Andy Kessler

Marketplace Radio: Reform won't change Wall Street pay

Marketplace Radio

12:00 minute mark.

WSJ: Bank Pay Controls Aren't the Answer

In his weekly radio address on Saturday, President Barack Obama said that "we cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess." A day earlier, Treasury Secretary Tim Geithner told the New York Times that "you don't want people being paid for taking too much risk."

So now the administration wants to control the pay of employees of banks and Wall Street investment firms.

Kenneth Feinberg, the administration's "pay czar," is being tasked to oversee employee compensation at firms that took bailout money from the government's Troubled Asset Relief Program (TARP). The Federal Reserve will require thousands of bank holding companies and state banks to submit their compensation plans for approval.

The administration has it wrong. It wasn't reckless schemes and excessive risk that sunk banks and Wall Street; it was excessive leverage. And thanks to cheap money and twisty regulations, risk was extremely undervalued. Banks owned huge portfolios of real-estate loans and mortgages specifically because they, and regulators, didn't think they were taking much risk at all.

Outlaw pay and pay will only go to those outside the reach of the law

Populist pay limits are squarely aimed at Wall Street, not local banks, yet for the most part Wall Street doesn't take much risk. Highly profitable investment banking and sales and trading are agency businesses, doing work for customers for a fee. Of course bad trades happen, and there are the rare rogue traders like Barings' Nick Leeson, who hid losses and sunk the firm, or Jérôme Kerviel, the young trader who lost $7 billion for the French bank Société Générale. But Wall Street firms are quite good at managing day-to-day trading risk.

Forbes: Lehman and Meritocracy

 

http://www.forbes.com/2009/09/14/lehman-brothers-goldman-sachs-bankruptcy-anniversary-opinions-contributors-andy-kessler.html

Part of the charm of Wall Street, and what scares most reasonable people away, is that it is as close to a meritocracy as exists on this earth. It's dog eat dog. It's sink or swim. You do a trade and it makes money, then you're a hero (for a moment anyway) and deserve a bonus. You bring in a deal, you get paid. You lasso more clients' assets under your firm's roof, you're a hitter. I once discovered some good news on the stocks I followed before the rest of the Street, and mentioned it to the sales force at a morning meeting and moved markets in New York, Tokyo and London. I had the head of global equities pat my head on the elevator ride up the next morning. Pat my head! I was told he never does that.

The flip side, of course, is what makes Wall Street so dangerous. You lose money for the firm and you're a heel. Do it again and you don't get paid that year. Do it a third time and you're out of a job. Just like that. Gone. I've seen it happen to friends and acquaintances at just about every firm up and down Wall Street. There is no tenure on Wall Street, no job security, no long-term guarantees. Ten- and 20-year careers end in a flash. Happens all the time, and everybody who works in the business knows this.

That's one reason why everyone is paid so well. Think of it as combat pay. But the other reason compensation is many, many multiples of the average wage in this country is that trading stocks, doing IPOs, merging companies, managing money is a very lucrative business. Not everyone can do it. It looks easy, football-field-sized trading rooms jammed with adrenalin-rush maniacs sitting in front of huge LCD screens. It might as well be a call center in Mumbai. But it's hard. Really nasty hard. Wall Street hires in that 99 percentile zone. And then they make your life miserable hoping you'll quit before they break you. Or hoping they break you before you lose money for the firm. It's not WalMart or General Motors or even Pfizer or Intel. It's trial by fire.

WSJ: Why AT&T Killed Google Voice

Earlier this month, Apple rejected an application for the iPhone called Google Voice. The uproar set off a chain of events—Google's CEO Eric Schmidt resigning from Apple's board, and the Federal Communications Commission (FCC) investigating wireless open access and handset exclusivity—that may finally end the 135-year-old Alexander Graham Bell era. It's about time.

With Google Voice, you have one Google phone number that callers use to reach you, and you pick up whichever phone—office, home or cellular—rings. You can screen calls, listen in before answering, record calls, read transcripts of your voicemails, and do free conference calls. Domestic calls and texting are free, and international calls to Europe are two cents a minute. In other words, a unified voice system, something a real phone company should have offered years ago.

 Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that's nothing—hence Google's proposal to offer voice calls for no cost and heap on features galore.

What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.

For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%. With customers unplugging home phones and using flat-rate Internet services for long-distance calls (again, voice is just data), AT&T's wireline operating income is down 36%. Even in the wireless segment, which grew 10% overall, per-customer voice revenue is down 7%.

Forbes.com - Thankfully, That's Not The Way It Was

http://www.forbes.com/2009/07/20/walter-cronkite-obituary-media-opinions-contributors-mediocrity.html

I've always had a problem with Walter Cronkite. He had this mind-meld grip on the brain of everyone, including me, who came of age in the 1960s and 1970s, with his subliminal promotion of mediocrity and complacency that kept an entire generation in the doldrums. And no, I'm not talking about his views on the Vietnam War and LBJ's line "If I've lost Cronkite, I've lost middle America." That was just noise.

Look, the guy could read the news okay. It's not rocket science. "Uncle Walter" had the anchor seat on the CBS Evening News from 1962 to 1981, back when people actually watched the news on television. How quaint. Seven o'clock, right after the local news. Like clockwork, finish dinner, put on Cronkite. And he was good--heck, he was the master. He taught himself to speak slowly, with a half regal, half Midwestern accent, so he could penetrate American minds, and infect them with his mystical powers of persuasion.

Am I talking about liberal media bias? No. C'mon, stay with me here. Every night, right after the news stories and vignettes on acid rain and student protests and Dan Rather in the jungles of Vietnam and crumbling cities and heroin epidemics and exposés on Watergate and fraud and corruption and burning slums, Walter Cronkite would turn to the camera, and with almost undisguised smugness, tell me, right to my face, "... And that's the way it is."

Liberal schmiberal. That was a cover. He was the voice of the establishment, The Man trying to keep us down. And there's nothing we could do about it because that's the way it is. And I believed him. We all did. A conspiracy by advertisers on his show? Who knows, but it took me a long time to break out of his trance.

WSJ: The Bernanke Market

http://online.wsj.com/article/SB124762005061042587.html

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

Technology Review: A Pound of Cure

http://www.technologyreview.com/computing/22852

The federal government is about to spend big on health-care IT. Too bad the medical industry has a vested interest in inefficiency.

Technology is once again being touted as a cure-all, this time for what ails the American health-care industry. The Obama administration's $787 billion stimulus plan includes $19 billion for health-care IT spending that provides incentives for doctors and hospitals to adopt electronic health records. Starting in 2011, stimulus funds will provide additional Medicare and Medicaid reimbursements for health-care providers using such systems.

These federal funding programs assume that the critical hurdle to widespread adoption of electronic medical records is cost. Indeed, hospitals surveyed in a study published last year in the Journal of the American Medical Association reported cost as the major barrier. Yet compared with other businesses, the health-care industry has been unmoved by the logic of lowering costs to increase profits. The truth is that these folks could have digitized the whole industry ages ago. The technology has been around for a long time: Wall Street began phasing out physical stock certificates over 35 years ago. Even the cash-strapped airline industry has gone ticketless, removing huge labor and overhead costs. These industries started using electronic records because they believed it would save money. The health-care industry simply has not followed suit.

The reason lies neither with cost nor with inadequate technology. Rather, the health-care industry's reluctance to digitize its records is rooted in a desire to keep medicine's lucrative business model hidden. Dangling $19 billion in front of a $2.4 trillion industry is not nearly enough to get it to reveal the financial secrets that electronic health records are likely to uncover--and upon which its huge profits depend. In those medical records lie the ugly truth about the business of medicine: sickness is profitable. The greater the number of treatments, procedures, and hospital stays, the larger the profit. There is little incentive for doctors and hospitals to identify or reduce wasteful spending in medicine.

Forbes.com - The Inevitability Of Internet Pirates

Pirates are all over the news this year. They were off the coast of Somalia … and now they're in Sweden? In April, a Stockholm court handed down a guilty verdict for "accessory and conspiracy to break copyright law" to the four owners of the Web site Pirate Bay, who now each face up to one year in prison.

Their crime? Setting up a site that allows 22 million users--and that number is growing--to search for and find pointers to (mostly) copyrighted material on the Internet. These so-called torrents are easily downloadable, perfect digital copies of music, TV shows, movies and, as it's known on the Web, pr0n. Outraged at their courts, Swedish citizens got the last laugh when the three-year-old Pirate Party received 7.1% of the vote in the early June European Union elections, guaranteeing it a seat in the European Parliament. Argh.

The funny thing is, Pirate Bay doesn't even host any copyrighted material for download, only directions to find it. If I were Google CEO Eric Schmidt, I'd hold off on that trip to Europe this summer. Because type "The Climb lyrics" into Google and you get pages of links to other Web sites with copyrighted lyrics to this Miley Cyrus song. Type in "Hannah Montana the Movie torrent," and you have a choice of download sites for a copy of the movie, all one click away. That's "accessory and conspiracy," if you ask me.

Fortunately, we in the U.S. rarely pay attention to Swedish laws. Did you know it's illegal in Sweden to repaint a house without a license and the government's permission? But along the lines of Supreme Court Justice Ruth Bader Ginsburg's remark--"Why shouldn't we look to the wisdom of a judge from abroad with at least as much ease as we would read a law review article written by a professor?"--I say bring on the Pirate Party!

CNBC: Fast Money - Bull Market or BS?

18:00 minute mark...

WSJ: Was It A Sucker's Rally?

The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

Only a fool predicts the stock market, so here I go.

I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:

1) Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.