Investing Curiouscatblog

Tag: regulation

  • Anti-Market Policies from Our Talking Head and Political Class

    It is very simple. Adam Smith understood it and commented on it. If you allow businesses to have control of the market they will take benefits they don’t deserve at the expense of society. And many business will seek every opportunity to collude with other businesses to stop the free market from reducing their profits and instead instituting anti-competitive practices. Unless you stop this you don’t get the benefits of free market capitalism. Free markets (where perfect competition exists, meaning no player can control the market) distribute the gains to society by allowing those that provide services in an open market efficiently and effectively to profit.

    Those that conflate freedom in every form and free markets don’t understand that free markets are a tool to and end (economic well being for a society) not a good in and of themselves. Politically many of these people just believe in everyone having freedom to do whatever they want. Promoting that political viewpoint is fine.

    When we allow them to discredit free market capitalism by equating anti-market policies as being free market capitalism we risk losing a great benefit to society. People, see the policies that encourage allowing a few to collude and take “monopoly rents” and to disrupt markets, and to have politicians create strong special interest policies at the expense of society are bad (pretty much anyone, conservative liberal, anything other than those not interested in economics see this).

    When people get the message that collusion, anti-competitive markets, political special interest driven policies… are what free market capitalism is we risk losing even more of the benefits free markets provide (than we are losing now). That so few seem to care about the benefit capitalism can provide that they willingly (I suppose some are so foolish they don’t understand, but that can’t be the majority) sacrifice capitalism to pay off political backers by supporting anti-market policies.

    Allowing businesses to buy off politicians (and large swaths of the “news media” talking heads that spout illogical nonsense) to give them the right to tap monopoly profits based on un-free markets (where they use market power to extract monopoly rents) is extremely foolish. Yet the USA has allowed this to go on for decades (well really a lot longer – it is basically just a modification of the trust busting that Teddy Roosevelt tried). It is becoming more of an issue because we are allowing more of the gains to be driven by anti-competitive forces (than at least since the boom trust times) and we just don’t have nearly as much loot to allow so much pilfering and still have plenty left over to please most people.

    I am amazed and disgusted that we have, for at least a decade or two, allowed talking head to claim capitalist and market support for their special interest anti-market policies. It is an indictment of our educational system that such foolish commentary is popular.

    Free Texts Pose Threat to Carriers

    At 20 cents and 160 characters per message, wireless customers are paying roughly $1,500 to send a megabyte of text traffic over the cell network. By comparison, the cost to send that same amount of data using a $25-a-month, two-gigabyte data plan works out to 1.25 cents.

    This is exactly the type of behavior supported by the actions of the politicians you elect (if you live in the USA).

    It is ludicrous that we provide extremely anti-market policies to help huge companies extract monopoly profits on public resources such as the spectrum of the airwaves. It is an obvious natural monopoly. It obviously should be managed as one. Several bandwidth providers provide bandwidth and charge a regulated rate. And let those using it do as they wish. Don’t allowing ludicrous fees extracted by anti-free-market forces such as those supporting such companies behavior at Verizon, AT&T…

    Related: Financial Transactions Tax to Pay Off Wall Street Welfare Debt – Extremely Poor Broadband for the USA (brought to us by the same bought and paid for political and commentary class) – Ignorance of Capitalism – Monopolies and Oligopolies do not a Free Market Make

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  • Is the Stock Market Efficient?

    I believe in weak stock market efficiency. And recently the market is making me think it is weaker than I believed :-/ I believe that the market does a decent job of factoring in news and conditions but that the “wisdom of crowds” is far from perfect. There are plenty of valuing weaknesses that can lead to inefficient pricing and opportunities for gain. The simplest of those are spotted and then adopted by enough money that they become efficient and don’t allow significant gains.

    And a big problem for investors is that while I think there are plenty of inefficiencies to take advantage of finding them and investing successfully is quite hard. And so most that try do not succeed (do not get a return that justifies their time and risk – overall trying to take advantage of inefficiencies is likely to be more risky). Some Inefficiencies however seem to persist and allow low risk gains – such as investing in boring undervalued stocks. Read Ben Graham’s books for great investing ideas.

    There is also what seems like an increase in manipulation in the market. While it is bad that large organizations can manipulate the market they provide opportunities to those that step in after prices reflect manipulation (rather than efficient markets). It is seriously annoying when regulators allow manipulators to retroactively get out of bad trades (like when there was that huge flash crash and those engaging in high frequency “trading” front-running an manipulation in reality but not called that because it is illegal). Those that were smart enough to buy stocks those high frequency traders sold should have been able to profit from their smart decision. I definitely support a very small transaction tax for investment trades – it would raise revenue and serve reduce non-value added high frequency trading (which just seems to allow a few speculators to siphon of market gains through front running). I am fine with speculation within bounds – I don’t like markets where more than half of the trades are speculators instead of investors.

    Related: Market Inefficiencies and Efficient Market Theory – Lazy Portfolios Seven-year Winning Streak – investing in stocks – Naked Short Selling

  • Extremely Poor Broadband for the USA

    The USA has extremely poor broadband service (compared to other rich countries). It is slow and expensive. Those that support economic policies more in line with the USA than other nations have a great deal of explaining to do about why the options are so bad. It is similar to the broken health care system.

    Those that support politicians leading to this state for broadband say they support “free markets.” In actuality, they support anti-competitive practices by extremely large companies (oligopolistic behavior). Free market theory (the original form) requires that no individual company can dictate to the market. You have free competition – no barrier to entry, no restraint on entry, customers can buy where they want… But the politicians we elect instead support policies and practices that restrain free trade and prohibit good solutions in order to benefit those that pay the politicians well. And then we vote for those politicians.

    Those wanting the anti-competitive markets have won in our political system. The main thing I wish was clearer was that we stop pretending these people have some capitalist leaning. They are anti-capitalist. If they want to support the policies they do I wish they would be required by the voters to at least be honest. Unfortunately the voters elect them with their dis-honest representations. If the politicians were honest they would have a more difficult time being elected (because voters want to pretend they like capitalism even while voting for politicians that just seek to give special benefits to those that pay the politicians. And then the politicians claim to support markets, and business and consumers when really they just favor making anti-market legislation and regulation to favor their contributors. As long as we vote for people that claim to support capitalism but undermine it at every step to help their friends we do deserve to suffer. I just wish we could convince enough of our fellow citizens that flashy propaganda and repeating lies over and over isn’t the same as facts and truth.

    1Gbps fiber for $70—in America? Yup.

    Where I live in Chicago, Comcast’s 105Mbps service goes for a whopping $199.95 (“premium installation” and cable modem not included). Which is why it was so refreshing to see the scrappy California ISP Sonic.net this week roll out its new 1Gbps, fiber-to-the-home service… for $69.99 a month.

    Given the anti-competitive policies in the USA, if they have much success they will probably just be bought (or maybe as others suggest fought in other anti-competitive ways, but buyouts are normally easiest for actually strong competitor) to allow anti-competitive pricing and service to continue. The only real hope is someone with actual power sees it in their interest to fight against the entrenched interests. Google is the best hope I think. It isn’t that Google has nearly as much political power as those interests but they are smart and have the advantage of just having to expose the anti-competitive behavior and apply pressure.

    The narrative the politicians and voters say they support is capitalism. But the reality is just those with the gold make the rules. But when this is made obvious and continually pressed by someone with power, clout, intelligence and political savvy it makes politicians and regulators hesitant to continue business as usual. Normally they just delay for a few months and then continue the corrupt practices. Google, plus others, plus lots of individual interest can fight that off – but it takes perseverance.

    Related: USA Broadband is Slow. Really Slow. – Plugging America’s Broadband Gap – Eliminate Your Phone Bill – Net Neutrality: This is serious

  • Banks Hoping they Paid Politicians Enough to Protect Billions in Excessive Fees

    USA consumers pay huge fees on debit cards not found in most other rich countries. Other countries provide debit cards with much cheaper fees than USA banks mandate now given their anti-competitive oligopolistic pricing power. I haven’t seen anyone (that isn’t in the pay of banks) arguing for keeping excessive fees in place. But there are lots of people being paid by the banks (including most likely, “your” representative).

    Banks want a favor — at your expense

    The big banks are pressing Congress for a favor that will cost the average American household $230 a year. The bankers argue that the favor is needed to support small community banks. But since the lion’s share of the favor will be collected by just four banks, it might be cheaper to subsidize community banks with a check direct from the Treasury.

    David Frum, special assistant to President George Bush, is exactly right.

    Banks charge an average of about 1% on debit card transactions. In Australia, where swipe fees are regulated, banks charge half as much — and still earn a profit.
    …
    [banks] are lobbying hard to repeal the cap on debit card fees in advance of the July date when Dodd-Frank goes into effect… Congress is not swayed by arguments. It is swayed by clout — and on this issue, it is the banks who have the clout.
    …
    Based on that experiment, economist Robert Shapiro of Sonecon estimates that about 56% of the value of reduced swipe fees will reach the final consumer. That’s the basis for his calculation of savings of $230 per household. That’s also the basis for his further calculation that reduced swipe fees will translate into a one-time gain of 250,000 new jobs.
    The new Republican House majority appropriately mistrusts government regulation. But if the financial crisis taught us anything, it should have taught that financial regulation is different from other forms of regulation. Invisible charges imposed by a financial cartel is not my idea of a free market.

    The caps were part of the huge bailout taxpayers gave banks and were meant to be a partial watering down of a few of the smaller favors their bought and paid for politicians had given them over the years (as “punishment” for their misdeeds).
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  • Credit Card Regulation Has Reduced Abuse By Banks

    Most of the practices deemed unfair or deceptive by the Federal Reserve have disappeared from new credit card offers since federal passage of the Credit CARD Act last year, according to a new report by the Pew Charitable Trusts, Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent – But Challenges Remain.

    The report finds that issuers have eliminated practices such as “hair trigger” penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances. However, Pew’s research also highlights a sharp rise in cash advance fees, continued widespread use of other penalty interest rates and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.

    One interesting tidbit from the report which studied the 12 largest banks and 12 largest credit unions: together these institutions control more than 90 percent of the nation’s outstanding credit card debt.

    Less than 25 percent of all cards examined had an overlimit fee, which is down from more than 80 percent of cards in July 2009. Additionally, mandatory arbitration clauses, which can limit a consumer’s right to settle disputes in court, are now found in 10 percent of cards compared to 68 percent in July 2009.

    At least 94% of bank cards and 46% of credit union cards (once again showing credit unions are likely to be a better option – though not always)came with interest rates that could go up as a penalty for late payments or other violations. But nearly half these warnings failed to inform the consumer of the actual penalty interest rate or how high it could climb.

    Bank cash advance and balance transfer fees increased on average by one-third during this period, from 3% of each transaction to 4%. Credit union cash advance fees went up by one quarter, from 2% to 2.5%. Both increases (which again show how poorly banks fair in comparison) are unconscionable given the incredible low costs of money today. You should not pay these ludicrously high fees.

    Related: Credit Card Issuers Still Seeking to Take Your Money – Continued Credit Card Company Customer Dis-Service – Legislation May Finally Pass to Address the Worst Credit Card Fee Abuse (Dec 2007)

  • Can Bankers Avoid Taking Responsibility Again?

    Banks continue to pay our politicians well to make sure they continue doling out special favors to the large banks. It is up to you, and your neighbors whether you hold politicians accountable for the actions they took to create the climate for the credit crisis and the huge favors granted (with your money) by politicians to those investment bankers. The bankers count on their money buying the politicians. I would have to say they are smart to believe that, though there is a small chance the invulnerability they feel is possible to pierce with enough foolish moves by the bankers and their friends (but in order for that to happen people would have to actually vote to elect ethical, intelligent and patriotic politicians instead of those who play the public for fools). I would put my money on the public again using their votes to elect those that will enrich special interests that pay the politicians at the expense of the country.

    Banks Say No. Too Bad Taxpayers Can’t

    Fannie and Freddie helped grease the nation’s housing machinery before and during the boom years, scooping up loans from all corners of the country. The more of these that Fannie and Freddie bought, the easier it was for banks to write new mortgages.

    To protect themselves from getting piles of garbage loans shoveled their way when they buy mortgages, Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don’t meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks.

    Surprise, surprise: banks don’t want to repurchase these loans. So when Fannie or Freddie identify problem mortgages and request repayment, a battle royal begins. Banks may argue, for example, that the repayment requests have flaws of their own.

    But for us as taxpayers, watching this battle from the sidelines, one growing concern is how aggressively Fannie and Freddie will pursue their requests. If banks refuse to buy back flawed loans, taxpayers will have to cover more of the losses.
    …
    According to March 31 figures from Freddie, for instance, the amount of problem loans that it has asked other firms to buy back stood at $4.8 billion — up 26 percent from $3.8 billion just three months earlier.
    …
    Banks have been unwilling to mark all of the bad loans they have and mortgage securities they hold to their true values because that would require a loss,” said Kurt Eggert, a professor at the Chapman University School of Law. “But this is about banks trying to avoid losses and having the taxpayers absorb them.”
    …
    Michael Cosgrove, a Freddie spokesman, said that the company is aggressive about enforcing its right to recover on questionable loans because it has a duty to be a good steward of taxpayer dollars. “These reviews are more important than ever; there is no reason why taxpayers should pay for decisions that led to the sale of bad loans to Freddie Mac,” he said.

    $4.8 billion? That seems amazingly low for all the fraudulent activity these banks are suppose to have engaged in. But so long as they can foist the problem loans into the taxpayers hands they can claim to deserve billions in bonuses for themselves. The staggering magnitude of the special favors bought by the bankers is amazing. The politicians have shown they are supporting their banking friends while saying a few tough words. And most likely the politicians and bankers will be celebrating another successful election this fall. If we want to change the outcome we can. But we don’t seem interested in doing so.

    Related: Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds – The Best Way to Rob a Bank is as An Executive at One – Sabotaging Regulated Financial Markets Leads to Predictable Consequences – Congress Eases Bank Laws – 1999

  • Charlie Munger’s Thoughts on the Credit Crisis and Risk

    Charlie Munger’s Thoughts on Just About Everything by Morgan Housel

    The academic elites failed us with their utterly asinine ideas of risk control. It was grounded on the idea that all risk took Gaussian distributions, which is just totally wrong. Very high IQ people can be completely useless. And many of them are.

    Benjamin Graham used to say, “It’s not the bad investment ideas that fail; it’s the good ideas that get pushed into excess.” And that’s a lot of what happened here.

    Some economic distortions come from the masses believing that other people are right. Others come from the need to make a living through behavior that may be less than socially desirable. I’ve always been skeptical of conventional wisdom. You have to be able to keep your head on when everyone else is losing theirs.
    …
    Take soccer as an example. It’s a tremendously competitive sport, and often times one team tries to work mayhem on the other team’s best player. The referee’s job is to limit this mayhem and rein in extreme forms of competition.

    Regulation is similar. Most ambitious young men will be more aggressive than they should. That’s what happened with investment banking. I mean, look at Lehman Brothers. Everyone did what they damn well wanted until the whole place was pathological about its extremeness.
    …
    A lot of this [financial collapse] can be blamed on accountants. Accountants as a whole have been trained with too much math and not enough horse sense. If some of these insane accounting practices were never allowed, huge messes could have been avoided. Bankers have become quite good at manipulating accountants
    …
    Learning has never been work for me. It’s play. I was born innately curious. If that doesn’t work for you, figure out your own damn system.

    More good thoughts from Warren Buffett’s partner at Berkshire Hathaway.

    Related: Buffett and Munger’s 2009 Q&A With Shareholders – Berkshire Hathaway Annual Meeting 2008 – Misuse of Statistics, Mania in Financial Markets – Leverage, Complex Deals and Mania

  • Making Debt Holders into Unpaid Regulators

    The credit crisis has shown the lack of political (or regulatory) skill, ethics and character that the USA has now. The solutions are not simple. Some are obvious, like limiting leverage, not providing huge favors to those that pay politicians huge amounts of cash… While Canadian banking regulators actually did their jobs well it is hard to believe most any American regulators will do well given the last 20 years of failures. Raghuram Rajan provides some interesting thoughts on potential improvement in: Making Debt Holders into Watchdogs

    The type of risks that put banks in the greatest jeopardy – and led to the recent crisis – are called tail risks. They have a small probability of turning out badly but are extremely costly if they do. Banks took on two kinds of tail risks prior to the crisis. One was economywide default risk, the risk that a broad portfolio of assets, such as mortgages, would suffer deep losses. The other was liquidity risk, essentially the way they financed the first kind of risk.

    Some banks – such as Citibank, Lehman Brothers, and Royal Bank of Scotland – loaded up on both risks, holding enormous quantities of mortgage-backed securities on the asset side and paying for them with short maturity debt on the liability side. Why did they do it? The simple answer: It was very profitable, provided the tail events did not materialize. Think of insurers that write a lot of earthquake policies (another tail risk). If you didn’t know they were writing earthquake insurance and not setting aside reserves, you would think they were enormously profitable until there’s a quake. For banks, there was always the threat of a day of reckoning when liquidity dried up and defaults skyrocketed. But they set aside few reserves against that happening.
    …
    Particularly worrisome, as my colleague Douglas Diamond and I have argued, is that once banks are leveraged enough that they will be severely distressed if economywide liquidity dries up, they double down on risky bets.
    …
    Here’s the drill: To make it harder for tail-risk-taking banks to grow, all banks should be required to issue a minimum level of debt (say, 10% of assets) that is automatically impaired – either converted to equity or written down – if the bank suffers sufficient losses. This will quickly change debt holders’ views on risky expansion. Moreover, no financial institution should be allowed to hold this debt.

    Related: Why Congress Won’t Investigate Wall Street – Scientists Say Biotechnology Seed Companies Prevent Research – Drug Prices in the USA

  • Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds

    Many people are ignoring huge costs (to the economy) and benefits (to those financial companies that ruined so many people’s lives and severely damaged the economy. Paying back money the government paid you is not that same as being innocent. While several of the too big to fail banks have paid back the direct cash they were given that is not an indication they are now off the hook for their disastrous behavior.

    First we know that much of the money “sent to AIG” just went directly to Goldman Sachs and others. Those big banks had taken risks and the only way those risks paid off was with billions from taxpayers. Without that they would have been bankrupt. And then when they paid the money they received directly they still haven’t paid back the billions they got from taxpayers (via AIG). And this money was paid back at 100 cents on the dollar though those instruments were trading for much less in the market (the government certainly would have found a less costly solution but for ignorance or a desire to reward their former company and friends at Goldman Sachs.

    Second, rates have been kept artificially low, to among other things, allow the big banks to make tens of billions (and costing savers tens of billions). Those savers have not been reimbursed for the losses caused by the big banks.

    And third if I gamble with money from my company and win my bet on the Super Bowl and then put the money back, I am still not innocent. Just because many of the big banks have paid back the money they were given directly by taxpayers does not mean they didn’t get huge benefits from the government. Pretending they are not bad guys because after ruining the economy, costing millions of people their jobs and savings, getting many benefits from the government, they then pay back the direct cash payments is not accurate.

    Response to: The New Bank Tax

    Related: Elizabeth Warren Webcast On Failure to Fix the System – The Best Way to Rob a Bank is as An Executive at One – Failure to Regulate Financial Markets Leads to Predictable Consequences – Jim Rogers on the Financial Market Mess – Congress Eases Bank Laws (1999)

  • Buffett Calls on Bank CEOs and Boards to be Held Responsible

    In his most recent letter to shareholders Warren Buffett suggests that bank CEOs and board members be held accountable when the risks they take (and reward themselves obscenely for when they payoff) backfire:

    In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –
    the financial consequences for him and his board should be severe.

    It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the
    last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

    The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their
    recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

    The lack of accountability or ethics from those risking the economy so they can take huge payments (and paying off politicians to allow those risks) has hugely damaged the USA and the economic future of the country. The longer we allow such unethical leadership to continue to the more we will suffer. The current low interest paid to savers and the wealth thus transferred to the banks (who then pay themselves even more bonuses) are but one legacy of this economically devastating path.

    By the way, there is no way the bankers will actually be held accountable. The behavior of politicians we continually elect shows they will not do something that those giving them the huge amounts of cash don’t like. If we don’t like that we have to elect different people – maybe people that care about the country and have moral principles instead of those lacking such qualities, that we do elect.

    The politicians believe in holding those that don’t give them huge payments accountable for their actions. They just draw the line at holding people that they play golf with accountable.

    Related: CEOs Plundering Corporate Coffers – Credit Crisis the Result of Planned Looting of the World Economy – The Best Way to Rob a Bank is as An Executive at One – Fed Continues Wall Street Welfare – Political Favors for Rich Donors – Why Pay Taxes or be Honest