Business Law Prof Blog

First Obama Press Conference

President Elect Obama started his press conference at 252 with stock trading over 220 points higher on the DJIA.  By the time he was finished the Index has dropped to 110 points or so, the majority of the drop occurring just 13 minutes after the start of his remarks (when the index had dropped 130 points).  At the conclusion of the conference, stocks on the Index began a climb to trade higher.  Volume was heavy during his remarks.  Perhaps it was sight of the governor of Michigan in his financial support group and his specific reference to her, and only her, in his remarks.  Rewarding failure has never been big with the markets.

In any event,  President Elect Obama, who shorted the market and outspent his opponent in his campaign, will now go long in the market with his proposals.  He shorted the market by positioning his campaign over two years ago to benefit if the market soured and it did, on September 15th.  Moreover, he, as good bears do, talked the market down for several years in an effort to profit from his short position.  He raised $650 million for his campaign, well over the $350 raised by McCain, and did not "share the wealth" with McCain,  rejecting the public finance money that would also cap his fund raising.  Had he followed current regulatory trends he would have been prohibited from shorting the market (at least until some good news, an uptick, was in the market to preceded his negative remarks) and he would have been subject to a "windfall tax" for his success in fund raising.   Now he is necessarily long the market, he wants a next term and a successful solution attributed to his administration.  So, as just as Governor Strickland as done in Ohio (flipping from the short side to the long side), his negative comments have, in the press conference, turned positive and upbeat.  "Enact my plan, which is the right one, in a bipartisan way, and this great resiliant and strong nation will once again prosper...[or something to that effect]"   I had tears in my eyes.

How Taxes Work

Making the rounds of the Internet:

"How Taxes Work . . .

This is a very simple way to understand the tax laws.

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man — the richest — would pay $59.

That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.

But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man who pointed to the tenth. "But he got $7!"

"Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too . . . It's unfair that he got seven times more than me!".

"That's true!" shouted the seventh man, "why should he get $7 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. "

Democrats Want to Outlaw "Excessive" Risk Taking

Democrats in Congress, Barney Frank, Charles Schumer, Nancy Pelosi and others, want to have an "overarching" regulatory authority to, in essence, regulate "excessive" risk-taking, whatever that is.  The authority will tell private actors in the financial industry how much risk is too much.  We will design and mandate child-seats for investors.  This smacks of the initial goals of Congress in the 30s (the Pecora Commission and hearings) that led to an increased mandatory disclosure regime but minimal raw regulation of risk-taking (see Institutional Investors Act for mutual funds).  Apparently we will re-visit that debate to see if we can regulate levels of risk taking.  If we do decide to regulate risk-taking, watch capital flow out of the country.   

New York Times Business Section: Written by Trial Lawyers

On Wednesday, B-1 headline "Strongest Election Day Stock Rally in 24 Years."  On Tuesday, B-7 headline, "Stock Fall as Service Industries Weaken."  1st paragraph mentions Tuesday's rally.  Third to last paragraph, "for those curious" mentions that Wednesday's decline fits within historical precedents.  It does not; it was the largest percentage decline in history, surpassing even 1932.  How did NY Times make the claim -- it averaged Tuesday and Wednesday. Oh good gracious. Note that it did not average Tuesday and Wednesday when it restated the claim for strongest election day rally in 24 years.  Manipulation of the news in the New York Times is awful.  Their stuff may as well be authored by trial lawyers.

A Zany Bailout: Take the Money, on the House, Pleeease ....

Am I the only one that thinks the TARP program is zany?  Paulson calls in nine major banks and forces them to take bailout money, $25 billion apiece.  Some of the banks object:  "We do not need it."  Paulson pleads with them to take the cash, otherwise other banks that do need it will be "stigmatized.  To be stigmatized means people will pull money out of a bank, collapsing the bank. "Get on board," he warns, "or you will not be "patriots."  Banks:  "No Strings Then."  Paulson:  "Okay, you can still pay dividends or pay off old debts with the new cash and I will water down the executive compensation restrictions and the stock we take will not vote and the dividends you pay on the government's stock will be at six to seven percent below market." The big banks: "Okay, to be a patriot, we'll take the billions in cash that we do not want and do not need."  The other national banks, that need the cash ask: "Do we get the same deal as the healthy banks on compensaton and dividends?" Paulson:  "Sure." The suffering national banks: "Wow."   

Now suffering regional banks come in.    "We need the cash to stay solvent."  Paulson, through his "credit committee," "Cannot have it, go find a merger partner, we will give cash to a bank that wants to buy you out."  Banks, "Pleeese.."  Paulson, "No we would give it to you if you did inner city loans, but you did not and you, according to my private criteria, applied in my discretion, were bad."  Banks: "Can we see the criteria."  Paulson: "No, its secret, we do not what to stigmatized banks that do not meet the criteria, which you, by the way, do not."  [E.g., Landler, "New Terrain for Arbiters of a Bailout" describing the "credit committee"]

Now healthy regional banks come in.  "We do not need the cash but we want to ask for it so were are not stigmatized.  We heard that banks that do not get cash will be presumed to not meet your secret criteria and be stigmatized.  So give us money we do not need and do not want in order that we may not be stigmatized."  Paulson, through his "credit committee":  "Makes sense to me, take some cash on the house, and please behave.  The press in on my a.. because you are using government money to pay off debts, pay dividends and buy other banks rather than lending out the new money."  Banks:  "We'll think it over."  Paulson:  "Thinking is good, here's the cash."

This description, which is not too far from the literal truth, is just looney. 

The Baby Boomers: The Shallowest Generation

See an excellent piece on baby boomers. http://seekingalpha.com/article/103202-the-shallowest-generation?source=article_sb_popular   This is my generation and this fellow is largely correct.   We spend now and pay later.  We are not dead yet (and when we are, books will be written on us that will not be flattering) and we have under saved for retirement and under provided for our inevitable medical problems.  The recent market reversal will add to this problem.  Again we will bleat for government money to make up for our refusal to save and put away money in sufficient amounts to live. 

Nassim Nicholas Taleb: the Black Swan

You have to love this guy.  He writes a book, the Black Swan, that is readable and puts forth a trading market strategy.  He also puts his cash in his strategy, managing a hedge fund.  His ship has come in.  His funds are rolling in cash and his book is a best seller. 

The theory -- the market undervalues the risk of extreme events (Black Swan events).  His hedge funds buys, over time, way out-of-the money "put" options for pennies.  When the market is "normal" his fund shows consistent small losses -- the rolling purchase prices for the put options that expire worthless.  When a "Black Swan" event happens, his fund cashes in big -- swamping the small loses with mammoth returns.  October was a Black Swan month; his funds returned 65 to 115 percent for the one month.  Theory proven; money made.  Now, however, the market will reprice the out of the money put options and his strategy, now known, will not yield the returns.  Markets learn -- on their own-- without government help--if we let them.

As I said you gotta love this guy.  Time to raise his taxes. 

Private Equity as a Punching Bag

The New York Times has a front page story on private equity buyout deals.  Andrew Sorkin and Michael de la Merced, "As Bills from Huge Buyouts Come Due, Economy Faces a Blow."  You can almost feel the glee in the writers language.  The financial crisis has been precipitated by our banks and financial institutions, not private equity funds.  Yet private equity funds, and hedge funds, are the funds the financial press hates -- the fund manager make big bucks and have too much success.  Just as the trading market losses have hit hedge funds hard, the economic slowdown is now hitting hard the portfolio companies of private equity funds.  And the glee -- see, the big money guys are getting theirs.  The stories leave out the most important bit of data.  Are the funds, on average, suffering more than market indexes or less??  We do not know.  Some funds are still making money.  Some funds are losing big.  The market is down 45 percent or so from highs. What is the situation of all funds, grouped and weighted?  Color me rosy, but I bet the private equity and hedge funds, on average, have lost less money than the market.  What evidence I have suggested that private equity funds, in the same period dropped an average of 20 percent, much less than the market indexes have fallen.  Note also that fund managers, unlike managers in many publicly-traded companies, take a hit first when returns are down -- the carried interest (the notorious 20 percent) goes first, first, when profits are low or non-existent.

Kicking a Man When Down: Edward Hadas

Edward Hadas "piles on" in todays New York Times.  "Less Finance May Be Just Fine."  Finance employees out of work will be thrilled to read that they were social baggage anyway and should take up careers in "industry, education or the arts."   He bases his attack on the old canard that trading is "little more than gambling" and that those in finance are "the house."  He is wrong, of course.  The secondary trading markets make the primary markets (when firms sell debt or equity to shareholders) much more productive (reducing substantially the cost of capital to firms that sell) by adding liquidity and depth to securities markets.  Secondary trading markets make prices more accurate to fundamental value (although never fully accurate of course) than they would otherwise be, to the benefit of firms, investors, and, well everyone, who want capital allocation to be value sensitive.  Gamblers bet on rolls of dice or horse races; traders bet on securities that provide social value.  There is a world of difference -- to those who do not specialize in kicking a man when he is down.  Oh, by the way Mr. Hadas, profits for the New York Times are down, down, down; the paper's bonds are junk.  Maybe journalists at the paper should get a job "in industry or education" or finance.  See others can kick a man when down too; hurts doesn't it.

GM Does Not Receive Government Cash for Chrysler Deal

Days after the United States auto makers announced 30 year sales lows for the last quarter, the government refused to give General Motors $10 billion in cash or guarantees to help the company purchase Chrysler.  Paulson did not want to broaden the $700 billion TARP program to include operating companies [it now includes financial companies].  Obama, of course, would give GM the $10 billion.  The Energy Department has yet to release $25 billion in loans to the big three United States auto companies -- the loans are for "energy efficient" cars.  Great. Gas is now under $2.00 a gallon and the government is subsidizing plastic cars with motorcycle engines.