Category: Finance

Not Enough Bullets

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Did you know that if the minimum rose as fast as Wall Street bonuses, it would be $44 an hour now?

I don’t know about you, but it makes me want to find a way claw to it all back, because, to quote Billie Ray Valentine, “Billy Ray Valentine principle, “The best way you hurt rich people is by turning them into poor people.” 

The chaos that the coronavirus pandemic unleashed on America’s economy turned out to be a major boon for Wall Street traders, according to new data from the New York state comptroller’s office.

Wall Street firms paid their New York City-based traders an average bonus of $184,000 last year, a 10% increase from 2019, New York’s comptroller, Thomas DiNapoli, said in a press release Friday.

But those paydays have been skyrocketing for decades. Since 1985, Wall Street traders’ bonuses have grown 1,217% — and that’s just part of their overall pay, which was more than $406,000 on average in 2019, according to data from DiNapoli’s office.

By comparison, the federal minimum wage has flatlined at $7.25 an hour — or $15,080 annually — for 12 consecutive years. When adjusted for inflation, it has actually decreased by 11% since 1985.

If the minimum wage had instead grown at the same rate as Wall Street bonuses, it would be $44.12 an hour today.

We really need to levy a tax on financial transactions, and place a limit on fees for tax advantaged accounts (IRAs, 401(K)s, etc) of less than 10 basis points.  (.1%)

These parasites have been doing nothing but extracting wealth from the rest of us for decades.

Nope, Nothing Dodgy Here

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Have you heard about SPACs? (AKA, “Blank check companies.”

The short version is that they are shell companies created to raise capital to take other companies public.

The SPAC issues shares, raises money, and then buys a company, taking the target public.

If this sounds dodgy, as in, “Why don’t those companies go public on their own?” you are right.

The answer is, as far as I can tell, evading regulations and increasing the opacity of the investment, since there is no SEC due diligence and the like.

Their rates of returns to investors suck, as they are typically a number less than 0, a loss, though the managers make bank, and I suppose money launderers are OK with taking the hit.

As such, it is not surprising that the SEC has opened an investigation into the recent explosion of these arcane financial instruments:

The U.S. securities regulator has opened an inquiry into Wall Street’s blank check acquisition frenzy and is seeking information on how underwriters are managing the risks involved, said four people with direct knowledge of the matter.

The U.S. Securities and Exchange Commission (SEC) in recent days sent letters to Wall Street banks seeking information on their special purpose acquisition company, or SPAC, dealings, the four people said.

………

The SEC, which declined to comment for this story, has previously said it was monitoring the SPAC boom, but the letters are the strongest sign yet that it is stepping up scrutiny of such deals and the Wall Street banks that underwrite them.

………

Wall Street’s biggest gold rush of recent years, SPACs have surged globally to a record $170 billion this year, outstripping last year’s total of $157 billion, Refinitiv data showed.

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Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege the SPACs and their sponsors, who reap huge pay-days once a SPAC combines with its target, hid weaknesses ahead of the transactions.

Hiding weakness ahead of the transactions is the PURPOSE of SPACS.

BTW, if you are wondering just how dodgy this whole mess is, look no further than WeWork, whose IPO infamously collapsed on insider looting and misleading accounting.  They now intend to go public via merging with a SPAC: 

Even though WeWork has long lost billions of dollars, it always found ways to attract huge investments from deep-pocketed investors. Now, less than two years after it was rescued from a collapse, the co-working company has found yet another backer willing to overlook its losses.

The company announced on Friday that it had agreed to merge with a blank-check firm in a deal that would give it a listing on the stock market it was denied when it was forced to shelve an initial public offering as investors questioned its financial strength and dubious governance practices.

Instead of a traditional I.P.O., WeWork is merging with BowX Acquisition, a company listed on the stock exchange for the sole purpose of buying a business, in a type of deal that has become hugely popular in recent months. Investors, bankers, and even celebrities and athletes have rushed to float such special purpose acquisition companies, or SPACs, because they offer their creators a chance to mint huge profits relatively quickly. And merging with these vehicles is attractive to companies like WeWork because they provide an express lane onto the stock market without the obstacles that scuttled WeWork’s public offering in September 2019.

“Obstacles,” what a quaint way to describe flagrant fraud and misrepresentation.

This is yet another way for Wall Street to steal from you,

Speaking of Leverage

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Indeed, WTF


Increased leverage goeth before a fall

It appears that the use of margin trading, one of the things that triggered the stock market crash of 1929, is spiking, which is a pretty good indicator to me that we are headed to another market panic:

In the current craze that encompasses everything from sneakers and NFTs to stocks, where valuations don’t matter because of widespread certainty that valuations will be even greater in a few days, and where folks are chasing lottery-type returns, supported by the Fed’s interest rate repression and $3 trillion in asset purchases, and by the government’s trillions of dollars of handouts and bailouts – well, in this perfect world, there is a fly in the ointment: Vast amounts of leverage, including stock market leverage.

Margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms – is just one indication of stock market leverage. But FINRA reports it monthly. Other types of stock market leverage are not reported at all, or are disclosed only piecemeal in SEC filings by brokers and banks that lend to their clients against their portfolios, such as Securities-Based Loans (SBLs). No one knows how much total stock market leverage there is. But margin debt shows the trend.

In February, margin debt jumped by another $15 billion to $813 billion, according to FINRA. Over the past four months, margin debt has soared by $154 billion, a historic surge to historic highs. Compared to February last year, margin debt has skyrocketed by $269 billion, or by nearly 50%, for another WTF sign that the zoo has gone nuts:

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And it’s risky leverage for the borrower. It seems like risk-free leverage when stocks go up, but when your stocks do the unheard-of and tank below a certain level, your broker will ask you to put more cash into your account or sell stocks into the tanking market, whereby you then join the legions of forced sellers.

In the past, a big surge in margin balances tended to precede history-making stock market declines:

………

Leverage is the great accelerator of stock prices, on the way up, and on the way down. Purchasing stocks with borrowed money creates buying pressure, and prices rise, and rising prices increase the margin balances a portfolio can support, and this encourages more stock-buying on margin.

On the other hand, selling stocks to deal with margin calls adds more selling pressure to an already declining market. The more prices fall, the more selling pressure there is from frazzled forced sellers trying to deal with margin requirements.

When market correct, this is going to be very ugly.

H/t Naked Capitalism.

This Will Not End Well

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So, the new hot thing is a payments processor called Stripe, and it is planning for an IPO and has just announced a $95 billion valuation with its series H funding round.

I’m generally dubious of “Unicorns”, and when I did a quick Google on Stripe, it appeared to be a fairly anodyne supplier payments processing, with the only “Innovation” I could see being its incorporation in Ireland, which will allow it to avoid most taxes.  (There appears to be no “Secret Sauce.”)

It’s a dull, if profitable, business with relatively low barriers to entry, but suddenly everyone is talking about making bank when it goes IPO.

I’m not saying that it’s a fraudulent operation, its business model appears to be solid, if rather dull.  What I AM saying is that its funding seems to be less about the business than it is about creating a hubbub which which will allow those institutional funders to fill their pockets, walk away, and the retail investor takes the losses when gravity returns:

The payments company Stripe is worth $95 billion after a new round of funding, making it the most valuable start-up in the United States.

The San Francisco and Dublin-based company said on Sunday that it had raised $600 million in new funding from investors including Sequoia Capital, Fidelity Management and Ireland’s National Treasury Management Agency. The investment nearly triples Stripe’s last valuation of $35 billion.

The funding comes amid a surge in the adoption of digital tools and services in the pandemic as more people live, work and make purchases online. That has fueled a wave of investment into, and eye-popping valuations at, tech start-ups, as well as a frenzy of highly valued initial public offerings. Investors have valued Airbnb, the home rental start-up that recently went public, at $123 billion. Roblox, a kids gaming start-up, saw its valuation soar to $45 billion when it went public last week.

Founded in 2010, Stripe builds software that enables businesses to process payments online. As more people have turned to online shopping in the pandemic, Stripe’s offerings have been in demand. It is the largest among a class of fast-growing, highly valued financial technology companies.

Then again, I am always profoundly skeptical of the, “Next Big Thing.”

SoftBank-Funded ……… Is Never a Good Start for a Sentence

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It is remarkable just how many enterprises that Softbank funds are fraudulent, criminal, or fraud and criminality adjacent.

When one looks at their investment targets, like WeWork, Uber, and DoorDash, which are basically criminal enterprises, with defrauding investors, evading transportation and safety regulations, and stealing from delivery boys (respectively) being central to their business models.

And now another SoftFank funded dodgy outfit has blown up, Greensill, which financed supply chains.

It’s model was to pay suppliers immediately at a discount, and then collect the difference when the large firms actually buying the stuff paid on a 90 day, and frequently longer, cycle. 

Its finances were sufficiently sketchy that their insurer stopped writing them policies, and then the house of cards collapsed:

Supply chain finance disruptor Greensill is undone by its own financial alchemy, putting at risk thousands of jobs in the UK, Australia and the EU. The timing could not be worse for already buckling supply chains.

Disruptor seems to be a synonym for criminality and ignoring the lessons of finance learned over more than 500 years of fractional reserve banking.

On Monday, the supply chain finance firm Greensill Capital filed for insolvency after defaulting on a $140 million loan it owes to Credit Suisse. Its parent company in Australia had already filed for insolvency there. According to UK court documents, Greensill had “fallen into severe financial distress” and can no longer pay off its debts. Over the past week many of the company’s directors have been frantically jumping ship, including its chairman Maurice Thompson, Australia’s former foreign minister Julie Bishop and former Morgan Stanley executive David Brierwood.

The firm has been in trouble for some time, as I warned in a previous NC post. A number of its client companies already collapsed in 2020. In the aftermath attention switched to the financial menage á trois Greensill had formed with its primary backer, Soft Bank, and Swiss mega-lender Credit Suisse. Greensill was also under investigation by German banking regulator BaFin and the Association of German Banks, an industry group, over its German subsidiary Greensill Bank’s huge exposure to a single client: U.K.-based steel magnate Sanjeev Gupta.

Yep, SoftBank.  

When you want to get in on a fraud, pump it up, and get out leaving suckers holding the bag.

Greensill’s fall from grace was as spectacular as its meteoric rise, writes the FT‘s John Plender:

Greensill Capital went from nothing in 2011, when Lex Greensill abandoned a big-bank career, doing global supply chain financing at Morgan Stanley and Citibank, to go it alone. By 2019 this upstart non-bank says it had extended $US143 billion ($185.5 billion) of financing to 10m-plus customers and suppliers in 175 countries. Its founder also notched up powerful contacts in government and hired former UK prime minister David Cameron as an adviser.

Yeah, hiring David Cameron as an adviser is another tell that they are relying on smoke and mirrors more than anything else. 

It turns out that the model Greensill used was “Working” in the short term because it allowed companies to cook the books:

For large companies the advantages are twofold: they get to preserve cash on-hand by extending payment terms with vendors. They can also record the amount they owe to the supply chain finance firm or bank as accounts payable on the balance sheet rather than as debt. This makes their liquidity position appear healthier than it actually is. And that can be dangerous. Companies can conceal the true size of their debt for longer, leaving investors and creditors bearing bigger losses when they finally collapse, as happened with Spanish green energy giant Abengoa in 2015, UK outsourcing giant Carillion in 2018 and NMC Health, the former FTSE 100 private hospital company, in 2020.

They then repackaged and resold the debt, but this was dependent on these bonds being insured, and when their insurer decided to stop writing policies, and the debt became profoundly unattractive to put it mildly. so the house of cards collapsed.

Once again, though, the principals of the firm will be fine, but this collapse is ricocheting around the trans-national supply chain, and we don’t know when this game of musical chairs will end.

If this sounds familiar to you, it’s because it’s rather similar like Bear Stearns in 2008.

One hopes that the repercussions are less severe.

Yes

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Over at The American Prospect, they ask, “Are Endowments Damaging Colleges and Universities?“

That sounds nonsensical, but that is because the real question that they are asking is, “Is the path chosen by universities and colleges to rely on risky and extremely high fee strategies run by Wall Street big shots to increase returns on their endowments damaging colleges and universities?”

That answer is unequivocally yes, even if you are not as incompetent a steward of your college’s money as Larry Summers was at Harvard. 

The goal of the Wall Street big shots is to maximize their own personal gain, and by promising big and providing almost Byzantine complexity that shields them from oversight, they make bank, and the colleges get f%$#ed:

These are perilous times for private, nonprofit, independent higher education, and not just because of changing demographics, ever-climbing tuitions, and pandemic shutdowns. For years, education researchers have charged that institutions are unable to control costs effectively, especially their operating costs. In public discourse, colleges and universities are often characterized as reckless spenders. So when they slash academic budgets or cut staff, nearly everyone shrugs. Higher education has gradually accommodated itself to austerity thinking. But as any critic of neoliberalism can tell you, austerity is really just another way that money and resources are redistributed upward, and outward.

It is rarely, if ever, discussed how endowment fund management is an integral part of the budget problem. As the tax filings of virtually every private college or university show, enormous investment management fees are pouring out of nearly every substantial endowment and into the pockets of fund managers. Most of these fund managers are not university employees, but rather work for industries such as private equity, hedge funds, and other so-called “alternative” investments. According to its tax filings, Oberlin College (my alma mater) paid out a total of $14,872,522 in investment management fees between 2013 and 2017, averaging around $3 million per year. During that same period, Amherst College paid out $186,601,258. At both colleges, investment management fees actually exceeded reported profits from investments several times. Excluding Harvard (which manages its roughly $41 billion endowment internally and has also faced criticism for immensely high overheads), the remaining Ivy League colleges reported paying out $241,653,279 in fees in 2017 alone. That same year, Stanford University paid out $47,901,005, and Johns Hopkins $28,112,000. The list goes on and on.

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But we can say that the pattern reflects a widespread institutional practice with endowments, tax-free investments held by nonprofit institutions that provide education as a public good. Increasingly, endowments are invested in expensive, secretive, unregulated, illiquid, risky, and hard-to-value financial instruments—the strategy laid out by David Swensen in his book Pioneering Portfolio Management and nicknamed the “Yale Model.” While acknowledging the greater risks involved, Swensen credits Yale’s returns to this strategy, noting that “developing partnerships with extraordinary people” is the single most important element for its success. What makes these people extraordinary is not specified, but the enormous amounts of money they are paid does fit that description.

Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology. Very few institutions seem to balk at putting alumni and other donations into risky, illiquid investments, something that would have been regarded as foolish and dangerous only a few decades ago.

 As I have said here many times, “There is nothing that the finance industry cannot ruin.”

Do You Want Some Cheese With That Whine?

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Ordinary investors who are paying attention understand that aggressively managed mutual funds almost always under perform the market over any significant time horizon.

These same investors also understand that you pay more in fees for this lackluster performance, and so they tend to invest in passive investments.

You cannot continue this, because it is worse than Communism:

The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.

In a note titled “The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism,” a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

“A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management,” they write.

High fees and subpar returns, coupled with the creation of a plethora of relatively inexpensive exchange-traded funds that track major equity indexes have helped fuel a massive shift in asset flows away from active management in favor of passive. While policymakers are quick to praise the benefits of these low-cost options for retail investors, Bernstein argues that this is a short-sighted view that doesn’t take into account the potential downsides involved with the increase in passively-managed assets.

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The social function of active management, in a capitalist society, is that it seeks to direct capital to its most productive end, facilitating sustainable job creation and a rise in the aggregate standard of living. And rather than be guided by the Invisible Hand and profit motive, capital allocation under Marxism is conducted by an oh-so-visible hand aimed at producing use-values that satisfy each member of the society’s needs. Seen through this lens, passive management is somewhat tantamount to a nihilistic approach to capital allocation.

No.

The mutual fund is a relatively new phenomenon.

You are having a kitten over this because, to quote Blazing Saddles, “We’ve gotta protect our phony baloney jobs!”

This is a Fascinating Concept, But Only if it is Applied Rigorously

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The suggestion that defense contractors post performance bonds is intriguing, but, much like the rest of the military industrial complex, the question is that the people who would enforce the terms of this bond would not allow themselves to be swayed by the political and economic powers of the defense contractors:

In Washington, D.C., “military reform” usually means “acquisition reform.” There is a lot of talk about it on Capitol Hill and in the Pentagon. Enough think-tank papers have been written on the subject to clear whole forests. But of the myriad options out there, one has escaped notice.

Performance bonds — money put up by a contractor as insurance to the buyer to make sure the job is done on time and to specifications — are already required for federal building projects under the Miller Act. Prime construction contractors have to furnish a surety to the government to ensure their work is completed properly and to guarantee all subcontractors get paid should the firm go out of business.

These bonds have been used with some success in overseas defense procurement contracts. Using performance bonds is one way the government protects its interests without having to resort to judicial proceedings. In fact, the Congressional Research Service recently noted that performance bond money can be used to “offset the costs of contract completion, which can include delays and finding a new contractor.”

The same idea could potentially be applied to a weapons acquisition project to protect the government’s — and the taxpayer’s — interests. But it has so far been overlooked during the sometimes desperate search for solutions to the Pentagon’s dysfunctional buying process.

One key selling point for this idea is that provisions for using performance bonds for Defense Department acquisition already exist. As is usually the case, improving discipline in weapons spending doesn’t require new rules but using the rules that already exist to better effect.

That last paragraph reveals the weakness of the concept.

The tools are already there, but the Pentagon is unwilling to use them.

If you were to decertify the 4 services, and move procurement to an agency independent of the Pentagon, a structure similar to Sweden’s FMV, you might have a chance of making it work, but this would require a catastrophe to generate sufficient impetus to do this.

The Origins of Money

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I’m sure that you all “know” how money started.

Societies were bartering, and it became too unwieldy, and so money was created as a proxy for value that reduced the friction in the transactions.

It’s an elegant theory. The only problem is that no one has ever found an example of this ever.

No examples in archeology, none in mythology, none.

Also, how does one develop a sufficient velocity to commerce to justify the creation of money?

You need money to create the levels of commerce that justify its creation.

It’s a chicken egg thing.

An alternate theory, and one that has some actual evidence behind it, is that money grew out of a system of debts and fines that were driven by the expansion of government.

This origin story actually works the way that human minds do:

Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong.

The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school [the belief that money originated with the states attempt to influence their own economy] of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems. Money started as—and still is—is a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this:

In a pre-market, feudal society, there was usually a system to maintain justice in the community. If someone committed a crime, the authority, let’s call him the king, would decide that the criminal owed a fine to the victim. The fine could be a cow, a sheep, three chickens, depending on the crime. Until that cow was brought forward, the criminal was indebted to the victim. The king would record the criminal’s outstanding debt.

 This system changed over time. Rather than paying fines to the victim, criminals were ordered to pay fines to the king. This way, resources were being moved to the king, who could coordinate their use for the benefit of the community as a whole. This was useful for the King, and for the development of the society. But the amount of resources coming from a criminal here and there was not impressive. The system had to be expanded to draw more resources to the kingdom.

 To expand the system, the king created debt-records of his own. You can think of them as pieces of papers that say King-Owes-You. Next, he went to his citizens and demanded they give him the resources he wanted. If a citizen gave their cow to the king, the king would give the citizen some of his King-Owes-You papers. Now, a cow seems more useful than a piece of paper, so it seems silly that a citizen would agree to this. But the king had thought of a solution. To make sure everyone would want his King-Owes-You papers, he created a use for them.

 He proclaimed that every so often, all citizens had to come forward to the kingdom. Each citizen would be in big trouble, unless they could provide little pieces of paper that showed the king still owed them. In that case, the king would let the citizen go, and not owe them any longer. The citizen would be free to go off and acquire more King-Owes-You papers, to make sure he would be safe the next time, too. This way, all the citizens needed King-Owes-You papers to stay out of trouble. That made King-Owes-You papers widely accepted, and consequently, also a useful medium of exchange. This lead to the rise of markets.

Not only does this better match the way humanity works, the creation of money is the other is a Kumbaya moment that really hasn’t ever occurred in the history of finance.

The author goes on to explain how we actually have relatively recent history to explain this:  The Spanish conquest of the Americas, where the locals saw the need for money only when their oppressors started demanding taxes.

Cyber Currencies’ Fatal flaw

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You can never be sure that someone won’t come after your assets via the blockchain.

When you realize that almost every square inch of the earth (Antarctica excepted) was stolen at some point, and the same applies to most assets in the modern world.

With Bitcoin and its ilk, there is no statute of limitations:

An interesting little observation by Izzy Kaminska over in the FT about a problem that Bitcoin faces. It’s a legal problem that leads to an economic one. And the problem Bitcoin faces is one that is based upon the very existence of the blockchain itself. There’s a good reason that all functioning economic systems have something akin to a market ouvert rule, or something like squatters’ rights. Note that I say something like, not exactly either of those rules. For example, if you find money in the street then you can’t and shouldn’t just keep it. But if you hand it in to the police, no one then claims if for some period of time, then it does become yours. No, you can’t just move into someone elses’ house and insist that it belongs to you. But move in for long enough (the time period varies) and no one complains or does anything and it becomes yours. You don’t get title when you buy stolen goods. But something you bought in good faith, in an open marketplace, does become yours eventually. Even if it had been stolen some point further down the ownership chain.

 The reason for these rules, and yes they vary across places and concerning different specific items, is that at some point we’ve got to give up on historic unfairnesses and or illegalities and just get on with the current allocation of scarce resources. We just don’t want to wall off something that may or may not have been stolen in, say, 1820, from being put to use today. We almost certainly would want to make sure that something stolen yesterday was returned to its rightful owner. But at some point between those two dates we’ve got to have a cut off point.

………

And that’s where Bitcoin has the problem, in that very existence of the blockchain:

The first relates to the ongoing legal recourse rights of Bitfinex victims. Even though they may have lost their right to pursue Bitfinex for compensation, they are still going to be entitled to track the funds across the blockchain to seek recourse from whomsoever receives the bitcoins in their accounts. That’s good news for victims, but mostly likely very bad news for bitcoin’s fungible state and thus its status as a medium of exchange.

Just one successful claim by a victim who tracks his funds to an identifiable third party, and the precedent is set. Any exchanges dealing with bitcoin in a legitimate capacity would from then on be inclined to do much stronger due diligence on whether the bitcoins being deposited in their system were connected to ill-gotten gains. This in turn would open the door to the black-listing of funds that can not prove they were originated honestly via legitimate earnings.

Of course, people should not steal things. And yet for a currency to work it has to be possible to take the currency at its face value. Thus it may well be that the bank robber paid you for his beer with stolen money but you got it fair and square and thus the bank doesn’t get it back as and when they find out. Another way to put this is that the crime dies with the criminal. And yet the blockchain upends all of that. Because every transaction which any one bitcoin has been involved in is traceable.

The problem with cyber currencies and the rest of the internet enabled Libertarian-Utopian is that they believe that computer code developed over a few months can somehow trump contract law and record keeping that has been developed over the past 1000+ years.

Ask yourself, what happens if you have a fruit tree with branches that cross a property line.  Who owns the fruit on those branches?

It is very complicated.

In some places, the branches, and fruit, belong to the property owner over whose property it extends.

In others, it belongs to the property owner of the location of the trunk, but  the owner of the property can prune branches over their yard and dig up roots under the yard.

In some places, it belongs to one person when it on the branch, and another when the fruit falls.

In some places, a landowner can sue for trespass for branches over their yard.

This is just a fruit tree.

Recording property transactions are far more significant, and potentially far more complex, and we saw what happened when the banks decided to create MERS to “streamline” fraud real estate transactions.

I’m an engineer, not a lawyer, dammit, * but is clear to me that the people behind these efforts have only the vaguest idea of how society works, and how long it took to get society works.

*I love it when I get to go all Dr. McCoy!

David Sirota Collects Another Scalp

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Last month David Sirota’s reporting revealed conflicts of interest in the review of the merger between Anthem and Cigna, resulting in regulatory and political push-back against the deal.

This month, his reporting of Chris Christie’s sweet heart deals with political contributor hedge funds has led to the New Jersey pensions backing away from the deals:

Governor Chris Christie’s pension officials on Wednesday signed off on a major divestment of hedge funds — a move that is expected to save taxpayers and retirees tens of millions of dollars in fees that had been flowing to Wall Street. The decision caps an intensifying campaign against the hedge fund investments by groups representing retirees.

 The campaign was prompted by an International Business Times investigative series that first spotlighted the skyrocketing fees.

 At a meeting of the Christie-controlled State Investment Council, pension officials cut in half the amount of state pension money that will be allocated to hedge funds, according to a press release from the New Jersey state AFL-CIO. That $3 billion reduction was part of an overall reduction of pension investments in higher-risk “alternative investments” that generate big fees, but whose returns have in many cases failed to keep pace with low-fee stock index funds. In all, the reduction in hedge fund investments is expected to save more than $120 million in fees next year, according to the labor federation, whose retiree members rely on the pension system.

 ………

 After a decade of public pensions pumping more retiree money into alternative investments, new questions have recently been raised about the fees and returns generated by the strategy. Major pension funds in California and New York have reduced their investments in hedge funds.

Back in 2014, before the national debate over pension fees had intensified, IBT first began reporting on how Christie’s administration had significantly increased the amount of pension money flowing to high-fee alternative investment firms. The two-pronged year-long series explored the politics of pension investments as well as the revenue implications of the investment shift.

 Under Christie, pension investments flowed to politically connected firms whose employees had delivered campaign donations to Christie-linked political groups. IBT also documented how Christie’s political team was in contact with the governor’s top pension adviser. That adviser’s private firm concurrently invested in a fund he had directed public pension money into. The adviser subsequently resigned after the state’s largest labor federation filed an ethics complaint against him.

So, these Gaultian supermen on Wall Street have once again been proved to be, “parasites”, “looters”, and “moochers.”

We need to shut down this sort of unproductive rent seeking.

Your Daily Schadenfreude

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Almost two years ago, I mocked hedge fund manager Bill Ackman’s jihad against Herbalife.

The nickel tour was that he went heavily short on Herbalife, and then he aggressively lobbied regulators to shut the company’s business model down.

Ackman’s actions were a primer on how Wall Street types used the political and regulatory processes in an attempt to enrich themselves.

He asserted that Herbalife’s business model was essentially a pyramid scheme, and now the FTC has ruled against some of the supplement manufacturer’s business practices, but the ruling was limited, and Ackman’s short bets will not pay off:

For nearly four years, Herbalife has been locked in a fierce Wall Street battle with billionaire hedge fund manager Bill Ackman. But on Friday the dietary supplements seller scored an enormous victory in this fight.

The Federal Trade Commission said on Friday that it had charged Herbalife with deceiving consumers into believing they could earn substantial money selling diet nutritional supplements, but it did not determine that Herbalife is a pyramid scheme or fraud like Ackman had alleged for years. Herbalife said on Friday it will pay $200 million in a settlement with the FTC. The settlement will force Herbalife to change some of its key business practices, but the regulatory investigation of Herbalife will not end with the type of knock-out blow that Ackman clearly had hoped.

The FTC did make strong accusations against Herbalife, claiming that Herbalife’s compensation structure was unfair because it “rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors.”

………

Still, the FTC settlement looks to be another big setback for Ackman, whose Pershing Square hedge fund is under pressure after suffering large losses over the last 12 months, mostly from a disastrous big bet on Valeant Pharmaceuticals, a company with a stock that has crashed. Pershing Square has a long-running and very large short position in Herbalife.

………

Ackman’s Pershing Square Holdings has already plunged by 19.1% this year after falling by 20.5% in 2015, and Ackman’s assets under management have fallen sharply. Ackman has suggested that he would continue to pursue his crusade against Herbalife even if his effort to get U.S. regulators to shut the company down was unsuccessful. He once said he would go “to the end of the earth” in his battle against the company and became teary eyed on a stage when describing the damage he believed it had done.

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Michael Johnson, Herbalife’s longtime CEO who has been at the forefront of the company’s battle against Ackman, argued the settlement was a big win. The company also announced that it had reached a $3 million settlement of an investigation conducted by the Attorney General of Illinois that had also hung over the company. “The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” Johnson said in a statement.

It’s nice to see a self styled hedgie “geniuses” taken down a few notches.

Oh Crap

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One of GM’s suppliers just went chapter 11, and it has the potential to shut down automobile assembly across General Motors:

A Massachusetts supplier that filed for bankruptcy protection last week could disrupt production at nearly every General Motors North American plant in coming days, according to documents filed in bankruptcy court.

Clark-Cutler-McDermott, based in Franklin, Mass., supplies acoustic insulation and interior trim products for automobiles, textiles and other transportation manufacturers. But GM is its largest customer and Clark-Cutler-McDermott is losing more than $30,000 a day — and more than $12 million since 2013 — partly because what GM pays for those components “usually decreases annually,” CEO James McDermott stated in a court filing.

But GM has no other supplier for the parts CCM provided and any interruption in delivery of those parts would cost the automaker “millions of dollars per day per plant,” GM said in another filing.

GM obtained a restraining order last month compelling CCM to continue supplying those items specified in its purchase orders with GM. But that order expired July 1. CCM filed for protection under Chapter 11 of federal bankruptcy law on July 7.

………

In a separate dispute, CCM wants to use $1.9 million of cash it held when it filed for bankruptcy to pay its workers. GM contends it provided most of that cash as part of its temporary restraining order.

GM doesn’t object to CCM paying workers for what was produced before the bankruptcy filing, but it does not want its cash used to pay workers if they aren’t making GM’s parts.

This could get very messy very quickly.

A lot of plants are retooling for the new model year right now, but if they lack the parts to reopen, we are going to see some major issues with the economy just as the presidential election ramps up, particularly in the Midwest.

And the Con Continues to Unravel

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Theranos founder Elizabeth Holmes has been banned from running labs for 2 years:

In a severe turn of events for former blood testing darling Theranos, which has been defending itself against accusations of wrongdoing for months, U.S. regulators slapped strong sanctions against the company and its owner.

Theranos said in a statement issued late Thursday that the certificate for its lab in Newark, Calif., had been revoked, its approval to receive Medicare and Medicaid payments “cancelled,” and that it would have to pay an unspecified fine. In addition, chief executive Elizabeth Holmes, the company’s founder, will be banned from owning, operating or directing a lab for at least two years.

………

Theranos was perhaps the most celebrated of these young companies. Holmes was at one time compared to Apple’s Steve Jobs, and the company’s valuation was estimated to be a staggering $9 billion at its peak.

I still don’t understand how this company was ever seen as a success.

Their technology never worked., but supposedly sophisticated investors showered them with hundreds of millions of dollars.

This is nuts.

This is Good News, Not Bad News

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It appears that in response to the Brexit vote, house prices in London have fallen.

This is actually a good thing. Ordinary people have been priced out of London by overpaid parasites from the City of London (investment banking), and foreigners who are using London real estate to as a way to hide and protect their ill gotten gains:

Thousands of London homes have had their prices slashed since the Brexit vote a week ago amid warnings of a slump in the stunned housing market, the Standard reveals today.

An Evening Standard analysis has found a huge spike in nervous home owners cutting their asking prices after the surprise result of the referendum last Friday morning unleashed what was described as “a perfect storm” by one leading investor.

The impact is expected to be most severe in the new luxury development along the river from Vauxhall to Docklands where falls of as much as 40 per cent are feared.

One central London branch manager at one of the capital’s biggest firms said: ”The whole thing is a disaster. The uncertainty will cause the markets to crumble and who knows when that is going to get better.

This is things getting better.

Rich people lose money, and ordinary people may be able to shorten their commute a bit.

Not the Onion: Hillary Clinton Proposes Welfare for Rich White Boys

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She has now proposed that entitled rich kids who launch startups will get 3 years forbearance on their student loans:

Hillary Clinton has a bold plan to ensure the bright future of every hardworking American who has the considerable resources required to start his or her own company: three years of student debt deferrals, for every single startup founder. Wonderful news for our striving technocrat class—they need all the help they can get.

………

What else do we need? Less debt, obviously. And who are the people most in need of debt forgiveness? The sort of people—overwhelmingly highly educated, white, male people—who launch startups.

Enter Hillary’s plan:

Hillary is committed to breaking down barriers and leveling the playing field for entrepreneurs and innovators who are launching their own start-ups. Hillary will allow entrepreneurs to put their federal student loans into a special status while they get their new ventures off the ground. For millions of young Americans, this would mean deferment from having to make any payments on their student loans for up to three years—zero interest and zero principal—as they work through the critical start-up phase of new enterprises. Hillary will explore a similar deferment incentive not just to founders of enterprises, but to early joiners – such as the first 10 or 20 employees.

What’s more, the economic benefits will trickle down to those of us who don’t have the courage or inheritance (“more than 80% of funding for new businesses comes from personal savings and friends and family”) to start our own hovercraft-sharing services and toothpaste disruption ventures. Startups, with their famously long lifespans and reliable revenue models, will eventually provide jobs (well, independent contractor agreements) for all of us down the road, as long as they don’t shutter due to lack of users, like Washboard did, or succumb to an overwhelming tide of warranted criticism, like SketchFactor.

This is, of course, absurd, but it is a window into who Hillary Clinton’s views on society and virtue, and as Lambert Strether pithily notes,  it ain’t a pretty picture:

Exactly as with health care (“never, ever”), Clinton seeks to destroy education as a public good. Therefore, she seeks, like a Victorian, to sort the worthy creditors, from the unworthy (and to create another complex administrative apparatus filed with credentialed 10%-ers (her base (ka-ching)) to do the sorting for her.

Her statements on single payer mirror this, as does her comments on Sanders’ tuition proposal, where she wanted to establish a whole new bureaucracy, and the attendant costs, and humiliation to the recipients.

Hillary Clinton in her teens supported Barry Goldwater.  She has described herself as a former “Goldwater Girl.”

It looks like you can get the girl out of the Goldwater, but you can’t get the Goldwater out of the girl.

I am so glad that I live in Maryland, where my vote does not count.

End This Guy’s Political Career

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This would create the largest health insurer in the country, but hizzonner thinks it’s fine to put a their own lobbyist in charge of creating a behemouth that would dictate healthcare to 53 million people.

Corruption doesn’t begin to describe this:

The regulatory review of the largest health insurance merger in U.S. history has now become a major political battle, pitting a national Democratic leader against his own party. On Friday, Connecticut Gov. Dan Malloy — a top Hillary Clinton surrogate who is the co-chair of the Democratic National Committee’s platform panel — faced pressure from his state’s Democratic House speaker to remove his appointed insurance commissioner from her role regulating Cigna’s controversial mega merger.

Connecticut House Speaker Brendan Sharkey’s call on Friday came after Clinton and former Health and Human Services Secretary Kathleen Sebelius raised concerns about the prospect of the merger harming the 53 million Americans who could be affected by the transaction. The deal is currently facing an antitrust review by state and federal regulators.

The political fight in Connecticut — which is leading states’ regulatory review of the merger — follows an International Business Times investigation documenting Connecticut Insurance Commissioner Katharine Wade’s personal and familial ties to Cigna, as well as an increase in campaign contributions to Malloy-linked political groups from donors affiliated with the merging companies. Wade, Cigna’s longtime in-house lobbyist, was appointed to her state government position by Malloy in early 2015 — just as Cigna and Anthem were finalizing their merger proposal.

“At a minimum, the commissioner should recuse herself from further involvement in the Cigna-Anthem merger review,” said Sharkey, according to the Connecticut Post. “Whether a potential conflict crosses a legal ethical line should not be the only factor here. Perception of a conflict is also an important part of the equation, and most onlookers, including consumer and health-care advocates following this issue all have the same perception.”

This is pay to play bullsh%$ at it’s worst.