Sunday, May 10, 2009

Home on the Deranged

Steven Malanga details the decades long obsession American politicians have had with home ownership, and its unintended consequences. Predictably, no one seems to have learned:
...before we’ve even worked our way through this crisis, elected officials and policymakers are busy readying the next. Barney Frank, the Massachusetts congressman who serves as chair of the House Financial Services Committee, has balked at proposals to privatize Fannie Mae and Freddie Mac, which would eliminate their risk to taxpayers and their susceptibility to political machinations.

Why? Simple: the government uses them to subsidize the affordable-housing programs that Frank supports. California congressman Joe Baca, head of the Congressional Hispanic Caucus, also opposes reining in affordable housing lending. “We need to keep credit easily accessible to our minority communities,” he asserts.

Republicans and Democrats, meanwhile, have scrambled to reignite the housing market through ill-conceived tax credits and renewed federal subsidies for mortgages, including the Obama administration’s mortgage bailout plan, which recalls the New Deal’s H[ome]O[wner's]L[oan]C[orp].

As Harvard economist and City Journal contributing editor Edward Glaeser has observed, mortgage lenders have finally “recovered their sanity”—only to have government dangling subsidized low interest rates and tax credits in front of them and their potential customers all over again. Behind these efforts is a fundamental misconception among politicians that housing drives the American economy and therefore demands subsidy at virtually any cost.

Wednesday, May 06, 2009

Emperor...No Clothes

We think Joe the Plumber and Cliff Asness would get along just fine:
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process.

Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing.

Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

....Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.

Careful what you wish for, UAW

NYU's Thomas Cooley says, you'll be sorry:
Government interference in the normal conduct of business has had a chilling effect on financial markets and threatens the progress of the recovery.

....Investors, other than the banks who desperately needed TARP funds for survival, are leery of any program that uses them. Anyone who took TARP funds has been subject to government interference in managerial decisions. The restrictions on bonuses and executive pay have been widely discussed in the media. Less well known are restrictions on the banks' ability to hire foreigners, and the constant harassment by Congress over internal management decisions on everything from the use of private aircraft to the locations of conferences. Some of these concerns are well justified, of course, but it wasn't clear ex-ante what all of the rules were and it isn't clear ex-post either.

....The Obama administration has shown repeatedly that it is willing to change the rules and even challenge the sanctity of contracts in the interests of its political agenda. The best, most recent example is the Chrysler restructuring.

The administration decided to tilt the restructuring in favor of the unions. The government proposed giving the United Auto Workers' retiree health fund a 55% equity stake in Chrysler--more than the combined stakes of Chrysler's merger partner, Fiat, or the other secured creditors that are owed roughly $7 billion. When some of the secured creditors, who were offered 30 cents on the dollar, balked, they were attacked by Obama as speculators.

....Citi, JP Morgan Chase, Goldman Sachs and Morgan Stanley, all major recipients of TARP Funds, all deep in the pocket of the Treasury, agreed to the administration's plan. So it looks like bankruptcy law will take a back seat to social policy.

There is at least some poetic justice in this outcome. The unions, whose years of work rules, and pension and health care deals helped sink the company, will have to eat their own cooking from now on. But their future success needs not only labor but capital.

Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

Sunday, May 03, 2009

Cheaters Never Prosper?

It seems their enablers do:
At the Ashley Madison agency, which revels in the motto, "Life is short. Have an affair," the global economic downturn is proving a boon for business.

....the message is hitting home as the economy reels, according to Noel Biderman, the company's founder and chief executive.

Membership has soared from one million to 3.6 million in just 12 months, and he expects another surge after the company launched a service allowing members to access the site from their mobile phones. The innovation is aimed at would-be cheaters who are nervous about leaving evidence of their infidelity on their computer at home or work.

Mr Biderman said that many couples who would otherwise have divorced were seeking affairs at the moment because of the cost of hiring lawyers and the difficulty of selling the marital home.

....It is free to register with Ashley Madison, but members pay with purchased credits to send messages to other users. The agency charges $49 (£33) for 100 credits or $249 for 1,000 credits and 50 credits buys 60 minutes of instant messaging time or 10 emails to different users.

They shoot horses, don't they?

If, they don't, they might start, in Indian country:
WARM SPRINGS INDIAN RESERVATION —
Here on this reservation in north-central Oregon, horses are woven deeply into daily life. They are traditionally used by tribal members in their work and their culture, whether it be for rodeos or horse parades.

Gathering, breaking and selling wild horses has long been part of the tribe's economy. Horses that don't make the grade are sold for slaughter.

But the nation's final three slaughterhouses were shuttered two years ago, and a perfect storm has formed with a glut of horses, lack of a market and economic recession.

Tribal rangeland managers now estimate 20,000 wild horses are overrunning Indian Country in Washington, Idaho and Oregon, with an annual foal crop raising the population by some 20 percent a year.

....Agricultural and rangeland experts from five tribes have been meeting quietly since last winter to explore options to manage horse populations on reservation lands. Their ideas, still in discussion, run the gamut.

The most controversial: opening a slaughter plant at the Warm Springs reservation, and maybe someday packing the meat for human consumption overseas, if the regulatory hurdles can be cleared and economics pencil out.

....There used to be a thriving horse market in this country, with buyers bidding on horses for processing plants in Stanwood; Maytown, Thurston County; and more than 20 other plants across the country, supplying an eager trade, particularly in Europe.

But the country's remaining three horse slaughterhouses, in Illinois and Texas, closed in 2007 after a sustained campaign by animal-rights activists that resulted in Congress forbidding USDA inspection of horse meat for human consumption. That ended any legal commercial packing industry for horse meat in this country.

Still, there is a demand for horse meat, particularly in Europe. But with no packer competition in the U.S. to supply it, and a glut of horses, foreign packers can set their price.

Trucking the animals long distances to slaughterhouses in Canada and Mexico also means buyers will take only the fattest, biggest animals.

For the sick, the old, and the skinny, today there is often no market at any price. Buyers who remember paying 70 cents a pound at auction are today paying as little as 6 cents a pound — if the packers will even take the animal.

....The bottom has fallen out of the horse market just as the recession is driving even owners of pedigreed, suburban stock to unload animals they can't afford to care for, overwhelming rescue and shelter operators.

It's the same story for the U.S. Bureau of Land Management, which is struggling to feed and care for some 30,000 wild mustangs gathered from public rangelands and put out to pasture in the Midwest in deference to opponents of slaughter.

The BLM is paying $27 million this year alone to feed and care for wild horses living out their days at taxpayer expense. With another 30,000 or so more wild mustangs still roaming the range, multiplying every year, the costs are growing. So far, the BLM has no solution to the problem.

Hold the Phone!

At the University of Washington, the PhDs are in...but their telephones are out:
"I think we're all aware that we're living through events that in 10 or 20 years we'll be talking about in our classes," he said.

He's referring to the day they took his telephone away.

[Richard] Kielbowicz, whom I had to reach by e-mail, is a professor at the University of Washington's Department of Communication. These are lean times at the UW, so to save money this department that specializes in how society exchanges information has gotten rid of its landline phones.

....Most professors have personal cellphones, so they're hardly shut off from the world. Still there are some who feel the demise of the landline phone is sad.

....On the other hand, the relics never rang anymore.

Kielbowicz, who teaches a course in the history of communication technology from the Gutenberg press to the World Wide Web, says his office phone would ring maybe once every two weeks. Calls became so rare that he began to view any that did come in with trepidation.

"Students no longer call on the phone, ever," he said.

Friday, May 01, 2009

Republican Optimist, Thy Name Is...

Mitch Daniels, governor of Indiana:
In Indiana, Republicans are the party of change and reform; ask anybody -- our opponents, the press, everybody. In the rhythm of life here, four years ago we replaced a 16-year regime that had gone stale.

And so we are the party that restored fiscal integrity. We are the party that addressed health care for the uninsured. We are the party that rebuilt an attractive business environment. We are the party that cleaned up the ethics issues in government -- that and much more. We attacked our infrastructure problem in a novel and taxpayer-friendly way.

....you know, the results are in -- and incidentally, we just won with the largest vote total in the history of elections in our state for any office any year.

....I guess what I'm saying is that when Indiana Republicans meet, I always tell them we cannot control what the party looks like in other places or nationally, but here in Indiana if we don't remain the party always defining the agenda, bringing the new ideas and standing for constructive change, then people will excuse us from duty. And they should. ...

People want to know first of all that you hear them and understand what's going on in their lives. I work at this incessantly -- I was riding all over Salden, Indiana, on my motorcycle Saturday -- and that you have some thoughts about how you make life better, more secure for them. Now, those thoughts can be animated by what we consider Republican principles, and that's fine. In other words, I don't think fiscal prudence went out of style; in fact, people are rediscovering it themselves, right? Save more, spend less -- and I think they expect government to emulate that.

When we addressed health care for the uninsured, or insurance for those without, it's a very free-market solution -- it's basically HSA's for poor people -- and it's extraordinarily popular. I had a lady hugging me and crying down in a coffee shop in Connorsville Saturday morning because she got coverage -- I've had this experience a thousand times -- she got coverage and she couldn't possibly have had it any other way. I just think that the image problems we have are very real, but also addressable, by a Republican Party that goes out of its way to show that it cares about average people and the least advantaged.

Let me just go off on another one my little sermons I always give. Here's a political fact of life: You can be a blue-blood, silver spoon, coastal elitist, and if you have the Democratic label, you start with the presumption that you are connected to average folks. And the Republicans start with the negative presumption. So don't whine about it being unfair, just recognize it and go work on it.