Category: Economy

SEC Is Looking Into Insider Abuse of Stock Plans

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A stock plan is an automatic stock trading scheme. It is frequently used by senior corporate officers, because (theoretically) it provides insulation from the temptations or accusations of insider trading.

The SEC is now looking into whether these plans are being manipulated by insiders.

Introduced in 2000 as part of a broader securities reform, these plans enable executives to buy and sell company stock virtually year-round, regardless of insider knowledge or trading “blackouts.” Financial planners and brokers tout the plans as a smart way for executives to take money off the table and diversify their portfolios.

The main stipulation is that executives must set up a written, systematic trading plan when they have no inside information, then hand off the actual trading to a broker or other third party.

But experts say the rules are so flexible that they have led to a wide spectrum of practices and disclosures. Some executives trade in consistent batches at recurring intervals, sometimes on a daily basis. Others trade stock based on undisclosed formulas that can be pegged to daily stock prices, moving averages or other variables.

Once again we are seeing that market deregulation frees the market to be corrupt to a far larger degree than it frees the market to be efficient. We need toi bring back all those FDR era laws that have been repealed starting in the mid 1970s.

This repeal has created nothing but corruption and pain for the little guy.

The Grim Future of Real Estate?

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Here is a story that we will see repeatedly over the next few years, entire neighborhoods blighted by foreclosures.

In this case, you have half million dollar homes that people have simply walked away from, and police have to patrol in order to prevent squatters. There are swimming pools that have moved from assets to West Nile and Malaria infested health risks.

We are going to see a lot of this, and a lot of people trapped in their homes because the entire neighborhood is illiquid, because no one wants to live there at any price.

Pleasant picture this.

Luckily, I live in an old neighborhood, built in the 1960s, so we won’t see as many exotic mortgages, and hence foreclosures.

Chrysler Workers are on Strike

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45,000 members of the UAW at Chrysler went on strike today.

As I’ve said earlier, given that there already was a model for a contract as a result of the one signed with GM, this means that either the circumstances (far fewer retirees at Chrysler) or the culture (Cerberus is a private equity firm, and perhaps they are looking at pumping and dumping) that is driving this.

My guess is that Cerberus is not an auto firm, and are not interested in being one. They want to resell Chrysler at a later time, and are pushing hard for concessions so that they can generate a quick sale or go public and reap the rewards.

Free Trade: The Best Weapon Against the “Free Traders”

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Dean Baker makes the point that the free trade evangelists would not be so supportive of free trade if their necks were on the line. (I should note that I made a similar point about press outsourcing to India in Pasadena California).

I am already a member of a profession abused by immigration policies (H1B and L1 visas), so Baker’s point that protected professions should be opened up to competition makes sense to me:

The big winners in this story are the workers who manage to keep themselves protected from international competition. As a result of recent trade and immigration policy, these highly paid professionals can buy low cost furniture, cars, and clothes. They can also have their homes renovated and their gardens maintained at low prices. They can even get cheap nannies for their kids.

But the key to the success of these highly paid workers is maintaining their own protection from international competition. There are long list of professional and immigration barriers that protect doctors, lawyers, and even economists and journalists from the same sort of international competition faced by textile workers and dishwashers.

In addition to the professional and licensing barriers that impose obstacles to foreign professionals working in the United States, there are also immigration barriers. These barriers prohibit a Wal-Mart Hospital or Wal-Mart University from hiring the lowest cost qualified foreign professionals from anywhere in the world, in the same way that Wal-Mart buys the cheapest clothes and toys from any country in the world.

The way to fix this problem is simple: we create transparent licensing requirements for the licensed professions that can be met by students training anywhere in the world. (Let them have test sites in their own country—administered by U.S. certified testers, of course.) We then remove any comparable pay requirements for these professions. The rule is free trade, just like with steel and clothes. If a Chinese doctor is willing to work in the U.S. for $50,000 a year or an Indian journalist is willing to work for $30,000, then they can be hired at these wages as easily as Wal-Mart buys cheap toys from China.

Word Up! Particularly the journalists and economists.

The Employment Numbers are Weaker than They Appear

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Nouriel Roubini’s observations are as follows:

  • The August revision (+93k) was almost entirely government jobs.
  • Private sector employment gains have averaged (+73K), which is very weal.
  • 80% of job created in September were either in government or in health/education services.
  • Housing job losses are under-reported, since illegal aliens are not counted in this figure.
  • The 2007 benchmark for employment figures turns out to be 297k less than predicted.
  • Year over year job growth has been falling for at least a year.

We are in a recession folks (me, not Mr. Roubini speaking).

Medieval Cities Returning

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Paul Krugman has an an interesting commentary on what he calls the return the rentier city, on his blog.

Basically, from a few hundred years ago (yes, I know not technically medieval) and before, the very rich in a city did not make their money there. They had some sort of holdings that generated their money elsewhere, typically hereditary lands, but they lived in the city.

More recently, the rich in the city have made their money in and around that city, through manufacturing, shipping, publishing, etc. Cities have been centers of business, but the rentier city is returning:

But these days, everything old is new again. Today’s Wall Street Journal (sub. Req.) has a story about the sources of London’s current boom: an influx of very wealthy foreigners, whose income comes from elsewhere. Middle Eastern sheiks, Russian beeznessmen, Indian industrialists, have become the backbone of London’s economy. It’s all helped a lot by British tax law, which gives big breaks to people who live in Britain but are “domiciled” elsewhere (don’t ask.)

Local town authorities are, of course, falling all over themselves, on the theory that it benefits the economy.

Personally, I’m of the belief that they are more of a burden than a benefit, as they push the middle class out of the cities, and raise the cost of housing and other services for everyone.

One comment on his post was very interesting, “But it doesn’t amaze me how 21st century America is starting to look like an accelerated rise and fall version of the Roman Empire: outsourcing civil functions, mercenaries, the Patriot Act, and now rentier cities.”

Baker is Right: IP is Protectionism

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Dean Baker makes the excellent point that economists who rail against any restriction on trade are nowhere to be found when the trade barrier supports movie and record executives or pharma.

We need to recognize the fact that IP is a restriction on free trade, and to understand that IP protections need to be balanced against the virtues of free trade. Conversely, this also means that the virtues of free trade need to be balanced against negative societal impact more generally.

Holiday Shopping Season Looks Grim

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Retailers are expecting a 2-5% increas in retail sales over the holiday season, with most looking at the lower end.

Between the subprime meltdown, and dropping house pri9ces, people will keep their money closer to themselves.

Honestly, I expect it to be below 2½%, and when one considers that inflation is significantly understated, we’re probably seeing more than 6% right now, this actually means a drop in real consumer spending.

This is where more than half the profit in retail sales is made, so this will ripple through the economy.

The Meme that the Government Understates Inflation is Hitting the Mainstream

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Here it is, San Diego Union-Tribune, of all places.

Basically the bad numbers come from a number of factors:

  • Bogus adjustments to inflation (I’ll post on “Hedonics” later).
  • Calling increases in prices asset appreciation (housing bubble).
  • Ignoring the effects of increases in College tuition. They also ignore the fact that people have few working years as a result of inflating degree requirements for positions.
  • Medical cost increases are understated in the cost of living.
  • Over-weighting consumer electronics in the CPI.

Understated CPI numbers mask dropping living standards, and reduce increases in entitlements, and as such, they benefit governments, regardless of party.

Countrywide CEO Dumped Stock Before Crash

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And it looks like he might very have gotten away with it. Where are Fred, Daphne, Velma, Shaggy, and Scooby when you need them.

Basically, he handled his shares through a trading plan, a sort of high level document which one gives to a broker, which is intended to avoid even the appearance of insider trading.

However, Countrywide Financial Corp. Chairman and CEO Angelo Mozilo revised the plan repeatedly in the summer of last year, at about the time that he would have been aware that Countrywide was circling the drain.

….

If a guy is changing his plan around, I would think that would send up a red flag. I wouldn’t allow my clients to do it,” said Thom F. Carroll, a financial planner with the Baltimore wealth management firm Carroll, Frank & Plotkin.

Mozilo adopted a new trading plan, added a second one and then revised it while the housing and mortgage industry slumped, the Times reported, citing regulatory findings.

The changes allowed him to sell hundreds of thousands of additional shares before Countrywide stock plunged.

Sandy Samuels, Countrywide’s chief legal officer, said Mozilo’s stock sales were all “in accordance with company policy.”

….

Yeah, right.