Job Creation and the Rich: The Facebook Story

President Obama is on the prowl for new targets for (1) raising more tax revenue and/or (2) demonizing “the rich” for campaign purposes. Among Obama’s proposals, besides raising taxes on high-income individuals generally, is to more than double the tax rate paid by many private equity and venture capital investors from 15% to 35%, by reclassifying sales of their businesses (or shares in their businesses) as ordinary income rather than capital gains (more detail here and, drawn from prior versions of the proposal here and here). A common trope being retailed in some form or another by Obama and his allies is that taxing the wealthy and private equity and venture capital has no impact on job creation. As is common to liberal arguments, rather than argue that they are proposing a worthwhile tradeoff, liberals deny even the possibility that their policies involve any tradeoffs whatsoever. As well they might: the voters are hardly going to accept anything right now that impedes the growth of private sector businesses and jobs.
Now, there are a lot of economic angles to this argument, which have been ventilated in more detail elsewhere. But a concrete example may be useful in illustrating how wealthy individuals, private equity and venture capital contribute to the growth of businesses and jobs: the story of Facebook.
Facebook, as you may recall, was largely the brainchild of 20-year-old Harvard student Mark Zuckerberg, and – to simplify a story that has involved a lot of acrimony and litigation – was founded by Zuckerberg and his roommate Dustin Moskovitz in February 2004 to provide a way for Harvard students to interact online. The company was not created in response to any consumer demand to spend money on such a product (seven years later, it still doesn’t cost you anything to have a Facebook account, and the company’s revenue comes mainly from advertising and similar streams). It was created because the founders thought it was a good product and that creating it would generate its own demand (the antithesis of demand-is-everything Keynesian economic theory). They were right – they got 1,200 subscribers within 24 hours, and the user base of Facebook has grown like wildfire for years since, to over 800 million today.
But while they were not exactly paupers – each invested about $1,000 at the start, and later $10,000 – there were limits to how far Zuckerberg and Moskovitz could spread their business idea without investment. Enter the money. First came Eduardo Saverin, also a Harvard student, the son of a wealthy Brazilian businessman; Saverin had reportedly made some $300,000 investing in oil futures, and put a stake in Facebook to become one-third owner and the company’s first CFO. That got the venture off the ground, born from the start in commodity trading profits. (Saverin was later bought out to resolve litigation)
Just four months after the company’s founding, in June 2004, it got a major investment: $500,000 from Peter Thiel. Thiel had been running his own multibillion-dollar hedge fund since 1996, and had made $1.5 billion in 2002 from taking PayPal (which he founded) public and selling it to eBay. Once again, an investor flush with cash from hedge fund profits and the sale of a new business provided the rocket fuel that allowed Facebook to take off from dorm-room startup to major online network. (Thiel reportedly received a 7% stake in the company, now worth well over a billion dollars).
As a startup, Facebook needed constant inflows of cash. The company moved its headquarters to Palo Alto around the time Thiel invested, and spent $200,000 in mid-2005 to buy (its prior domain name was It cost money from the very beginning to defend against lawsuits. And the company seems to have lost millions in its first two years of operations.
Yet the product itself grew and grew, expanding overseas by the fall of 2005, and the constant inflow of capital kept it able to sustain that growth. Venture capital firm Accel Partners put $12.7 million into Facebook in April 2005, followed by Greylock Venture Capital, which invested $27.5 million that same year. By 2007, Microsoft invested $240 million in exchange for just a 1.6% stake in the company, implying that the whole enterprise was now worth $15 billion. Today, Facebook has over 2,000 employees, and expects to grow that to 9,400 employees by 2017.
Anecdote is not the singular of data, and like most stories of individual companies you can overdraw the policy implications from Facebook’s growth. Yes, Facebook is an extreme example. Yes, Facebook grew in the shadow of the Bush tax cuts of 2001 and 2003, but it also grew up in high-tax states like Massachusetts and California, and of course I couldn’t tell you the particular tax rates paid by the various wealthy investors in the company. But Facebook’s story, and thousands of others like it (if less dramatic) illustrate three timeless truths:
(1) Growing businesses need capital;
(2) Capital for risky startup ventures – especially ones with as steep an upward growth trend as Facebook – tends to come primarily from wealthy individual investors and from the venture capital and private equity vehicles they fund (the business career of Mitt Romney is full of examples of this); and
(3) The more of that capital you have, and the better the after-tax returns it can earn, the more seed corn there is to grow still more of those businesses.
You would think that President Obama – who at least in 2008 drew a lot of support from Zuckerberg and his Silicon Valley ilk – would appreciate this concept. But Obama remains the same man who in the primary debate in 2008 in Philadelphia told Charlie Gibson that he wanted to raise the capital gains tax “for purposes of fairness” regardless of whether it brought in more revenue. Even as the economy has stagnated and dragged down his own political fortunes with it, Obama seems unwilling to even consider the importance of private capital in any recovery. Investors in new businesses, consider yourselves unfriended.

BUSINESS: Negotiating Through The Media

There are many species of bad journalism, most of which involve too much opinion by the writer, but sometimes the opposite is true and a writer gives you the apparent facts without the context needed to make sense of them. Let me use an article from the NY Times about 30 Rock to illustrate a common type of bad journalism that I find to be equally amusing and annoying: reporting negotiating positions without bothering to explain to the reader to take negotiating positions with a grain of salt, let alone how to interpret statements made in the course of negotiations. This has been a common thread in scores of articles these past few months about – among other topics – the debt ceiling negotiations, the Libya war, the perpetual Israel-Palestine ‘peace process,’ the NFL and NBA labor negotiations, the Mets’ legal dispute with the Madoff trustee and other business machinations and their efforts to re-sign Jose Reyes, and the legal imbroglio surrounding the Dodgers. I’ve read more articles on all these topics than I could count that failed to give the reader the guidance to put the parties’ statements in the context of the underlying negotiating dynamics.
The Times tells us, first, that Alec Baldwin has said he’s leaving 30 Rock after next season, a departure that of course would be a terrible blow to a show built around the tensions between his (awesome) character, Jack Donaghy, and Tina Fey’s Liz Lemon. It may well be true that Baldwin sincerely has other things on his mind, maybe even a run for public office, and/or that he’s feeling he’s done all he could with the character. But it’s at least equally likely that he could be persuaded to stay on if NBC offers money or other contractual concessions to make it worth his while.
Then we get the response from NBC brass and from Lorne Michaels, the show’s executive producer:

Executives from the show and NBC aren’t sure, but they made it clear in interviews here this week that his departure would not mean an automatic end to the award-winning comedy.
NBC’s new entertainment chairman, Bob Greenblatt, said: “I’d love nothing more than to have Alec for the duration of the show. That’s my goal. Let’s see what we get.”
NBC’s interest in keeping “30 Rock” around for at least one more year after the coming season can be explained by the need for more episodes to enhance the show’s resale value in syndication.
The executive producer of “30 Rock,” Lorne Michaels, was more definitive about a future for the comedy, even if Mr. Baldwin turns down all blandishments to continue. “I would hope he would want to go on,” Mr. Michaels said on Monday. “But we’re going to keep doing the show.”

Again: I don’t doubt that NBC would very much like to extend the show’s run one extra season for syndication purposes; many a sitcom past has been kept on past its proverbial shark-jumping point for that reason. If 30 Rock is still making money at that point, the network would probably try to soldier on without Baldwin. And Lorne Michaels has never been a guy who thought any of his cast members were indispensable (to put it mildly). But this all smacks strongly of a negotiating posture: the network and Michaels are doing interviews here precisely to send Baldwin the message that he’s not holding all the cards. And the reporter, Bill Carter, doesn’t breathe a word of that, probably because he knows full well why they are giving him these interviews.
Of course, Greenblatt and Michaels have their own competing agendas:

Mr. Greenblatt did open the door to a possible disagreement with Mr. Michaels over the re-entry of “30 Rock” onto NBC’s schedule. The show’s sixth-season premiere has been postponed until midseason because of the pregnancy of its star, Tina Fey.
Asked if “30 Rock” was ensured a spot back on NBC’s successful Thursday night comedy lineup, Mr. Greenblatt said, “That is a good question, and I really don’t have an answer for it.” He added, “Nothing’s written in stone.”
But as far as Mr. Michaels is concerned, it is. “The show will be back on Thursdays,” he said confidently.

Of course, if Baldwin’s future with the show is in doubt, that’s one reason the network would not want to commit valuable Thursday night prime-time space, plus Greenblatt is taking charge of a fourth-place network and probably should keep his options open. But NBC has to keep Michaels happy, too; as the creator of Saturday Night Live, he remains a vital part of the network’s brand image. Michaels’ certainty here is obviously intended to send an unsubtle message that he will not be a happy camper if the network moves his prime-time baby out of its Thursday night sinecure.
I don’t mean to pick on Carter, who in this article has at least offered us enough quotes from each of the participants that a skeptical reader can piece together what is really being said here; that’s not always the case with this sort of journalism. But in general, reporters aren’t doing their jobs if they don’t report how someone involved in negotiations could stand to gain from taking a particular position in public, and worse still if they straight-facedly claim that someone will never make a particular concession (e.g., Jose Reyes won’t talk about a new contract during the season), when in fact they might well do so for the right price. The dynamics of negotiations and how they are handled through the media can differ across situations, but there are a finite number of basic underlying approaches to negotiating, and they crop up across many different fields of endeavor.
Consider the debt ceiling debate – surely many Republicans would have preferred to pass ‘cut, cap and balance,’ and some were genuinely opposed to raising the debt ceiling at all. But for many people involved in the fight, pushing for the ideal policy, even if it was the policy they wanted, was also a matter of getting leverage to extract a better deal when the time came to compromise. Similarly, many Republicans sincerely opposed any deal that would raise any taxes at all; others may have been willing to trade some revenue-raisers for something better, but found it convenient to stay in line with the ATR pledge against tax hikes as a posture unless and until that better offer materialized. None of this is insincere; it’s just good bargaining.
Learn to look for the signs of negotiating postures between the lines of news articles, and they will surface again and again in every section of the paper.

BUSINESS/OTHER Grantland on the National

If you haven’t yet checked out Bill Simmons’ new ESPN-backed website, you should. The site has taken its share of mockery, partly due to the hazing that comes with new, risky ideas, partly because Bill’s success (a recent NY Times profile labelled him ” the most prominent sportswriter in America”) has spawned a natural backlash, partly because of the eccentric decision by ESPN brass to name the site after long-dead 1920s sportswriting icon Grantland Rice. The site is mainly geared towards long-form sportswriting, and of course it makes me nostalgic for the days when Bill was running his own small, scrappy regional site back in Boston, where I was one of the very few regular contributors.
Anyway, it is fitting that one of Grantland’s inaugural features is a two-part oral history/remembrance (here and here) of The National, America’s first and only national daily sports newspaper, which ran from 1990-91. The profile is chock full of hilarious detail, lovingly remembered by the many talented writers who worked there – it’s worth the read just for the vicious potshots taken by the interviewees at Mike Lupica, who used The National as one of his many platforms but, unlike most of the others, didn’t commit his heart and soul to the project. You can tell reading it that most of the people involved felt, and still feel, that The National was the most exciting thing they’d ever be involved with. The tale of its rise and fall, complete with extravagant spending, a fantastic product, and a complete failure of practical business planning, strongly foreshadowed the dot-com mania that arose later in the decade, although ironically it was the technology of the late 90s that the paper most desperately needed and lacked. But as the retrospective points out, the paper may not have been a success, but it had influence on the sports-media world that persists to this day.
I remember fondly reading The National, on those occasions when I could lay hands on it and it had timely boxscores, always a dicey proposition. Some context on the times, and on why I confess I didn’t myself read The National as often as I’d have liked: we think today of the college years as a time when young people are deluged with access to the Information Age, but in 1990-91 I was in my sophmore-junior years in college in the days before the Internet; I didn’t own a television until my third year of law school, I could only sporadically get WFAN, I couldn’t afford a daily newspaper (as often as not I went to the library to read the papers)…and at the time, I was writing a weekly political op-ed column for the campus newspaper, the lead sports columnist job being filled by Bill Simmons. When I went to spend a semester in DC in the spring of 1992, I actually had to put a 3.5″ floppy disk in the mail every week to publish my column. When I started writing again for Bill’s site in 2000, it was a revelation to be able to email him a column and have it posted the next day. Now, of course, anything but instantaneous publication seems archaic.
Anyway, set aside some reading time – it’s a long profile but worth the read.

Concentrated Ignorance

The Soros-funded “Think Progress” (two lies for the price of one!) pays a number of writers to obsess about finding the Koch brothers under their bed. Powerline’s John Hinderaker administers a spectacular beat-down to one of those writers, Lee Fang, on the subject of a particularly loopy conspiracy theory about oil futures. It’s quite clear that Fang does not know even the first thing about the commodity futures markets or the oil business, and makes one glaring error after another on the subject – not minor errors, mind you, but errors like not having the first clue how markets work, how oil companies make money, or how oil prices were affected by the global economic slowdown in late 2008.
It can often be frustrating dealing with left-wing blogs, because they have so much more paid manpower and free time compared to the largely volunteer corps of conservative blogs, which are disproportionately staffed by people with day jobs and families. But in cases like this one, what matters more is the competitive advantage of the conservative blogosphere in having more people who have actual experience in the business world.

BUSINESS/ Protection Racket

Francis Cianfrocca dissects the roots and impacts of the banking crisis and asks whether we are likely to see a resurgence of protectionism. A sample:

Everywhere in the world for a good twenty years now, the real rate of return on economically-productive investments has tended to be well below its previous trendline. During that time, rates on the short-term debt of high-rated governments have tended to be in the range of one percent as opposed to the historical two or more percent.
That’s one point. Another one (famously dubbed “the conundrum” by Alan Greenspan) was the fact that the interest rate on the economically-meaningful 10-year Treasury note remained depressed even as the Fed increased interest rates during the middle years of the past decade, fueling the housing bubble among other things.
Broadly speaking, there’s no business model available for banks under such conditions. To survive, they need to increase the yields they earn, by dialing up risk, leverage, or the term structure of their asset portfolios. As it turns out, bankers did all of that, and even resorted to inventing phantom assets, like CDO-squareds, that weren’t even based on actual economic value….the underlying drivers are clear enough to see.
And they’re still in place today. Too much credit had been created in the hunt for yield. The developed countries in 2008 and 2009 faced the prospect of seeing that mountain of credit deflate, so they socialized it instead.

His last line sums up in a nutshell why protectionism appeals to the Left. Read the whole thing.

8-K? What’s An 8-K?

Coming as it does somewhat within my area of professional expertise, this is perhaps the most alarming example yet of the complete ignorance of the Obama Administration and Capitol Hill Democrats regarding how business operates – and to think these same people will be voting on overhauling financial services regulation:

The White House political and legislative operations were said to be livid with the announcement by several large U.S. companies that they were taking multi-million or as much as a billion dollar charges because of the new health-care law, the issue was front-and-center with key lawmakers. By last Friday, AT&T, Caterpillar, Deere & Co., and AK Steel Holding Corp. had all announced that they were taking the one-time charges on their first-quarter balance sheets. More companies were expected to make similar announcements this week.
“These are Republican CEOs who are trying to embarrass the President and Democrats in general,” says a White House legislative affairs staffer. “Where do you hear about this stuff? The Wall Street Journal editorial page and conservative websites. No one else picked up on this but you guys. It’s BS.”
On Friday White House chief of staff Rahm Emanuel and Obama senior advisor Valerie Jarrett were calling the CEOs and Washington office heads of the companies that took the financial hits and attacked them for doing so. One Washington office head said that the White House calls were accusatory and “downright rude.”
The companies are taking the charges because in 2013 they will lose a tax deduction on tax-free government subsidies they have had when they give retirees a Medicare Part D prescription-drug reimbursement. Many of these companies have more than 100,000 retirees each. AT&T may have more than three-quarters of a million retirees to cover.
“Most of these people [in the Administration] have never had a real job in their lives. They don’t understand a thing about business, and that includes the President,” says a senior lobbyist for one of the companies that announced the charge. “My CEO sat with the President over lunch with two other CEOs, and each of them tried to explain to the President what this bill would do to our companies and the economy in general. First the President didn’t understand what they were talking about. Then he basically told my boss he was lying. Frankly my boss was embarrassed for him; he clearly had not been briefed and didn’t know what was in the bill.”
It isn’t just the President who didn’t understand his own proposal. Late Friday, House Energy and Commerce Committee Chairman Henry Waxman and Rep. Bart Stupak, chairman of the Oversight and Investigations panel, announced that they would hold hearings in late April to investigate “claims by Caterpillar, Verizon, and Deere that provisions in the new health care reform law could adversely affect their company’s ability to provide health insurance to their employees.”

Read the whole thing. H/T Moe Lane. Then, read Mark Steyn’s explanation of the specific change at issue and why it’s likely to change corporate behavior:

In 2003, Washington blessed a grateful citizenry with the Medicare prescription drug benefit, it being generally agreed by all the experts that it was unfair to force seniors to choose between their monthly trip to Rite-Aid and Tony Danza in dinner theatre.
However, in order to discourage American businesses from immediately dumping all their drug plans for retirees, Congress gave them a modest tax break equivalent to 28% of the cost of the plan.
Fast forward to the dawn of the ObamaCare utopia. In one of a bazillion little clauses in a 2,000-page bill your legislators didn’t bother reading (because, as Congressman Conyers explained, he wouldn’t understand it even if he did), Congress voted to subject the 28% tax benefit to the regular good ol’ American-as-apple-pie corporate tax rate of 35%.
For the purposes of comparison, Sweden’s corporate tax rate is 26.3%, and Ireland’s is 12.5%. But just because America already has the highest corporate tax in the OECD is no reason why we can’t keep going until it’s double Sweden’s and quadruple Ireland’s.
I refer you to the decision last year by the donut chain Tim Hortons, a Delaware corporation, to reorganize itself as a Canadian corporation “in order to take advantage of Canadian tax rates.” Hold that thought: “In order to take advantage of Canadian tax rates” – a phrase hitherto unknown to American English outside the most fantastical futuristic science fiction.
Ask yourself this: If you impose a sudden 35% tax on something, are you likely to get as much of it? Go on, take a wild guess. On the day President Obama signed ObamaCare into law, Verizon sent an e-mail to all its employees warning that the company’s costs “will increase in the short term.”
And in the medium term? Well, U.S. corporations that are able to do so will get out of their prescription drugs plans and toss their retirees onto the Medicare pile. So far just three companies – Deere, Caterpillar and Valero Energy – have calculated that the loss of the deduction will add a combined $265 million to their costs.
There are an additional 3,500 businesses presently claiming the break. The cost to taxpayers of that 28% benefit is about $665 per person. The cost to taxpayers of equivalent Medicare coverage is about $1,200 per person. So we’re roughly doubling the cost of covering an estimated five million retirees.

Now, let me explain this real simple: If you do something that’s going to cost a company a lot of money, they have a whole lot of legal reasons why they have to tell their shareholders that sooner or later. And, if they’re being prudent, they will tell them sooner rather than later when it starts showing up in the company’s cash flow and the stockholders panic. Dennis the Peasant goes through this in a bit more detail, and he and Erick and Ace all look at Waxman’s plan to drag the disclosing CEOs before a Congressional committee to explain why they are daring to inform their shareholders of the impact that the new regulations, specifically the withdrawal of tax breaks, will have on their business.
At least honest leftists would admit that yes, they were doing something genuinely harmful to publicly traded employers, although honest leftists would next try to pass even more laws to prevent the companies from doing anything to pass on the costs to employees, customers and/or taxpayers so as to preserve enough return to shareholders to enable the company to keep raising capital to stay in business. But in the happy-fairy-land of guys like Obama and Waxman, there are never any costs or tradeoffs to heaping new taxes and regulations on businesses in the middle of a recession, and no behavioral incentives changed when you meddle with the tax code.
The level of ignorance here is staggering. George W. Bush understood this stuff. Sarah Palin understands this stuff. Yet, these people whose self-image depends on telling themselves how much smarter than Bush and Palin they are, are continually taken by surprise by these things.
UPDATE: Ben Domenech looks at how Waxman is banking on intimidation but may end up getting more than he bargained for by calling witnesses who have no realistic choice but to contradict him.

Government Motors, British Style

Claire Berlinski on the pathetic British history with nationalized car companies:

British Leyland was born. It held 40 percent of the UK car market and within five years lost nearly a quarter of it.
Why? The early seventies saw ever more intense competition from continental auto manufacturers, as well as the rise of the Asian car tigers. Leyland’s management was inflexible and slow to adapt. The group had too many companies under its control, and they made similar, competing, outdated cars. The oil-price shock didn’t help. Neither did Leyland’s militant union. Led by Derek Robinson, an unapologetic Communist known as “Red Robbo,” the union embarked on a series of ruinous disputes with management, regularly bringing production to a standstill.
Leyland’s factories were overmanned, its equipment old, its cars ugly. Antique collectors with a keen sense of irony now cherish the dumpy Austin Allegro, known at the time as the Flying Pig. Available in beige, brown, and wilted-lettuce green, it leaked, and its rear windows spontaneously popped out. Its proudest design innovation was its squarish steering wheel. While Leyland was busy inventing the world’s first square wheel, the Germans were building the Volkswagen Golf, a stylish, family-friendly, fuel-efficient hatchback that quickly became one of the best-selling cars in history.

The rest of the piece is less humorous and more dire in its parallels to the present day, as the British spent 13 years pouring taxpayer money down this rathole. Margaret Thatcher was right to oppose the whole project – as Berlinski summarizes the Iron Lady’s thinking, “[i]f the economy was in crisis, she held, the government should waste less of the taxpayers’ money, not more” – but even Lady Thatcher lacked the political strength to stop subsidizing the misbegotten venture until almost the end of her tenure in office, thanks to the voting power of the auto workers whose jobs continued to exist solely as a matter of public charity.
Perhaps we can still learn a thing or two from real-world history before we spend the next decade going down the same dead-end road.

Corporate Farmfare

Francis Cianfrocca at the New Ledger makes a startling point writing on an issue I have addressed at some length before: the excessive government involvement in America’s farm policy. He argues that if you look at the numbers, the Agriculture Department’s budget is larger than the profits of the entire U.S. agriculture sector.
I don’t agree with his provocative conclusion that the industry would vanish without subsidies, but it would surely be compelled to adapt.

Silverdome Fire Sale

The death of Detroit continues, as the Potiac Silverdome, onetime home of the Detroit Lions, sells for a mere $583,000 to an unidentified Canadian company:

The sale of the Silverdome takes a large financial burden off the hard-hit city of Pontiac, which has fallen on hard times, with budget shortfalls and high unemployment. Earlier this year, GM announced it would close a truck plant, taking about 1,400 jobs from the city.
As a result…Pontiac could ill afford to continue paying $1.5 million in annual upkeep for the stadium. With a private owner, the property “will go back on the tax rolls,” he explained.
The 80,000-seat Silverdome was the biggest stadium in the National Football League when it was built in 1975 for $55.7 million. The stadium, which sits on a 127-acre plot, is also the former home of the National Basketball Association’s Detroit Pistons.
The stadium reached its football zenith in 1982 as the site of Super Bowl XVI, when San Francisco’s 49ers beat the Cincinnati Bengals…
Despite its rich history, the stadium has seen little use since 2002, when the Lions concluded their last season there.


Meet The New Brownshirts

Intimidation, home invasion and the not-too-subtle threat of physical violence – by community organizers closely allied with governmental power and receiving taxpayer money. It’s not a pretty combination:

Bruce Marks doesn’t bother being diplomatic. A campaigner on behalf of homeowners facing foreclosure, he was on the phone one day in March to a loan executive at Bank of America Corp.
“I’m tired of borrowers being screwed!” Mr. Marks yelled into the phone. “You’re incompetent!” Before hanging up, he threatened to call bank CEO Kenneth Lewis at home to complain about the loan executive.
Mr. Marks’s nonprofit organization, Neighborhood Assistance Corp. of America, has emerged as one of the loudest scourges of the banking industry in the post-bubble economy. It salts its Web site with photos of executives it accuses of standing in the way of helping homeowners — emblazoning “Predator” across their photos, picturing their homes and sometimes including home phone numbers. In February, NACA, as it’s called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted.
In the 1990s, Mr. Marks leaked details of a banker’s divorce to the press and organized a protest at the school of another banker’s child. He says he would use such tactics again. “We have to terrorize these bankers,” Mr. Marks says.
Though some bankers privately deplore his tactics, Mr. Marks is a growing influence in the lending industry and the effort to curb foreclosures. NACA has signed agreements with the four largest U.S. mortgage lenders …in which they agree to work with his counselors on a regular basis to try to arrange lower payments for struggling borrowers. NACA has made powerful political friends, such as House majority whip James Clyburn of South Carolina, and it receives federal money to counsel homeowners.

The goal of this sort of thing, of course, is to thoroughly politicize business decisions from top to bottom of the economy, squeezing out as far as possible the role of independent business judgment and for the benefit of favored constituencies and politicians (see here for one of the more egregious examples by one of the nation’s most notorious practitioners of political extortion, and here for a similar example of the use of strong-arm street tactics). And the results will be predictable: together with the move to limit credit card fees, the Democrats and their activist allies will put businesses to the choice of (1) extending bad credit in exchange for insufficient returns to cover the risks, for the purpose of currying political favor and keeping the brownshirts away from their homes and families, or (2) getting out of the business altogether. (Allahpundit notes the third choice of shifting costs onto good credit risks, but there’s only so much blood to squeeze from that stone directly, except insofar as it’s done indirectly by using taxpayer money to bribe the banks).
It’s not a good thing for liberty, not a good thing for the economy, and ultimately not a good thing for the integrity of a government that gets too comfortable pulling the strings.

BUSINESS: PCAOB and Sarbox In The Dock

The Supreme Court this morning granted certiorari in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al., No. 08-861 on the Court’s docket. The case will be briefed over the summer, heard in the Fall (after, among other things, Justice Souter’s retirement, assuming all goes on schedule) and decided some time between next December and July 2010. Given that my firm and/or my clients may well end up being involved in the case, I won’t try to handicap its success or get too far into its merits, but know this: the issue before the Court presents important questions generally about the scope of separation of powers restrictions in economic regulation, and specifically about the constitutionality of a key provision of Sarbanes-Oxley and, potentially, could threaten the entire statute.
Continue reading BUSINESS: PCAOB and Sarbox In The Dock

You Know What We Needed? More, Cheaper Subprime Loans! And Maybe Cheaper Hookers, Too.

So, Ezra Klein wants Eliot Spitzer back in public life, and argues that New Yorkers should take him back just like his wife did, and presumably for the same reasons. This is part of Spitzer’s rehab tour (more here and here). But Klein has picked the wrong man, and for the wrong reasons.
First of all, Spitzer should never be entrusted with any sort of executive authority ever again. The reasons for this are too numerous to recount here, but let’s start with the obvious: the man held the State’s top two law enforcement positions (Attorney General and Governor) while pursuing a lengthy and illegal prostitution habit, which he surrendered (so far as we know) only when exposed by a federal investigation. Yes, some politicians have survived hookers and other sex-and-crime scandals before: Barney Frank is still in Congress two decades after paying for an affair with a prostitute who operated a brothel out of Frank’s apartment; David Vitter is running for re-election in the Senate after being exposed as a former client of the DC Madam; Gerry Studds kept a commitee chairmanship in the House after an affair with an underage Congressional page; Ted Kennedy is still in the Senate four decades after leaving a woman to drown in his car, an event that in a just world would have resulted in a charge of second-degree murder. But bad as our tolerance for such scandals in legislators may be, they are another thing entirely when you are talking about a man who was charged not only with casting votes and writing laws but with taking care that the laws be faithfully, fairly and uniformly enforced while he was creeping around choking hookers.
It should also not be forgotten that fair and reasonable law enforcement was never Spitzer’s thing. Before the hooker scandal broke, he was already mired in investigations over improper use of state troopers to dig up dirt on political foes. He pursued a thuggish investigation designed to intimidate crisis pregnancy centers while giving a pass to abortion clinics. He forced out the successful management of AIG over charges that seem terribly penny-ante compared to what happened afterwards, and pursued a petty and ultimately unsuccessful vendetta against former NYSE chairman Dick Grasso. He tried to issue drivers’ licenses to illegal aliens, and while he was going after New York’s leading industries, his parole board dramatically increased the number of violent felons it let back on the streets; Spitzer never had much interest in violent crime. His signature move was applying vague laws to conduct they’d never been extended to; over and over again, he prosecuted things people had done that they’d never thought illegal. His targets, when they fought him in court, often won, a reflection of the weakness of his cases on the merits; Spitzer’s MO depended on suing businesses who couldn’t afford the consequences of an ongoing government campaign against them and had to settle rather than fight. Oh, and let’s also not forget, as we watch New York suffer under the bumbling regime of David Paterson (who even Klein admits is a “disaster”), that Spitzer was the guy who picked Paterson (already known for such lunacy as his ‘shoot to wound’ bill) to take over in case Spitzer had to resign, at the same time that Spitzer was engaging in the pattern of criminal activity that forced him to do just that.
All that aside, let’s look at the Spitzer article from 2004 that has Klein swooning about “pretty prescient stuff”:

Unfortunately, our belief in the importance of equal opportunity and nondiscrimination is too often forgotten when it comes to the debate over whether and how to police the market for home mortgages. In poor and working-class communities across the nation, predatory mortgage lending has become a new scourge. Predatory lending is the practice of imposing inflated interest rates, fees, charges, and other onerous terms on home mortgage loans — not because the imperatives of the market require them, but because the lender has found a way to get away with them. These loans (which are often sold as refinance or home improvement mechanisms) are foisted on borrowers who have no realistic ability to repay them and who face the loss of their hard-won home equity when the all-but-inevitable default and foreclosure occurs. When lenders systematically target certain low-income communities for loans of this sort, as they often do, the result is more insidious. Costs are imposed and burdens inflicted in a manner and to a degree that is discriminatory by race.
On the surface, predatory lenders are doing nothing more than seizing a “market opportunity” for refinancing or home-improvement loans in lower-income communities. To be sure, such communities desperately need credit. And it stands to reason that the prices and terms will be less favorable to borrowers whose financial circumstances are troubled or limited. In this sense, predatory loans are the natural outcome of a competitive market.[…]
[But] it is difficult to imagine a less rational, less efficient economic practice than lending of this sort. At the micro-level, it results in a gross misallocation of costs– imposing higher costs than the market requires on those least able to bear them. At the macro-level, it denies lower-cost capital to whole classes of persons who would otherwise qualify for it and to neighborhoods whose economic vitality depends on it.
In these circumstances, government must step in to curb predatory lending and encourage the flow of fairly priced capital to sectors where it is needed and will be well-used.

Leave aside Spitzer saying that the problem with the market is that it charges more than the market requires, which is nonsense by definition in the absence of a cartel (nobody claims that the chaotic mortgage market was a cartel at the retail level; the only place where the market narrowed to a few players was at the GSE level). The critical point here is that Spitzer never argued that the borrowers he discussed should not be given loans at all; to the contrary, his reference to “lower-cost capital” makes clear that he felt that the problem was that lenders were pricing loans too high. But if lenders had made the same loans at lower rates, they’d have been in even worse shape than they are now, with less return on their investments to cover the same default rates. Spitzer’s simplistic thinking seems to be that the only reason why subprime borrowers would end up defaulting was because they were paying too much in fees – it never occurred to him that the problem was underpriced credit for overpriced real estate investments by people with insufficient credit, whether they be people who should never have been given a mortgage to higher-end borrowers who were given one too big for their means. In short, Spitzer got the problem precisely backward – and worse yet, Ezra Klein, writing with the benefit of hindsight, still thinks this is profound.
No thanks.
UPDATE: I see Mickey Kaus beat me to making some of the same points about Klein and that Spitzer quote.

Cap and Don’t Trade

As anyone who followed the Kyoto Protocols back in the 1990s can tell you, even if you believe that government action to stem carbon emissions would be desirable, Kyoto wasn’t a genuine effort to get a worldwide agreement on limiting emissions: it exempted seven of the world’s eight most populous nations (the U.S. being the lone exception) from its provisions, including rapidly growing economies like China (now the world’s number one carbon emitter) and India. And neither of those countries, with more than a billion inhabitants each, has any intention of being subject to the kinds of restrictions that President Obama’s carbon emissions “cap-and-trade” plan would impose on U.S. industries, much less during a global recession. Including industries that employ lots of the blue-collar union workers the Democrats purport to represent.
Those industries’ and unions’ solution, naturally, is even more government taxes and regulations: use trade barriers to try to inflict the same harm on foreign manufacturers as on American ones. Hey, why not start a trade war? Just remember, one thing, though: Senator Smoot and Congressman Hawley both lost their bids for re-election in 1932.

Continue reading Cap and Don’t Trade

Foreign Earnings, Continued

A followup here to the post linked here:

If I have profits in Estonia and I re-invest the profits there, the ECTR is 0%.
If I repatriate the profits to the U.S., because there was no corporate tax paid to Estonia to qualify for the “foreign tax credit” I get hit for the full 35% U.S. rate – period.
If the “loophole” of leaving those profits in Estonia (rather than repatriating them) is “closed,” I’m getting hit with a 35% “fee” just for being a U.S.-based corporation.
If the “loophole” is closed, the only way to get away from that fee for the “privilege” of being a U.S.-based corporation is simply to take the enterprise itself out of the country – to Bermuda, or the Cayman Islands, or…. Estonia.

Obama’s Plan To Drive Corporations Out Of the U.S.

I know I link to a lot of pieces by my colleagues at RedState, but this from Skanderbeg (who knows his stuff because he does a lot of business abroad) is really a concise masterpiece explaining the lunacy of Obama’s latest plan to jack up taxes on already-battered American businesses. A sample of his explanation of the existing anti-business rules that Obama wants to make worse:

Suppose you are CEO of XYZ Widgets, Inc., an international widget supplier based in the U.S. You have a competitor, ABC Widgets Oy, based in Finland. Both of you sell widgets in the U.S., earn profits, and pay U.S. corporate tax on those profits. Both of you sell widgets in Finland, earn profits, and pay Finnish corporate tax on those profits. So far, so good. However, here things diverge. ABC Widgets Oy can take its remaining after-tax profits from the U.S. and bring them back to home base in Finland to invest in things like increasing widget production – and not face another hit of Finnish corporate tax on that money. In contrast, if you (XYZ Widgets, Inc.) want to repatriate your after-tax profits from Finland back to the U.S. – to invest in things like increasing YOUR production of widgets…well, you have to pay the full (and also too-high) U.S. corporate tax of 35% on those already-taxed-in-Finland profits. You’d probably choose to leave that money outside the U.S. – and, oh, use if for something like investing in increasing your widget production by building a new plant in someplace like Romania.
In the above, replace “Finland” with the name of any other country in the world, and the story is the same. The U.S. is the only country that has this “double-taxation” rule.

There are three possibilities. One, Obama really is this economically ignorant. Two, Obama knows the consequences of his actions and genuinely desires to reduce the presence of large corporations in the U.S. and replace them with government employment. Three, Obama is cynically pandering to his economically ignorant base and, perhaps, hoping that somehow his plan will end up getting scuttled.

BUSINESS/ Man Up, Wall Street

A hilarious column from Michael Lewis that’s too good to excerpt. Lewis has the rare gift of two-sided satire, by which he can simultamneously needle both Wall Street’s traditional mindset and the fools on Capitol Hill who want to change it. The serious question underlying his Swiftian proposal is whether the big financial firms can regain their health if they have to willingly submit to political micromanagement of all their decisions.

The Brink

I’ve explained here, here, here, here, here, and here, among others, why I grudgingly supported the original Paulson Plan that formed the foundation of TARP and why I have been opposed to its expansion and to all the subsequent bailouts. This post gives a pretty good anecdotal glimpse into why the situation in mid-September 2008 was so uniquely dire compared to the more usual workings of even a fairly severe recession.

BASEBALL/ Name Dropping

Sign of tough times:

Citigroup Inc., eager to quell the controversy over how lenders are using government bailout money, is exploring the possibility of backing out of a nearly $400 million marketing deal with the New York Mets, say people familiar with the matter.


In a statement Monday, Citigroup said that “no TARP capital will be used” for the stadium — referring to government funds from the Troubled Asset Relief Program. But as it revisits the pact, Citigroup is essentially acknowledging that the volatile political climate could make it untenable for the bank to proceed with the deal.


The Mets deal was attacked last week as an example of misplaced spending by financial institutions that needed bailout funds. Reps. Dennis Kucinich (D., Ohio) and Ted Poe (R., Texas) wrote to Treasury Secretary Timothy Geithner on Wednesday, asking him to push Citigroup to dissolve the Mets deal.

I can’t really get into this story very far, and it’s the worst kind of story as far as I’m concerned (I’m not a big fan of business-of-baseball stories and I hate being compelled yet again to mix baseball and politics), but a few quick observations:
1. So much for the brief era in which the Mets appeared to be getting closer to financial parity with the Yankees. I’m not that personally familiar with the state of the naming-rights market but I have to assume that it will be very hard to get an equivalent contract in terms of annual revenue or duration.
2. Sadly, if Citi does exit the deal, it will be tough to get a name that fits as well with the team and the city – I dread some phone company or regional bank that changes its name every three years, or something silly like “Vitamin Water Park.” And I swear, if they end up naming it “Obama Field” I’m not going to be responsible for my actions.
3. As you can see if you’ve seen pictures or been by the park, the colossal Citi signs have been up for a while now.
4. We have not even seen the beginning of how Washington politicians are going to be micromanaging entities that have accepted taxpayer money. More on this another day, but while I supported the original Paulson Plan – which involved the federal government buying bonds in arms-length transactions in the hopes of recovering most if not all of its original outlay – I can’t possibly support any of the more expansive bailouts that have been done since, not least because of the galloping corporatism that is unleashed when the government goes from being a mere customer of private business to an investor, donor and business partner.

BUSINESS: The Doctor is Making Street Calls

Our old friend and occasional guest blogger Dr. Manhattan is back, this time blogging at The Atlantic’s Business section. Adjust your bookmarks accordingly. His first entry cautions against oversimplifying the argument, now in vogue, that the root of Wall Street’s downfall was public ownership (i.e., firms capitalized with shareholder money rather than owner-operated), noting that closely held hedge funds have also fallen prey at times to excessive and imprudent risk-taking:

[S]uppose we have an employee-owned investment firm, organized as a private partnership, which aims to become a major financial institution. In Lewis’ formulation, it should be the least likely candidate to run excessive leverage and blow itself up with untrammeled risk-taking. In fact, it might spare no expense on the risk-management side and only use the most highly sophisticated analysis to protect the franchise.
I am thinking, of course, about Long-Term Capital Management.

Read the whole thing. This is a useful caution, but I’m skeptical of argument by anecdote (and I note here that Dr. Manhattan is simply marshalling one anecdote against a handful deployed by Michael Lewis), as all it does is demonstrate that partnerships are not wholly immune to the problem. In fact, defenders of free markets will almost always tell you that the whole point of a free market system is that you can get a variety of different responses to the same set of incentives, and inevitably some of them will be successful responses and some will be failures. Like democracy itself, the free market is designed not to be error-free but error-correcting; by contrast, replacing free market systems with concentrated, centralized decisionmaking does nothing to reduce the natural tendency to human error, but simply reduces the number of decisionmakers working on a problem, restricts the range of possible innovations and removes the mechanism for flushing erroneous decisions out of the system.
If you accept for the sake of argument that (1) large and thinly-evaluated risks are bad and (2) publicly owned firms are more likely to take them than private partnerships, you can make the case that publicly traded financial firms are riskier than privately held ones without necessarily having to shoulder the burden of proving that privately held firms are always prudent in managing risk. That’s a point that at the end of the day is one for systematic study, not anecdote.

Deficit Disconnect: A Farewell to Rubinomics

Riddle me this. One argument you hear tossed around these days is that Bush’s tax cuts somehow had something to do with the currently poor state of the economy. The argument is almost never backed by any serious attempt to explain how this is, simply that because the Bush critics don’t like his tax policy it must be to blame.

More to the point, the case for blaming low taxes for the economic downturn is diametrically opposed to the “Rubinomics” line that liberals everywhere spent the first seven years of Bush’s Administration pushing. The argument, at the time, was that low taxes would lead to big deficits, and big deficits would push up interest rates by “crowding out” private access to credit as safe federal borrowing sopped up all the available credit.

In fact, the conventional economic wisdom today is that precisely the opposite happened – that we had a credit bubble, and in particular a housing credit bubble, because interest rates were artificially low and private access to credit got too cheap, resulting in too many loans being made at rates that were not sufficient to cover the credit risks, especially systemic risks, being taken. When credit finally did get expensive, after the bubble burst and a lot of the lenders got essentially wiped out, the problem was less a market-wide lack of capital than a lack of faith in the ability to identify credit-worthy borrowers – interest rates didn’t shoot up uniformly so much as they rose in comparison to the rates for sovereign borrowers like Uncle Sam (in the parlance of the markets, spreads widened). And even that only happened after years of overexpansion of private credit side by side with low taxes and high deficits.

In other words, the Rubinomics crowd, who claimed so much credit for the tech boom of the 1990s on the theory that eliminating the deficit had created prosperity by lowering interest rates, turned out to have their diagnosis completely wrong, or at any rate so oversimplified given the many other variables involved as to be meaningless. Which was pretty much what the supply-siders had been saying all along: not that deficits are a good thing, but that in the grand scheme of things, the economic effects of deficits on access to cheap private credit is not one of the major drivers of economic prosperity, nor of economic downturns.

Of course, Rubinomics won’t have much if any influence in the Obama Administration, which is turning its back on the economic theory and practice of the post-1940 period and heading for old-fashioned Keynesian ‘pump priming’ and trillion-dollar deficits as far as the eye can see. And the onetime disciples of Rubin will simply declare that this is what they have always believed in, and that it still means low taxes are bad. Change, after all, means never having to say you’re sorry.

BUSINESS: Liar’s Poker Folds

I’ve been waiting for Michael Lewis to write the definitive account of the credit crisis. This is an excellent start.
Here’s a few of his vignettes on the housing market madness at the foundation of the crisis, although he has much more on how it worked its way through the financial system:

Continue reading BUSINESS: Liar’s Poker Folds

Opening Your Mouth And Removing All Doubt

Megan McArdle advises Matt Taibbi to stop. And has some good advice for people who only tuned in to the financial world during the credit crisis:

No one who did not know what a CDO was before the crisis should be opining as to the causes or the possible solutions. And anyone who tells you that they understand exactly why this happened, why we got this crisis instead of the dollar crisis we were expecting, and what kind of regulations will unquestionably fix it, is definitionally too ignorant to be opening their mouth.

The funny thing is Taibbi ranting about the institutional market for securities backed by bad loans…while at the same time refusing to address the bad loans themselves except to deny they had any role. That failure of basic logic alone is hilarious.
The overextension of housing credit, which formed the collateral for the various instruments whose loss of value set off so many other dominos falling, was, by definition, at the root of the crisis. Now, was the root of the crisis the only cause, or the only thing we ought to avoid repeating? Are there other, second-order aspects of the system that made it more vulnerable to the contagion from loans to un-credit-worthy borrowers based on overvalued real estate? Of course not, and as McArdle says, the fact that we can piece together some significant contributors to the crisis does not equate to understanding fully why it happened.
Then again, while I understand McArdle’s call for a cool, academic assessment of the multiple factors involved after we get more data, that approach is entirely impractical in the middle of a contested election, in which both sides are naturally going to have to answer voter questions about what happened and why. It would be political malpractice for Republicans not to make the (accurate) point that the roots in the lending/housing market are the part of all this in which bad public policy played the most direct role in distorting the market away from its natural equilibrium. And it’s likewise a slam dunk to point out that had Republican-led legislative efforts to rein in the GSEs not been stymied in the 2001-2005 period, the situation would have been, at a minimum, much more tractable to deal with, and that Democratic opponents of such efforts had longstanding financial and ideological reasons to oppose them.
I kept meaning to do a longer post on the inevitable (even if McCain wins) mania for more regulation, although I could just as easily refer you to McArdle’s entire blog for that. Here, for example, she points out the obvious fact that regulators are human and not generally wiser than the businesses they regulate:

Continue reading Opening Your Mouth And Removing All Doubt

BUSINESS: Unmarked To Market

An SEC Press Release issued today offers a clarification that may relieve institutions that feel compelled to use “mark to market” or “fair value” accounting for debt securities as to which there is no liquid market (I’ll try to just offer a neutral description here; other people at my law firm will no doubt be offering our clients more detailed advice on this topic). This is just one aspect of the credit crisis, but MTM has acted as something of an accelerant for the financial troubles of institutions holding mortgage-backed securities for which there is no active market. Some people, mainly on the Right, have argued that suspending MTM would give needed breathing space and eliminate the need for Treasury to step in as market maker and buy up MBS, while others have argued that loosening the accounting rules just conceals the problem and delays the day of reckoning.
Anyway, today’s statement offers at least some clarification that companies need not be rigidly tied in to market prices where there’s no market:

When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable…The determination of fair value often requires significant judgment. In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value.

The statement goes on to note that distressed sales may also not be the best evidence of fair value and deals with other indicia of value such as broker quotes and methods of determining impairment of an asset (recall that unlike, say, the New York Stock Exchange, markets for debt securities do not necessarily have instantaneous public price reporting of all transactions). This is one example of how the regulators are now acting to use the tools already at their disposal rather than wait for Congress to give definitive guidance.
More analysis here.
UPDATE: McCain camp notes they’ve been pressing this issue since March. Fuller statement excerpt here.

The Day After

Well, the last couple of days could have gone better, couldn’t they?
The Wall Street Journal has probably the best overview of Congress’ failure. Lest anyone get the wrong idea from yesterday’s post, which I will freely admit I wrote in a heat when emotions were very raw as the vote slipped away and the stock market collapsed (the credit markets are worse – LIBOR more than doubled overnight, which should frighten the bejabbers out of anyone who pays attention to this stuff), I do think there’s plenty of blame to go around in both parties here (naturally, CNN and other media sources are blaming only the Republicans, ignoring who has a majority of votes in the House):
Let’s start with the obvious: the credit crisis demands action (I’d love to take the purist free market position of letting lots of businesses fail, but while that makes sense in the case of any one enterprise, the credit/debt markets are like the atmosphere of the economy; if there’s no atmosphere, things get uglier by multiples for lots of bystanders who didn’t make any mistakes related in any way to the crisis. Here’s one canary in the coal mine: the New York Sun, quite possibly New York’s best newspaper. If you don’t believe me, listen to Tom Coburn, the Oklahoma populist who is such a good friend to taxpayers that all four candidates in the presidential race have fallen over themselves seeking a share of credit for battles Coburn led). And more to the point, if any action is going to take place it has to be large, rapid, decisive, complex, unpopular, and unpleasant for principled people on both sides of the aisle.
Congress, of course, was basically designed specifically to not work this way, and by nature it attracts people who don’t work that way. On some level you can’t fault the House of Representatives for falling back, when pushed hastily to act on something that was clearly beyond most Members’ understanding, on just representing popular anger against the bailout plan that was pouring in to their offices. (This is also why we generally don’t put Congressmen or Senators on national tickets – we may have low expectations for legislators, but couldn’t abide this sort of behavior in a President).
An aside: an awful lot of basic economics is just common sense expressed in equations, charts and terms of art, and is therefore easy enough for adults to understand if they think about it a little. As a result, there are a lot of people in Congress, at least on the GOP side and among moderate Democrats, who I would trust to understand the essentials of how the economy works.
Modern global finance, when you cut all the way to the gray matter of how the system operates, is another story. It’s clearly not something a lot of conservative Republicans in Congress undertood, or that most Congressional liberals would even bother to try to understand. And we’re stuck with one Presidential candidate who spent his whole life in public service and seems to think that profit motives are somehow a lesser calling, and another who has proudly boasted of turning away from the private sector and is obsessed with income inequality rather than how income and wealth gets created in the first place. Even the Harvard MBA in the White House is an oilman, not a finance guy. Quite simply, our political class is not equipped to handle this crisis. Now, the traditional conservative answer to that is to say, well, that’s why we let the market sort this stuff out rather than entrusting politicians with things that, if they understood them, they wouldn’t be politicians. But at this juncture, I’d rather trust the Goldman Sachs guy, Paulson, to come up with the answer (and as another aside, thank heavens Bush got a qualified Treasury Secretary on the third try after the two prior efforts to give the job to industrial CEOs).
House Republicans and John McCain
Whether House Republicans voted “no” out of ideological principle, responsiveness to angry constituents, fear of losing re-election, ambition to rise within the caucus, pique at Nancy Pelosi, or some combination thereof, they win no awards for courage or wisdom in a crisis. The GOP House leadership bit the bullet and came back on their shields; they can’t be faulted for lack of courage but they were ultimately ineffective in whipping their own caucus.
I have noted a few times that I agreed on policy grounds with John McCain’s decision to involve himself in the negotiations, and the record bears out that his involvement helped House Republicans improve the deal enough to get 60+ votes. Patrick Ruffini continues to argue that it was bad political strategy, and he’s probably right that McCain neglected my rule that you never fight legislative battles you can’t afford to lose. Either way, McCain did not, in the end, come up with enough House GOP votes to ensure passage. He bought into the process, and didn’t deliver the final product.
As a matter of pure political theater, if I was running the campaign, the ideal resolution this week would be to have McCain, or better yet Gov. Palin, get the whip count from Roy Blunt of the most-wavering Republicans, and burn the phone lines to round up 12 House conservatives who voted against the bailout but could be persuaded to switch. Given suddenly softening public opposition to the deal after yesterday’s market crash, this may yet be possible, and given that the holdouts include a lot of rural/small town Republicans, Gov. Palin may be just the person to speak their language (and promise to campaign in their districts and defend their decision). Then, hold a joint press conference hailing them as heroes for biting the bullet to switch their votes and save the economy and, while she’s at it, explain to the media that she has learned as a Governor that being a doer matters more than being a talker. “Nancy Pelosi, here are the votes you couldn’t deliver in your own caucus. Now, let’s get beyond finger-pointing and do the people’s business.”
That would be a political masterstroke, which could be accomplished entirely by conservative Republicans without the assistance of a single Democrat or wobbly moderate; it would stand the entire blame debate on its head and totally and instantly remake her reputation going into Thursday’s debate. Of course, dramatic gestures of that nature rarely seem to work in politics, but I can’t see why it would not be worth a try.
UPDATE: I see Tom Maguire has suggested nearly exactly the same thing.
House Democrats and Barack Obama
Leaving aside policy, Karl Rove pretty perfectly captures here the political and emotional dynamic on the House floor as the vote came down:

H/T. The question of the day is whether the failure of the bailout package was proof of Pelosi’s and Barack Obama’s incompetence or their deliberate choice.
On the incompetence front, well, most of you will remember how the whip operation worked when Tom DeLay was House GOP Whip and later Majority Leader: Republicans running the chamber basically never lost a floor vote because DeLay would twist arms until they snapped like twigs to get those last few votes, and would not bring a bill to the floor until he damn well knew he had those votes. The House is not the Senate; the minority has no formidable powers of obstruction. The majority gets what it wants, period. If you assume Pelosi wanted this to pass, you would think she could have used every procedural device and lever of influence in the book to make it happen.
But increasingly, it looks like this was deliberate and done to place the interests of blaming Republicans over the nation. Soren Dayton rounds up the damning evidence, including the fact that Pelosi never even had her Whip, John Clyburn, do his job and round up support. Then we get this, which even the New York Times couldn’t find an excuse not to print:

Mr. Holtz-Eakin said Mr. McCain had made “dozens of calls” on the bill, some to House Republicans who opposed it.
Aides to Mr. Obama said he had not directly reached out to try to sway any House Democrats who opposed the measure.

H/T. Go back and listen to that list reeled off by Rove, and notice the presence of a lot of Obama allies, including Congressman Jesse Jackson jr, national co-chair of the Obama campaign and a frequent spokesman on Obama’s behalf (Jackson’s statement is here). (Obama’s own Congressman, Bobby Rush, also voted No). Do we really think Obama could not have swayed Jackson’s vote on this? Are there really not twelve House Democrats, not even in the Congressional Black Caucus – which voted heavily against the deal – who care what Barack Obama thinks? (If not, that bodes ill indeed for an Obama presidency).
In other words, neither Pelosi nor Obama raised a finger to make this happen, and their defenders must at best argue that they are so ineffective they could not have made a difference if they tried (I mean, if you can’t buy William Jefferson’s vote…). Barney Frank was bragging that he could persuade a dozen more Republicans if they’d give him the names, but three Massachusetts Democrats, Stephen Lynch, John Tierney and William Delahunt, all voted No as well, and Frank doesn’t seem to have made any headway with them. Pelosi’s speech laying into Republicans on the eve of the vote just seems the icing on the cake here.
Needless to say, deliberately contributing to the defeat of legislation they professed to support, solely for political gain, would not reflect well on Pelosi or Obama. But as little respect as I have for their competence, I can’t look at their inaction and think they are really fools enough that they could have been trying to pass it and acted as they did.
That said, I do not think four years of this would be at all healthy for the conservative movement. (H/T Ace). I mean, it was fun to read and several of the individual factual pieces are worth repeating, but the overall theme and especially the flow chart just reeks of “truther”-style conspiracy theory.
President Bush
I don’t especially blame Bush for the vote failure – it’s not like he has any political chits left to call in (how totally obvious is it that Bush would have been happy to head back to his ranch about three months ago?). Then again, if one of the lessons of Bush I was that you need to spend your political capital while it lasts, one of the enduring lessons of Bush II is that maybe you shouldn’t spend it all and have nothing left for a rainy day.

Delay For Its Own Sake

SECOND UPDATE: Well, the House has voted the bailout down 228-205, despite 66 Republicans (including basically the entire leadership) throwing in behind the bill despite their distaste for it; the Democrats lost something like 40% of their caucus. Seems to me that McCain, having gone all-in for this bill, now has to do Pelosi’s job for her and locate the last 13 votes to get this done. We know Obama can’t and won’t, despite bragging that he deserved credit for the deal.

UPDATE: Looks like they are voting anyway and at last check, the House is about set to vote the deal down. Hold on to your seatbelts, folks.

So, the word just came down that the Senate will not vote on the bailout package until Wednesday night. House Republicans should refuse to vote on the deal until the ballots are cast in the Senate. And Nancy Pelosi and Harry Reid should be ashamed of themselves.

Really, I had intended to write up a review of the progress made in the negotiations over the weekend, but it is just astonishing to me that we have not had votes in both Houses first thing this morning, and as the Democrats run the place, this is entirely their fault.

You may or may not agree that the bailout bill is necessary, but the Democratic leadership in Congress is supporting this bill on the publicly avowed theory that it is. And the reason why it is perceived as necessary is to shore up confidence in fast-paced credit markets. Yet not only did we have dithering last week driven by Democratic efforts to turn the bill into a Christmas tree of special interest favors like earmarked handouts to left-wing groups like Barack Obama’s friends at ACORN and unrelated corporate governance provisions for the whole economy, but now the Democrats seem in no hurry to bring the bill to a vote.
I know it’s hard to get this all written down and digested. (Which, by the way, is one reason all the extras should never have been piled on). But Members of Congress get paid to make decisions. They had all weekend and then some to evaluate the basic merits of the Paulson bailout plan. And every day, every hour that there’s no deal, there are additional financial institution failures, further tightening in the credit markets, and uncertainty-driven losses in the stock market.

The reason why the Democrats want delay is extraordinarily simple: electoral politics. Economic uncertainty always plays against the party in the White House. The polls over the last week bear this out. Every day the agony is prolonged and more people lose money, it benefits Obama.

And of course we saw the contrasting reactions last week in the presidential race: John McCain dropped everything to go to Washington and help Republicans battle back, successfully, against all the Democratic add-ons (John Boehner: “if it were not for John McCain supporting me at the White House when I said whoa, whoa, time-out, they would have run over me like a freight train.”), while nobody asked for Obama’s help and he had no discernible impact on the negotiations. As a result of his decision to take action, McCain ends up more dependent on getting things actually done and delivering, a dynamic that’s wholly alien to Obama, who has no experience with needing to get results.

Personally, unhappy as I am with the turn of events that brought the market to this point, I support the bailout. But House Republicans shouldn’t let themselves get used to provide political cover for an emergency rescue operation if the Senate’s just going to sit on it for another two and a half business days. They should refuse to play along with this effort and should not participate in any vote that doesn’t include a simultaneous Senate vote.

Some Straight Talk For House Republicans: Time To Lead From The Rear

The question of the day is whether House Republicans are going to support some form of bipartisan bailout deal. The Paulson plan is pretty much the only plan that is on the table with any conceivable chance of passing a Democrat-controlled House and Senate, period. There will undoubtedly be battles over what to add on to the basic bones of the Paulson plan, or whether to tinker around the edges of its structure, but while people debate the academic merits of plans laid out by Newt Gingrich, the Republican Study Committee, and others, we need to bear in mind that none of those plans has any chance of passing this Congress.
Nobody is threatening a filibuster of the Paulson plan in the Senate, and indeed I have not seen any sign of major organized opposition among Senate Republicans. As we all know from elementary school Civics, if Nancy Pelosi can get her caucus to line up behind the bill, not a single House Republican’s vote is needed to pass it. The bailout remains massively unpopular and sets many bad policy precedents, and under ordinary conditions Republican intransigence would be the right and honorable thing to do: make the majority take responsibility for doing something unpopular, present a coherent alternative, capitalize at the polls, and replace as much of the unpopular plan as possible with the alternative after the elections.
These are not normal times. House Republicans need badly to come to grips with four very unpleasant realities, and to do so ASAP – and if ever there is a time for John McCain to lead them, this is it:

Continue reading Some Straight Talk For House Republicans: Time To Lead From The Rear

BUSINESS/ How We Got Here

Daffyd ab Hugh at Big Lizards has an insanely long but comprehensive and comprehensible post on the nature of the current financial crisis and the Paulson bailout plan. (H/T Ace) As somebody who was familiar with a good deal of this stuff before it hit the front pages, I can vouch for the fact that this is a smart, clear, insightful summary. My main question about it is that Daffyd seems to assume that Treasury will be buying MBS at the low, distressed market prices now available, and I’m not sure we have assurances that is the case.
By the way, I was listening to the horrible Mets game rather than watching President Bush’s speech tonight, but on paper at least the speech was a fairly clear layman’s explanation of how the crisis developed. I know some conservatives wanted a more partisan finger-pointing speech, but Bush isn’t running for office, he’s trying to hold together fragile bipartisan support for a bill nobody likes. And he does seem to give credence to Daffyd’s reading of how the bailout will operate:

[A]s markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

BUSINESS/ Monday Bailout Roundup

I tried over the weekend to do a more serious post with my analysis of the credit crisis and the bailouts, but basically there’s just no way for me to get into this further without running afoul of my day job. At this juncture, given the limits on what I can write, the best I can offer my readers on the whole Wall Street/bailout issue is a roundup of links and what I can see and hear going around the political side of things:

Continue reading BUSINESS/ Monday Bailout Roundup

BUSINESS: The Man To Read

I know I tend to link a lot to my colleagues at RedState, where I am currently one of the site’s Directors; we have a tremendous and varied group of writers and thinkers on the site, and while I don’t necessarily agree with any of them all the time, we have quite a number of people who are always worth reading.
But if there’s one of my co-Contributors to the site who you really need to be reading regularly, it’s Francis Cianfrocca, who writes under the pseudonym of “blackhedd.” He’s scary-smart about Wall Street issues he knows from personal experience, he’s utterly unsentimental and willing to think outside the box, and unlike most people in the blogosphere, nearly everything he writes is 100% original content you can’t get anywhere else. And he’s been warning the rest of us about the falling sky in the credit markets pretty consistently since about June 2007. And unlike me, he’s not hemmed in at all turns from writing about these issues (I have to avoid writing in any but the most general terms about my firm’s clients, which includes almost everybody).
Here’s his stuff just from the last week:
*Explaining the root causes of the crisis.
*Henry Paulson and the First National Bad Bank of the United States.
*The AIG bailout here and here.
*The Fannie/Freddie bailout here.
*The non-bailout of Lehman Brothers here.
*Other roundups of the week’s events here, here, here and here,

Don’t Panic

If there’s one lesson we should all bear in mind as fear stalks Wall Street and the presidential race keeps getting tighter as it races towards its conclusion, it is this: Don’t Panic.

Now, the current crisis is not an illusion; at its core, it’s about markets that valued assets one way and now value them as being worth considerably less, and that has all sorts of ripple effects when it threatens to close down major financial institutions or force the fire-sale liquidation of portfolios of billions or trillions of dollars worth of assets for which there may not currently be a liquid market. People have lost real money and real jobs, and serious people in business and government alike do need to think long and hard about how to contain the damage and reassess and rationalize government’s regulatory roles going forward.

But financial markets, credit markets and even consumer spending markets all depend on trust and confidence, and can all be brought to a grinding and ultimately self-defeating halt by panic.

Now, John McCain has never been accused of being a financial whiz, but the one thing we can trust McCain not to do is panic in a crisis, or encourage anyone else to panic. McCain’s survived three plane crashes, multiple bouts with cancer, the loss of a presidential primary campaign, five years in captivity, months on end in solitary confinement, countless hours of torture, being at the epicenter of a shipboard fire that killed 134 people, being named in a front-page scandal that killed multiple major political careers, being beaten by an angry mob, having one of his top legislative priorities torpedoed by his own party’s base, standing stubbornly for a war nearly everybody had declared lost, and just a year ago found his presidential campaign broke, rudderless and declared dead by nearly everybody. Yet time after time after time, McCain picked himself up, dusted himself off, gritted his teeth, set his jaw, and refused to give up, whether that meant lying broken in a filthy cell as a young man or trudging on week after week to sparsely-attended rallies in the New Hampshire snow as an old one.

Continue reading Don’t Panic

SOX Survives

A divided panel of the DC Circuit this morning, in Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 07-5127 (D.C. Cir. Aug. 22, 2008), rejected a challenge to the Public Company Accounting Oversight Board’s appointment on separation of powers grounds; because of the lack of a severability clause in Sarbanes-Oxley, the challenge presented the possibility that the court would have had to declare the entire statute unconstitutional. Judge Judith Rogers, joined by Judge Janice Rogers Brown, found that the statute did not unduly dilute the executive branch’s control over the PCAOB:

We hold, first, that the Act does not encroach upon the Appointment power because, in view of the [SEC]’s comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President. Second, we hold that the for-cause limitations on the Commission’s power to remove Board members and the President’s power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates.

Slip op. at 3 (emphasis added). In short, the court found “no instance in which the Board can make policy that the Commission cannot override.” Id. at 33. The court did, however, find that the constitutional challenge was properly presented and did not require exhaustion of administrative review procedures. Id. at 7-8. Judge Brett Kavanaugh dissented, on essentially similar grounds to Justice Scalia’s masterful (but lone) dissent in the 1988 independent counsel case, Morrison v. Olson, although he also argued that the constitutional problems here go beyond those in Morrison:

The President’s power to remove is critical to the President’s power to control the Executive Branch and perform his Article II responsibilities. Yet under this statute, the President is two levels of for-cause removal away from Board members, a previously unheard-of
restriction on and attenuation of the President’s authority over executive officers. This structure effectively eliminates any Presidential power to control the PCAOB, notwithstanding that the Board performs numerous regulatory and lawenforcement functions at the core of the executive power. So far as the parties, including the United States as intervenor, have been able to determine in the research reflected in their exhaustive and excellent briefs, never before in American history has there been an independent agency whose heads are appointed by and removable only for cause by another independent agency, rather than by the President or his alter ego. But that is the case with PCAOB members, who are removable for cause only by the SEC – and it is undisputed that the SEC as an independent agency is not the President’s
alter ego.

Presumably, the plaintiffs will petition the Supreme Court for cert; it remains to be seen if the Court takes the case.
UPDATE: The plaintiffs say they will either petition for cert or for rehearing en banc by the full DC Circuit.


Beldar notes that ExxonMobil in the second quarter of 2008 paid three times as much in taxes as its after-tax profits.
You know, if there is one thing – one thing – that will encourage the development of alternative fuels, it’s the same thing that led to the mad scramble of capital into internet and telecom in the 1990s: the belief by investors that whoever got ahead in the race to market would reap fabulous profits.
The best possible way to blunt that belief is to slap additional taxes on today’s energy producers for being too profitable. Especially when they aren’t even all that profitable on a returns-on-investment basis; those humongous profit figures are just due to massive market share:

Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings.

(That WSJ editorial also notes that Google had a 25.3% profit margin).
Anyway, I’ll probably get into this further when I have time for a longer post on energy, but I laid out the case in 2006 for some ideas on how government can do more to strengthen the confidence of investors that the winners of any alternate-fuel gold rush actually get to enjoy the spoils of their investment and labor.

BUSINESS/ A Word Means What I Say It Means

Is the U.S. economy in a recession? The Democrats and the media have been saying so for a while, but the funny thing is, “recession” is a word and it has a meaning, and the fact that the economy is throwing off a lot of scary indicators and people in particular businesses or jurisdictions are losing jobs may mean the economy has problems, but it doesn’t mean we’re in a recession – at least not yet – any more than clouds in the sky mean that it’s raining. A recession requires multiple quarters in which the GDP declines – that’s what it means, no more and no less. It’s true that you have to already be in a recession before the data comes in to prove it…so how many consecutive quarters of negative growth in the economy are we working on right now?
Well, the data is in this morning, and in the most recently concluded quarter – the 2d quarter of this year – the economy grew, at a 1.9% annualized rate, the best since the 3d quarter of 2007.
Great news? No. 1.9% isn’t the kind of robust growth we’d been used to since 2003, and the underlying structural worries are still there, and some reports are crediting short-term stimulus checks and weak-dollar-driven drops in imports, neither of which is cause for long-term celebration. But as usual, the bad news has been overstated by efforts to paint this as 1933 or 1979 all over again. If we elect a president who wants to jack up taxes, close off trade and hold the line against domestic energy production, though, it might be.
PS – If you want a gander at how much worse things could be, check out the Detroit housing market (Democratic mayor, City Council, Governor and state legislature for years now).

BUSINESS: Couric Flounders

CBS, besides defending a $70 million lawsuit over the dismissal of its last Evening News anchor, is now pondering dumping Katie Couric, who has failed to earn her own $75 million paycheck.
For Couric, this turned out to be a bad case of hubris: she assumed that, having been a commercial success in morning TV, she could switch to the different format and audience of evening news and not only succeed but turn around a floundering, scandal-tarred news division. It didn’t happen; not only did she lose one of her principal assets along the way (Couric’s chipper demeanor always went over well with the morning-TV crowd), but once CBS made the decision to stay a nominally straight news outlet rather than becoming an openly left-leaning news source, Couric was always the worst possible person to try to correct CBS News’ decades-long reputation as the most liberal news source on TV.
Clearly, CBS should have listened to me when I suggested back in December 2004 that they hire CNN’s Erica Hill instead. Hill’s career has only headed up since then; Headline News ended up rebranding her prime-time shift as “Prime News with Erica Hill,” and more recently she moved to the mother network to pair with Anderson Cooper on one of CNN’s two most prominent news shows (the other being The Lou Dobbs Really Hates Foreigners Hour). Hill probably wouldn’t have singlehandedly turned around CBS overnight either, but hiring a younger, lower-key and undoubtedly less expensive anchor would have kept costs and expectations lower, and signalled a commitment to rebuilding the brand from scratch rather than trying to poach from NBC. Instead, CBS is now reduced to denying reports that it’s going to outsource newsgathering to … CNN.

Quick Links 4/4/08

*This analysis of major league managers’ tendencies illustrated as cartoon faces is…well, you have to click on the graphic to get the full effect. It’s bizarre. H/T Rays Index.
*Today is the 97th anniversary of the introduction of baseball’s MVP Award by automaker Hugh Chalmers. The first-ever MVPs? In the AL, 24-year-old Ty Cobb for his first and best .400 season, batting .420/.467/.621 with 47 doubles, 24 triples and 83 steals, scoring 147 runs and driving in 127. In the NL, 28-year-old veteran Cubs rightfielder Frank “Wildfire” Schulte, narrowly over Christy Mathewson, for batting .300/.384/.534 with 21 triples and 21 homers (only the third 20-HR season ever if you exclude the fluky 1884 Cubs), 105 Runs, and 107 RBI.
*Our old friend Dr. Manhattan is back blogging! While I was tied up doing my baseball previews, he had a fine column taking John McCain to task for his knee-jerk ignorance on the connection between vaccines and autism. As a general rule, the more science is involved in an issue, the worse McCain is. He seems sometimes to have a superstitious faith in junk science.
*Former equipment manager Yosh Kawano is leaving the Cubs clubhouse after 65 years. That’s a very long time to work for one baseball team and not get a World Series ring. I think Kawano’s name is familiar to me from one of Joe Garagiola’s books…as in, he was there when Garagiola played for the Cubs.
*Via Pinto, Travis Nelson at Boy of Summer has a lengthy attack on Melky Cabrera. I’m more optimistic about Cabrera’s potential for across-the-board growth as a hitter, but I’d generally agree that his prospects are much dimmer if you don’t regard him as a competent defensive center fielder.
*There’s no such thing as an innocent non-Muslim? This may go a ways to explaining what this means. I can’t buy into Hawkins’ notion, which has been pushed for some time by my RedState colleague Paul Cella, that the U.S. should bar immigration by Muslims, but when you consider Hawkins’ logic, I have to admit that that’s more an emotional reaction than a reasoned position on my part.
*While I don’t agree with all the analysis, David Frum and Bill Kristol have some useful points about the perlious passivity of the Bush Administration in responding to criticism, most particularly the conviction that there’s no point in fighting over the past. The Administration’s enemies have nourished a number of myths about the past 7 years that have proven terribly corrosive of its credibility, goodwill and, ultimately, ability to get anything done. (On a related note, consider how little press went to the Army Corps of Engineers’ ultimate admission that its design defects caused the flooding of New Orleans).
*Yes, Glenn Greenwald is still a fool who has trouble with elementary logical reasoning.
*The Nineties economy in a nutshell. This, too.
*Guns don’t kill people, guns kill movie scripts.
*24 is coming back! Maybe that means Jack Bauer will stay out of trouble.