of us old enough to remember know that the “Where’s the beef?” lady was exhorting us to go eat at Wendy’s. We know that when he’s not getting high, Steven thinks all us “dudes” need to call Dell and get a computer sent straight to our doors. This case, by the way, illustrates the dangers of having a single, visible, fallible spokesperson.

Hey hey! Who here likes to polka?? It doesn’t matter how good an ad is if it doesn’t reach people apt to buy the product. Thankfully, advertisers have more or less realized that kids looking to buy dolls, toy cars, and GoGurt are not watching Cartoon Network at 11 PM on a school night. Likewise, the readers of Sesame Street Magazine are not in in a position to buy a new minivan. They aren’t even in a position to reach the pedals.

Here, have some heavy-handed morality to go. Public Service Announcements (PSAs) are not actually trying to sell us anything. They are trying to get us to do something — or not do something. Just Say No. Save Water. Talk To Your Kids. All are generally good messages. But sometimes they take themselves way too seriously: if you use drugs you support terrorism; won’t somebody please think of the children. Even the best of this class of ads lends itself to parody: This is your brain; this is your brain on drugs; this is your brain on drugs with a side of bacon. Let’s take it easy here. I think we all know the PSA message of the week.

Some of the most perplexing ads are “image ads.” Basically these are run by large companies, often with many subsidiaries, to remind us they exist. Sure, maybe you aren’t in the market for a GE product today, but maybe your dishwasher will break next week, maybe you’ll need a light-bulb next month, maybe your company will need jet engine next year, or maybe you’ll buy some GE stock for your retirement account. It’s hard to say whether these ads are effective.

An effective ad makes someone want to do something. That is all any of us needs to remember.

The Grasso is Greener on the Other Side

There. It’s done. Dick Grasso has resigned as head of the New York Stock Exchange. A man who was debatably the most powerful man on Wall Street is now unemployed, in answer to widespread calls for blood since disclosure of his $140 Million salary package. Please go ahead and feel free to sample some of the news coverage. Even the Head of the SEC and the Senate wanted to know what was going on. Many people are outraged that he received so much money. And yes, it certainly is a lot of money.

But personally, I’m inclined to think he worked pretty hard for it. Several of those news items in the last paragraph make it clear that he worked his way up from the bottom, earning less than $85 per week in the late 60s, and that he simply knows more about how the arcane NYSE system works than anybody. Who coordinated things such that the markets were only closed for 4 days after September 11, 2001? Dick Grasso, that’s who. For those who aren’t experts in Manhattan Geography, the World Trade Center was walking distance from the NYSE. Many brokerages, mutual funds, and financial advisors had offices in the WTC. There are faces you no longer see on CNBC because they were at Ground Zero. There were other companies that lost 3-letter types in the terrible incident — that falls under the category of what the SEC likes to call “material information.” Almost everybody on Wall Street lost someone they knew that day. Many of them watched the Towers go down live and in person. The financial markets would have fared far worse to be closed another week. This is to say nothing of the impact such a delay would have had on the economy as a whole. Yes, I do believe that not being able to access the capital markets would have had a negative effect on American business.

Fine, that was 2 years ago, what has he done lately? Where was Dick Grasso when the lights went out last month? In his office, making sure things would run smoothly in the morning, on generator power of course. He slept in his office that night.

Don’t start thinking this is the end of the story. The money was not just sitting on the floor of the NYSE waiting for somebody to pocket it. The Board of the NYSE had to sign off on this mess, and now they will have their noses rubbed in it. In fact, if you think Dick Grasso was overpaid, the Board is where to lay the blame. Expect heads to roll. The volatility of the situation is illustrated by the fact that they couldn’t find someone to replace Grasso before lunch.

My inner tin-foil hat wonders who stood to benefit from Grasso’s demise.

Why Can’t Johnny Make Ends Meet

It does not take an expert to see that families are having a hard time in America. Manufacturing jobs — long seen as one of the best ways for a man with no college degree to support his family — are vanishing. The tech bust has left many educated professionals scrambling to avoid long term unemployment. Among those lucky enough to still have jobs, Americans have less leisure time than anytime after the 40 hour workweek was “mandated.” Schools are by all accounts not giving young people an adequate education, particularly when compared to the education of 50 or 100 years ago. Our children’s academic accomplishments are dwarfed by those from most other industrialized nations. Crime rates are dropping, but Americans feel less safe than ever. Personal debt is at incredible levels, consumers are desperate to refinance where they can, and the Government has sold them down the river by tightening up bankruptcy law and adding needless layers of complexity under the guise of a “tax cut.”

There are many theories regarding the causes of “The Problem With America These Days.” Unfortunately, many of them center on such untenable ideas as “It’s because we’ve lost Old Time Religion” (oh yeah, things were much better in Salem) or “It’s because there’s no respect for the Family anymore” (define respect and family so we can talk) or even “It’s all the fault of Women’s Lib and mothers working outside the home.”

The idea of Moms With Jobs is really not that new. Moms have been helping out with the family finances since biblical times and through the ages, but the amount of work required to run a family home had generally prevented most moms from being full time members of the workforce.* Mandatory school attendance and labor saving devices have made possible the Mom With Career. However, both parents working can be a surprising drain on the family finances.

There are expenses associated with work beyond increased tax liability (the argument used by some Republicans in the past about “mom working just to pay the taxes” is ludicrous, since you aren’t taxed on money you don’t make). To send mom to work means she will need more reliable transportation than she would need to just get the groceries, take the kids to school, and pick up the dry cleaning. Speaking of dry cleaning, she will need work attire, and she will need to have it cleaned. She will also have to arrange child care, which is by no means inexpensive, particularly if she wants licensed care by someone who will not jeopardize the health and safety of her child. She will also be having lunch out more often, meaning she will spend a whole lot more on lunch than if she were eating peanut butter sandwiches with the kids. There will also be a lot more take-out and convenience food in the family menu, and that is going to cost more money. Despite the potentially deleterious effects on the family health and waistline, nobody is really going to want to cook a nice meal after working all day and fighting traffic home. These costs vary from family to family, but they add up in a hurry. They can easily consume mom’s paycheck.

Bankruptcy expert Elizabeth Warren admits this while offering up another way that the two-income family is falling behind. If I may quote: “Presenting carefully researched economic data to support their arguments, the authors contend that, contrary to popular myth, families aren’t in trouble because they’re squandering their second income on luxuries. On the contrary, both incomes are almost entirely committed to necessities, such as home and car payments, health insurance and children’s education costs. When an unforeseen event such as serious illness, job loss or divorce occurs, families have no discretionary income to fall back on.” Her thesis specifically includes the idea that, based on their aggregate income, families are buying (and bidding up) houses in desirable neighborhoods with good schools. Furthermore, that “more reliable transportation” I mentioned as a necessary expense of mom working often is turning out to be a new car that the family can only afford because both parents are working. Interestingly, this book was written with her daughter; this would tend to suggest she knows something about being a Mom With Career. This is not from some two-bit economist sociologist wannabe, but from a distinguished Harvard professor with a list of publications and accomplishments longer than your arm. Nevertheless, the ideas are controversial.

Be of good cheer, as she does provide suggested solutions. First, arrange the finances such that necessities can be paid out of one paycheck. Then the second income becomes truly “extra” and can be used on luxuries like saving for retirement or eating out without guilt. She furthermore suggests regulatory reforms to require bigger down-payments on houses to discourage getting overextended on mortgage payments, capping credit card interest rates and fees, school vouchers, and better education about financial planning for those of us who have more liabilities than assets.

Something to think about.

* The single mother has also been with us throughout the ages, since the first time a father died or walked out on his family. Single mothers almost by definition have to earn a living in addition to all the expected activities of Mom. There is nobody else to do it.

Same As It Ever Was, or Numbers Lie

The markets in the United States are having a nothing day, as everyone digests conflicting data. While manufacturing appears to be expanding, manufacturing output is falling. Meanwhile, there are fewer jobs and continuing layoffs. Nevertheless, some economists are predicting 4.0% growth in the Gross Domestic Product — a figure Reuters reminds us is “the fastest pace since the height of the boom in 1999.” Furthermore, although there is scant coverage of the fact, they are predicting profits to grow even more than that. Nevertheless, inflation is expected to stay low, that is as long as you don’t include gasoline or insurance rates. In the midst of all this, the Fed is expected to sit on their hands when they meet tomorrow. Nothing to see here, the economy is fine. Right?

Meanwhile, WalMart reports that same store sales growth will be near the top of the estimated range.

Growth is great! It is un-American to say otherwise. However, growth in profits in the long term cannot exceed growth in the GDP. Otherwise the GDP would rise, not just because all those goods were sold, but because they had to be manufactured and shipped. Short term, such hyper-growth is made possible by taking market share away from competitors (which only lasts until competitors change business practices to compete better, or go out of business), having an innovative product (which lasts until everyone who wants one has one), getting into new business segments (either by continuous research and development, or by acquiring other companies, neither is sustainable), or by accounting legerdemain (Enron, Cendant, Worldcom, the list goes on). Similar arguments go towards continual sales growth. One additional and important constraint exists on those “same store sales” that the retail sector is always on about: one business location has finite capacity. You can only cram so many people into a WalMart. You can only make them buy product so fast. You can only put so much merchandise on the shelves. Making the store bigger is expensive and only pushes the problem out a little.

If I sound skeptical about the idea of continued corporate growth in excess of GDP without creating inflation, it’s only because I am.

Nine Eleven

Today is the anniversary of what is debatably the single saddest day in my lifetime.

Two years ago today, 19 nut-cases hijacked 4 airliners full of people and fuel. They destroyed the World Trade Center, damaged the Pentagon, killed about 3000 people — an astonishingly low number considering the time and place — and took away our innate sense of security.

The occasion was commemorated in New York City as well as other places with moments of silence.

Around the world wreathes were laid, prayers were said, names of the dead were spoken, commemorative gardens and art exhibits were opened, blood drives were conducted, parades were marched, school children sang patriotic songs, heads of state gave speeches denouncing terrorism. In addition, nations were put on alert, and there were calls for curtailing civil liberties in the name of the War on Terror.

Closer to home, a local mini-mart chain was giving away free deluxe car washes.

Clearly that’s what it’s all about. Moments of silence and car washes.