Thursday, July 02, 2009

Cap & Trade Details

In reply to this recent post concerning the lack of apparent equity market reaction to Friday's stealth passage by the House of a 'cap and trade' bill, a reader wrote this note to me,

"Re your post on your Reasoned Skeptic blog on the cap and trade bill, I'd be interested in you doing a blog post on your thoughts on allowing a border tax adjustment for imports from countries with lax carbon standards. You may have noticed that the House bill includes a border adjustment provision; it was slipped in late last week, despite arguments against one from the Obama administration. If you're not familiar with border adjustment, attached are comments by Representative Inglis arguing for border adjustment, and slides by AEI on carbon border adjustment (14-18 re border adjustment and carbon; 1-13 re background on border adjustments)."

To be honest, no, I did not know this. I have yet to read the detailed article from last weekend's Wall Street Journal, and this sort of fine point isn't necessarily gleaned from televised coverage, little as there was, given the weekend news cycle and my own aversion to viewing such weekend coverage.

The reader sent me two attachments discussing how such a proposed 'carbon equalization' regime would work, which I appreciated. Suffice to say, as I expected, after quite a bit of dense, mind-numbing detail on these schemes, both documents admitted to the two things I had already guessed, prior to reading them.

First, the sheer implementational difficulties of such a regime are represent real obstacles to their successful operation. Think months'-long delays, if not years, as complicated carbon-usage forms are completed, submitted, and then overwhelm some federal department charged with administration of the whole mess.

That's the optimistic view. The reality, as with our recent experience with mortgage finance 'liar loans,' is likely to be wholesale fraud, deceit, and the employment of various 'consultants' to complete applications in such a manner as to gain favorable treatment, knowing the ability of government to investigate each application and enforce penalties for fraud will be de minimis.

Then there's the real problem- a GATT-based challenge at the WTO. This sort of issue was my first instinct in believing this importation-adjustment process to be practically unenforceable.

To get to the plainly-written crux of the matter, this will come down to a question of whether it's legal, in the context of world trade agreements, for one country to enforce its pollution penalties on producers in other countries importing into the first country.

Similar to the phenomenon of labor-intensive, low-value-added work moving to low-labor-cost countries around the world, despite various attempts of high-wage countries to stop it, it's logical to expect high-carbon-cost countries to lose employment, GDP and tax revenues from both to low-carbon-cost countries, irrespective of attempts to stop this flow.

I just don't believe a lot of complicated US law involving various carbon-usage adjustments is going to fly. Before it's sorted out, the economic uncertainty and resulting loss of jobs and economic activity from the US to poorer, 'dirtier' countries, will probably cause a serious rethink of the whole idea.

More Politicizing At The Fed

This morning's Wall Street Journal carried a fascinating piece on the selection of William Dudley as New York Fed President.

Essentially, the piece exposed the raw arm-twisting and intervention by outgoing president, now Treasury Secretary Tim Geithner, in Dudley's favor.

The article portrays Geithner and Bernanke, as well, as putting extremely heavy pressure on the NY Fed's board to choose their preferred candidate.

To the Journal's credit, the piece included some history of the Fed's design, including the regional banks and Fed boards, intended to prevent just this sort of undue influence from Washington.

The manipulation of the NY Fed's board grew so strong that Pepsico CEO Indra Nooyi resigned, using as cover her busy schedule of other duties.

I have lamented, since last fall, the continuing political flavor, content and focus of many of my business blog's posts. This article helps illustrate that it's not my choice to shift so much of my attention to political matters.

It's evident that the very fabric of American business is being heavily politicized and coerced by the federal government. This story concerning the undue influence exercised by Washington over the important regional Fed bank in New York reveals that this is a continuing theme of growing importance in our economy, and it's increasingly managed nature.

Wednesday, July 01, 2009

The Missing 'Cap and Trade' Market Reaction

The House passed a carbon 'cap and trade' bill Friday afternoon by just a 7 vote margin.

Funny how it missed the major news feeds, isn't it?

By scheduling the vote prior to a weekend, and the July 4th holiday recess, the House virtually guaranteed that the average American wouldn't notice the vote. The unplanned coincidence of Michael Jackson's death that afternoon virtually assured the vote's disappearance from major coverage over the weekend.

What has mystified me, though, is the lack of apparent reaction in equity markets of institutional investors. This bill, as currently written, constitutes the most massive tax and wealth transfer probably ever proposed by the US Congress.

Perhaps the lack of investor reaction is due to the Senate's not yet passing a compromised version into law.

Still, I'm just amazed that such a huge tax increase and energy policy rewrite which will radically shift fortunes among US business sectors and regions is only one chamber away from passage, with no observable sign of distress among professional equity investors.

CNBC's Hidden Advertising

I happened to be watching CNBC earlier this morning, when I saw a guy named Brian Singer, formerly a senior asset management executive at UBS, appear on Squawkbox.

The ostensible reason for having Singer on the program was his former status as the overall manager of $300B when at UBS. But the real reason was essentially to let Singer advertise that he has left UBS and formed a new hedge fund group.

So, in effect, if you are well-connected with CNBC and can provide some apparent newsworthy spin to your self-promotion, you can use their platform for free advertising.

Singer's big news? That he's starting a hedge fund in this time of market turbulence. That he decries 2/20 pricing. Instead, he is offering 1% and, after five years, 20% of the gains above the S&P500.

Actually, that's an old idea. I offered that back when I partnered with a hedge fund a decade ago. What Singer rambled on about for quite some time was something I had succinctly stated in a Powerpoint slide.

Perhaps in the wake of some mediocre performances by the hedge fund community generally, Singer feels he has nothing to lose promising to only take performance fees on above-market gains, since customers are looking more judiciously at the performance for which they are paying.

What was somewhat striking about the whole 5 minute episode, though, is that Singer was basically allowed a free infomercial just for having been a senior executive at a large firm.

I guess it's a 'hide in plain sight' sort of thing. Claiming something is newsworthy allows CNBC to dispense free air time to friends and perhaps repay favors, or offer exposure as a quid pro quo to sources.

How's that for journalistic ethics from a 'news' network?

Tuesday, June 30, 2009

Forget Responsibility- Let's Just Blame Bernie Madoff

I've written eight other posts concerning the Bernard Madoff investment fraud, all of which may be found by clicking on the 'Madoff' label, in the list along the right side of this page. Of all of them, I think this one, from late December of last year, best captures my feelings on the entire affair.

Of course, since Madoff was sentenced yesterday to 150 years in prison, the topic of his epic fraud was headline news again yesterday.

CNBC and Fox News made much of the wailing of various 'victims' of Madoff's fraud. Once again, the media helped shift responsibility from the so-called sophisticated investors who ignored the many warning signs concerning the fraudulent scheme, and place the entire blame on Madoff.

In contrast, I wrote in that prior post,

"To me, the key observation, which I read in the Journal last week, was that an outside analyst had done a sort of 'back of the envelope' calculation to determine that Madoff's portfolios, according to estimates of the assets he ran being in the tens of billions of dollars, must have had trading activity exceeding the entire market for various index puts or calls. Additionally, experienced clients seemed to think nothing of the fact that blue chip equities showed no decline in prices earlier this year, although they were key to the alleged strategy.

This smacks of convenient denial of reality by so many clients. The suspension of disbelief, and a desire to simply believe that unbelievably good, and not just consistently, but uniformly constantly good results, were real.

As I reviewed the mechanics of Madoff's scheme of undisclosed numbers of individual accounts, rather than a single, explicitly-spotlighted fund, with my partner, my belief that Madoff had long ago discovered loopholes that I, too, observed earlier this decade grew significantly.

The most important element of his fraud, without question, was the lack of independent custodial inventory reports of financial assets held in accounts for clients. I can't emphasize enough that this alone left every one of Madoff's clients vulnerable.

Coupling this with a curious lack of diversification, a/k/a greed or stupidity, and you have the recipe for disaster among so-called 'sophisticated' investors.

How many once-wealthy Americans having millions of dollars of accumulated financial assets are now simply bankrupt? Or nearly so, with almost nothing to show for decades of successful careers?

And all of this....all of it...would have been minimized, if not totally avoided, had each and every investor insisted on receiving a regular asset inventory report from an independent custodian. This would have prohibited false claims of asset ownership, or required an entire custodian's business to be in league with Madoff.

I don't believe any more regulations will prevent a repeat of this type of periodic investment fraud. There are plenty of safeguards required by current regulations. But nobody can prevent a person from simply throwing caution to the winds, trusting in a manager, and his 'special' inner client circle, without any objective, confirming evidence."

Rather than the sort of statements no doubt made by various clients of Madoff's in court, which I'm sure portrayed themselves as victims who bear absolutely no responsibility for what happened to them and their money, I would love to read in this morning's newspapers, and see video on cable news, statements like these:

"I was greedy and failed to diversify my millions of dollars of assets as I have been advised and taught for decades.

I foolishly asked no questions as to how Mr. Madoff could achieve such uniformly-constant, positive returns for decades, when no other manager ever demonstrated such performance perfection.

I took the advice of my friends at face value and asked no questions.

I felt so fortunate to be allowed to give Mr. Madoff all of my assets to manage that I never bothered to ask questions about how he achieved his performance.

Learning that my money would be refused for management by Mr. Madoff if I asked a single probing question, I kept my mouth shut and just wrote the checks.

Despite the fact that Mr. Madoff did not have a publicly-listed mutual fund with an independent accounting firm auditing the accounts, and a custodian of assets, I gave him all of my assets.

I never bothered to demand a quarterly custody report from an independent custodian verifying that Mr. Madoff's firm held the assets claimed in a separate account for my benefit.

I suspended disbelief that anyone could achieve such uniformly perfect investment returns, because I didn't want to discover that this was all a fraudulent scheme.

It never occurred to me to do a rough estimate of whether the options markets were sufficiently large to accommodate Madoff's claimed strategies.

I violated almost every precept of intelligent money management- diversification of instruments and managers, validation of assets held- in my greedy and reckless pursuit of constantly-positive returns from Mr. Madoff."

Alas, I know I won't be reading or seeing those statements from people who lost money in Madoff's scheme. No, they are being portrayed only as victims. Nobody seems to be forcing them to admit to their own greed, bad judgment and denial while they were receiving custom-created reports falsely reporting such amazingly constant gains in the worst equity market in generations.

In fact, I continue to find some humor in ongoing 'searches' for the 'missing billions.'

Haven't people gotten "it" yet? There weren't any 'missing billions.' The totals of those numbers on all those fraudulent, typed-up account statements are themselves fictitious. Madoff never made those profits. He spent them.

People, it's a Ponzi scheme. The gains were illusory. The money people gave Madoff was spent and is either gone, or cleverly hidden in several or many blind accounts, to be eventually accessed by his family after enough time has passed for them to safely recover and launder the money.

So, sure, there's probably a lot of money hidden somewhere. But it's unlikely to be on the scale of what people believe. The false gains which pumped up expectations of Madoff's phantom horde have probably created an equally-false expectation of the size of his remaining illicit plunder.

It's sad that the major lesson of the Madoff fraud is going largely untaught and unreported. By making Madoff the only villain, and excusing the greed and stupidity of his pigeons, the media are fostering the sense that what happened to Madoff's clients could not have been avoided, and involved no amount of naive and inept investing behavior.

Monday, June 29, 2009

Cable TV Attempts To Fend Off Internet Video

I've written several posts, most recently, here, regarding the efforts of cable television providers to cope with an initially small, but growing segment of viewers who are turning to the internet for all of their video programming.

Last week, the Wall Street Journal carried two separate articles on the response of cable systems to this phenomenon. Basically, they cable system providers are offering their customers access to exclusive video content, and internet access to existing cable video content, in exchange for not disconnecting their cable feeds, and merely keeping their high-speed internet access.

I don't think this will work. It seems to me that people tend to want known content for the lowest price, consistent with their viewing habits or access capabilities. Quite a bit of existing cable content is now available on Hulu, or on an inexpensive, per-episode basis on iTunes.

Like many technologies, there's a growing rift between younger consumer segments and older ones. For example, I prefer to watch most television programming on a large screen, but my children have learned to be fairly ambivalent between a television screen or their laptops.

Promising as-yet-unspecified video content in exchange for very pricey access to content you can access either via Netflix, Amazon, iTunes or Hulu doesn't seem like such a great deal anymore. Further, consumers are learning to accept and use a variety of means by which to access video content.

Finally, as I noted in this post, in February, TiVo is now fully capable of adding a menu of internet URLs to its menu, thus allowing a subscriber to access any internet site for video content. It's not clear to me why TiVo is waiting to do this. Perhaps it's a matter of quid pro quo with content providers continuing to make it easy to use TiVo instead of their proprietary DVRs.

In any case, there are a multitude of paths to video content that don't lead through a paid cable television subscription.

Adding a few exclusive video programs is, in my opinion, unlikely to be a long-term solution for the cable providers. Eventually, they're going to face what music and movie producers have already undergone- technological advances which render their proprietary hold over video content moot and of much less value than it could command in the past.