June 29, 2007 4:20
Vanguard guy says Dutch pensions are good, but not necessarily something we want to imitate
The excitement over my column on the swellness of the Dutch pension system continues. Here's the reaction of Steve Utkus, who runs the Vanguard Center for Retirement Research:
The Dutch system is interesting but has some limitations from a European perspective. One is that it ties benefits to working in the Netherlands, a small country and job market, inhibiting workers from moving across the continent. Another is that the pensions are organized on occupational/industry lines, and so there are issues in moving from pension system to system when an industry is in decline.
Also, the US does have a compulsory DB system known as Social Security. The relevant issue in the US is not probably whether we need more DB, but whether we need workplace DC for the mid/small employers who don't offer 401Ks.A sensible system to match the Dutch system, with more flexibility, would blend the DB/SS system with a compulsory DC system for small employers. And that's exactly what policymakers are debating in the mandatory auto IRA proposals.
DB means defined benefit, like a pension plan. DC means defined contribution, like a 401(k). The "mandatory auto IRA proposal" Utkus is talking about is something that comes up from time to time among wonky Washington types, but I have no idea what kind of traction it has among actual lawmakers.
June 29, 2007 11:56
An exciting new asset class for America's pension funds and college endowments to consider
Today's NRC Handelsblad has an article outlining a recent change in fortunes (for the better) at Rotterdam's Feyenoord soccer club. One of the reasons is a new program called "Talent Pool" (they failed to come up with a proper Dutch name for it) which allowed outside investors to buy a stake in the transfer rights of seven young players. Soccer teams usually exchange players in cash transfers instead of the trades prevalent in most U.S. sports. Reports the NRC (translation mine):
For 250,000 euros each, a number of investors could sign up to share 25% of the proceeds of future transfers. In this manner Feyenoord generated six million euros. Interest in the Talent Pool was such a success that Feyenoord is now working on a second pool that should bring in about five million euros.
This sounded vaguely familiar to me, and a bit of googling confirmed that Feyenoord did not originate the idea. Argentina's Boca Juniors did, in 1997, with a transfer-rights fund that actually traded on the Buenos Aires exchange for four years. The WSJ had a story last year about a Lisbon hedge-fund manager who buys and sells the rights to promising Portuguese soccer players. A couple of funds were launched in the UK last year to do the same.
So I can't decide: Is this burgeoning trade in human flesh the creepiest thing in the world, or an entirely appropriate way to spread the risks and rewards of a volatile business?
June 29, 2007 7:50
New column: Blackstone's taxing IPO
My latest column is in the issue of the magazine with Rupert Murdoch on the cover and online here. It begins:
On June 22, shares in the private-equity firm Blackstone Group began trading publicly on the New York Stock Exchange. By late afternoon, CEO Stephen Schwarzman's 23% stake in the firm he co-founded was worth almost $9 billion; he also pocketed $700 million cash from the deal.The same day, several high-ranking members of the House Ways and Means Committee introduced legislation to make Schwarzman and Blackstone pay a lot more in federal income taxes than they do now.
Coincidence? Naah. The astounding riches made public for the first time when Blackstone filed for its stock offering are a big reason this is shaping up to be a hot summer for private equity. Key members of the Senate Finance Committee have also proposed tax hikes, hearings are planned on both sides of Capitol Hill, and private-equity firms are gearing up for a lobbying fight.
But Blackstone-induced "class envy," as TV pundit Larry Kudlow has called it, is not the only reason Congress has suddenly developed an interest in the subject. Nobody proposes touching Schwarzman's big founder's stake, which slipped below $8 billion within days as Blackstone's stock price dropped. At issue instead is the mere $398 million he made as CEO last year, much of it in carried interest on Blackstone's investments. And the manner in which carried interest is taxed is enough to make even a megamillionaire corporate CEO envious. Read more.
The Kudlow class envy quote is from this mostly ridiculous NRO column, which I've been meaning to comment on for a few days now, but just can't figure out where to start.
June 28, 2007 11:03
The U.S. loses to Argentina, with class coming out of its earholes
At halftime, when the score was still 1-1, I was gearing up to write an embarrassingly gushing post about our brave young band of second stringers and their glorious performance against Argentina's A team. But Messi, Tevez, and Co. ended up winning 4-1 (although the U.S. team certainly never embarrassed itself). So I will quote instead from a few of GolTV announcer Ray Hudson's classics, as lovingly gathered on Wikipedia (nothing from tonight's game yet, but I'm sure there will be soon):
* "Cannavaro is running around like a three-legged giraffe out there, but it's effective."
* "Brad Davis has class coming out of his earholes."* "As electrifying as a hair dryer thrown into a hot tub, my friend. Absolutely breathtaking! It puts the Haitian Voodoo rattle on this one. When he finishes -- oh! Like Betamax, they do not make them like him anymore! What more can you say? An extraordinary goal by an extraordinary player! That will send these people into their dreams tonight thinking of heavenly things. Absolutely bamboozles his defender with this virtuoso goal and little blondy says I wanna be like him. I doubt it very much. Look at this, gets all of his angles right, sets it up for himself. Cygan is just a spectator, looks down at him and says, 'That's not human.' And it is not. It is superhuman." -- November 2006, Barcelona versus Villareal, after Ronaldinho scored a spectacular overhead kick
* "Just like a Turkish bellydancer on a surfboard, Ronaldinho skipping through the tulips"
* "Cheekier than a monkey in a monkey tree."
* "Kovalenko for me was outstanding also in his football, not just his gritty performance. He's a footballer; he's got great feet. He's a good link man, a great outlet, he challenges ... he would stab his grandmother in the eye for another bowl of porridge."
June 28, 2007 3:49
Okay, the private equity boom isn't really all about taxes
Someone calling himself The Epicurean Dealmaker has determined that I need to "spanked" for something I wrote Wednesday, and it pains me to admit that this TED is right. Actually, it doesn't pain me all that much to admit that he's right, since the opportunity to have my more ill-considered arguments swatted down by knowledgeable readers before they cause too much damage is one of the main reasons I decided to start blogging. But I really don't want to be spanked by Ann Coulter, as he recommends. Can we please arrange an alternative punishment?
Anyway, here's what I wrote:
I've become more and more convinced that the private equity boom of the past decade in the U.S. has been driven in large part by tax arbitrage. By buying corporations and then loading them up with enough debt that they no longer have any taxable earnings, then paying their partners with "carried interest" that for reasons that have more to do with history than logic is taxed as capital gains instead of as ordinary income, the private equity firms are doing an end run around the U.S. tax system.
TED's response to the first part is that any corporation can take advantage of the tax code's bias for debt over equity (because interest is tax deductible and dividends aren't), and the fact that private-equity-controlled companies avail themselves of that advantage to a greater extent than publicly traded firms doesn't mean that the tax code is driving their success. It just means they're acting more rationally. Fair enough.
As for my implication that taxing partners' carried interest at capital gains rates is some kind of major factor behind the private equity boom, TED writes:
[A]ll this tax preference really does is encourage more people to become PE professionals, since it allows an ambitious finance professional or hanger on to pay (lower) taxes on his or her labor as if he or she were an investor, rather than a common wage slave like a CEO or investment banker. But the limited partners who pony up the vast majority of funds used in the PE business already get capital gains treatment on their investments—like every other slob with a Charles Schwab account and 300 shares of Microsoft—so capital gains treatment for carried interest has the exact effect of nada, zilch, zero on their decision to allocate funds to that asset class.
I don't think "nada, zilch, zero" is quite right, because the lower taxes paid by private equity partners enable investors in private equity funds to employ better talent for less money than if they were, I dunno, putting their cash in mutual funds. But still, I was pretty clearly wrong to write that "the private equity boom of the past decade in the U.S. has been driven in large part by tax arbitrage." I actually had hemmed and hawed over that "in large part." For a while I had it as "in part," which wouldn't have been entirely wrong. But whatever. TED is in large part right; I was in large part wrong.
The flip side to his argument, by the way, is that the private equity guys are probably full of baloney when they argue that taxing their carried interest as ordinary income would have some sort of devastating effect on the business. Oh, and The Epicurean Dealmaker appears to be a very good blog. If you're into epicurean dealmaking--and maybe even if you're not.
June 28, 2007 11:47
Action news: fire on the turnpike!
Because I know that what readers of this blog really want to see is photos of flaming trucks on the New Jersey Turnpike, I pulled out my camera phone when this vista appeared before me during an automotive voyage to the Garden State this morning:
Disappointingly, the flames were no longer raging by the time I got close. Instead, it looked like this:
This is what's called citizen journalism. Isn't it great?
June 28, 2007 7:44
Don Siegelman and Richard Scrushy hear about their jail time, and I remember my days with Don
Former Alabama Gov. Don Siegelman found out Wednesday that he could be spending more than 10 years behind bars for appointing former HealthSouth CEO Richard Scrushy to a state hospital regulatory commission in exchange for a $500,000 Scrushy contribution to Siegelman's unsuccessful campaign for a state lottery. Scrushy, the federal judge in Montgomery said, could get more than eight years.
This case has gotten a bit of national attention lately because Karl Rove reportedly urged U.S. attorneys in Alabama to pursue Siegelman. But I think a bunch of stories by Eddie Curran in the Mobile Press-Register played a big role, too.
As for the merits of the case, I'm conflicted: If giving money to a political campaign in exchange for getting appointed to government office is a federal offense, then scads of government officials (including most of our ambassadors overseas) belong in jail. But putting Scrushy on a panel whose decisions affected HealthSouth's business seems pretty dodgy. And a jury did convict the both of them.
The reason I'm blogging about the topic, though, is because it makes me sad that this is Don Siegelman's moment in the national spotlight. His unsuccessful run for the Democratic nomination for governor in 1990 was the first political campaign I ever covered (I was a reporter for The Birmingham News). He was a frustrating candidate to follow--very good at staying on message, and very simplistic in his message. And that campaign was the beginning of a two-year stint in Montgomery that disabused me of a long-held desire to become a political journalist.
But Siegelman was and is nonetheless a remarkable figure. He was a Catholic kid (Alabama isn't exactly swarming with Catholics) who rose to the top of the famous/infamous student government "Machine" at the University of Alabama, then ended up marching in anti Vietnam War protests there. While at Georgetown Law he adopted lefty Long Island Congressman Allard Lowenstein, of all people, as his political mentor. He spent some time studying at Oxford. He ran George McGovern's Alabama campaign in 1972. He married a Jewish woman. He earned a black belt in karate. These are not things known to win a person political points in Alabama (well, maybe the karate was okay).
And yet, somehow or other, Democrat Siegelman was after all that able to persuade the people of an increasingly Republican state to elect him to statewide office (secretary of state, attorney general, lieutenant governor, governor) again and again and again. The guy was, in his own strange and lonely way, a political genius. Presumably he won't be able to get elected yet again after this. Although in Alabama, you never know.
As for Scrushy, his acquittal on 85 fraud charges in 2005 was, as best I can tell, a travesty. So at least they got him for something this time.
Update: Siegelman got seven years and four months. And the more I think about it, the more that bothers me. This (out-of-date) post by Mark Kleiman (via Matty Yglesias) gets at part of the reason why:
If you had any doubt that the fuss about Libby's sentence is largely a matter of Washington insiders, political and journalistic, rallying to the defense of one of their own, consider the contrasting silence about the Siegelman case. A highly popular Democratic Governor of Alabama was indicted by a highly political U.S. Attorney's office, which is now seeking a thirty-year sentence. He was convicted of appointing someone to a state board that the same man had been appointed to by three previous governors, in return for a contribution in support of a referendum campaign. If that's a crime, then what are we to say about the system of rewarding campaign contributors with plum Ambassadorships?
Siegelman got far less than 30 years. He got less than the sentencing guidelines called for. But sending a politician to jail for seven years for doing something that (a) was pretty much standard practice and (b) did not involve any kind of personal enrichment seems kinda, you know, wrong. And since nobody in the Washington political or media elite is standing up for Don, as a satellite member of the New York media elite I'll say this for him: He wasn't in politics to get rich. As far as I could tell, he was mainly in politics to ... be in politics. And that ain't a crime.
June 27, 2007 11:30
How much do corporate taxes actually bring in around the world?
At the request of several commenters to my post on how U.S. corporate tax rates compare internationally (they're really high), I have now dug out the OECD's estimates of the taxes corporations actually paid, as a share of GDP, in 2005. As best I can tell, you have to pay money to the OECD or have them certify you as a journalist to to get this data, although there is some free stuff from the source document, the 2006 edition of Revenue Statistics, available here. Compiling this involved some actual arithmetic on my part, so don't blame the OECD if I got it all wrong:
Norway 12.8%
New Zealand 5.7%
Luxembourg 5.5%
Czech Republic 4.6%
Belgium 4.0%
Spain 3.9%
Netherlands 3.9%
Sweden 3.7%
Denmark 3.6%
Canada 3.5%
United Kingdom 3.4%
Ireland 3.4%
Finland 3.4%
United States 2.9%
Italy 2.8%
France 2.8%
Switzerland 2.5%
Slovak Republic 2.4%
Iceland 2.4%
Turkey 2.3%
Austria 2.3%
Hungary 2.1%
Germany 1.8%
Japan 0.4%
Korea 0.4%
Of the five OECD countries with the highest corporate tax rates (Japan, the U.S., Germany, Canada and Spain), two are near the bottom in revenue, two are in the middle, and one (Spain) is near the top. Of the five with the lowest rates (Ireland, Hungary, Iceland, Slovak Republic and Poland), three are in the bottom half, one is just above dead center, and one (Poland) didn't turn in its numbers on time. That clears it all up now, doesn't it?
Still, all thirteen of the countries with higher corporate tax revenues as a share of GDP than the U.S. have lower corporate tax rates. That may say more about the social norms and sizes (most are pretty small) of those countries than the incentive effects of lower tax rates. But still, we probably ought to be at least talking about lowering corporate tax rates here.
As I've studied the private equity taxation debate, I've become more and more convinced that the private equity boom of the past decade in the U.S. has been driven in large part by tax arbitrage. By buying corporations and then loading them up with enough debt that they no longer have any taxable earnings, then paying their partners with "carried interest" that for reasons that have more to do with history than logic is taxed as capital gains instead of as ordinary income, the private equity firms are doing an end run around the U.S. tax system. When things like that happen, it's always worth asking whether we should be saying shame on those private equity firms or shame on the U.S. tax system.
Update: Disregard the previous paragraph, and read this.
June 27, 2007 8:19
It's not a subprime meltdown, it's a badly managed hedge fund
Calculated Risk, a really smart financial blog that because I'm a navel-gazing MSMer I only read for the first time last week, had a post over the weekend (link via Barry Ritholtz) mocking the New York Times for explaining away Bear Stearns' hedge fund problems as "fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes." (My friend Julie Creswell was one of the offending story's authors, so let's just assume right here that some meddling editor added that line and Julie had nothing to do with it.)
The problem with this explanation is that if it's the loose lending practices that were at fault, why aren't a bunch of other hedge funds at the brink of failure? It's not as if the Bear Stearns High-Grade Structured Credit Fund and its High-Grade Structured Credit Enhanced Leveraged Fund were the only funds out there buying mortgage debt, after all.
In a post last week I wondered if this was because other money-losing funds just haven't come out of the woodwork yet. Calculated Risk contributor Tanta, "a former bank officer and mortgage lending specialist who is currently on extended medical leave," argues (in backward fashion) that the issue is really that Bear Stearns was running its funds--in particular the Enhanced Leverage fund, which bought its mortgage debt with lots of borrowed money--in wildly irresponsible fashion:
Let's leave, for the moment, the question of the incredibly complex and opaque layers of leverage, synthetic structures, derivatives swaps, and mark-to-model valuations that transformed mere commonplace mortgage loan write-downs into 23% losses of $600MM invested equity in approximately 9 months on a fund created because its precursor fund, which had dawdled along for two years or so generating a mere 1.0-1.5% a month return, we are informed, just wasn't good enough for the high rollers who didn't damn well put their money in hedge funds to earn 12-18% a year. This is really all about a bunch of subprime loans.
In other words, it's not all about a bunch of subprime loans. It's about Bear Stearns, and the investors in its hedge fund. But is it really just Bear Stearns? Somehow I doubt it.
June 26, 2007 11:34
Al Gore likes being a businessman
My friend Ellen McGirt has a cool article on Al Gore in in the July Fast Company (which I know about because she hegemonically posted a link to it on her Facebook page). An excerpt:
Since his nonelection, Gore has become a millionaire many times over, bringing him, in financial terms, shoulder to shoulder with the C-suite denizens he used to hit up for campaign cash. In addition to the steady flow of six-figure speaking gigs, he has become an insider at two of the hottest companies on the planet: at Google (NASDAQ:GOOG), where he signed on as an adviser in 2001, pre-IPO (and received stock options now reportedly worth north of $30 million), and at Apple (NASDAQ:AAPL), where he joined the board in 2003 (and got stock options now valued at about $6 million). He enjoyed a big payday as vice chairman of an investment firm in L.A., and, more recently, started a cable-television company and an asset-management firm, both of which are becoming quiet forces in their fields.
Financial disclosure documents released before the 2000 election put the Gore family's net worth at $1 million to $2 million. After years of public service--and four kids needing high-priced educations--Al and Tipper used to fret occasionally about money. Not anymore. They have a new multimillion-dollar home in a tony section of Nashville and a family home in Virginia, and have recently bought a multimillion-dollar condo at the St. Regis condo/hotel in San Francisco. Available data indicate a net worth well in excess of $100 million.
And another:
"I have really enjoyed the business world much more than I expected," Gore says, settling back in his chair. He speaks animatedly about incentive structures and how information flow creates opportunities.
One problem he had in politics, he says, was identifying an issue too early--"'predawn' is the term I use"--to be able to act on it. But "in the business world, particularly at a time when things are moving so swiftly, if you can see it early, you can make a business opportunity out of it." He pauses. "For whatever reason, the business world rewards a long-term perspective more than the political world does."
Anyway, read the article. You will learn lots of interesting things, such as that Current TV actually makes money.
June 26, 2007 9:43
The Washington Post's take on Cheneynomics
Today brings us the economic-policy chapter of the big Washington Post series on how Dick Cheney runs America. It's not nearly as dramatic or sinister-seeming as yesterday's installment on torture 'n' stuff. Economic policy is like that, I guess.
One big takeaway is that economic policy in the Bush administration is run not by the Treasury Secretary, as it was in the Clinton years (at least after Lloyd Bentsen retired), but by the Vice President. Which at least seems better than having it run by some junior political aide in a cubbyhole office in the West Wing, although from the Post account it looks like it was mostly political considerations, combined with a very facile supply-side view of how the economy works, that drove Cheney's thinking on the subject. It's entirely possible that there was more to it that; this was clearly not a topic that Post reporters Jo Becker and Bart Gellman were especially psyched to write about.
In any case, the legacy Cheney leaves behind on the economic front are persistent budget deficits (albeit, I always feel obliged to point out, much smaller deficits relative to GDP than those of the 1980s and early 1990s), an economy that's still growing and dynamic but has clearly seen better days, and a bunch of huge, as-yet unresolved problems, from the U.S. trade relationship with China to the future funding of Social Security and especially Medicare. Apparently Cheney was against the expensive new Medicare drug benefit, but he was accommodating enough to let the President have his way on that.
Oh, and one other interesting moment in the article. Ed Lazear apparently needed Cheney to tell him that the mortgage-interest tax deduction is popular:
When Edward P. Lazear, chairman of the White House Council of Economic Advisers, broached the idea of limiting the popular mortgage tax deduction, he said he quickly dropped it after Cheney told him it would never fly with Congress. "He's a big timesaver for us in that he takes off the table a lot of things he knows aren't going to go anywhere," Lazear said.
And really, making policy in Washington is all about saving time, right?
June 26, 2007 7:00
No flight from risk just yet
John Authers in the FT makes the point (subscription required) that the great flight from risk that people with respect for market history have been predicting for a while now still hasn't come to pass:
Angela Montero, of Société Générale, pointed out last week that Mexican bonds yielded 5.85 per cent. 10-year bonds in Colombia, gripped by scandal and guerrilla war, yield 6 per cent. US treasuries yield only about 5.15 per cent, but, more tellingly, New Zealand and Australian bonds yield 6.2 and 6.75 per cent respectively.
This is in local currency terms, and speculators have pushed the aussie and kiwi dollars to excessive levels. But can Mexico or Colombia really be a safer bet to repay a loan than Australia or New Zealand?
My thinking is that they can't. But every week there seems to be another sign that the global age of easy money that has brought us these weird interest-rate relationships is about to come to an end and then ... it doesn't.
June 25, 2007 10:30
Hegemons prefer Facebook
From the latest fascinating essay by danah boyd, UC Berkeley grad student and online-social-networking guru (link via Howard Rheingold via joerissen):
The goodie two shoes, jocks, athletes, or other "good" kids are now going to Facebook. These kids tend to come from families who emphasize education and going to college. They are part of what we'd call hegemonic society. They are primarily white, but not exclusively. They are in honors classes, looking forward to the prom, and live in a world dictated by after school activities.
MySpace is still home for Latino/Hispanic teens, immigrant teens, "burnouts," "alternative kids," "art fags," punks, emos, goths, gangstas, queer kids, and other kids who didn't play into the dominant high school popularity paradigm. These are kids whose parents didn't go to college, who are expected to get a job when they finish high school. Teens who are really into music or in a band are on MySpace. MySpace has most of the kids who are socially ostracized at school because they are geeks, freaks, or queers.In order to demarcate these two groups, let's call the first group of teens "hegemonic teens" and the second group "subaltern teens." (Yes, I know that these words have political valence. Feel free to suggest an alternative label.) These terms are sloppy at best because the division isn't clear, but it should at least give us a language with which to talk about the two groups. ...
As someone who has witnessed some serious Facebook uptake over the past few weeks by hegemonic non-teens, I think ms. boyd is definitely onto something here.
Update: Clearly, some folks really don't like this observation (see the comments). A couple notes to the people who think that I and others in the media shouldn't have given boyd's essay (and no, I don't know why I went with her affectation of not capitalizing her name, but at this point I have to just to be consistent) any play at all:
1) True, she's not the number-crunching quant that some (including me) might prefer, but boyd is a recognized authority on this online social networking stuff. Her research is funded by the Macarthur Foundation, she's explained the appeal of MySpace to the American Association for the Advancement of Science, she's worked for Google and Yahoo, etc.
2) As Nora notes in the comments, if you actually read boyd's piece it's full of caveats and cautions and it's pretty clear that she identifies more with the "subalterns" than the "hegemons." Which may be why the comments on her blog about the essay (of which there are 153 and counting) are generally much more positive than the comments here.
3) I have witnessed some pretty dramatic Facebook uptake over the past month among my peers in the New York media business, and in technology circles nationwide. These are people who for the most part wouldn't be caught dead with a MySpace page. They are also, by boyd's definition, hegemons. (Hegemony sure ain't what it used to be.) Her observations about social networking behavior among teens seemed to square with that. Yes, Facebook is still a gnat in comparison with the elephant that is MySpace. But it is experiencing growth in interesting new places, and that's worth writing about.
Update 2: Ms. boyd ruminates about "the most problematic of essays I've ever shared publicly," and Robert Scoble discusses "danah's perfect media storm."
June 25, 2007 8:28
A Dutch newspaper gives real meaning to the term 'widely read'
A cousin who was passing through Schiphol over the weekend bought me a copy of my favorite newspaper, the NRC Handelsblad. I haven't had time to actually read it yet, but I was immediately struck with how the NRC, always one of the widest newspapers on the planet, has so far resisted the trend toward skinnification. Next to the Wall Street Journal, which used to be the widest of American papers, the NRC now looks positively giant:
No, it's not the most convenient of formats. (I may bring the paper with me on the subway this morning and see how many people I can irritate by opening it up.) But it looks great, doesn't it?
June 22, 2007 4:13
America's poor, overtaxed corporations
Reader Marcus Choudhary has urged me to mention, amid all this talk about the sweet tax deal that private equity firms and private equity partners get, that corporate tax rates in the U.S. are pretty high. So if the folks at the House Ways and Means and Senate Finance committees really want to make our tax system more consistent and fair, they might want to consider cutting taxes on corporations as they raise them on the private equity guys.
Fat chance of that, of course, especially with lawmakers looking for ways to bring in more money. Although I do wonder whether, with U.S. corporate tax rates among the highest in the world and corporations getting ever more adept at shifting income around to reduce taxes, we might actually get an increase in revenue by cutting corporate rates. You know, like Arthur Laffer says we would.
Of the 30 members of the OECD, here are the top five and bottom five when it comes to corporate income tax rates (rates are averages and include state and local taxes; you can get the full list here) in 2006:
Top 5
Japan 39.54%
U.S. 39.3%
Germany 38.9%
Canada 36.1%
Spain 35%
Bottom 5
Ireland 12.5%
Hungary 16%
Iceland 18%
Slovak Republic 19%
Poland 19%
June 22, 2007 11:30
What's so emotional about wanting a fair and consistent tax system, Mr. Blankfein?
Goldman Sachs CEO Lloyd Blankfein says it's "emotion" that's driving the Congressional push to change the tax treatment of private equity:
“Right now, sentiment is what is really transcendent,” Mr Blankfein said in an interview with the Financial Times. “But as you get into the consequences . . . for competitiveness and fairness . . . it turns away from sentiment.”
Blankfein is surely right that gut reaction to Steve Schwarzman's big payday as Blackstone hits the markets today--about $700 million from selling shares, plus a $8.8 billion valuation (as of about 11:20 a.m.) for his remaining 23% stake in the firm--is one reason why Congress is interested in making him pay more taxes. But I spent a while yesterday reading through law professor Victor Fleischer's excellent analysis of partnership tax law, which has been read closely by the House and Senate staffers preparing the possible tax change, and it's clear that there's an entirely unemotional and to my eyes very persuasive case to be made for taxing the "carried interest" earned by general partners in private equity funds as ordinary income, not capital gains.
The case is one of consistency and fairness. Right now, our tax code is biased in favor of private equity and against corporations. A new CEO who is hired to turn around a public company, is given a big pile of options to motivate him, and succeeds in his work is taxed when he cashes in those options at the full 35% personal income tax rate. Yet a private equity partner who buys a troubled company using other people's money, succeeds in turning it around, and then cashes in is taxed at the 15% capital gains rate. There's nothing emotional about saying that this is inconsistent.
This whole thing is starting to remind me of the battle over expensing stock options. The move to treat options grants as an expense was initially driven by purest accounting logic. It didn't actually gain enough momentum to become reality until emotion--in the form of outrage over the corporate scandals of 2001 of 2002--took charge. But those Silicon Valley executives who argue even today that options expensing was nothing but the product of East Coast envy (sorry for the lack of a link backing this up, but I swear I've heard these very words in a recent conversation) are dead wrong, and so is Lloyd Blankfein when he says sentiment is the main thing driving the private equity tax talk.
None of this means we shouldn't have a serious discussion about the potential economic consequences of taxing private equity partners as employees. But I suspect that it's the guys who don't want their taxes raised who will be wielding the most emotional and sentimental arguments.
June 21, 2007 2:24
Taxing those private equity billionaires (and their little dogs, too)
So Congress may actually take on the big tax break, if you want to call it that, enjoyed by investment partnerships like private equity, venture capital and hedge funds. According to today's NYT:
At the heart of the newest proposal is an attempt to bar private equity and hedge fund operators from a longstanding, but little understood, practice that has allowed them to pay a lower capital gains rate of 15 percent instead of the ordinary top income tax rate of 35 percent on their performance fees, which typically represent most of their annual income.
The industry argues that the portion of profits they receive from investments should receive preferential treatment because of the risk involved. But critics contend that the fees are effectively bonuses because private equity firms have little, if any, of their own money at stake.
This is actually something that's been talked about for a couple of months. The point of the Times article is that it's now suddenly being taken seriously by some people on the House Ways and Means and Senate Finance committees. Last week, Senate Finance top dogs Max Baucus and Charles Grassley introduced a bill that would raise taxes for publicly traded investment partnerships (which private equity giant Blackstone Group is about to become) by treating them as regular corporations. This seems hard to argue against: If you're publicly traded, you're a corporation, right? Except the Baucus-Grassley bill doesn't require that all publicy traded partnerships be taxed as corporations, just those "directly or indirectly deriving income from providing investment adviser and related asset management services."
The logic is perhaps even clearer on taxing fund managers' paychecks as regular income instead of capital gains. But lots of people have been arguing against it--partly out of pure self-interest, partly out of a concern that it will discourage behavior that appears to have been pretty good for the U.S. economy. Venture capitalist Fred Wilson took this on back in April:
[T]o my mind the biggest issue with changing the way VC carried interest is taxed is the unintended consequences. If angel investors who put up their own dollars at risk continue to get capital gains treatment (as they should) and venture capitalists who are investing institutional money lose capital gains treatment, the best venture investors will simply choose to invest their own capital instead of others.
This would mean, I guess, that pensions, college endowments and the like would no longer be able to invest in the best venture capital (and private equity and hedge) funds--and that those funds would make fewer investments. Which would presumably be bad.
The lesson I'm taking from all this is that as soon as you start taxing different kinds of income differently, you inevitably get into really messy situations like this. There's a reasonably persuasive economic argument for favoring risk-taking behavior in the tax code, which we (and lots of other countries) try do by taxing capital gains at a lower rate than regular income. But as soon as you create such a differential, you create a strong incentive for people to try to disguise regular income as capital gains. And it can be really hard to draw a line between the two. The Tax Reform Act of 1986 strove to remedy this by taxing both kinds of income at more or less the same (low) rate. But that didn't stick. So what do we do now? As is so often the case, I'm not at all sure. You got any good ideas?
June 21, 2007 12:47
The subprime mortage market's $280 billion question
Back in March, when the whole subprime mortgage mess was beginning to hit the headlines, derivatives consultant Janet Tavokoli said something that both interested and alarmed me. Some of the big Wall Street firms appeared to have started betting against the subprime market at the beginning of the year and successfully protected themselves from the meltdown. But who had lost money then? I asked.
"That’s the $300 billion question, because no one is fessing up to being on the other side of this trade," Tavokoli told me.
No one had to fess up immediately because the bonds and derivatives that make up the subprime market aren't traded on an organized exchange or priced in any kind of consistent and public way. If you owned subprime debt, that meant you had a lot of leeway to keep pretending that it had maintained its value.
This appears to be what happened with Bear Stearns' High Grade Structured Credit Strategies Enhanced Leverage Fund and its High Grade Structured Credit Strategies Fund. Both owned securities at the top of the subprime heap, which haven't yet been hit by defaults. But the willingness of others to buy those securities has dropped dramatically over the past few months, and the managers of the Bear funds were slow to acknowledge these changed market conditions. To quote from yesterday's W$J:
Last month, Enhanced Leverage reported that its value fell 6.75% in April after the fund's bets on the mortgage market went wrong. Two weeks later, it put the loss at 18%, spooking already-nervous investors and creditors and sending many of them running for the exits.
The huge revision at least in part reflected conversations Bear Stearns hedge-fund managers had with bond dealers, three of which told them in late April that some of the funds' assets were worth less than the values stated on the funds' books, according to a person familiar with the matter.
The Bear Stearns funds owned mortgage securities that used to be valued at about $20 billion. Which I guess means the rest of the market is still struggling with a $280 billion question.
June 21, 2007 10:47
Well, here's somebody who agrees that Dutch pensions are swell
Carol Zurcher, CPA, of Winter Park, Fla., sent me a nice e-mail about my column on the strengths of the Dutch pension system, which has generated a spectacular lack of interest from Curious Capitalist readers. Here's what she had to say:
Thank you for your article "Where Retirement Works." A large part of my practice is in designing, implementing and administrating defined contribution plans (not investing). I am an advocate of Group–Trustee Invested Plans, rather than Individual Self-Directed Account Plans. The Group–Trustee Invested Plan design provides plan participants access to money managers that they generally would not have access to.
The Self-Directed Account plan design is creating a system of information and administration overload. This additional information is not going pay any retirees benefits. Guidance such as Section 508 of the Pension Protection Act of 2006 and the Department of Labor’s FAB 2006-03, although well intended, may in the long run increase the administration burden on small employers to the point where it is no longer cost effective for these employers to offer plans.
It is refreshing to see an article that supports the risks being shared by all plan participants and assets being managed by professionals.
So there you have it. I see some very catchy slogans for my incipient pension-reform movement here:
Question Section 508!
FAB 2006-03 Isn't Necessarily So Fab!
June 20, 2007 3:59
The great Toys "Я" Us quandary, finally resolved
Ever since that day in the late 1950s when entrepreneur Charles Lazarus named his second store Toys "Я" Us (the first, which specialized in kids' furniture, was called Children's Bargain Town), those who wrote about him struggled with that backwards R. You just couldn't reproduce it in most newspapers and magazines, and in fact the official company name in SEC documents is "Toys R Us Inc."
But nowadays, thanks to the magic of html, it's easy to write an Я! I'm sure many others figured this out years ago, but I saw Steven Wells do it in the Guardian sportblog today, and was inspired. After a little searching, I found that he was probably using a character from the Cyrillic alphabet. To get it, you just type an ampersand followed, with no space, by #1071;
June 20, 2007 11:39
Something you didn't know about how the blogosphere works
Here's part of a comment, from Curious Capitalist regular Yagdyu, that deserves wider distribution:
Most bloggers and blog commentors are either rich people or are friends and family to rich people. Our access to millions and millions of dollars allow[s] us to waste time on the internet giving baseless opinions on issues that affect less fortunate people. We then use this data to manufacture and market products to those same people.
My "I ♥ (heart, for those browsers that can't handle my coding) Dutch pensions" t-shirts will be available for sale any day now.
June 20, 2007 8:42
IT still matters, but only for a few companies with really deep pockets
In May 2003, Nicholas Carr published an article in the Harvard Business Review called "IT Doesn't Matter" that launched his glorious career as a technology pundit and made a lot of people in Silicon Valley really angry.
Carr's argument was that for most big companies, information technology had become a simple necessity, not a source of competitive advantage. Which seemed to be horrendous news for a producer of super-high-end computing equipment and software like Sun Microsystems. And sure enough, Sun lost money every fiscal year from 2002 to 2006.
But now Sun is profitable again (its fiscal 2007 results won't be out for another month or so, but the first three quarters looked pretty good). And it has become so by largely embracing Carr's argument. "I agree with Nick Carr more than I disagree," Sun chief technology officer Greg Papadopoulos told me over breakfast Tuesday, "much to the chagrin of my peers in the industry."
In Papadopoulos's telling, information technology has become a commodity for most of the companies that drove the boom in IT spending in the late 1990s. Worse than a commodity, a burden. Something you're afraid of messing up, but can get no real competitive advantage from. "Five years from now, if I still had my internal IT shop running my e-mail at a Fortune 1000 company, I'd be as proud of it as I am of my pension fund," he said.
What this means is that Sun has had to focus on those deep-pocketed companies for whom IT is still a competitive advantage:
1) The Web 2.0, social networking and gaming sites that have captured the bulk of Internet traffic. Microsoft, GooTube, MySpace, etc.
2) The big companies that can still wrench profits out of superior computers and software--FedEx routing its trucks or Wall Street firms pricing their derivatives.
3) The companies consolidating business IT tasks at the network level: Salesforce.com, SugarCRM, Workday, etc.
There aren't many such customers, and in the future there may be even fewer. "The world needs only five computers," Papadopolous wrote in a post on his blog (you can't be a top Sun executive and not have a blog) back in November:
I'm just saying that there will be, more or less, five hyperscale, pan-global broadband computing services giants. There will be lots of regional players, of course; mostly, they will exist to meet national needs. That is, the network computing services business will look a lot like the energy business: a half-dozen global giants, a few dozen national and/or regional concerns, followed by wildcatters and specialists.
The model for Sun, then, is oilfield equipment and services provider Schlumberger, Papadopoulos said. Schlumberger makes a lot of money, although it's probably never going to get its CEO on the cover of Fortune--whether he wears a superhero costume or not. Funny that Papadopoulos didn't cite Schlumberger archrival Halliburton as his example, huh?
June 19, 2007 1:12
The strange ways of life in a Facebook world
A couple of weeks ago, when I wrote a post about Facebook and LinkedIn, Paul Lukasiak commented:
These social networking sites are kinda scary to me...
In real life, people move on, make new friends, forget old acquaintences, etc, etc, etc...Now, for the rest of your life, you will be stuck with that guy you thought was pretty cool when you were a sophomore in high school, but turned out to be kind of a jerk by you junior year, will be part of your life forever. Even if you move to Katmandu, he's going to be sending you his freaking baby pictures....
Thanks to Facebook, BFF MEANS "forever", whether you like it or not.
That isn't the half of it. I'll let my friend Thomas Crampton explain, in a blog post he put up Friday:
Today I discovered the perils of changing my Facebook profile.
My fiancee and I decided that showing our engagement in Facebook gave out a little too much personal information.But I did not realize that unchecking the box marked “Thomas Crampton is engaged to Thuy-Tien Tran” would send a message to everyone connected to us in Facebook that “Thomas Crampton and Thuy-Tien Tran are no longer engaged”.
Within minutes an email arrived from a friend in San Francisco asking if I was doing ok and a friend in France posted the news on his Twitter feed ... which has nearly 800 readers. Colleagues discussed the situation without me knowing about it. ...
Thomas's blog post about this will of course find its way all over the blogosphere (it hasn't yet, but I'm doing my part here), at which point thousands and thousands of strangers will know that he and Thuy-Tien Tran are engaged. Which I guess is better than thinking they've broken up.
June 19, 2007 11:17
Reader mail: Don't go calling ExxonMobil stingy
Art Zadrozny of West Chester, PA, writes in response to my column on ExxonMobil's stinginess:
Did you not read your own words in the article about Exxon's approach to oil exploration? Why would the company want to put itself in the same situation it found in 1981 - investing heavily in development, only to see the market bottom out and profits lag?The real issue is the limited opportunities for ExxonMobil and other majors to find new oil. You would do readers better service by highlighting this as a consequence of world politics, not Exxon's business philosophy.
True, Exxon always was more risk adverse than the smaller oil companies, but your article does not do justice by caliing Exxon's approach stingy, it only feeds the public mindset that big oil is out to rip us all off and actually has some control over prices.
Exxon's profits of less than 11% are not out of line with other corporate sectors either, and there is no guarantee that oil will stay at $65/Bbl. World prices could just as easily drop IF tensions in the Middle East calmed down.
If I sound like a oil company supporter, well, maybe it's becaused I worked in the industry for 25 years. But that relationship, as well as my stock holdings, ended 9 years ago. (I wish I had held the stock positions, but at the time, things did not look so good.)
I don't really disagree with Art's analysis. I just can't quite bring myself to depict the most profitable company in the history of th