Tax Loopholes, Cont.

First came the fact that principals at hedge funds, private-equity shops, and

the like paid just 15% in taxes on their income. Then came the fact that when

a hedge fund or a private-equity shop goes public, it’s structured so that it

doesn’t need to pay the corporate rate of income tax. And now, the NYT’s incomparable

David Cay Johnston has revealed that $3.7 billion of the proceeds

from Blackstone’s IPO will be taxed not at the income-tax rate, not at the capital-gains-tax

rate, but rather at

a negative rate.

Yes, Blackstone’s partners will have to pay $553 billion in taxes up-front,

which is 15% of the $3.7 billion they’re putting into a "blocker corporation".

But in return, they will then get back $1.1 billion in deductions over 15 years,

which is their share of the 35% "good will" deduction allowable on

that $3.7 billion.

As it happens, I was talking taxes last night, too, and specifically some of

the many ways that entrepeneurs use to avoid paying them. (Roth IRAs, apparently,

are limited to contributions of just $4,000 per year – but if you value

your founder’s equity at a low enough price, you can put as much of it as you

like into such a vehicle, and then not have to pay any capital gains tax when

you go public and your equity gets sold for millions.)

Meanwhile, Paul Krugman beats

up on Democratic senators for not being harsher when it comes to these tax

dodges (free version here):

The hesitation of the Senate Democrats is terrible for the party’s

image. It conveys the impression that they’re as beholden to hedge funds,

one of the few types of businesses whose campaign contributions strongly favor

Democrats, as Republicans are to the oil and drug industries.

And Dean Baker takes

issue with Pete Peterson personally for benefitting from

the Blackstone tax dodge. I don’t buy that: it’s not Peterson’s fault that these

loopholes exist, and his enlightened views on fiscal policy do not mean that

he has any obligation to pay more taxes than he legally owes. This is why I’m

unimpressed by people bashing

Bono for paying low taxes, as well.

It’s people like Grover Norquist who I really take issue with

– people who are perfectly happy lying

about the current tax code in order to prevent sensible changes. Take this,

for instance:

Millions of Americans with defined benefit pensions have their retirements

wrapped up in private equity firms. Ditto for college endowments and philanthropic

trusts. Hiking taxes on these investments will ruin the retirement, education,

and charitable hopes of millions of Americans.

Norquist knows full well that (a) college endowments and philanthropic trusts

pay no tax at all; and that (b) pension funds who invest in private-equity firms

are limited partners whose returns will be untouched by any proposed changes

in the tax code. It’s not taxes on investments which Congress is proposing to

change, it’s taxes on the income of the general partners.

Posted in taxes | Comments Off on Tax Loopholes, Cont.

Thursday Links Barely Manage

John Carney says that bosses should sever

their connection to the internet. Jon Corzine takes

his advice.

Blackstone is officially worth more than 13 times as much as Lazard. Cue merger

talk.

How did S&P’s possible downgrade of $12.08 billion in bonds become S&P’s

possible downgrade of $7.35 billion in bonds? Tanta wants

answers.

How to make

cities slicker. (Via Kevin

Maney)

Ranking countries by the

quality of their managers. Does Italy really have better management than

the UK? I’d love to see Lance Knobel’s take on this paper.

(Update: Lance’s

take.)

NewsVisual.

Posted in remainders | Comments Off on Thursday Links Barely Manage

Why Enormous Personal Debt Means a More Vibrant Economy

Chris Dillow finds

a silver lining to the ever-increasing amounts of leverage bidding up asset

prices around the world:

My generation (early 40s and older) left college with little debt, and could

buy relatively cheap housing. As a result, we could save, build up housing

equity, and perhaps pay off our mortgage quickly. This means many of us are

in a position to downshift (as I did years ago) or look forward to early retirement.

This means the economy could lose a cohort of highly-skilled workers.

However, more recent graduates are saddled with debt and high mortgages, and

so will have to work longer. This improves the long-run supply potential of

the economy.

This is the point at which happiness researchers start jumping up and down

and saying that people in rich economies who work themselves to death are hardly

the happier for it. But that’s downright uncapitalist, that is. Here’s to cripplingly-large

mortgages and student loans!

Posted in bonds and loans, economics, personal finance | Comments Off on Why Enormous Personal Debt Means a More Vibrant Economy

BRICs vs ICs

Justin Fox today lays

out the reasons why Brazil and Rusia pale in importance besides India and

China. "I’ve always been a little dubious of the famous Goldman Sachs forecast

about the future importance of the ‘BRICs’ economies," he writes. "BRICs,

I fear, may be a great acronym in search of a corresponding economic reality.

ICs doesn’t look or sound nearly as good, but that’s where the real action is."

In terms of macroeconomics, he’s probably right. Russia is a demographic nightmare,

rich in commodity wealth but poor in endogenous growth. Brazil has a much larger

and younger population, as well as a strong entrepeneurial class, but it, too,

has largely been riding the commodity boom.

But what Fox misses is that the BRICs idea was never purely macroeconomic:

it’s primarily an investment thesis. And what Brazil and Russia lack in terms

of long-term outlook, they more than make up for in terms of investability.

It has been much easier and much more lucrative in recent years to buy stocks

in Russia and Brazil than it has been to try and get stock-market exposure to

the relatively closed economies of China and India.

Especially now, with the Chinese stock-market bubble about to burst, faith

in China’s long-term prospects isn’t going to make you lots of money. Investing

in the likes of CVRD and Gazprom looks like a safer, smarter bet.

Posted in emerging markets, stocks | Comments Off on BRICs vs ICs

Why There Aren’t Anti-Collusion Lawsuits in the CDO Mess

A lawyer wants to know whether there might be an antitrust or collusion case

to be brought against Wall Street banks in the wake of the CDO mess:

We’re looking into whether, in the wake of Bear Stearns’ meltdown, the major

players in mortgage backed securities market (Bear Stearns, Goldman, Morgan,

Citi, etc.) have agreed to support that market by not selling off their holdings.

Obviously none of them wants to see the CDO market tank, and arguably they’re

doing a good thing by propping it up. But an agreement like that among the

big banks is also an antitrust/market manipulation problem – and the short

sellers in mortgage backed securities indexes (ABX and others) are among those

injured.

Both I and the lawyer in question think that this is a very bad idea.

Firstly, the big banks are not generally big holders of CDO tranches.

The whole reason why CDOs exist in the first place is that they’re a mechanism

for moving risk off the balance sheets of the sell side, and onto the balance

sheets of the buy side.

That said, Bear and Goldman and both Morgans all have large buy-side subsidiaries,

which almost certainly do own quite a lot of CDOs, so it might be possible to

make some kind of prima facie case. As a rule, though, the asset-management

arms of these banks are highly insulated from the rest of the bank, and are

certainly unlikely to start colluding with their competitors. Trying to prove

collusion on the buy side would be almost impossible, I think.

Part of the reason is that they don’t need to collude in order to hold on to

their CDOs. CDOs, by their very nature, are a buy-and-hold investment. There’s

almost no liquidity in them, and the explicit tradeoff in the CDO market is

that investors get a higher coupon by giving up liquidity. What’s more, all

CDO tranches are still, for the time being, happily paying their coupons in

full and on time. In such a situation, there’s really no incentive at all for

a fund manager to sell those tranches at a loss.

In fact, as Keith Hahn of Dealbreaker points

out today, money managers have every incentive not to sell their CDOs, to

mark them to market, or to do much of anything, really. Much better to just

head to the beach and work on your plausible denials of any inkling that something

was amiss:

Asked about losses, he says they are there but he doesn’t have to mark to

market his portfolio until someone discovers it or the rating agencies force

his hand. So his plan is to lie low and collect the management fees (and bonus)

and pretend as if there are no losses.

Finally, there’s the fact that it would be really, really hard to demonstrate

damages. You can’t short something which never trades, and as far as I know

no one is writing credit protection on CDOs. There are lots of people writing

credit protection on MBSs, including subprime-backed MBSs, but they’re a different

instrument entirely. Yes, it’s possible that a forced fire sale of subprime-backed

CDOs might result in lower prices for MBSs or the ABX index. But it’s also possible

that it wouldn’t. So it’s hard to say with a straight face that fund managers

not selling their CDOs were responsible for losses (or smaller-than-otherwise

gains) on ABX shorts – especially when the likes of John Paulson

are getting 40% returns in one month from following exactly that strategy.

Paulson, of course, is the fund manager who accused Bear Stearns of a different

kind of market manipulation, although as far as I know he never went close to

taking anybody to court. He’s smarter than that: he knows that courts are unlikely

to have a huge amount of sympathy for short-sellers.

Which doesn’t, of course, mean that there won’t be any lawsuits. In fact, I’m

told by the same lawyer that this very blog entry could precipitate one:

You should also know what might happen — whether or not you think it’s an

antitrust problem, some lawyer at some second rate ambulance chasing plaintiffs’

firm will read your post and file a lawsuit. It won’t be our firm (case is

probably too risky for us anyway), but someone else might well take a shot.

One option is to address the general topic without quoting my question (which

basically invites a lawsuit), and without mentioning magic words like "antitrust"

and "collusion." The ambulance chasing firms monitor blogs etc.

for words like that. Don’t do their work for them. Careful writing on stuff

like this is less likely to precipitate dubious lawsuits.

Frankly, I’m not clever enough to answer this question without quoting it and

without using the magic words. And besides, if I worried about the unintended

consequences of my blog entries, I’d never write anything at all. I also reckon

that it would be reasonably difficult to bring this lawsuit if only because

you’d first need to find a plaintiff. And I can’t imagine there are too many

asset-backed short-sellers who are keen to go down that particular road. So,

a message to any lawyer thinking along these lines: Shoo! Go away! This wasn’t

even your idea to begin with! Find another ambulance to chase!

Do you think that worked?

Posted in law | Comments Off on Why There Aren’t Anti-Collusion Lawsuits in the CDO Mess

Unexpected Correlations: Lead and Crime, Coffee and AIDS

While I’m no great fan of Freakonomics in particular, I am a fan in general

of economists uncovering hitherto unsuspected causations. There was a great

one in the Washington Post on Sunday, about the

link between lead exposure and crime. It seems that by far the best thing

you can do if you want to bring your crime rate down is to switch to unleaded

gasoline and then wait for 20 years.

Here’s Emily Oster, with another interesting correlation:

Uganda’s rate of HIV infection, it turns out, is very highly correlated to the

amount of coffee that it exports. The famous ABC

campaign in the country did precede a fall in HIV infection, but it also

preceded a fall in coffee exports, so maybe public education doesn’t reduce

AIDS in sub-Saharan Africa as much as we thought it did.

There’s lots more where that came from in this talk, including the fact that

if a sub-Saharan African nation doubles its exports, it will quadruple

its rate of AIDS infections. Poverty reduction and AIDS reduction are not always,

it would seem, the same thing.

Posted in development, economics | Comments Off on Unexpected Correlations: Lead and Crime, Coffee and AIDS

Adventures in Corporate Doublespeak, Jones Apparel Edition

Jones Apparel CEO Peter Boneparth has

been fired. Bloomberg explains

why:

Jones stock has dropped by almost a third since Boneparth, a former investment

banker, took the helm five years ago. The company in February reported its

first annual loss in at least 17 years and a month later said it wouldn’t

retain Boneparth after his contract expired in 2009…

Jones’s profit has declined or it reported a loss in eight of the past 10

quarters.

That’ll do it. But the chairman of the board, Sidney Kimmel,

doesn’t want to just come out and say that the CEO was underperforming and therefore

unceremoniously ousted. Instead, the company press

release quotes him as he embarks boldly upon a course of classic corporate

doublespeak. The incoming CEO, Wes Card, has demonstrated "a

commitment to utilizing our outstanding design, merchandising and operating

talent to capitalize on opportunities in the marketplace," Kimmel’s quoted

as saying, adding that "Peter and the Board agreed that this was an appropriate

time to transition our leadership."

"Transition," Mr Kimmel, is not a verb. Or if it is, it shouldn’t

be. And in any event, I looked it up in my thesaurus, and it’s not listed as

a synonym for "fire". Next time, could we have a little more in the

way of honesty and a little less in the way of euphemistic and obfuscatory circumlocutions?

You now have a CFO named John McClain. With any luck, he’ll

import John McClane’s

ability to get straight to the point. You clearly need it.

Posted in defenestrations, stocks | Comments Off on Adventures in Corporate Doublespeak, Jones Apparel Edition

John Mackey Still Hasn’t Resigned, And Probably Won’t

The reaction to the John Mackey sockpuppet

scandal has been surprisingly muted this morning. Indeed, it was only when

I picked up the paper version of the WSJ that I realized the story

was placed in the quirky Page One column in the middle of the page, complete

with quirky headline:

Whole Foods Is Hot, Wild Oats a Dud — So Said ‘Rahodeb’

Then Again, Yahoo Poster Was a Whole Foods Staffer, The CEO to

Be Precise

Does that scream scandal to you? The "then again" formulation makes

it sound more like a light irony.

Meanwhile, Dealbreaker

says "this is embarrassing". Portfolio also takes a relatively light-hearted

look at the affair.

Mackey himself certainly doesn’t seem to grok the severity of what he did.

This is what

he says on his own website:

I posted on Yahoo! under a pseudonym because I had fun doing it. Many people

post on bulletin boards using pseudonyms.

Well, yes, John, they do. But you’re not "many people". You’re the

CEO of the company. Your job is not to have fun, it’s to be a responsible steward

of Whole Foods on behalf of its shareholders. And your message-board antics

have now made you a laughingstock who has no place in any executive position

in any public company.

Herb Greenberg gets

it right:

Why a CEO (or any officer, for that matter) would post on an investment message

board, either anonymously or otherwise, is beyond me. Never mind the obvious

regulation FD concerns: It’s just wrong! If a CEO wants to have his own blog

on his own company’s website that is vetted by the company’s legal counsel

— you won’t find any argument here.

To post on outside message boards, especially using an alias, not only shows

poor judgment but strikes to the heart of a company’s culture and makes you

wonder what else might not be quite right.

John Mackey should resign today. If he doesn’t, his board should fire him.

Posted in stocks | 1 Comment

Real Estate Leverage Datapoint of the Day

If you lend so much money to Hilton hotels that you know its

cashflows can’t cover the coupon payments, at least you have the reassurance

that Steve Schwarzman is looking to get huge returns on his

equity, and that he can’t do that without staying current on his debt. What

on earth are the lenders

to buyers of office buildings thinking?

Some loans used so-called negative leverage — when a buyer’s debt payment

is more than the income the property produces. In the past, banks underwrote

loans based on current cash flow — typically the rents landlords receive

from tenants. As the market heated up and banks competed against each other

to produce loans, some began underwriting loans based on expected future income

levels…

Some of these riskier loans, especially in the white-hot Manhattan

office market had been based on the current pace of rent increases-about 25%

in the past 12 months in Manhattan — continuing for 10 years or more.

I don’t get this at all. What are the chance of Manhattan rents, which are

alraedy at an all-time high, rising another 25% a year for 10 years? That’s

a total increase of 931% – so if rents are say $75 a foot today, they’re

expected to be $700 per square foot in 2017. Which is ridiculous on its face.

Even if inflation comes in at 3% a year over that time, we’re still talking

rents of $550 per square foot in real terms, which is a level five times higher

than the very top of today’s market.

In fact, this number is so hard to credit that I’m sure there’s some kind of

mistake here. Lenders might have been crazy, but they weren’t that

crazy.

Posted in bonds and loans, housing | Comments Off on Real Estate Leverage Datapoint of the Day

When Papers Promise But Don’t Deliver, CDO Edition

I continue my search

for someone who can shed light on exactly what happens to the alphabet soup

of MBS and CDO and CDS when subprime default rates rise. I briefly thought I’d

hit paydirt when Alea blogged a

February paper

by Joseph Mason and Josh Rosner, with a very

enticing abstract:

The authors go on to measure the efficacy of ratings agencies when it comes

to assessing market risk rather than credit risk. They determine that even

investment grade rated CDOs will experience significant losses if home prices

depreciate…

Was this what I’ve been looking for, an explanation of the link between home

prices, mortgage-backed bonds, and CDOs? Alas, it was not to be. I’ve scoured

the whole paper two or three times now, and – well, I just can’t find

their finding. Home prices are barely mentioned in the report, and not at all

in the part of the report which deals with CDOs. I also can’t find any mention

of losses in investment-grade CDOs for any reason at all. So I certainly

can’t find any link between home prices and losses in investment-grade CDOs.

The closest thing I can find is this:

Given recent events, we now know the defaults are in the mortgage pools and

it is only a matter of time before they accumulate to levels that will threaten

rated mezzanine RMBS. Given the high proportion of CDO investments in mezzanine

RMBS, the questions therefore become: (1) when will the defaults hit CDO returns

and (2) what will be the effect when CDO investors react, as they did with

previous sectoral difficulties, by divesting the sector and moving on to new

forms of collateral?

The statement that "it is only a matter of time" before losses hit

the MBS market is especially weird in light of the fact that they haven’t mentioned

this before, and that they say earlier on in the paper that as far as the MBS

market is concerned, "prepayment risk is an entirely different order of

magnitude than default risk". It’s as though they can’t make up their mind

about default risk, and whether it’s a tiny problem or a massive one.

But in any case, all of the authors’ discussion about risks in the CDO market

centers on the probability that CDOs will move out of subprime mortgages and

into some other asset class, reducing liquidity in the MBS market and ultimately

hurting the housing market as a whole. That’s all perfectly reasonable –

but it doesn’t even come close to demonstrating that existing CDOs with investments

in the MBS market will suffer significant losses on their rated tranches.

So, the search continues. In the meantime, there do certainly seem to be winners

as well as losers from the current mess: a $2 billion fund run by John

Paulson returned

40% in June alone – and that’s after fees. I guess that losing

his fight

against Bear Stearns didn’t do him any harm at all.

And I hasten to add that I’ve nothing against commenter jck,

who runs the Alea blog and who left a very handy comment on my last subprime

post. According to him, the implied spread on BBB- rated bonds, if we can trust

the ABX index, is about 2500 basis points. That’s huge: debt securities very

rarely trade at that sort of level without defaulting. On the other hand, securities

at the bottom of an asset-backed waterfall do exhibit a huge amount of price

volatility, since a small change in the structure’s total cashflows can mean

a huge variation in recovery value.

Update: jck emails me to point out that a later

version of the paper has more detail – although it still doesn’t draw

any connection between house-price declines and CDO defaults. He adds:

I think they are misguided if they think downgrading the asset side automatically

implies downgrade of the liability side of the CDO, for example if there is

a general credit degradation with increased correlation, the junior tranches

will actually gain against the senior tranches i.e spreads will contract,

but this a draft so I will wait for the final print before getting more critical.

Posted in bonds and loans | Comments Off on When Papers Promise But Don’t Deliver, CDO Edition

John Mackey, Sockpuppet, Should Resign

I hate sockpuppets. In May, a commenter calling himself "Jude Carlson"

left a comment on

my blog. "Why are you so negative about Zipcar? Did you know that 100,000

people use it? Obviously, they can’t all be wrong about the company," it

started, and it ended by asking me "What have you done latley? [sic]".

A bit of basic IP tracking showed the comment was left by someone at Zipcar,

which made me very angry at

them. Companies can and should defend themselves in public. But it should

always be clear when they’re doing so: no employee should ever pretend to be

someone he’s not.

So the news that Whole Foods CEO John Mackey posted

regularly on Yahoo message boards under the name Rahodeb is shocking. This

is a major ethical lapse, and I hope that the Whole Foods board is treating

it very seriously indeed. Lee Siegel got fired

indefinitely suspended from the New Republic for less. Mackey even went

so far as to post a comment saying that he wasn’t a "Mackey groupie".

I’ve been reasonably

nice about Mackey in the past, and I’m not sure that this revelation should

in itself prevent Whole Foods from buying Wild Oats. But I do think that Mackey

should resign as CEO: he clearly doesn’t have the self-control necessary to

run a major public company.

(By the way, since I’m criticising Mackey, I should also criticize the WSJ

as well. This is dreadful:

In a message in January of that year, Rahodeb predicted great things for

Whole Foods’ stock. "13 years from now Whole Foods will be a $800+ stock

before splits," he wrote. "Whole Foods is a tremendous growth stock."

At the time, the shares traded at about $94. Whole Foods’ shares closed yesterday

at $39.50, up $1.03, or 2.68%.

Whole Foods shares have not falled from $94 to $40 since January 2005. There

was a two-for-one stock split at the end of 2005, which means that they’ve fallen

from $47 to $40. Which is bad, but not nearly as bad as the WSJ makes it seem.)

Posted in stocks | Comments Off on John Mackey, Sockpuppet, Should Resign

Why Live Earth Shouldn’t Count Its Viewers

Carl Bialik asks,

apropos the Live Earth estimates of 2 billion viewers: "Is it OK to cite

questionable estimates in service to a good cause?" The answer, of course,

is no. But especially not when the issue is one where the entire moral

high ground is predicated on your having more accurate and reliable numbers

than the other guy.

The problem is that these numbers have been customarily exaggerated for years,

and that if Live Earth had come out with a more credible number, people would

have mentally compared it unfavorably to the 1 billion people they think watch

the Oscars every year. But still, "everybody else does it" is always

the weakest excuse. Better not to release numbers at all than to release numbers

which are ridiculous on their face.

Posted in statistics | Comments Off on Why Live Earth Shouldn’t Count Its Viewers

Private Equity: Why Higher Taxes Mean Higher Returns

The Epicurean Dealmaker has a

great argument today for abolishing the favorable tax treatement given to

private-equity principals. Let me try to summarize:

  • The returns on private equity investments are calculated across all

    private-equity shops, not only the best ones.

  • But it’s only the best PE shops – the likes of Blackstone and KKR

    – which seem to be able to consistently generate outsize returns.

  • So the best way to increase private-equity returns would be to cull the

    younger, smaller shops, leaving only the big, successful ones.

  • Many of the principals at younger, smaller shops find their career enticing

    because of the favorable tax treatment it offers: they essentially pay only

    15% income tax.

  • So if you raised the tax rate on carried interest, you would discourage

    underperforming investors from entering the private-equity market, which would

    be left to the large, long-established players with impressive overall returns.

  • Which means that raising taxes on private-equity principals would increase

    returns in the private-equity industry as a whole!

I’m convinced.

Posted in private equity, taxes | Comments Off on Private Equity: Why Higher Taxes Mean Higher Returns

Sun Valley: The Rich and the Reckless

barry-diller-large.jpgBillionaires

are, generally, a very risk-conscious breed, which is one reason why Roman

Abramovich is spending

$2.4 million a year on private security, including hiring former solidiers

of the SAS, Britain’s elite commando unit. At the same time, they’re often big

risk-takers, if the pay-off in thrills is big enough: think Larry Ellison’s

yacht races, or Richard Branson’s adventures in hot air balloons.

What doesn’t make sense is high-risk, low-return behavior such as not

wearing a seatbelt when driving at 91 miles an hour on the Garden State

Parkway.

And so the question naturally arises: Why doesn’t Barry Diller

tie his shoelaces? Reuters photographer Rick Wilking caught

the IAC CEO in podiatric

peril earlier today. What could possibly explain his recklessness? A few

possibilities:

  • It’s a fashion statement orchestrated by his wife, fashion designer Diane

    von Furstenberg, who is walking on his right.

  • Diller’s shoelaces are always tied by his valet, but unfortunately there

    wasn’t space for both the valet and Diller’s store of cardigans on his private

    jet. Clearly, the valet had to be left behind, with potentially disastrous

    consequences.

  • Diller is too forward-looking to ever look down at his feet. How can he

    be expected to know when his laces are untied?

  • Diller is such a busy man he doesn’t have the time to tie his shoelaces.
  • Diller only ever wears loafers. He really has no idea what shoelaces are.
  • Diller’s just a wild and crazy guy – sometimes, he even goes outside

    without putting sunblock on his bald patch!

Posted in wealth | Comments Off on Sun Valley: The Rich and the Reckless

Whether Computers Can Help Poor and Middle-Income Countries

Computers can do many things, but can they make poor countries richer? One

of the leading researchers when it comes to the impact of information and communication

technology (ICT) on development is the World Bank’s Charles Kenny,

who added no fewer than four fully-researched papers to his blog

today. To mark the occasion, I had a conversation with him by email, reproduced

here.

FS: The poorest people in the world clearly need a lot of

things — food, shelter, even access to a telephone — much more than they need

internet access. And besides, the poorest people in the world are often illiterate,

which by definition means they’re not going to be able to do much with a computer.

But in middle-income high-literacy countries such as Chile, one might expect

an internet boom. Yet you

cite an OECD

study from 2000 which found that although 95% of the population was literate,

only 20% of the population was literate enough to usefully use a computer.

So my first question: Have things changed since 2000? You say in your other

paper that 62% of schools in Chile are now online. Does this mean that when

kids graduate from those schools they’re likely to be not only literate but

computer-literate? Or will the computers in those schools likely be used mainly

by the minority of children who would have become computer literate anyway?

CK: It’s worth noting the OECD study was talking about comparatively

advanced usage — learning online, for example — rather than basic applications.

I’m sure the short answer to your question is that things are getting better

in Chile. How computers are used in schools is a complex question even in the

US, with studies suggesting that they don’t have much impact on educational

outcomes unless they’re carefully integrated into the curriculum, teachers are

well trained and so on. But Chile is a step ahead on this –their Enlaces

program was one of the earliest to tackle these kinds of questions. So I’d

guess the percentage of kids equipped to benefit from online learning is growing,

and as they get older, the percentage of Chileans who can bank online, or pay

parking tickets online, will also grow.

What I find worrying about the OECD statistic is that it involves a country

that is pretty rich by global standards — an income per capita more than six

times the average in Sub-Saharan Africa, for example. If the number of people

with the kind of literacy needed for advanced online use is that low in Chile,

what is it going to look like in Mali or Mauritania? And how far are computers

going to spread in Sub-Saharan schools where, once you’ve paid for teachers,

you have maybe $5 per primary student per year to pay for buildings, chalk and

textbooks — let alone IT classrooms?

FS: I looked at the OECD report, and it says that Level 3

skills — which is what you were referring to — are "considered a suitable

minimum for coping with the demands of everyday life and work in a complex,

advanced society. It denotes roughly the skill level required for successful

secondary school completion and college entry." There are two skill levels

— 4 and 5 — above Level 3. The skill level needed to understand Market Movers,

say, is at least Level 4, and possibly Level 5. To achieve Level 3, you need

to be able to read four film reviews and decide which one is the least favorable,

or read an article about cotton diapers and write three reasons why the author

prefers cotton diapers to disposable ones. My feeling is that to get real value

out of the World Wide Web using a web browser, you’d need at least Level 3 literacy:

would you disagree?

In Chile, it turns out that just 11.6% of native-born Chileans between the ages

of 16 and 65 have Level 3 literacy. (67% of second-language foreign-born Chileans

do, though, which brings the overall numbers up.) Only 1.3% of native-born Chileans

have Level 4 or 5 literacy. By contrast, the numbers for the US are 34% of native-born

at Level 3, and 21.1% of native-born at Level 4 or 5. These are additive, putting

well over 50% of US-born Americans at Level 3 or above. The numbers for Sweden

are 40.3% and 37.3% respectively, giving a total of 77.6% at Level 3 or above.

Only Portugal comes close to the Chile numbers, with 16.7% at Level 3 and another

3.2% at Levels 4 or 5.

It seems to me that the ability to use a computer is a function of your education,

much more than the other way around. In other words, there’s not much point

in putting computers in schools where the kids aren’t educated enough to use

them. In Africa, I’m sure you’d have the situation where even many teachers

aren’t literate to computer-using level. Might that be the case in Chile, too?

Portugal, even?

Is there much point in spending lots of money introducing computers to countries

where most of the population isn’t literate enough to use them? Or is something

important happening among today’s youth? Is there some reality to the concept

of a post-literate society, where kids might not be very literate on the OECD

scale, but can still be very proficient with computers?

CK: I’m sure Market Movers requires a level six. Or at least

some of the stuff on subprime mortgages does.

There’s the famous example of the

hole in the wall in India, where Sugata Mitra put a computer in the wall

of a slum and watched what happened, which suggests that kids with hardly any

access to formal education can do some basic stuff on computers like navigate

websites — they found Disney.com pretty quick, apparently. Of course, that

doesn’t prove that children can use the web for learning without instruction

— and most of the evidence points the other way. You can use computers as a

learning tool to teach literacy and numeracy, as well as to teach IT skills,

but in order to do that you need teachers with high ICT literacy themselves,

a solid curriculum, plenty of teacher training and lots of computers. As you

suggest, these conditions are lacking in many parts of the world.

But it’s a leap to go from there to saying ‘developing countries don’t need

computers.’ You don’t need universal computer literacy for IT to have a vital

role in business and government operations. Survey evidence suggests that 58

percent of businesses in Tanzania were using email in 2003, for example. Budgeting

and finance, communications, procurement… there are lots of roles for IT even

in the poorest countries. More broadly, when we look at information and communications

technologies as a whole, there are applications that are being used successfully

by even some of the very poorest people in the World — mobile telephony, school

instruction supported by radio programming, same language subtitling on television

programs. All of this stuff is spreading rapidly, and can be supported by web-based

applications running in the back office. So, the role for IT is different. Universal

computer ownership, or universal access to computers in schools, might be an

inappropriate goal for many — most– countries, but selective use of IT to

achieve development results will continue to be important.

Posted in development | Comments Off on Whether Computers Can Help Poor and Middle-Income Countries

Bottled Water

Bottled water is ridiculous. People pay vast amounts of money for water which

is generally of lower quality than tap water – especially if it comes

in a throwaway plastic bottle and has been sitting there for more than a couple

of months. Increasingly,

high-end restaurants, especially in California, are abjuring bottled water in

favor of their own on-site filtration systems. And in a sign of desperation,

Evian, home of the world’s worst website, has released

something called the Palace bottle, complete with its own coaster, which apparently

"brings a heightened level of luxury to fine dining occasions". With

any luck, the writing is on the wall, and consumers will start appreciating

bottled water for what it is: an utter

waste of both carbon and money.

But what about places like China? Surely there, where tap water is known to

be unsafe, one can justify the existence of bottle water? Actually, no. You

know how Dasani and Aquafina are basically just rebranded tap water? Well, it

turns out that in

China, bottled water is literally rebranded tap water.

Up to half of the water used in water coolers across China’s capital could

be "fake", or not as pure as its manufacturers claim, state media

said on Tuesday of the latest in a series of health scares…

Three years ago, a nationwide inspection on barrelled water found a 22 percent

substandard rate. In the most serious case, 80 percent of barrelled water

in the southern province of Jiangxi was reportedly not the real thing.

In much of the developing world, the rise of bottled water is invidious. The

elites know that the tap water is dirty, so they start drinking bottled instead

– and as a result, they have much less incentive to make the tap water

clean. It’s a bit like the crime rate in Mexico City or Johannesburg: if it

gets so bad that the rich start hiring their own security guards and living

behind razor wire, then at that point they’ve taken matters into their own hands

and become less interested in working towards a broader societal solution to

the crime problem.

So even though the Chinese elite are enraged

by this news, in my eyes it’s not all bad. In China, it seems, the only way

to guarantee clean water for anybody is to guarantee clean water for everybody.

And what’s more, with any luck this news will keep demand for bottled water

subdued. I’m hoping that by the time China becomes the world’s dominant economic

power, bottled water will be remembered as a 20th-Century curiosity, rather

than a fact of life.

Posted in economics, governance | Comments Off on Bottled Water

Trying To Make Sense of the Mortgage-Backed Market

Andrew

Leonard says that I’m "a voice of calm and restraint when the rest

of the econo-blogosphere is racing to the windows to see if the sky has started

to rain suicidal investment bankers". Always happy to help. So let me revisit

the issue of US mortgage-backed bonds, and try to put yesterday’s panic into

a bit of context.

But first, it’s useful to get some real datapoints. As Leonard also notes,

the media has a habit of obsessing over the ABX

indices, and invariably it will emphasize whichever ABX index has dropped

the most that day. At the moment, the most underperforming of the ABX indices

is the ABX-HE-BBB- 07-1, which is an index of credit default swaps on the riskiest

tranches (rated BBB-) of bonds backed by subprime mortgages and issued in the

second half of 2006. The index closed yesterday at 51.4.

Does this mean that bonds issued at the end of last year are now worth just

51 cents on the dollar? I’m not sure. Check out the fire

sale prices being quoted by Calculated Risk today. Bonds rated below investment

grade – which would be either equity tranches or bonds which have already

been downgraded by ratings agencies – are apparently being offered for

between 28 cents and 58 cents. Which means that bonds rated below BBB- still

have value. What’s more, the most expensive of those bonds, the ones asking

58 cents, are from Ameriquest, one of the names where, to read the press, value

has already been obliterated.

Remember that the way mortgage-backed securities get tranched, the lowest tranches

have to be wiped out entirely before the next tranche up takes any losses at

all. So if investment-grade bonds are going to suffer losses, you can be sure

that non-investment-grade bonds will be worth zero. Of course, if you mark to

market, you can suffer losses long before that. But the fact that junk-rated

bonds from Ameriquest mortgages are being sold for over 50 cents on the dollar

in a fire sale doesn’t make me feel that the end is necessarily nigh.

On the other hand, I have to say I’m surprised that the weakest of the ABX

indices is the 07-01 series, which is limited to bonds issued in the second

half of 2006. Anecdotally, underwriting standards were meant to have tightened

up significantly over the course of those six months, but you’d never suspect

it from the way the bonds are performing. What’s more, house prices were meant

to have already started falling by then, which means that earlier-vintage bonds

should have larger amounts of negative equity and consequently lower valuations.

Clearly the big worry facing the markets is that the ratings agencies will

downgrade a lot of BBB- and even BBB paper to junk status, which could trigger

a wave of forced sales from buy-side firms who aren’t allowed to hold junk bonds.

On the other hand, the same worry faced the market when GM and Ford got downgraded

to junk, and the market barely blinked. Often fear of downgrades – the

kind of fear sparked by yesterday’s announcements – is worse than the

downgrades themselves.

All of which leaves me in the "still baffled" camp. I don’t understand

what’s going on in the 07-01 ABX series, I don’t know how many fund managers,

in reality, are not allowed to hold junk-rated paper, and I still don’t have

much of a grip on how credit default swaps on mortgage-backed bonds are structured,

and what constitutes a credit event under such contracts. I’d also love to get

a much clearer bead on who’s been buying protection in the CDS market, whether

they’re making loads of money right now, and what’s happening to those profits.

Any recommendations for an expert in such matters who I should talk to?

Posted in bonds and loans, housing | Comments Off on Trying To Make Sense of the Mortgage-Backed Market

Mike Bloomberg, Social Networking Mogul

David

Carr, bringing bylines to DealBook, notes that Michael Bloomberg

is going to be hanging out with the MySpace and Facebook honchos (that’s Rupert

Murdoch and Mark Zuckerberg, for those of you following

along at home) at Herb Allen’s Sun Valley power klatsch this

week. Carr tells us that Bloomberg "has proven to be one of the most durable

and consistently innovative media barons of our time". What he doesn’t

tell us is that Bloomberg was arguably the world’s first social-networking billionaire.

What can Murdoch and Zuckerberg learn from him?

Bloomberg (the product, not the man) got its start in the financial world by

providing real-time bond-analysis tools which were simply unavailable elsewhere.

If you were working in fixed income and you didn’t have a Bloomberg –

well, let’s just say you wouldn’t continue to work in fixed income for long.

But Bloomberg today is much, much bigger than a bond-analysis tool. People who

don’t know their convexity from their modified duration are glued to their Bloombergs

more or less all day, at work and often at home as well.

And a lot of the reason is that Bloomberg invented social networking before

Mark Zuckerberg was even born. Bloomberg LP was founded in 1981, and Bloomberg

saw very early on the huge potential of two-way information flows. Rather than

just sending information to his clients, he would allow them to ask specific

questions and get immediate answers. Once that was possible, it was relatively

easy to allow them to message each other. Long before email really

took off, Bloomberg messages were regularly flying all over Wall Street, both

within firms and between them.

At the center of it all was an open directory of pretty much everybody on the

Street. Everybody had his own page on Bloomberg, could be found very easily,

and could communicate equally easily with anybody else on the system, bypassing

the phone calls and layers of secretaries which had previously intermediated

the conversation. It wasn’t long until a Bloomberg became as necessary as a

telephone as a tool for keeping in touch. And even today, long after every firm

has opened its systems up to the internet and email, many research notes and

messages continue to be sent out on Bloombergs instead.

Bloomberg’s success mirrored that of Facebook more than that of MySpace, because

it was exclusive. People were happy putting all their contact details out in

the open on Bloomberg, because the only people who could read it were other

people with Bloombergs, and a Bloomberg cost $20,000 per year. The system was

closed and proprietary, and policed in a draconian manner, to the point of automatically

banning messages containing profanity.

Interestingly, Bloomberg to this day has never really embraced the internet.

He saw very early on the value of remaining exclusive, and stayed that way.

Meanwhile, Facebook, looking for crazy-high growth rates, is becoming increasingly

open – something which hasn’t always gone down well with its Ivy League

early adopters.

Bloomberg made his billions, in many ways, by shunning the openness of the

internet – something no one else at Sun Valley has the nerve to attempt.

But even the internet moguls could learn a lot from him in terms of how to build

and maintain a loyal community of users.

Posted in technology | Comments Off on Mike Bloomberg, Social Networking Mogul

The Economics of Book Publishing

Much as I admire Steven Levitt, I hated

his meretricious book, Freakonomics, and I’ve made a conscious decision not

to put the Freakonomics blog in my blogroll. The huge success of the book, however,

has meant that a lot of other social scientists have tried to replicate its

success by using pseudo-provocative headings such as "What Bill Gates and

Paul McCartney have in common with criminals".

I haven’t read recent efforts along those lines by Tyler Cowen

or Tim Harford or Steven Landsburg, so I won’t

say anything about them. And I haven’t read Why Beautiful People Have More

Daughters by Satoshi Kanazawa, either, an excerpt

from which includes that bit about Paul McCartney. What I have read is an utterly

compelling take-down

of Kanazawa’s methodology by Andrew Gelman of Columbia

University.

Gelman is conflicted

about the book, and about Kanazawa’s work in general:

I just don’t know how to think about this. It’s clear to me how journalists,

bloggers, and reviewers should react: the should discuss this work with skepticism.

The trouble is that the papers were published in a reputable journal (J. Theor.

Biology), and a journalist/blogger/reviewer who does not happen to see my

critique would naturally tend to trust the result…

Should I blame Kanazawa? I don’t want to be dismissive of scientific speculation–I

don’t like the idea of statistican as censor–so maybe there would be a way

for him to present more of the full

statistical story in his book (for example, in the beauty-and-daughters

study, a graph with the proportion of girls born to people of all five beauty

categories–rather than just comparing categories 1-4 to category 5–along

with the beauty assessments from all three waves of the study). It’s a tough

call to decide how to present speculative findings.

I think Gelman is being far too easy on Kanazawa here. The book, especially,

has nothing to do with presenting speculative findings, and everything to do

with trying to hit a Freakonomics-style home run in the publishing world. This

isn’t science, it’s business. And if a book like this can sell more copies by

fudging the science, there’s a good chance that it will. That’s basic economics,

that is.

Posted in economics | Comments Off on The Economics of Book Publishing

Argentina Quietly Starts Making Friends With Energy Companies

Buenos Aires just got its first

snow in 30 years, in what is almost certainly its first real, snow-on-the-ground

snowstorm since 1918. In the US, energy usage rises in the summer, when everybody

starts switching on their air conditioners. In the Argentine, however, it’s

the other way around: energy usage rises in the winter, when people start heating

their poorly-insulated homes using subsidized energy. With the current cold

snap sending energy demand skyrocketing, the government of president Nestor

Kirchner has been forced to ration energy supply to businesses, hurting

the fast-growing economy.

The bigger picture is that Argentina’s energy companies have had no interest

whatsoever in beefing up the country’s energy infrastructure since Argentina’s

default and devaluation at the end of 2001. When that happened, Argentina unilaterally

started paying its energy companies – most of which were foreign-owned

– in pesos rather than dollars. (Up until 2001, the peso was pegged, one-to-one,

against the dollar, and the distinction didn’t matter nearly as much.) The foreign

investors in Argentina’s energy sector lost hundreds of millions of dollars,

and saw no prospect of making any more money down the road. So they ceased investing,

and, for good measure, took Argentina to the World Bank’s international court

for the settlement of investment disputes, Icsid.

Kirchner knows that energy rations are unsustainable, so he needs to make nice

with the energy companies against whom he has been railing for years. At the

same time, he doesn’t want to lose any political face. So what’s he doing? Euromoney’s

Jason Mitchell has at least some of the answer (behind a subscription

firewall here):

Argentina has settled more than half of the 36 cases that multinational companies

have filed against it at the International Centre for the Settlement of Investment

Disputes…

At least 17 of the cases before Icsid have now been settled or suspended,

as a result of direct out-of-court bilateral negotiations with the companies.

The Argentine government managed to get the claims withdrawn in exchange for

concession extensions, tariff increases, subsidies and tax exemptions.

Everyone wins. The energy companies get the tariff increases

they’ve long been demanding, Argentina gets the energy it needs, and Kirchner

gets to keep the whole thing quiet: the Icsid settlements have received almost

no press. What’s more, if his wife Cristina Kirchner, who is

running for president in October’s presidential election, is asked about any

of this, she can always start backtracking

on her husband’s policies during the election campaign. Meanwhile Nestor

is now a lame duck with nothing to lose. It’s all very clever indeed.

Posted in emerging markets | Comments Off on Argentina Quietly Starts Making Friends With Energy Companies

How To Get To AAA

When a debt security carries a high credit rating, like AA or AAA, what makes

it secure? Sometimes it’s just the fact that the issuing entity has a lot of

financial strength: think UPS,

for instance. But the number of companies with that kind of financial strength

is decreasing rapidly, as mangement succumbs to shareholder pressure for more

leverage. Yves Smith of Naked

Capitalism notes in an email to me that

in the stone ages of finance, there was a fair bit of AAA paper (most money

center banks, many utilities, AT&T when it was Ma Bell, most sovereign

credits) but now there are very few native AAA credits. So there has been

an imbalance in that slice of the market.

That imbalance is driving demand for more artificial AAA bonds, from investors

who can’t find the native stuff any more.

Meanwhile, Tanta at Calculated Risk is quoting

John Mauldin on how the ratings agencies rate mortgage-backed

securities:

The rating process was not the same as the ratings that were used in the

corporate world. But the problem is that the ratings used the same designations.

Instead of creating a whole new type of rating standard (say, using numbers

like "CDO rank 1-10"), they used the same designations that bond

investors were used to.

I think it is disingenuous for a rating agency to explain the difference in

paragraphs 457-503 in 7-point type and dense legalese in their disclosure

document. Investors had (and should have) a certain level of expectation when

the designation "AAA" is used. GE and Exxon types of expectations.

The main difference between a native AAA and an asset-backed AAA is in mark-to-market

volatility. A credit rating does not mean that an investor is unlikely

to lose money if he marks his investments to market. It means only that an investor

is unlikely to lose money if he holds his security to maturity. The problem

is that if you’re buying native AAA bonds, you’re getting safety on both counts,

whereas if you’re buying asset-backed AAA bonds, you’re getting safety only

on the latter count. But investors knew that perfectly well: it’s not the ratings

agencies’ fault that they chose to ignore it.

How does a bunch of subprime nuclear waste become a AAA bond? That’s the question

I hinted

at yesterday, when I said that diversification was key. In response, I got

a number of comments, both on the blog and by email, telling me, quite rightly,

that I’d ignored the other key way of boosting credit ratings: overcollateralization.

But in the CDO market, I’m not convinced that overcollateralization always

works particularly well. Consider three different CDOs:

  1. A $100 million CDO backed by $200 million in mezzanine tranches of subprime-backed

    mortgage-backed securities.

  2. A $100 million CDO backed by $100 million in AA tranches of subprime-backed

    mortgage-backed securities.

  3. A $100 million CDO backed by $100 million in a mixture of residential MBS,

    commercial MBS, and corporate syndicated loans.

All three of these CDOs can and would be tranched, and one of those tranches

would end up carrying a AAA rating. But I think I would feel safer with the

triple-A tranche of CDO3 than of CDO2, and I would feel safer with the triple-A

tranche of CDO2 than of CDO1.

How can CDO1 be the least safe of the lot, when it’s backed by twice as much

collateral? Because in the event of a serious subprime meltdown, mezzanine tranches

of subprime bonds could be wiped out. And twice zero is still zero. Once the

mezzanine tranches are wiped out, the higher-rated tranches start taking losses

as well. But at least they retain some cashflow, which means that the

AAA parts of CDO2 – the parts which get paid first – would probably

be fine.

Meanwhile, the owners of the AAA parts of CDO3 are really quite sanguine about

subprime losses. Those losses are absorbed entirely by the equity portion of

the CDO, and the AAA parts can be paid entirely with cashflow from commercial

mortgages and corporate syndicated loans.

In other words, the most diversified CDO is the safest, while the most overcollateralized

CDO is the weakest. Now of course this is an artificially-constructed thought

experiment, and I’m sure there are lots of overcollateralized CDOs which are

perfectly safe even if they don’t have much diversification. But as a general

rule I think a CDO buyer should be looking first at diversification, and then

to other sorts of credit enhancement, such as guarantees or wraps from insurance

companies who specialize in such things.

Posted in bonds and loans | Comments Off on How To Get To AAA

Why the S&P-Triggered Subprime Selloff Makes No Sense

Ratings agencies are normally behind the curve: the market will generally start

selling off long before a company actually gets downgraded. And so it might

seem to be in the case of bonds backed by subprime mortgages: in the wake of

the massive sell-off in such securities over the past few months, Standard &

Poor’s is finally saying that it might

(or might not) downgrade 2.1% of the $565 billion in subprime-backed bonds

that it rates.

What’s fascinating is the market reaction to this news. I’m not saying that

I expected this kind of thing – which was entirely expected – to

cause a major rally. But surely a relatively small announcement like this –

no actual downgrades, just one in fifty bonds being put on credit watch negative

– was priced in to the market already?

It seems not:

The announcement triggered the biggest rise in U.S. Treasuries in more than

a week and prompted the U.S. dollar to fall to a record against the euro.

Shares of securities firms tumbled and an index tracking the performance of

mortgage-bonds dropped to a new low…

An index of credit-default swaps linked with 20 securities rated BBB- and

created in the second half of 2006 fell 9.5 percent this morning to a new

low of 50.25, according to New York-based derivatives broker GFI Group Inc.

The ABX-HE-BBB- 07-1 index has fallen by nearly half since January, reflecting

growing expectations of defaults on the bonds.

Remember that a downgrade alone is not enough to trigger payment on a credit

default swap, and that nothing has changed in the actual credits underlying

the ABX indices. And yet there’s still this massive sell-off.

To make things even more puzzling, the S&P downgrades really are, to use

an over-used word, contained:

Many of the bonds S&P is reviewing were made up of loans originated by

New Century Financial Corp., which filed for bankruptcy protection in April,

and Fremont General Corp., which federal regulators forced from the subprime-loan

business in March.

This does go to show that underwriting matters, and that the companies with

the loosest underwriting standards are the ones whose bonds are now performing

the most badly. (It doesn’t help, of course, that now those companies are in

bankruptcy, provisions allowing bondholders to put mortgages back to the originator

are worthless.)

But it seems to me that S&P’s announcement today tells us nothing that

we haven’t known for months about the subprime market. So count me utterly baffled

by the market reaction.

Posted in bonds and loans, housing | Comments Off on Why the S&P-Triggered Subprime Selloff Makes No Sense

The Value of the Hilton Brand

John Kay writes

about brands, and manages in his first sentence to get off on two

wrong feet, if such a thing is possible.

With Paris dragged screaming back to jail, and the hotel group the latest

victim of private equity, it has not been a good few weeks for the Hiltons.

While there are celebrities who would be damaged by a jail term, Paris Hilton

is most definitely not one of them. I’m sure that her stint in prison was unpleasant

for her personally, but Kay is writing about brands here, and Paris Hilton remains

one of the strongest and most lucrative individual brands in the US, if not

the world. And her brand value has only gone up in the wake of all the jail-related

publicity.

But no matter how many times she takes her clothes off or goes to jail, Paris

Hilton will never be worth $20 billion. For that, you need to build a lasting

business. And Hilton co-chairman Barron Hilton has done a magnificent

job of growing his company over the past few years and finally selling it at

an all-time high, netting a cool $1 billion for himself.

What’s more, all that money is going to be donated

to the Conrad N. Hilton Foundation, which is very much a Good Thing:

The foundation supports projects that provide clean water in Africa, education

for blind children, and housing for the mentally ill. Its aims, based on Conrad

Hilton’s will, are "to relieve the suffering, the distressed and the

destitute."

The Hilton family, in other words, is not a "victim" of private equity;

quite the opposite. Instead, it’s a beneficiary of private equity,

and of the fact that the buyer, Blackstone, is willing to borrow far

more money than the company is realistically able to repay.

Kay is quite right that the Hilton brand is a little tarnished these days.

Which makes it all the more impressive that Barron Hilton managed to squeeze

$20 billion out of Blackstone for a company which had net income in its most

recent quarter of just $95 million, down from $104 million a year ealier.

Last week was one of the best weeks in Hilton family history: it showed that

Barron Hilton, just like his father Conrad, deserves to be remembered as an

excellent creator of value in the hospitality industry. Whether the same will

be able to be said of Steve Schwarzman, only time will tell.

Posted in private equity | Comments Off on The Value of the Hilton Brand

Anti-Counterfeiting Bill Doing Well in Washington

John McCary of the Wall Street Journal reports today on the Bayh-Voinovich

bill, an anti-counterfeiting bill which got nowhere in 2005 but which has slightly

better prospects now, in the wake of minor revisions.

There’s really nothing objectionable about the bill itself, which "ensure

that agencies like the Treasury and Justice departments share information on

counterfeiting investigations, including those involving terrorist financing,"

according to McCary. At worst, this is a minor waste of time, especially if

no counterfeiting investigations turn up any connection to terrorist financing.

At best, it could increase the chances of catching counterfeiters and terrorists

both.

What is objectionable, however, is the rhetoric involved.

"If thousands of our businesspeople were being held up at gunpoint in

a foreign country, if our laboratories and research facilities were being

raided and shut down by unidentified individuals, there would be a sense of

alarm," said Sen. Evan Bayh, an Indiana Democrat, referring to the persistence

of product piracy. "That is in effect what is happening today."

Er, no. No US businesspeople are being "held up at gunpoint" –

in fact, guns tend to be conspicuously absent from any counterfeiting investigations.

No US labs or research facilities are being raided or shut down, either. So

quite why Bayh insists on this kind of hyperbole is unclear. But politicians

are prone to hyperbole: it’s the press which is meant to keep them in some kind

of check. McCary never says that Bayh’s assertions are ridiculously over-the-top

– maybe he reckons that’s so obvious that he doesn’t need to. But then

he writes this, with a completely straight face:

Counterfeiting is estimated to cost U.S. companies more than $250 billion

in lost revenue each year. Globally, its costs have been estimated at $600

billion annually. The World Health Organization estimates that up to 10% of

the world’s pharmaceuticals may be counterfeit. Both the U.S. government and

Interpol, the international police organization, have pointed to connections

between counterfeit sales and terrorist financing.

US companies don’t lose anything close to $250 billion due to counterfeiting,

and the global costs aren’t anywhere near $600 billion. These are invented figures,

pulled out of thin air,

with no empirical basis at all. They should not be represented as facts in the

Wall Street Journal, even when they’re immodestly covered with an "estimated

at" figleaf.

As for the connections

between counterfeiting and terrorist financing, they’re tenuous at best, and

generally consist of typical underworld linkages between criminals and paramilitaries

in places such as Northern Ireland, Kosovo, and Chechnya.

The one somewhat reassuring part of McCary’s article is when he mentions, en

passant, that ‘the Justice Department said in a letter to Judiciary Committee

Chairman Sen. Patrick Leahy that the bill has "serious flaws" and

that the agency wouldn’t support it.’ Maybe there are still some parts of the

US government which are more interested in substance than spin.

Posted in Politics | Comments Off on Anti-Counterfeiting Bill Doing Well in Washington

Jockeying Ends for IMF Position

Well, after

all that, it seems to be over before it had really begun. Dominique

Strauss-Kahn is the

official EU candidate to lead the IMF, which means he is the next leader

of the IMF. Maybe next time there’ll be less in the way of smoke-filled rooms

and more in the way of a genuine search for the most qualified candidate.

Posted in IMF | Comments Off on Jockeying Ends for IMF Position