In the fast food sub sandwich category, the two biggest players are Subway and Quiznos. Due to a huge head start and relentless franchising, Subway is the dominant company in the marketplace. Their advertising has traditionally focused on differentiating their products from other fast food categories such as burgers and fried chicken.
Subway ads typically emphasize the fresh baked bread and the vegetable fixings piled on their sandwiches. They have positioned themselves as a lighter alternative to other fast food restaurants. Their spokesperson, Jared, has built an entire career around a friendly personality and the fact that he lost a lot of weight by eating Subway food.
Quiznos, on the other hand, has played off the category leader Subway. Quiznos ads have pointed out how much more meat is on their subs, and stressed the oven toasting. “If you want a sub,” they seem to say, “shouldn’t it be our sub and not theirs?”
As a consumer of both chain’s sandwiches, I can attest Quiznos does make a superior sub. What the Quiznos ads forget to mention is that it is also a more expensive sub. The price differential for the premium Quiznos product is $2-$3 more than Subway would charge.
Recently, Subway began a promotion centering around the concept of “the $5 foot long.” It started with selected foot long sandwiches being discounted down to a $5 dollar price. The promotion was so successful (aided by an incredibly catchy ad campaign) that the $5 foot long concept has been extended to all of their sandwiches.
The motivating idea behind the campaign is simple: more food for less money. It is the same animating concept behind McDonalds dollar menu.
Now Quiznos is responding with their own foot long product. The ads for the ciabatta bread sub emphasize the fact that it sells for only $4. In fact, the ad ends by repeating the price three times, albeit with a humorous twist. The new Quiznos ads are clearly a reaction to the Subway campaign. The message is “our sub is cheaper than their sub.”
The ads are funny and memorable. They feature the toasting oven as one of the characters in the ad. The oven’s voice is intended to resemble the HAL 9000 computer in 2001: A space Odyssey.
There are two ways to establish the value proposition in the mind of the consumer. One way is to emphasize the superior features or quality of your brand compared to the competition. The other way is to emphasize a lower price.
With their new ads launching this new product, Quiznos has abandoned the superiority strategy of brand building. They are now trying to sell a cheaper sandwich than Subway. Once you start competing solely on price, it is tough to build your brand up as a premium product.
In the long run, this new direction will hurt Quiznos more than the short term market share gain helps them.
Tuesday, March 31, 2009
Tuesday, March 24, 2009
Take this TARP...Part II
Goldman Sachs, the big Wall Street investment bank, recently announced that they were going to try and repay their share of the Federal TARP bailout money ahead of schedule. The previously announced plan was to repay the Treasury by the end of this year. They have now said they could pay back the government as early as the end of April.
I can’t help thinking this is partially due to the furor over the AIG bonuses. Watching the AIG financial traders get used as a metaphorical piñata by the politicians and media has got to be a powerful spur to get out from under the Federal thumb. Who can blame them: would you want to have to answer to Barney Franks?
As in the case of Northern Trust, I think much of the political grandstanding over the AIG bonuses was overwrought and silly. But I also think that the sooner the government gets out of the ownership of financial institutions, the better for the country. So if the posturing and outrage spurs the managers of companies to put their houses in order and regain their independence, in the long run we will be better for it.
It is an ill wind that blows no good.
I can’t help thinking this is partially due to the furor over the AIG bonuses. Watching the AIG financial traders get used as a metaphorical piñata by the politicians and media has got to be a powerful spur to get out from under the Federal thumb. Who can blame them: would you want to have to answer to Barney Franks?
As in the case of Northern Trust, I think much of the political grandstanding over the AIG bonuses was overwrought and silly. But I also think that the sooner the government gets out of the ownership of financial institutions, the better for the country. So if the posturing and outrage spurs the managers of companies to put their houses in order and regain their independence, in the long run we will be better for it.
It is an ill wind that blows no good.
Monday, March 23, 2009
AIG: Hangin' too good for em! Tax the b***s!
I’m outraged about the AIG bonuses. And right now I’m not talking about how $165 million in retention bonuses was paid out to the traders in the Financial Products unit; the same guys who wrecked the company. I’m still hacked off about that, but right now I’m outraged at the actions of the US Congress in regards to the situation.
In a state of high dudgeon, the House of Representatives passed a special bill last week that imposed a 95% tax on those bonuses. The US is looking at a trillion dollar deficit this year, and Congress is wasting their time going after a small group of traders who are getting retention bonuses when they should not even have been retained. Part of the taxpayer bailout of AIG should have been firing those guys. Instead, they were allowed to stick around until they qualified for bonuses.
The thing is, they were allowed to stick around to the end of the year. They had contracts, and those contracts have to be honored.
Now Congress, after the fact, is trying to get the money back. The US Constitution prohibits something call a Bill of Attainder. A Bill of Attainder is an act of the legislature that targets specific individuals and punishes them without a trial. Confiscatory taxation designed to hit only a small group of people arguably fits that definition.
What should have happened is that at the time of the original bailout, before the Treasury acquired 80% of AIG, all of the employment contracts should have been rendered subject to renegotiation as a precondition to receiving the money. Alas, no one thought of that during the press of events. Too bad, so sad.
Much as it pains my partisan soul, I have to give the Obama administration a pass on this one. By the time Obama was inaugurated in January, the retention bonuses had already been earned.
Instead of grandstanding and hyperventilating about how they are going to get that money back, our elected representatives would more constructively spend their time learning the ins and out of the financial system they are being asked to continue to bail out. Yes the AIG bonuses are outrageous, but in the great scheme of things they are also miniscule.
I would say that Congress has bigger fish to fry, but technically, whales are mammals, not fish.
In a state of high dudgeon, the House of Representatives passed a special bill last week that imposed a 95% tax on those bonuses. The US is looking at a trillion dollar deficit this year, and Congress is wasting their time going after a small group of traders who are getting retention bonuses when they should not even have been retained. Part of the taxpayer bailout of AIG should have been firing those guys. Instead, they were allowed to stick around until they qualified for bonuses.
The thing is, they were allowed to stick around to the end of the year. They had contracts, and those contracts have to be honored.
Now Congress, after the fact, is trying to get the money back. The US Constitution prohibits something call a Bill of Attainder. A Bill of Attainder is an act of the legislature that targets specific individuals and punishes them without a trial. Confiscatory taxation designed to hit only a small group of people arguably fits that definition.
What should have happened is that at the time of the original bailout, before the Treasury acquired 80% of AIG, all of the employment contracts should have been rendered subject to renegotiation as a precondition to receiving the money. Alas, no one thought of that during the press of events. Too bad, so sad.
Much as it pains my partisan soul, I have to give the Obama administration a pass on this one. By the time Obama was inaugurated in January, the retention bonuses had already been earned.
Instead of grandstanding and hyperventilating about how they are going to get that money back, our elected representatives would more constructively spend their time learning the ins and out of the financial system they are being asked to continue to bail out. Yes the AIG bonuses are outrageous, but in the great scheme of things they are also miniscule.
I would say that Congress has bigger fish to fry, but technically, whales are mammals, not fish.
Tuesday, March 17, 2009
BankTracker: How bad is it at my bank?
I have found a new toy. The BankTracker website has been set up to use publicly available data to rate the health of banks. The site takes information that banks are required to report to the FDIC every quarter, and creates a ratio of troubled assets to capital and reserves.
The troubled assets are defined as loans that have not received a payment in 90 days, loans that are no longer accruing interest (usually this means loans that have not received a payment in 60 days), and the category of other real estate, which means property that the bank has already foreclosed on. The foreclosed property is carried on the books as having a value equal to the outstanding balance of the loan at the time of foreclosure.
The troubled assets are then divided by the combination of Tier 1 capital and loss reserves to come up with a ratio. On the BankTracker website, the ratio is expressed as the percentage of troubled loans to capital. For example, if a bank had $100 million in capital and $10 million in troubled loans, the website reports the ratio as 10. If the website reported the ratio as 130, that would mean that troubled loans were equivalent in value to 130% of the banks capital.
So go ahead and look up your bank and see where they stand. I did, and my bank’s ratio was about 30. Their problem loans add up to about 30% of their capital. Not that bad, although the median for all banks was about 10. Still, my bank has enough capital to ride out the current mess, as long as the number of problem loans doesn’t get worse.
Even banks with ratios over 100 can still survive. If a bank has problem loans in excess of the amount of capital they carry, and cannot recover any of the value of those loans, the bank is technically insolvent. But that doesn’t take into account the recovery value of the assets. Take the other owned real estate (foreclosed properties). If the bank sells those properties for 50 cents on the dollar, they only write off half the value of the property.
For all of the problem loans, they will move from non accruing status to 90 days late, into foreclosure. After foreclosure, they will be other owned real estate. Eventually, the foreclosed houses will sell, and whatever fraction of the loan value the bank recovers will be added to capital.
I don’t know what criteria the FDIC uses to determine their problem bank list. But I would guess that anyone with a problem loan to capital ratio exceeding 150% would be an excellent candidate.
The troubled assets are defined as loans that have not received a payment in 90 days, loans that are no longer accruing interest (usually this means loans that have not received a payment in 60 days), and the category of other real estate, which means property that the bank has already foreclosed on. The foreclosed property is carried on the books as having a value equal to the outstanding balance of the loan at the time of foreclosure.
The troubled assets are then divided by the combination of Tier 1 capital and loss reserves to come up with a ratio. On the BankTracker website, the ratio is expressed as the percentage of troubled loans to capital. For example, if a bank had $100 million in capital and $10 million in troubled loans, the website reports the ratio as 10. If the website reported the ratio as 130, that would mean that troubled loans were equivalent in value to 130% of the banks capital.
So go ahead and look up your bank and see where they stand. I did, and my bank’s ratio was about 30. Their problem loans add up to about 30% of their capital. Not that bad, although the median for all banks was about 10. Still, my bank has enough capital to ride out the current mess, as long as the number of problem loans doesn’t get worse.
Even banks with ratios over 100 can still survive. If a bank has problem loans in excess of the amount of capital they carry, and cannot recover any of the value of those loans, the bank is technically insolvent. But that doesn’t take into account the recovery value of the assets. Take the other owned real estate (foreclosed properties). If the bank sells those properties for 50 cents on the dollar, they only write off half the value of the property.
For all of the problem loans, they will move from non accruing status to 90 days late, into foreclosure. After foreclosure, they will be other owned real estate. Eventually, the foreclosed houses will sell, and whatever fraction of the loan value the bank recovers will be added to capital.
I don’t know what criteria the FDIC uses to determine their problem bank list. But I would guess that anyone with a problem loan to capital ratio exceeding 150% would be an excellent candidate.
Sunday, March 15, 2009
"...and negotiating for the company will be Bobo the chimp."
The big international insurance company AIG made the news again this weekend. No, they didn’t require another round of taxpayer funded bailout money. The $170 billion pumped in during the last three rounds seemed to have stabilized the patient for the time being.
The news this weekend was that AIG was going to pay out $450 million in “retention bonuses” to employees throughout the organization. These bonuses were apparently written into the employment contracts for executives at the various business units that make up AIG.
The amazing part about this is that $165 million of the retention bonus pool is allocated to the people at AIG’s financial products unit in London. These were the brainiacs who made all the bad deals that sunk AIG into such dire straits that they needed the $170 billion in the first place. Apparently the lawyers at AIG headquarters reviewed the employment contracts and concluded, “yup, we gotta pay ‘em.”
These guys in London inked deals that went bad to the tune of $60 billion in the last three months of 2008 alone. But they held their heads high and refused to quit, so by making it to the end of the year, they qualify for “retention bonuses.”
Who writes these contracts? This is the worst case of “head I win, tails you lose” I’ve seen all year.
According to news reports, the retention plan was set up early in 2008, before the realization set in about how bad the losses on the credit default swaps engineered at the financial products unit were going to be. AIG wanted to keep a number of executives from leaving, so the plan was set up to pay retention payments to senior people.
Call me crazy, but I’m not sure I’d want to keep the people around who wrecked the company and wiped out the shareholders. And the people who wrecked the company are still on the payroll, because they have a contract. For some reason, their business performance didn’t qualify as grounds for termination.
It kind of makes you wonder what you have to do to be fired for poor performance. Do you think being caught on videotape cutting a deal with Satan to sell him the souls of your customers would do it? Or would that qualify you for an additional bonus payment for “out of the box” thinking?
I wish I could get my hands on one of those contracts and see what it really says.
The news this weekend was that AIG was going to pay out $450 million in “retention bonuses” to employees throughout the organization. These bonuses were apparently written into the employment contracts for executives at the various business units that make up AIG.
The amazing part about this is that $165 million of the retention bonus pool is allocated to the people at AIG’s financial products unit in London. These were the brainiacs who made all the bad deals that sunk AIG into such dire straits that they needed the $170 billion in the first place. Apparently the lawyers at AIG headquarters reviewed the employment contracts and concluded, “yup, we gotta pay ‘em.”
These guys in London inked deals that went bad to the tune of $60 billion in the last three months of 2008 alone. But they held their heads high and refused to quit, so by making it to the end of the year, they qualify for “retention bonuses.”
Who writes these contracts? This is the worst case of “head I win, tails you lose” I’ve seen all year.
According to news reports, the retention plan was set up early in 2008, before the realization set in about how bad the losses on the credit default swaps engineered at the financial products unit were going to be. AIG wanted to keep a number of executives from leaving, so the plan was set up to pay retention payments to senior people.
Call me crazy, but I’m not sure I’d want to keep the people around who wrecked the company and wiped out the shareholders. And the people who wrecked the company are still on the payroll, because they have a contract. For some reason, their business performance didn’t qualify as grounds for termination.
It kind of makes you wonder what you have to do to be fired for poor performance. Do you think being caught on videotape cutting a deal with Satan to sell him the souls of your customers would do it? Or would that qualify you for an additional bonus payment for “out of the box” thinking?
I wish I could get my hands on one of those contracts and see what it really says.
Saturday, March 14, 2009
Orchestra Tuning (Off-topic Post)
I went to a concert by our local symphony orchestra this evening. Before they began playing the first piece on the program, the musicians did what they do at all symphonies, all over the world. They tuned up their instruments.
Is there any more wonderfully expectant sound in the world than a symphony tuning up? It is a sound latent with all the potential that the future holds.
It is the sound of predawn lightening of darkness, just before the sun breaks over the horizon. It is the sound of the first cup of coffee in the morning, before the day's business begins. It is the sound of the mad scramble to get dressed and ready for an evening out, just before you step out the door.
Often times, I enjoy those moments of anticipation when the orchestra tunes up as much as some parts of the actual program. Judging by the videos that others have posted on YouTube, I'm not the only one.
Is there any more wonderfully expectant sound in the world than a symphony tuning up? It is a sound latent with all the potential that the future holds.
It is the sound of predawn lightening of darkness, just before the sun breaks over the horizon. It is the sound of the first cup of coffee in the morning, before the day's business begins. It is the sound of the mad scramble to get dressed and ready for an evening out, just before you step out the door.
Often times, I enjoy those moments of anticipation when the orchestra tunes up as much as some parts of the actual program. Judging by the videos that others have posted on YouTube, I'm not the only one.
Tuesday, March 10, 2009
We Bring Good Things to Light?
GE stock has fallen precipitously in value over the last year. It was trading at a little over $6 per share last week, having come down from a high of $40+ in 2007. This is the same GE that builds both jet engines and refrigerators, light bulbs and MRI scanners. GE even owns NBC and Universal Studios. They are a leader in globalization, noted for having a deep management bench and the ability to develop talent. GE is one of the few American companies with AAA bond rating. The bluest of the blue chips.
And yet, panic selling drove the price down 45% in one month. This, despite the fact that the company was profitable last year. What gives?
The problem is that GE has xx in assets, but has yy in liabilities. If GE has problems paying back those liabilities, that spells real trouble for the stockholders. In corporate finance, the owners of the liabilities (bondholders) always get paid before the owners of the equity (stockholders). The reason the stock price has fallen so far is that the judgement of the market is that GE’s liabilities won’t be paid back.
You may think “What’s the problem? They’ve got a lot more assets than liabilities.” Well, maybe yes, and maybe no.
GE is really two companies. There is General Electric, which is the collection of industrial businesses that makes all the stuff. They have twice as many assets as liabilities. Then there is GE Capital. GE Capital provided half of GE’s profits for 2007. The problems are in GE Capital portfolio. In the 2007 annual report, GE Capital had $646 billion in assets, and $587 billion in liabilities. If the assets are worth only 10% less than what GE said they were worth a year ago, that would be enough of a fall in value to wipe out GE Capital’s equity, forcing the company to put more cash into the business.
GE Capital uses the AAA rating to borrow money cheaply. They then use that money to make loans. A lot of the loans are equipment leases. You want to lease a jet engine or MRI scanner, GE Capital will help you do that. But they make a lot of other types of loans as well. For a financing company, the money borrowed is a liability, and the loans made are the assets.
The market is concerned about writedowns hidden in the loan portfolio. Another way of saying that is that the assets are worth a lot less than what GE has been saying, and GE will have to ‘fess up soon.
I decided to go looking through the annual report to see if I could spot any potential problems. In corporate annual reports, the pesky details that can cause trouble are usually buried in the notes that follow the financial statements at the back of the report. Opening up the report almost at random, I found Note 12: GECS Financing Receivables.
Inside Note 12 was a line item for a division called GE Money, listing Non-US Residential Mortgages: $73.759 billion. So GE owns a mortgage company that is holding almost $74 billion in mortgages. I’m guessing that most of the mortgages are in the UK.
Attached to the line items was a reference to subnote (A). In little, tiny print, subnote (A) included the following statement: “approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization.”
Yikes. Let me translate that for you: “GE holds over $19 billion dollars of toxic subprime mortgages in a collapsing real estate market.” After those UK homeowners stop paying, GE will foreclose, and then sell the houses for half. My back of the envelope calculation is that GE will have to write down that sliver of their portfolio by about $10 billion dollars. The total reserve for losses in their Financing Receivables is only $4.3 billion.
GE recently eliminated 70% of their dividend. This contributed mightily to the free fall in the stock price, but it will free up $9 billion a year in cash to apply to other uses, like writing off foreclosed mortgages. I have a feeling that they are going to need the cash.
The 2008 annual report is due any day now. I can’t wait to read it.
And yet, panic selling drove the price down 45% in one month. This, despite the fact that the company was profitable last year. What gives?
The problem is that GE has xx in assets, but has yy in liabilities. If GE has problems paying back those liabilities, that spells real trouble for the stockholders. In corporate finance, the owners of the liabilities (bondholders) always get paid before the owners of the equity (stockholders). The reason the stock price has fallen so far is that the judgement of the market is that GE’s liabilities won’t be paid back.
You may think “What’s the problem? They’ve got a lot more assets than liabilities.” Well, maybe yes, and maybe no.
GE is really two companies. There is General Electric, which is the collection of industrial businesses that makes all the stuff. They have twice as many assets as liabilities. Then there is GE Capital. GE Capital provided half of GE’s profits for 2007. The problems are in GE Capital portfolio. In the 2007 annual report, GE Capital had $646 billion in assets, and $587 billion in liabilities. If the assets are worth only 10% less than what GE said they were worth a year ago, that would be enough of a fall in value to wipe out GE Capital’s equity, forcing the company to put more cash into the business.
GE Capital uses the AAA rating to borrow money cheaply. They then use that money to make loans. A lot of the loans are equipment leases. You want to lease a jet engine or MRI scanner, GE Capital will help you do that. But they make a lot of other types of loans as well. For a financing company, the money borrowed is a liability, and the loans made are the assets.
The market is concerned about writedowns hidden in the loan portfolio. Another way of saying that is that the assets are worth a lot less than what GE has been saying, and GE will have to ‘fess up soon.
I decided to go looking through the annual report to see if I could spot any potential problems. In corporate annual reports, the pesky details that can cause trouble are usually buried in the notes that follow the financial statements at the back of the report. Opening up the report almost at random, I found Note 12: GECS Financing Receivables.
Inside Note 12 was a line item for a division called GE Money, listing Non-US Residential Mortgages: $73.759 billion. So GE owns a mortgage company that is holding almost $74 billion in mortgages. I’m guessing that most of the mortgages are in the UK.
Attached to the line items was a reference to subnote (A). In little, tiny print, subnote (A) included the following statement: “approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization.”
Yikes. Let me translate that for you: “GE holds over $19 billion dollars of toxic subprime mortgages in a collapsing real estate market.” After those UK homeowners stop paying, GE will foreclose, and then sell the houses for half. My back of the envelope calculation is that GE will have to write down that sliver of their portfolio by about $10 billion dollars. The total reserve for losses in their Financing Receivables is only $4.3 billion.
GE recently eliminated 70% of their dividend. This contributed mightily to the free fall in the stock price, but it will free up $9 billion a year in cash to apply to other uses, like writing off foreclosed mortgages. I have a feeling that they are going to need the cash.
The 2008 annual report is due any day now. I can’t wait to read it.
Monday, March 9, 2009
Another Step Closer to the Edge
I have encountered more evidence of the incipient collapse of our civilization. Barbie Totally Stylin’ Tattoos. Yes, our friends at Mattel have come up with a doll that little girls can “customize” by covering the toy in designs using the included “tattoo gun.”
Mothers will be so proud of the creative work of their daughters. It just brings a tear to your eye.
What’s next? “Baby’s First Body Piercing” kits?
Mothers will be so proud of the creative work of their daughters. It just brings a tear to your eye.
What’s next? “Baby’s First Body Piercing” kits?
Thursday, March 5, 2009
Not Long Before the End
The final collapse of Western civilization may be near. There are signs and portents, for those who know how to interpret the omens.
Take, for example, the case of Latreasa Goodman. This is a woman in Florida who went to McDonalds and ordered the 10-piece Chicken McNuggets with fries and a drink. After paying for the items she was informed that they were out of McNuggets. The manager refused to give her a refund, instead offering any other item off the menu. Our gal Latreasa did not want any other item, she wanted her McNuggets, or she wanted her money back.
Faced with this impasse, she had at least three choices on how to handle the situation:
A) Take her fries and drink, losing her $3.49, and drive off, never go back to that McDonalds.
B) Choose another item to go with her fries and drink, drive off, and never go back to that McDonalds.
C) Call 911.
Ms. Goodman picked option C. Three times. The first time she called, the 911 operator actually agreed to dispatch a police officer to the scene, but the police apparently did not show up fast enough to suit Ms. Goodman. Hence calls two and three.
When the police finally showed up, they cited Ms. Goodman for abuse of the 911 emergency system. Her riposte is classic: "This is an emergency. If I would have known they didn't have McNuggets, I wouldn't have given my money, and now she wants to give me a McDouble, but I don't want one. This is an emergency."
I love the way she repeated that it was an emergency, just in case they didn’t understand the first time she said it.
The astonishing thing to me is the sense of entitlement possessed by this woman. The cops spent more money in gas driving out to where she was than the value of the dispute, but she obviously didn’t care about anything else other than getting what she wanted.
One lone nut job does not a trend make, I know, but to me this woman epitomizes the trend toward total reliance upon government for the solutions to all problems. God forbid she solve the problem peacefully on her own.
You can listen to recordings of the 911 calls, and see a previous mug shot of Ms. Goodman here.
Take, for example, the case of Latreasa Goodman. This is a woman in Florida who went to McDonalds and ordered the 10-piece Chicken McNuggets with fries and a drink. After paying for the items she was informed that they were out of McNuggets. The manager refused to give her a refund, instead offering any other item off the menu. Our gal Latreasa did not want any other item, she wanted her McNuggets, or she wanted her money back.
Faced with this impasse, she had at least three choices on how to handle the situation:
A) Take her fries and drink, losing her $3.49, and drive off, never go back to that McDonalds.
B) Choose another item to go with her fries and drink, drive off, and never go back to that McDonalds.
C) Call 911.
Ms. Goodman picked option C. Three times. The first time she called, the 911 operator actually agreed to dispatch a police officer to the scene, but the police apparently did not show up fast enough to suit Ms. Goodman. Hence calls two and three.
When the police finally showed up, they cited Ms. Goodman for abuse of the 911 emergency system. Her riposte is classic: "This is an emergency. If I would have known they didn't have McNuggets, I wouldn't have given my money, and now she wants to give me a McDouble, but I don't want one. This is an emergency."
I love the way she repeated that it was an emergency, just in case they didn’t understand the first time she said it.
The astonishing thing to me is the sense of entitlement possessed by this woman. The cops spent more money in gas driving out to where she was than the value of the dispute, but she obviously didn’t care about anything else other than getting what she wanted.
One lone nut job does not a trend make, I know, but to me this woman epitomizes the trend toward total reliance upon government for the solutions to all problems. God forbid she solve the problem peacefully on her own.
You can listen to recordings of the 911 calls, and see a previous mug shot of Ms. Goodman here.
Monday, March 2, 2009
Northern Trust: "Take this TARP and Shove It..."
Two weekends ago Northern Trust sponsored a PGA tournament in LA. As part of their sponsorship, they flew hundreds of their clients and employees out to California for the event. Northern Trust’s guests were put up in fancy hotels, and treated to several parties, with big name entertainment such as the bands Chicago, Earth Wind, and Fire, and Sheryl Crow.
When news of this sponsorship broke, Congressman Barney Frank fired off an outraged letter, demanding that Northern Trust pay the Treasury back the amount that they spent on this event. His position was that since the bank had not refused Federal TARP money last year, it "demonstrates extraordinary levels of irresponsibility and arrogance" for the bank to spend money marketing to it’s clients in a way that Barney Frank disapproved of.
Last week Northern Trust defended itself by pointing out that it was profitable, and that it was funding a marketing plan out of those profits, not out of the TARP bailout money. They also pointed out that the Federal money was actually a loan, and that they had made the interest payments back to the Treasury on time.
Now the other shoe has dropped. This weekend Northern Trust announced that it would be returning the $1.6 billion given to it by the Treasury as soon as possible. In essence, they have told the Federal government “You can take your unsolicited bailout money, and your unsolicited advice on how we should run our business, and put them both where the sun don’t shine!”
Northern Trust does most of its business with institutions and high net worth individuals (AKA rich folks). Thy put the trust in trust funds. The execs at NT must have figured that if they went with the sackcloth and ashes marketing advocated by the new Puritans in Congress and the media, they stood to lose a lot of business. As long as they had the Federal money on their books, they were going to continue being attacked for following a strategy that has made them one of the banks that don’t need a bailout. So to preserve their successful business model, they decided to return the money.
One question pops up for me. Just how much money do you have to have in a bank to get treated like a Northern Trust client? I keep what I consider a fair chunk of money on deposit at my bank, and I don’t get freebies like getting flown out to a California golf tournament, and being put up at the Ritz Carleton. My bank won’t even give me a coupon for the get away weekend at the local Red Roof Inn.
Or how about the Sheryl Crow concert? Shoot, I’d be happy with a Sheryl Crow CD! No, the only freebie I’ve gotten from my bank was a pad of Post-it notes, and I had to distract the banker to get those (“Look, it’s Hailey’s comet!” Point with the left hand, snatch with the right).
When I grow up, I want to be a Northern Trust client.
When news of this sponsorship broke, Congressman Barney Frank fired off an outraged letter, demanding that Northern Trust pay the Treasury back the amount that they spent on this event. His position was that since the bank had not refused Federal TARP money last year, it "demonstrates extraordinary levels of irresponsibility and arrogance" for the bank to spend money marketing to it’s clients in a way that Barney Frank disapproved of.
Last week Northern Trust defended itself by pointing out that it was profitable, and that it was funding a marketing plan out of those profits, not out of the TARP bailout money. They also pointed out that the Federal money was actually a loan, and that they had made the interest payments back to the Treasury on time.
Now the other shoe has dropped. This weekend Northern Trust announced that it would be returning the $1.6 billion given to it by the Treasury as soon as possible. In essence, they have told the Federal government “You can take your unsolicited bailout money, and your unsolicited advice on how we should run our business, and put them both where the sun don’t shine!”
Northern Trust does most of its business with institutions and high net worth individuals (AKA rich folks). Thy put the trust in trust funds. The execs at NT must have figured that if they went with the sackcloth and ashes marketing advocated by the new Puritans in Congress and the media, they stood to lose a lot of business. As long as they had the Federal money on their books, they were going to continue being attacked for following a strategy that has made them one of the banks that don’t need a bailout. So to preserve their successful business model, they decided to return the money.
One question pops up for me. Just how much money do you have to have in a bank to get treated like a Northern Trust client? I keep what I consider a fair chunk of money on deposit at my bank, and I don’t get freebies like getting flown out to a California golf tournament, and being put up at the Ritz Carleton. My bank won’t even give me a coupon for the get away weekend at the local Red Roof Inn.
Or how about the Sheryl Crow concert? Shoot, I’d be happy with a Sheryl Crow CD! No, the only freebie I’ve gotten from my bank was a pad of Post-it notes, and I had to distract the banker to get those (“Look, it’s Hailey’s comet!” Point with the left hand, snatch with the right).
When I grow up, I want to be a Northern Trust client.
Thursday, February 26, 2009
Northern Trust: "I'm shocked, shocked to discover..."
There has been another dust up this week regarding a bank that received Federal money not spending their resources as the legislators would wish. Northern Trust Bank, a Chicago based institution, sponsored a golf tournament in Los Angeles last weekend. As part of their sponsorship, they paid for employees and clients (mostly clients) to fly in for the event. The bank paid for the guests to stay in expensive hotels, and sponsored lavish parties, headlined by the artists Chicago, Earth,Wind & Fire, and Sheryl Crow. Suffice it to say that big bucks were spent, and a good time was had by all.
Since Northern Trust was the recipient of $1.6 billion from last year’s Federal bailout package, outraged howls from Congress ensued when details about the swanky soirees hit the media. Representative Barney Franks, chairman of the House Banking Committee, fired off a letter to Northern Trust, castigating the bank for their “arrogance and irresponsibility” and demanding Northern Trust return to the Treasury a sum equal to what was spent on the event. The letter was cosigned by seventeen other Democratic congressmen.
This is the kind of political grandstanding that explains why politicians should not be in charge of the banking system in this country. Among all the screams of “an outrage, simply an outrage,” and “have they no shame,” several facts about the issue have been drowned out.
First, Northern Trust signed the five year sponsorship contract for this golf tournament in 2007, before the whole banking mess started. Furthermore, blocks of hotel rooms, caterers and bands for events like this are usually booked six months or more in advance, with sizable deposits paid. In other words, these expenses were committed to long before any of the Federal bailout package was even thought of, let alone handed out. What was Northern Trust supposed to do, break the contracts and lose all the prepaid expenses?
Even more important, keep in mind that Northern Trust did not ask for money from the Treasury. Northern Trust is a profitable bank. Even after all the prepaid expenses for the golf event, they earned over $600 million in 2008. They accepted the money from the Treasury’s Troubled Asset Relief Program (TARP) because they were asked to take the money.
The Treasury Department wanted all of the twenty largest financial institutions in the country to take money from the bailout fund. The idea was that if only banks in trouble got bailout funds, it would be a red flag to investors and depositors. The Treasury didn’t want to start a run on the very banks that most needed their help. So banks that did not need a capital infusion were arm-twisted into taking the money, right along with the banks that were on the edge of insolvency. In Northern Trust’s case, the TARP money came in the form of a loan, and they are paying almost $80 million a year back to the Treasury.
I borrowed money from a bank to buy my home. I make my mortgage payments on time, and have never been late. As long as I keep making those payments, I don’t think the bank has a right to tell me I can’t serve steak if I have a barbeque in my backyard. The same principle applies here. Congress (or more to the point, individual representatives) doesn’t have the right to tell profitable businesses how they should operate.
And here’s my final point on the Northern Trust story for today: when Northern Trust throws a big party in LA, doesn’t that stimulate the economy? If you are a hotel maid, or a catering server, or even a roadie for Sheryl Crow, aren’t you benefiting from these parties? Those people have jobs, and are probably grateful to be working in today’s economy.
The US government is about to start spending almost $800 billion on a stimulus package to put people to work. Maybe Congressman Franks should not be in such a big hurry to stop private institutions from doing the same thing.
Since Northern Trust was the recipient of $1.6 billion from last year’s Federal bailout package, outraged howls from Congress ensued when details about the swanky soirees hit the media. Representative Barney Franks, chairman of the House Banking Committee, fired off a letter to Northern Trust, castigating the bank for their “arrogance and irresponsibility” and demanding Northern Trust return to the Treasury a sum equal to what was spent on the event. The letter was cosigned by seventeen other Democratic congressmen.
This is the kind of political grandstanding that explains why politicians should not be in charge of the banking system in this country. Among all the screams of “an outrage, simply an outrage,” and “have they no shame,” several facts about the issue have been drowned out.
First, Northern Trust signed the five year sponsorship contract for this golf tournament in 2007, before the whole banking mess started. Furthermore, blocks of hotel rooms, caterers and bands for events like this are usually booked six months or more in advance, with sizable deposits paid. In other words, these expenses were committed to long before any of the Federal bailout package was even thought of, let alone handed out. What was Northern Trust supposed to do, break the contracts and lose all the prepaid expenses?
Even more important, keep in mind that Northern Trust did not ask for money from the Treasury. Northern Trust is a profitable bank. Even after all the prepaid expenses for the golf event, they earned over $600 million in 2008. They accepted the money from the Treasury’s Troubled Asset Relief Program (TARP) because they were asked to take the money.
The Treasury Department wanted all of the twenty largest financial institutions in the country to take money from the bailout fund. The idea was that if only banks in trouble got bailout funds, it would be a red flag to investors and depositors. The Treasury didn’t want to start a run on the very banks that most needed their help. So banks that did not need a capital infusion were arm-twisted into taking the money, right along with the banks that were on the edge of insolvency. In Northern Trust’s case, the TARP money came in the form of a loan, and they are paying almost $80 million a year back to the Treasury.
I borrowed money from a bank to buy my home. I make my mortgage payments on time, and have never been late. As long as I keep making those payments, I don’t think the bank has a right to tell me I can’t serve steak if I have a barbeque in my backyard. The same principle applies here. Congress (or more to the point, individual representatives) doesn’t have the right to tell profitable businesses how they should operate.
And here’s my final point on the Northern Trust story for today: when Northern Trust throws a big party in LA, doesn’t that stimulate the economy? If you are a hotel maid, or a catering server, or even a roadie for Sheryl Crow, aren’t you benefiting from these parties? Those people have jobs, and are probably grateful to be working in today’s economy.
The US government is about to start spending almost $800 billion on a stimulus package to put people to work. Maybe Congressman Franks should not be in such a big hurry to stop private institutions from doing the same thing.
Monday, February 23, 2009
Sunday, February 22, 2009
Gaming the System
Despite the forest of laws that make up the Federal tax code, on a conceptual level the income tax system is pretty simple.
First, you total up your income. Next, you subtract deductions from income to arrive at your taxable income. Multiply that by the appropriate tax rate, and you arrive at your tax liability. Once you know your tax liability, you apply any applicable tax credits. Credits reduce your tax liability, dollar for dollar. The result of these calculations is the amount of income tax you owe the Federal government.
The last step in the process is to compare the amount of tax you have prepaid (aka withholding) to the amount of income tax you owe. If you had more withheld more than you owe, the IRS sends you a refund. If you withheld less than you owe, you get the pleasure of writing the IRS a check for the difference (cue the wailing and gnashing of teeth).
Clear as mud, right?
For wage slaves like me, and historically for most of us, it was difficult to beat the system. Your employer reported your wages directly to the IRS. For those of us who didn’t get the free use of a car and driver, there wasn’t much chance to under report income, aside from the odd garage sale now and then. You had to be unusually creative to come up with enough deductions to exceed the standard deductions, so that avenue for chicanery was also closed off to most of us.
So most of us were just resigned to paying taxes. Depending on your withholding you might get a big refund or you might have to pay in a little at the end of the year, but unless you owned a business with a lot of cash income, your opportunities for cheating on your taxes were pretty limited.
But with the Earned Income Credit, the opportunities have gotten much broader based. Remember, tax credits affect your tax liability on a dollar for dollar basis. This makes them six to ten times more powerful than hiding income or making up deductions, depending on your tax bracket. At the 15% tax bracket, you have to come up with $6.67 dollars of deductions to reduce your taxes by $1.00. One dollar of tax credit reduces your tax liability by $1.00.
But it gets better, because tax credits come in two flavors: non-refundable and refundable. With non-refundable credits, you can reduce your taxes to zero, but after that they don’t do much good. Once your tax liability is zero, you get your withholding refunded, but that’s all.
But the Earned Income Credit is a refundable credit. This means that even if you owe no taxes, you get the whole credit added to your refund. As an example, suppose an individual is a single parent with two children, and the individual earns $18500 per year. To make ends meet this person has the children enrolled in Medicaid, lives in government subsidized Section 8 housing, and receives food stamps (all non-taxable).
This person would file as head of household with three personal exemptions. With a standard deduction for head of household at $8000, and $10500 in personal exemptions, the taxable income in this case is $0. The individual gets all of their withholding back in the refund. But he also gets $4056 from the government in EIC.
The thing about these credits is that they provide huge incentives to game the system. So in the example I’ve just laid out, if the taxpayer was living with his girlfriend, and she also had earned income, his EIC would be reduced if they got married. If a single parent is living with a partner who pays more than half the household expenses, the parent is ineligible for the EIC. But all you have to do is fail to mention the partner when you do your taxes, and bang-zoom, you get that fat check of free government money.
Let’s say your niece lives with your mother, who is surviving off social security. For tax purposes, you claim that your mother and niece live with you, which makes you eligible to claim the niece for EIC. So what if you moved out of your mom’s house years ago. She doesn’t have earned income, so she can’t take advantage of the credit. Someone has got to take advantage of the government in that family.
The EIC can provide the equivalent of two or three months worth of wages for some low income earners. That’s a pretty strong incentive to cheat the system.
I used to think it was only the wealthy who cheated on their taxes. But anyone can play at being Tom Daschle these days.
First, you total up your income. Next, you subtract deductions from income to arrive at your taxable income. Multiply that by the appropriate tax rate, and you arrive at your tax liability. Once you know your tax liability, you apply any applicable tax credits. Credits reduce your tax liability, dollar for dollar. The result of these calculations is the amount of income tax you owe the Federal government.
The last step in the process is to compare the amount of tax you have prepaid (aka withholding) to the amount of income tax you owe. If you had more withheld more than you owe, the IRS sends you a refund. If you withheld less than you owe, you get the pleasure of writing the IRS a check for the difference (cue the wailing and gnashing of teeth).
Clear as mud, right?
For wage slaves like me, and historically for most of us, it was difficult to beat the system. Your employer reported your wages directly to the IRS. For those of us who didn’t get the free use of a car and driver, there wasn’t much chance to under report income, aside from the odd garage sale now and then. You had to be unusually creative to come up with enough deductions to exceed the standard deductions, so that avenue for chicanery was also closed off to most of us.
So most of us were just resigned to paying taxes. Depending on your withholding you might get a big refund or you might have to pay in a little at the end of the year, but unless you owned a business with a lot of cash income, your opportunities for cheating on your taxes were pretty limited.
But with the Earned Income Credit, the opportunities have gotten much broader based. Remember, tax credits affect your tax liability on a dollar for dollar basis. This makes them six to ten times more powerful than hiding income or making up deductions, depending on your tax bracket. At the 15% tax bracket, you have to come up with $6.67 dollars of deductions to reduce your taxes by $1.00. One dollar of tax credit reduces your tax liability by $1.00.
But it gets better, because tax credits come in two flavors: non-refundable and refundable. With non-refundable credits, you can reduce your taxes to zero, but after that they don’t do much good. Once your tax liability is zero, you get your withholding refunded, but that’s all.
But the Earned Income Credit is a refundable credit. This means that even if you owe no taxes, you get the whole credit added to your refund. As an example, suppose an individual is a single parent with two children, and the individual earns $18500 per year. To make ends meet this person has the children enrolled in Medicaid, lives in government subsidized Section 8 housing, and receives food stamps (all non-taxable).
This person would file as head of household with three personal exemptions. With a standard deduction for head of household at $8000, and $10500 in personal exemptions, the taxable income in this case is $0. The individual gets all of their withholding back in the refund. But he also gets $4056 from the government in EIC.
The thing about these credits is that they provide huge incentives to game the system. So in the example I’ve just laid out, if the taxpayer was living with his girlfriend, and she also had earned income, his EIC would be reduced if they got married. If a single parent is living with a partner who pays more than half the household expenses, the parent is ineligible for the EIC. But all you have to do is fail to mention the partner when you do your taxes, and bang-zoom, you get that fat check of free government money.
Let’s say your niece lives with your mother, who is surviving off social security. For tax purposes, you claim that your mother and niece live with you, which makes you eligible to claim the niece for EIC. So what if you moved out of your mom’s house years ago. She doesn’t have earned income, so she can’t take advantage of the credit. Someone has got to take advantage of the government in that family.
The EIC can provide the equivalent of two or three months worth of wages for some low income earners. That’s a pretty strong incentive to cheat the system.
I used to think it was only the wealthy who cheated on their taxes. But anyone can play at being Tom Daschle these days.
Monday, February 9, 2009
A Noun is the Name of a Thing
I signed on with H&R Block to be a tax preparer this year. I did it both for the experience, which I figured would help with my own taxes, and because I hoped to make a little extra money. As a first year preparer, it turns out I was wrong about making any real money, but that is a topic for another post.
So I have been working part time the last two weeks doing taxes, and have done about 20 returns so far. Most of the people who file early are getting big refunds, but I didn’t realize how big until I started processing their taxes. The vast majority of the tax returns I’ve done have gotten way more money back from the IRS then they paid in withholding.
The language we use around taxes is completely misleading. Take someone who pays $2000 in withholding and gets all $2000 back, plus another $3000 in top of that. Should we be calling that a tax refund? Normally a refund is the return of money paid in. The return of withholding counts as a refund, but what about the other $3000? Instead of calling that part of their refund, wouldn’t it be more accurate to call it welfare?
At an even more basic level, why are we calling everybody taxpayers? Half the households in America pay no income tax. A more accurate term would be tax filers. Actually, if you get more tax money out then you pay in, doesn’t that make you a tax receiver?
I'm not done with the subject of taxes, there will be more to come. By the way, my opinions are my own and in no way should be considered to represent H&R Block in any way.
So I have been working part time the last two weeks doing taxes, and have done about 20 returns so far. Most of the people who file early are getting big refunds, but I didn’t realize how big until I started processing their taxes. The vast majority of the tax returns I’ve done have gotten way more money back from the IRS then they paid in withholding.
The language we use around taxes is completely misleading. Take someone who pays $2000 in withholding and gets all $2000 back, plus another $3000 in top of that. Should we be calling that a tax refund? Normally a refund is the return of money paid in. The return of withholding counts as a refund, but what about the other $3000? Instead of calling that part of their refund, wouldn’t it be more accurate to call it welfare?
At an even more basic level, why are we calling everybody taxpayers? Half the households in America pay no income tax. A more accurate term would be tax filers. Actually, if you get more tax money out then you pay in, doesn’t that make you a tax receiver?
I'm not done with the subject of taxes, there will be more to come. By the way, my opinions are my own and in no way should be considered to represent H&R Block in any way.
Thursday, February 5, 2009
Another Fine Mess
Another Obama nominee has run into tax problems, this time by proxy. The husband of Hilda Solis, the nominee for Labor Secretary, owns an auto repair business in California. It has now come to light that this business had a number of outstanding state and county tax liens against it. The oldest liens were sixteen years old, and the total value of the liens was $7630. According to news reports, Sam Sayyad, Ms. Solis’ husband, was not even aware of the outstanding liens until asked about them.
There are two ways you can look at this story. One, you can spin this into a partisan attack on the administration. “Look at these guys: first Geithner, then Daschle, then Killefer, and now Solis. These guys are all crooks and tax cheats.”
This dog won’t hunt. Daschle and Killefer have withdrawn. This flap about Solis is much ado about nothing. $7630? Please, get serious. If her husband didn’t get something so penny ante resolved before this, it was because he really didn’t know about the tax liens.
I think a more interesting take on the situation was the point I brought up in my last post. Governmental regulation can be so pervasive, and yet so obscure, that even people who intend to be in compliance may not know they are in violation of one regulation or another.
No, Sam Sayyad is not a crook. He is just an honest businessman trying to run his company and make a little money doing it. But if the people on the pro-regulatory side of the aisle can’t keep even with the current level of regulation and taxes, surely that has to be an argument against adding to the burden.
There are two ways you can look at this story. One, you can spin this into a partisan attack on the administration. “Look at these guys: first Geithner, then Daschle, then Killefer, and now Solis. These guys are all crooks and tax cheats.”
This dog won’t hunt. Daschle and Killefer have withdrawn. This flap about Solis is much ado about nothing. $7630? Please, get serious. If her husband didn’t get something so penny ante resolved before this, it was because he really didn’t know about the tax liens.
I think a more interesting take on the situation was the point I brought up in my last post. Governmental regulation can be so pervasive, and yet so obscure, that even people who intend to be in compliance may not know they are in violation of one regulation or another.
No, Sam Sayyad is not a crook. He is just an honest businessman trying to run his company and make a little money doing it. But if the people on the pro-regulatory side of the aisle can’t keep even with the current level of regulation and taxes, surely that has to be an argument against adding to the burden.
Wednesday, February 4, 2009
Trouble in Paradise
Two of President Obama’s appointees withdrew their nominations yesterday. In both cases the reason for their withdrawal was the exposure of problems with filing and paying taxes. Tom Daschle, the former majority leader of the US Senate, pulled out of consideration to be Secretary of Health and Human Services. His tax faux pas was failing to list the use of a car and driver as compensation when he reported his income. The vehicle was provided to Mr. Daschle by one of the companies he worked for. The rule is pretty simple. If you pay for a car and driver yourself, you can use the milage driven for business purposes as a tax deduction. If you accept a car from someone else, the value of that service is compensation, the same as getting paid.
The other nominee was Nancy Killefer, who had been tapped to become the nation’s Chief Performance Officer. Ms. Killefer, a senior partner at the McKinsey management consulting firm, failed to pay the unemployment insurance premiums on her personal household staff of two assistants and a housekeeper.
This is so rich a situation that one scarcely knows where to begin, but time is short, so I’ll start by venting my spleen on the low hanging fruit.
Chief Performance Officer? What the hell kind of job is that? Apparently someone had the bright idea of creating a new position, based in the White House, tasked with finding and eliminating wasteful spending by the government. ‘Cause having Inspector Generals in every government department wasn’t enough. No, we needed a new government waste czar.
Here’s a little hint for you: the position of Chief Performance Officer is a terrific example of government waste. Criminy, the job title is it’s own punchline.
Now let’s talk about the tax issues, starting with Ms. Killefer’s. This is pretty simple. With household help, such as maids, nannies, drivers, cooks, and personal assistants, the rule is pretty simple: either you pay an independent contractor for services rendered, or you have employees. With independent contractors, they have to deal with the taxes and government paperwork on their own. With employees, you have to deal with those hassles for them. Every small business owner in America has learned that lesson.
I can only guess at why Ms. Killefer did not pay the unemployment insurance for her employees. Perhaps she believed that she did not have enough employees to fall under the requirements of the law. The District of Columbia disagreed. The funny thing is that there are employee leasing firms that will handle all of those messy details for you. Heck, any temp agency could have handled the payroll issues, for a markup of the employees’ wages. Why didn’t she just do that?
By the way, did she provide her employees health insurance? That’s a question I’d like to have answered.
Mr. Daschle apparently had the use of the car and driver for three years before he got around to talking to his accountant about it. The value of those services was about $300,000, based on the amount of taxes paid to settle the issue. By the way, this is the same sort of tax issue that fat cat corporate types run into, when they use the company jet to fly their spouses on vacation. If you use the company vehicle for personal purposes, the cost is income to you. Does that make Mr. Daschle a fat cat corporate type?
One Republican has already quipped: “No wonder the Democrats don’t mind raising taxes. They don’t intend to pay them!”
Now, these were probably unintentional violations of local and Federal laws. Both individuals have admitted they made a mistake and made restitution. But these are supposed to be the best and the brightest, and they can’t figure out how to comply with government requirements.
After all, the incoming administration is pro-government regulation. They believe that more government, not less, is the solution to the nation’s problems, yet some of the very people selected to put new programs in place are not in compliance with the existing regulatory scheme.
How will the rest of us cope, after they’ve had more time to put their agenda into place?
The other nominee was Nancy Killefer, who had been tapped to become the nation’s Chief Performance Officer. Ms. Killefer, a senior partner at the McKinsey management consulting firm, failed to pay the unemployment insurance premiums on her personal household staff of two assistants and a housekeeper.
This is so rich a situation that one scarcely knows where to begin, but time is short, so I’ll start by venting my spleen on the low hanging fruit.
Chief Performance Officer? What the hell kind of job is that? Apparently someone had the bright idea of creating a new position, based in the White House, tasked with finding and eliminating wasteful spending by the government. ‘Cause having Inspector Generals in every government department wasn’t enough. No, we needed a new government waste czar.
Here’s a little hint for you: the position of Chief Performance Officer is a terrific example of government waste. Criminy, the job title is it’s own punchline.
Now let’s talk about the tax issues, starting with Ms. Killefer’s. This is pretty simple. With household help, such as maids, nannies, drivers, cooks, and personal assistants, the rule is pretty simple: either you pay an independent contractor for services rendered, or you have employees. With independent contractors, they have to deal with the taxes and government paperwork on their own. With employees, you have to deal with those hassles for them. Every small business owner in America has learned that lesson.
I can only guess at why Ms. Killefer did not pay the unemployment insurance for her employees. Perhaps she believed that she did not have enough employees to fall under the requirements of the law. The District of Columbia disagreed. The funny thing is that there are employee leasing firms that will handle all of those messy details for you. Heck, any temp agency could have handled the payroll issues, for a markup of the employees’ wages. Why didn’t she just do that?
By the way, did she provide her employees health insurance? That’s a question I’d like to have answered.
Mr. Daschle apparently had the use of the car and driver for three years before he got around to talking to his accountant about it. The value of those services was about $300,000, based on the amount of taxes paid to settle the issue. By the way, this is the same sort of tax issue that fat cat corporate types run into, when they use the company jet to fly their spouses on vacation. If you use the company vehicle for personal purposes, the cost is income to you. Does that make Mr. Daschle a fat cat corporate type?
One Republican has already quipped: “No wonder the Democrats don’t mind raising taxes. They don’t intend to pay them!”
Now, these were probably unintentional violations of local and Federal laws. Both individuals have admitted they made a mistake and made restitution. But these are supposed to be the best and the brightest, and they can’t figure out how to comply with government requirements.
After all, the incoming administration is pro-government regulation. They believe that more government, not less, is the solution to the nation’s problems, yet some of the very people selected to put new programs in place are not in compliance with the existing regulatory scheme.
How will the rest of us cope, after they’ve had more time to put their agenda into place?
Thursday, January 29, 2009
Viscous circles, Virtuous Cycles, and the Stimulus
The US House passed a $813 billion dollar stimulus package spending bill yesterday. The vote went along party lines, with the Republicans, in a remarkable show of party unity, voting 100% opposed. It will now proceed on to the Senate.
There has been a steady drumbeat of bad economic news in the last few weeks, with a number of major companies, from Alcoa to Starbucks, announcing major job cuts. Both consumer and business confidence are at low ebbs. So I think a stimulus package is probably a good thing at this point. But I think there hasn’t been much discussion about the purpose behind the stimulus. Put another way, what is the stimulus intended to accomplish?
Most of the rhetoric has been about job creation. The debate has been couched in terms of what puts people back to work faster, spending or tax cuts. My perspective is that the emphasis on job creation is misplaced. As a conservative, I would argue that the purpose of government is not to guarantee everybody a job (an impossible task in any case). The major purpose of government is to safeguard our liberties, with a minor in promote the general welfare.
The purpose of the stimulus should be to create an inflection point in the general trend line of the economy. To do that, we need to break up the current negative feedback loop driving decision making.
I can see my mother now, saying “What the Hell does that mean?”
First, let’s talk about inflection points. Anytime you look at a graph, the line is trending downward over time, or it is trending upwards over time. If you have a graph that shows both, the spot where the trend changes from down to up or up to down is the inflection point. The economy is trending down right now, and from the news, it is trending down pretty steeply. What the stimulus should do is reverse that trend, to get the economy growing again. That will be difficult because the downward trend is being fed by a negative feedback loop.
Here is the mechanism at work: demand is soft, so companies layoff workers. Once they are laid off, those workers cut back on their spending. Since they are not spending, demand for products and services drops further. With lower demand, more companies announce layoffs, leading to another round of reduced spending, lower demand, and more layoffs. The cycle feeds on itself. Another term for a negative feedback loop is a viscous circle.
Adding to the problem are the effects of fear. People who haven’t lost their jobs yet say “I could be next,” and cut back on their spending as well to conserve cash. This is perfectly natural (by which I mean I’m doing it too), but it steepens the decline.
In a growing economy, as demand increases, businesses hire more employees. Those new employees start spending more, increasing demand, leading to more hiring, driving spending higher, and so on. This is a positive feedback loop, also known a virtuous cycle. Once businesses increase in confidence, they start investing in capital. Capital investment both drives the cycle higher and leads to productivity improvement, bringing higher standards of living as well as more jobs.
The emphasis on turning the economy around versus merely creating jobs is critical. A goal of job creation will lead to an expansion of government payrolls. The easiest way to make sure everyone has a job is to keep hiring. But once you add government positions, it is hard to remove them. You end up with higher government costs for the long term.
An emphasis on a short term surge to kick start the private sector leaves the long term heavy lifting to the private sector. And it is the private sector which will develop the productivity improvements that will raise living standards in the long run.
There has been a steady drumbeat of bad economic news in the last few weeks, with a number of major companies, from Alcoa to Starbucks, announcing major job cuts. Both consumer and business confidence are at low ebbs. So I think a stimulus package is probably a good thing at this point. But I think there hasn’t been much discussion about the purpose behind the stimulus. Put another way, what is the stimulus intended to accomplish?
Most of the rhetoric has been about job creation. The debate has been couched in terms of what puts people back to work faster, spending or tax cuts. My perspective is that the emphasis on job creation is misplaced. As a conservative, I would argue that the purpose of government is not to guarantee everybody a job (an impossible task in any case). The major purpose of government is to safeguard our liberties, with a minor in promote the general welfare.
The purpose of the stimulus should be to create an inflection point in the general trend line of the economy. To do that, we need to break up the current negative feedback loop driving decision making.
I can see my mother now, saying “What the Hell does that mean?”
First, let’s talk about inflection points. Anytime you look at a graph, the line is trending downward over time, or it is trending upwards over time. If you have a graph that shows both, the spot where the trend changes from down to up or up to down is the inflection point. The economy is trending down right now, and from the news, it is trending down pretty steeply. What the stimulus should do is reverse that trend, to get the economy growing again. That will be difficult because the downward trend is being fed by a negative feedback loop.
Here is the mechanism at work: demand is soft, so companies layoff workers. Once they are laid off, those workers cut back on their spending. Since they are not spending, demand for products and services drops further. With lower demand, more companies announce layoffs, leading to another round of reduced spending, lower demand, and more layoffs. The cycle feeds on itself. Another term for a negative feedback loop is a viscous circle.
Adding to the problem are the effects of fear. People who haven’t lost their jobs yet say “I could be next,” and cut back on their spending as well to conserve cash. This is perfectly natural (by which I mean I’m doing it too), but it steepens the decline.
In a growing economy, as demand increases, businesses hire more employees. Those new employees start spending more, increasing demand, leading to more hiring, driving spending higher, and so on. This is a positive feedback loop, also known a virtuous cycle. Once businesses increase in confidence, they start investing in capital. Capital investment both drives the cycle higher and leads to productivity improvement, bringing higher standards of living as well as more jobs.
The emphasis on turning the economy around versus merely creating jobs is critical. A goal of job creation will lead to an expansion of government payrolls. The easiest way to make sure everyone has a job is to keep hiring. But once you add government positions, it is hard to remove them. You end up with higher government costs for the long term.
An emphasis on a short term surge to kick start the private sector leaves the long term heavy lifting to the private sector. And it is the private sector which will develop the productivity improvements that will raise living standards in the long run.
Tuesday, January 27, 2009
Ski Trip '09
I just got back from my annual ski trip this weekend. Although I live in Tennessee, I still go out with the Ski Club of Sarasota. This marked my nineteenth year of going skiing with the club. This year I went on one of the trips organized by the Florida Ski Council. The Council puts together several trips a year where all of the member clubs send a contingent. This allows the Council to pool the buying power of the various clubs, and negotiate a better deal from the ski area.
This year’s trip was to Snowmass, a resort located near Aspen.
Now, the thing about skiing is that after you schuss down the hill, you have to spend about seven to ten minutes riding the ski lift back up the hill. Since you get on the lift in the order in which you reach the bottom of the run, the people who ride up with you are a pretty random assortment of the people who are skiing that day.
It is very quiet on the lift, so I kill time by yakking with my fellow passengers. It was an interesting cross section of Americans, with more than a few Australians thrown in. A couple of quick impressions were formed:
A ski vacation to a destination resort like Snowmass is an expensive undertaking. With everything in, from airport parking and baggage charges down to the $23 cheeseburger lunch on the mountain, I dropped about $2000 per person for the trip. In tough economic times, you would expect a big ticket discretionary expense like a ski vacation to be dropped by a lot of people. Anecdotally, this appeared to be the case, as a number of my fellow travelers noted the complete lack of lift lines. This was confirmed by one property manager I rode up with, as he told me bookings in the properties he managed were off by over 30%.
Counterintuitively, this same property manager told me that some of the owners he represented were turning down low-ball offers to rent houses. These owners would turn down valid offers at below the listed rental rate, preferring to take themselves out of the market before they cut their price. I can only conclude that represents either A) a failed negotiation: the owners who turned down the offer will wish they had accepted it when no other offers come along; or B) the owners do not care if their property is drawing an income or not.
Since houses in the Aspen area sell for millions of dollars, proposition B supposes that there is a significant population of owners who can afford to park millions of dollars of equity into property that they only use a few weeks out of the year.
I’m in the wrong line of work!
This year’s trip was to Snowmass, a resort located near Aspen.
Now, the thing about skiing is that after you schuss down the hill, you have to spend about seven to ten minutes riding the ski lift back up the hill. Since you get on the lift in the order in which you reach the bottom of the run, the people who ride up with you are a pretty random assortment of the people who are skiing that day.
It is very quiet on the lift, so I kill time by yakking with my fellow passengers. It was an interesting cross section of Americans, with more than a few Australians thrown in. A couple of quick impressions were formed:
A ski vacation to a destination resort like Snowmass is an expensive undertaking. With everything in, from airport parking and baggage charges down to the $23 cheeseburger lunch on the mountain, I dropped about $2000 per person for the trip. In tough economic times, you would expect a big ticket discretionary expense like a ski vacation to be dropped by a lot of people. Anecdotally, this appeared to be the case, as a number of my fellow travelers noted the complete lack of lift lines. This was confirmed by one property manager I rode up with, as he told me bookings in the properties he managed were off by over 30%.
Counterintuitively, this same property manager told me that some of the owners he represented were turning down low-ball offers to rent houses. These owners would turn down valid offers at below the listed rental rate, preferring to take themselves out of the market before they cut their price. I can only conclude that represents either A) a failed negotiation: the owners who turned down the offer will wish they had accepted it when no other offers come along; or B) the owners do not care if their property is drawing an income or not.
Since houses in the Aspen area sell for millions of dollars, proposition B supposes that there is a significant population of owners who can afford to park millions of dollars of equity into property that they only use a few weeks out of the year.
I’m in the wrong line of work!
Thursday, January 15, 2009
"Who is this guy FICA..."
Timothy Geithner, the president of the Federal Reserve Bank of New York, is Barack Obama’s nominee to become the next Treasury Secretary, i.e., the guy who hands out all the fat checks of bailout money. During his confirmation hearings, it has come to light that he filed his taxes improperly for three years running, and had to pay a bunch of back taxes. With interest.
Here’s what happened: In 2001, 2002, and 2003, Geithner was employed by the International Monetary Fund. Because the IMF is an international organization, they do not collect Social Security and Medicare taxes from their US employees (I remember the Friends episode where Rachel got her first paycheck ever: “Who is this guy FICA, and why does he get so much of my money”).
Now, the US employees of international organizations such as the IMF are not exempted from Social Security and Medicare taxes. Instead, even though the employees get a W-2, they also have to pay self employment taxes. That tax rate is about 15%, because the employee pays both halves: the half that is normally withheld from a paycheck, and the half that the employer normally pays without reporting it on the pay stub.
I remember the first time my wife took a foray into owning her own business, and encountered this self employment tax. Wife (in tears): “I worked so hard for that money. Now I have to pay 15%, plus more for income taxes? I don’t think it’s fair for the government to get so much of my money.” Husband: “Welcome to the Republican Party, my love.” But I digress.
Apparently, Mr. Geithner failed to report this self employment tax for those three years (plus a small portion of 2004, but who’s counting?). He did his taxes himself for 2001, and then used an accountant for 2002 and 2003 tax years. This oddity of being an employee, but still having to pay self employment taxes, only hits a few people. So it is perhaps understandable that both he and his accountant missed it. When the IRS caught up with him, he ‘fessed up and paid a settlement. No harm, no foul, right? Anybody can make a mistake, right?
Except that there are a couple of things that stand out in this situation.
First of all, the Treasury Secretary oversees the Internal Revenue Service. Shouldn’t the guy overseeing tax collection be able to, oh, I don’t know, do his own taxes without screwing it up?
Secondly, it turns out that the people who run the payroll at the IMF do know about this self employment tax loophole. For the US employees who have to pay the self employment tax, they add money to your salary to cover the 7.5% that the employer normally pays. The practice is called “grossing up,” as in they increase your gross pay by 7.5%.
Where it gets really interesting is that the gross up pay is paid out quarterly. So this raises the question: what did Geithner think those extra payments were for? Good behavior?
Think back sixteen years. When Bill Clinton was elected, his first pick for Attorney General was Zoe Baird. Ms. Baird, a high powered corporate attorney of considerable experience, was torpedoed when it came to light during the confirmation process that she had used an undocumented immigrant as household staff for several years, and that she had failed to pay the proper taxes for her employee. It was felt that the most senior law enforcement official in the US shouldn’t be someone who had broken the law.
Sixteen years later, a completely different political climate reigns. Mr. Geithner is almost certainly going to sail on to confirmation in the Senate. Still, it makes me wonder. How many other US employees of the IMF have gotten their taxes wrong this way?
Here’s what happened: In 2001, 2002, and 2003, Geithner was employed by the International Monetary Fund. Because the IMF is an international organization, they do not collect Social Security and Medicare taxes from their US employees (I remember the Friends episode where Rachel got her first paycheck ever: “Who is this guy FICA, and why does he get so much of my money”).
Now, the US employees of international organizations such as the IMF are not exempted from Social Security and Medicare taxes. Instead, even though the employees get a W-2, they also have to pay self employment taxes. That tax rate is about 15%, because the employee pays both halves: the half that is normally withheld from a paycheck, and the half that the employer normally pays without reporting it on the pay stub.
I remember the first time my wife took a foray into owning her own business, and encountered this self employment tax. Wife (in tears): “I worked so hard for that money. Now I have to pay 15%, plus more for income taxes? I don’t think it’s fair for the government to get so much of my money.” Husband: “Welcome to the Republican Party, my love.” But I digress.
Apparently, Mr. Geithner failed to report this self employment tax for those three years (plus a small portion of 2004, but who’s counting?). He did his taxes himself for 2001, and then used an accountant for 2002 and 2003 tax years. This oddity of being an employee, but still having to pay self employment taxes, only hits a few people. So it is perhaps understandable that both he and his accountant missed it. When the IRS caught up with him, he ‘fessed up and paid a settlement. No harm, no foul, right? Anybody can make a mistake, right?
Except that there are a couple of things that stand out in this situation.
First of all, the Treasury Secretary oversees the Internal Revenue Service. Shouldn’t the guy overseeing tax collection be able to, oh, I don’t know, do his own taxes without screwing it up?
Secondly, it turns out that the people who run the payroll at the IMF do know about this self employment tax loophole. For the US employees who have to pay the self employment tax, they add money to your salary to cover the 7.5% that the employer normally pays. The practice is called “grossing up,” as in they increase your gross pay by 7.5%.
Where it gets really interesting is that the gross up pay is paid out quarterly. So this raises the question: what did Geithner think those extra payments were for? Good behavior?
Think back sixteen years. When Bill Clinton was elected, his first pick for Attorney General was Zoe Baird. Ms. Baird, a high powered corporate attorney of considerable experience, was torpedoed when it came to light during the confirmation process that she had used an undocumented immigrant as household staff for several years, and that she had failed to pay the proper taxes for her employee. It was felt that the most senior law enforcement official in the US shouldn’t be someone who had broken the law.
Sixteen years later, a completely different political climate reigns. Mr. Geithner is almost certainly going to sail on to confirmation in the Senate. Still, it makes me wonder. How many other US employees of the IMF have gotten their taxes wrong this way?
Monday, January 12, 2009
Bernie Madoff's Victims
I’ve been reading a lot about Bernie Madoff in the news recently. Bernie is the Wall Street financier who has owned a securities trading firm for four decades. He was one of the pioneers of electronic trading, and was actually president of the NASDAQ organization for a couple of years. As a market maker, he was one of the most respected members of the Wall Street finance community.
He also ran a money management firm, noted for taking cash from wealthy individuals and other money management firms and producing consistent, steady returns of 1% to 2% a month.
Except that it now appears that Bernie wasn’t actually investing the money he was given. He was making up the posted gains, and using the money new investors gave him to pay cash distributions to older investors. A Ponzi scheme. The biggest, longest lasting Ponzi scheme in history.
So now I am reading stories from people who lost everything from a couple of hundred thousand dollars to a couple of million dollars up to institutions that have lost billions of dollars. Estimates of total losses have run as high as $50 billion dollars.
But here’s what I want to know: Can you truly lose money that you never had? For example, I read one account of an investor who put $25,000 into a fund that invested with Madoff in 1992. Even though the investor pulled out cash distributions every year, his investment had grown to $150,000. In his account, the investor said he had lost all $150,000.
The thing is, the investor never had $150,000. He only thought he had that much because Madoff told him he had that much. The most he ever had at risk was the original $25,000, and he had probably gotten most of that back in distributions over the years. So what is the true loss?
A Ponzi scheme is essentially a zero sum game. A zero sum game is one where the winnings of some of the players are offset by the losses of the other players. The individual running the scheme, in this case, Bernie Madoff, takes a cut off the top. Madoff’s skim, however, appears to be miniscule compared with the sums invested. I mean, the guy lived well, but not that well.
When all the forensic accounting is completed, the losses of later investors are going to be balanced with the gains of the earlier investors. And once that accounting is done, the losers are going to hire lawyers and try and get their money back from the winners.
Thousands of plaintiffs and defendants, all using lawyers to fight over money. Now that’s not a zero sum game. That’s a negative sum game.
Except for the lawyers.
He also ran a money management firm, noted for taking cash from wealthy individuals and other money management firms and producing consistent, steady returns of 1% to 2% a month.
Except that it now appears that Bernie wasn’t actually investing the money he was given. He was making up the posted gains, and using the money new investors gave him to pay cash distributions to older investors. A Ponzi scheme. The biggest, longest lasting Ponzi scheme in history.
So now I am reading stories from people who lost everything from a couple of hundred thousand dollars to a couple of million dollars up to institutions that have lost billions of dollars. Estimates of total losses have run as high as $50 billion dollars.
But here’s what I want to know: Can you truly lose money that you never had? For example, I read one account of an investor who put $25,000 into a fund that invested with Madoff in 1992. Even though the investor pulled out cash distributions every year, his investment had grown to $150,000. In his account, the investor said he had lost all $150,000.
The thing is, the investor never had $150,000. He only thought he had that much because Madoff told him he had that much. The most he ever had at risk was the original $25,000, and he had probably gotten most of that back in distributions over the years. So what is the true loss?
A Ponzi scheme is essentially a zero sum game. A zero sum game is one where the winnings of some of the players are offset by the losses of the other players. The individual running the scheme, in this case, Bernie Madoff, takes a cut off the top. Madoff’s skim, however, appears to be miniscule compared with the sums invested. I mean, the guy lived well, but not that well.
When all the forensic accounting is completed, the losses of later investors are going to be balanced with the gains of the earlier investors. And once that accounting is done, the losers are going to hire lawyers and try and get their money back from the winners.
Thousands of plaintiffs and defendants, all using lawyers to fight over money. Now that’s not a zero sum game. That’s a negative sum game.
Except for the lawyers.
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