Trade tariff battle will not lead to any long-term damage

Posted on by j.giglio

President Trump’s views on trade have never been a secret. Trump finally delivered on his campaign promises by announcing unilateral tariffs on steel and aluminum imports coupled with the imposition of about $60 billion in new tariffs on China. The moves generated frightening headlines, with experts predicting they will have dire consequences for the global trading system, but such claims are exaggerated.

Trade is a competitive game and every country plays hardball. The Trump policy is supposedly designed to counter a series of unfair Chinese trade practices, such as its longstanding restrictions on American companies, the forced transfer of American intellectual property, and many cases of patent and trademark infringement. The administration has demanded that China shave $100 billion off its record $375 billion trade surplus with the United States.

U.S. firms have been unable to sell advanced goods and services to China’s rapidly expanding middle class. It is widely acknowledged that in many market segments China requires foreign firms to share proprietary technology as a  condition of market access. The firms provide innovation and their Chinese counterparts imitate foreign design.

Many of the president’s media antagonists say these actions threaten to unleash a trade war; that the  moves appease the resident’s Rust Belt constituency but are unlikely to end America’s trade deficits or bring back manufacturing jobs. They also warn of rising consumer prices and are convinced that the U.S. would lose a trade war with the emerging market giant.

Yet it is unclear whether the president and the economic  nationalists in his administration will govern as tough as they talk. It is quite possible that actual tariffs will fall short of  the threats. For example, the tensions with American allies generated by the steel and aluminum tariffs are likely to be resolved through cometic concessions.

Following the president’s tariff announcement, China initially targeted tit-for-tat tariffs to put pressure on politically sensitive states that voted for Trump, hitting him where it hurts the most ahead of mid-term elections later this year. China’s Ministry of Commerce quickly said that it would impose a 15 percent tariff on $3 billion worth of American fruit, pork, wine, seamless steel pipes and more than 100 other products that represent about 2 percent of total American exports to China.

But soon after all this huffing and puffing, China’s Premier Li Keqiang, at a conference that included global chief executive officers at the Great Hall of the People in Beijing, pledged to open markets to avert a trade war with the United States and to ease access for American businesses. Also, China offered to buy more American made semiconductors and allow foreign financial firms to take majority stakes in Chinese securities firms.

Then on April 1, the Chinese Finance Ministry said the previously announced tariffs will take effect immediately.

China is reliant on foreign trade for growth and job creation and needs to retain access to the U.S. market. The country certainly doesn’t want to engage in a trade  war with its best customer. China’s exports to the U.S. are equal to about 4.5 percent of its GDP. In contrast, U.S. exports to China are equal to about two-thirds of 1 percent of GDP. Although less important to the economy than it was, trade accounts for almost 40 percent of Chinese GDP versus less than 30 percent in the U.S.

America’s decline relative to other countries is an old story. First the Russians were going to leave the U.S. in the dust, then the Japanese. But consider the strong and intrinsic advantages America enjoys. They include being functionally energy and agriculturally independent, having more favorable demographics and a consensual society. Drug dealers still prefer suitcases full of dollars, not yuan, and global investors still seek Treasury bonds as a safe haven in times of crisis.

President Trump’s trade moves may temporarily roil U.S. markets, but there is no need to panic or bet against the United States.

Originally Published: Apr 7, 2018

The eye-for-an-eye approach to trade

Posted on by j.giglio

On March 8, America’s populist-in-chief signed an executive order slapping a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. President Trump said he did it to protect the nation’s economic and national security. It came a little over a month after Trump said he would impose tariffs and quotas on imported solar panels and washing machines.

The United States has had the world’s largest trade deficit ever since 1975. In 2017 imports were about $2.9 trillion and exports were just over $2.3 trillion, as Americans continue to consume more than we produce.

The steel and aluminum tariffs have aroused little enthusiasm and much criticism. Naysayers argue they will do nothing to strengthen America’s economy or national security, and spark a global trade war. They say the tariffs will result in higher prices as steel users pass costs onto consumers.

Supporters claim there already is a trade war underway and it is being waged by China. That country accounts for more than two-thirds of America’s current trade deficit. We import $506 billion – mainly consumer electronics, clothing, and machinery – from China, but export only about $131 billion in goods.

China has been blocking high-value exports from the United States. For example, it charges a 25 percent import duty on cars, 10 times the 2.5 percent levy the United States puts on imported vehicles.

China also imposes steep tariffs on imported automobile parts. As Elon Musk tweeted, “No US auto company is allowed to own even 50% of their own factory in China but there are five 100% China-owned EV auto companies in the US.” Obviously, engaging in tough trade talks with China is long overdue.

It will take years for the United States, China and the global trading system to work out imbalances on a wide range of goods. America’s prosperity depends on a robust approach to correct failed trade policies, with a focus on the industries of the future. It makes no sense for America to excel at innovation without securing the domestic and foreign markets for its products.

It merits mentioning that instances in which American companies ship raw materials to China for assembly at a lower cost, then sell the finished products count as imports. American multi-national companies are happy to hire foreign workers from emerging markets with lower standards of living to keep their labor costs low and profits high. They figured out that to make income redistribution work on a global scale: American workers have to be less welloff so their overseas counterparts can be less poor.

But the new tariff on steel imports will not impact China. The United States is the world’s biggest steel importer, buying 35.6 million tons in 2017. Nearly 17 percent come from Canada, 13.2 percent from Brazil, and 9.7 percent from South Korea. Unless the Chinese are routing their steel exports through American allies, the U.S only imports about 3 percent of its steel from China.

After pushback from Canada, wiser minds prevailed within the administration and tariff sanctions were suspended indefinitely pending renegotiation of the North American Free Trade Agreement.

The tariffs may trigger reprisals. The day after President Trump signed the tariff executive order, the European Union published a 10-page list of American products that would be targets for retaliation, including peanut butter, grains, and motorcycles.

While steel and aluminum account for only a small portion of trade, the President’s rhetoric indicates that this is just the opening salvo from the White House bunker after years of benign neglect. The primary target is China. Trump has already called its unfair trading practices “an assault on our country.”

As the head of the World Trade Organization, one of the guardians of the global trading system, noted after the tariffs were announced, “Once we start down this path it will be difficult to reverse direction. An eye for an eye will leave us all blind and the world in a deep recession.”

 

Originally Published: Mar 22, 2018

Time to reform the civil service

Posted on by j.giglio

The American people are rightly fed up with an accelerating cascade of government failures. Just as one recedes from the headlines, another pops up

Most recently, Americans learned that law enforcement, including the FBI, failed to act on several detailed, credible tips about Nikolas Cruz, who went on a killing spree on February 14, killing 17 and wounding another 14 at a Parkland, Fla., high school. This was a perfect example of see something, do something, but government workers did nothing.

Their behavior validates the public’s opinion that too many government workers are just plain incompetent, and sometimes decide to ignore the public– the very people they are supposed to protect – knowing full well they will never be held accountable.

Surely it will not be long before these agencies are asking for more money and an expanded role.

The Parkland, Florida school shooting is just the latest in a series of high-profile institutional failures. They began with the September 11 attacks, when 2,977 people lost their lives because America’s intelligence and law enforcement agencies missed warning signs. Then came botched efforts to deal with the devastation of Hurricane Katrina, the inadequate financial regulation that contributed to the 2008 financial meltdown, the National Security Agency letting Edward Snowden walk away with its crown jewels, the IRS’ targeting of conservative political groups, Russian spies being allowed to meddle in U.S. elections in the midst of Cold War 2.0, and the beat goes on.

These notable public failures contribute to the unhealthy divide between citizens and their government. With evidence of failure all around, is it any wonder that the public has become disillusioned, angry, and frustrated with all levels of government?

The scandal-plagued Veterans Administration is a glaring example of how government hurts the very people it purports to help when agency employees, not the nation’s veterans, become its most important constituency.

The Veterans Health Administration, which is part of the VA, is charged with providing medical care to those who have served our country. In 2014 Americans learned VA hospitals were making military veterans wait far longer than the targeted 14-day period to receive services.

Some died while waiting for care, and some hospitals falsified records to make it look like they were meeting their targets. The Phoenix VA Hospital reported that the average waiting time for medical appointments was 24 days. According to the VA inspector general’s report, the actual time was 115 days.

Instead of being disciplined for mismanagement after the VA paid out over $200 million in wrongful death settlements over a decade, VA officials received generous bonuses.

In the most recent scandal, at the VA Medical Center in Bedford, Massachusetts, an employee allegedly steered several hundred thousand dollars in contracts for landscaping services and supplies to her brother’s landscaping business. The supplies never showed up and the work was never done. The employee was demoted one pay grade, but kept her job.

If the American public wants government to stop repeating stupid mistakes, it must recognize that civil servants act within a bureaucratic system that rewards the status quo. For decades, reforms have failed to fix a bureaucracy that is far too large to manage and adequately oversee.

Studies describe the sources of failure, including fragmentation of authority, misaligned political incentives, and the government’s size. What is often overlooked is that federal workers are almost never fired for poor performance or misconduct. They have strong civil service protections and firing processes are riddled with complex regulations and confusion over how to apply rules designed to preserve fairness and diversity.

It’s time to get real. Civil servants enjoy a level of job security that the ordinary private sector employee can’t begin to imagine. Nothing much will change until the civil service system is reformed and the notion of accountability accentuated.

To quote Plato: “What is honored in a country is cultivated there.”

Originally Published: Mar 10, 2018 at 12:16 PM

 

For big banks, crime pays

Posted on by j.giglio

Last month federal authorities fined three European banks and arrested eight traders they say tried to manipulate the market in gold, silver, and certain financial products. This allegedly included a practice called “spoofing,” or placing thousands of bids to buy or sell a stock for the sole purpose of moving the stock. The orders are then quickly cancelled.

As usual, the case against Deutsche Bank, HSBA, and UBS was settled for a total of $46.6 million in fines without any of them admitting guilt. The money comes from shareholders, not individual bankers.

While the full extent of the wrongdoing is unknown, these and others of the world’s largest banks have broken the law over and over again, settling with the government each time. Fines don’t deter big banks, which are still out of control almost nine years after the financial crash.

The shameful legacy of the 2008 financial crisis continues. If a bank is “too big to fail,” the worst thing that will befall its senior executives is a comparatively minor fine that will be paid with shareholders’ money.

The 2008 financial crisis devastated the global economy and cost American workers their jobs and homes. After the financial meltdown and subsequent Great Recession, the government did not charge any top bankers or pursue corporate prosecutions for the widespread malfeasance and mortgage fraud that fueled the bubble and led to the crisis.

Some believe bankers control the government. Others believe the banks did nothing wrong. Still others believe there was insufficient evidence to prove beyond a reasonable doubt that any specific individual committed a crime.

Then there are those who believe that prosecuting big banks will result in “collateral consequences” to financial markets and the economy. They argue that too-big-to-fail banks had to be rescued by the government to stave off total economic collapse and this should be considered in deciding whether to file charges. The latter view has prevailed, with the government settling for cash rather than seeking prison sentences. Softball tactics.

In addition to being paid for by shareholders, the settlements lack transparency. They are sealed. The government does not spell out what the company did wrong or how the amount of the fine was determined. How can the public ever know how tough the government really was?

This was not always the case. After the savings and loan scandals of the 1980s, when hundreds of banks failed due to reckless real estate loans, the Department of Justice prosecuted and convicted over a thousand bankers for their transgressions.

But if you are a small family owned bank in Chinatown that’s a different story.

Abacus Federal Saving Bank a small Chinatown-based bank wedged between two noodle shops and catering to poor immigrants in New York, New Jersey and Connecticut – along with 19 of its former employees were charged by the Manhattan District Attorney in a massive mortgage fraud scheme. It was the only bank indicted for mortgage fraud related to the 2008 financial crisis. The 240-count indictment handed down in 2012 claimed that the bankers allegedly falsified loan applications to secure hundreds of millions of dollars in loans for unqualified borrowers through the Federal National Mortgage Association, known as Fannie Mae.

At the time, Abacus was the nation’s 2,651st largest bank with about $300 million in assets. During the trial, it was learned that the bank’s default rate was 0.3 percent during the period covered by the indictment, from May 2005 to February 2010, far below the national average.

After a four-month trial in 2015 that cost the bank more than $10 million, a jury found Abacus and its senior officers not guilty of grand larceny, conspiracy, falsifying business records, mortgage fraud and other charges.

You don’t have to be Sherlock Homes to conclude big banks get away with their crimes for a pittance. No one goes to jail and no one ever gets prosecuted. The fines are just a cost of doing business.

Originally Published: Feb 17, 2018
 

Irresponsible behavior on immigration reform

Posted on by j.giglio

President Trump was hoping to mark his first anniversary in office at his Mar-a-Largo estate in Florida, but then the federal government shut down for 69 hours. The high-stakes game of chicken that began Jan. 20 ended when Democrats and Republicans in the Senate reluctantly came to an agreement that will keep the federal government paying its bills until Feb. 8.

Unable to pass a federal budget for the fiscal year that began Oct. 1, Congress has repeatedly resorted to these “continuing resolutions.”

The latest stalemate ended when Senate Democrats woke up, smelled the coffee, and relented on their demand for immigration reform in return for assurances from Majority Leader Mitch McConnell that the Senate will consider immigration proposals in the coming weeks and take up the plight of Deferred Action Childhood Arrivals recipients, often referred to as “Dreamers.”

Poll after poll has shown that most Americans want the Dreamers, who were brought to the United States illegally as children, protected. But a recent CNN poll also showed that when given a choice between keeping the federal government open and passing DACA legislation, most said they don’t want the government to shut down.

Americans understand that attracting hard-working legal immigrants has been an important reason for the nation’s prosperity. They also understand that promised entitlements like Social Security won’t be around in a few decades unless we have more workers paying into them.

President Obama introduced DACA in 2012 as a stopgap measure to avoid deportations. President Trump rescinded Obama’s executive order creating the program last September, but delayed implementation until March 2018 to give Congress the opportunity to develop a replacement. As a practical matter, Dreamers are not in immediate danger of being deported because any action would trigger legal challenges.

While the media was salivating over the prospect of an extended federal shutdown, this three-day version was uneventful. Unlike the 21-day instance in 1995-1996 and the 16-day shutdown in 2013, the fight was not over raising the federal debt ceiling or health care policy. Instead, it was about Senate Democrats trying to pressure their Republican counterparts to ensure that about 800,000 immigrants, mostly from Mexico, who came to the United States as children could remain.

Before you know it, Feb. 8 will be upon us. There is no end to the suspense.

All this political posturing and blame-gaming is about one part of a much larger immigration issue and the President’s insistence on building a wall on our southern border.

Moreover, both parties dance around an unspoken yet reasonable question: Once DACA recipients are addressed, how long before pressure mounts to accommodate the Obama administration’s Deferred Action for Parents of Americans and Lawful Permanent Residents, which was designed to defer deportation for about five million parents of children born in the United States and also of children brought to the country legally?

“Deferred action” is Washington speak which in plain English means ignoring the law.

The evidence with entitlements suggests that each extension of benefits establishes a new base for future expansion. As time passes, more groups of undocumented immigrants come forth claiming they are no less deserving and political pressure is brought on their behalf to again expand protection. The process repeats itself until a program’s original intention is virtually unrecognizable.

Immigration issues have defied compromise for decades. Americans have a wide range of opinions on the subject, many of which don’t add up to a coherent point of view. These conflicted emotions have blocked comprehensive immigration legislation and skirted the issue of enforcing existing laws.

Not to be overlooked is the political imperative to be reelected, which incentivizes politicians to follow Scarlett O’Hara’s approach from “Gone with the Wind”: “After all, tomorrow is another day.” Given that we elect politicians, the lack of a well-conceived immigration policy is the price the electorate must pay for their irresponsible behavior.

Originally Published: Feb 3, 2018

 

Next up, entitlement programs

Posted on by j.giglio

With the so-called tax reform bill behind him, House Speaker Paul Ryan wants to reform and modernize the big three entitlement programs: Social Security, Medicare and Medicaid. It’s something that needs to happen, but it won’t be easy – especially in an election year.

The speaker is under pressure from conservative House members and deficit hawks, who supported the tax reform legislation that added a whopping $1.5 trillion to the national debt in exchange for a commitment to address entitlements and deal with debt and deficits.

Entitlement costs are rising as the population grows older and sicker. Even if you assume that cutting the corporate tax rate will unleash economic growth, the tax cuts are highly unlikely to pay for themselves. We cannot grow our way out of the looming entitlement crisis.

But the speaker’s plan to overhaul entitlement programs may run into the harsh political reality that not all Republicans are on board in an election year in which control of Congress is up for grabs.

Looking to preserve the GOP’s narrow Senate margin the Senate, Majority Leader Mitch McConnell has thrown cold water on the idea of entitlement reform. He would prefer to focus on the long-awaited infrastructure funding plan, which is more of a bipartisan exercise.

During his campaign, President Trump repeatedly promised not to cut Medicare, Medicaid, or Social Security. Of course Democrats say the Republicans plan to pay for the tax bill with cuts to entitlements and the social safety net.

There is no strong constituency for the tough budget cuts needed to limit the size of government or reduce the national debt.

Broadly speaking, entitlements are government financial benefits to which beneficiaries have a legal right. The most important examples of federal entitlement programs include Social Security, Medicare, and Medicaid, unemployment compensation and food stamps. And don’t forget agricultural support programs.

You can debate the merit of these programs, but one thing is clear: entitlements are expensive, and for a long time the cost has either been ignored or passed on to future generations.

Nearly half of all U.S. households benefit from at least one federal entitlement program. Entitlement spending today is about a tenth of U.S. gross domestic product, meaning one out of every ten dollars Americans earn goes to pay for Medicaid, Medicare, or Social Security. As the government struggles to pay for these programs, the number of recipients grows as people live longer thanks to advances in medical care.

This means they are drawing more benefits over their lifetimes than the funding systems were ever designed to generate. Since Americans are having fewer children, fewer workers are paying into the system. The Affordable Care Act also increased the number of people eligible for Medicaid.

According to the Center on Budget and Policy Priorities, about half the federal budget is spent on Social Security and health care programs like Medicare.

Another 16 percent goes to national defense and 6 percent to paying interest on the national debt. That does not leave much, especially as entitlement costs rise. If these programs are not fixed, they will consume the entire budget, leaving nothing to clean the environment, repair roads and bridges, and address countless other needs.

Nobody, including Speaker Ryan, is talking about actually cutting entitlement programs. The goal is to restrain increases and make the programs sustainable going forward. On a positive note, there are approaches that enable the U.S. to fix the programs while exempting current beneficiaries.

For example, consider containing health care costs by focusing more on preventative care and improved management of chronic conditions like obesity and diabetes. As for Social Security, consider gradually raising the full retirement age and eliminating the current payroll tax cap.

If these choices don’t seem palatable, it’s important to remember that the biggest threat to the big three programs is to continue down the path of least resistance and do nothing at all.

Originally Published: January 20, 2018

 

Sham tax ‘reform’ proves more than ever that money talks

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

Originally Published: January 6, 2018

 

Corporate America needs a 21st century Dragon Lady

Posted on by j.giglio

While successful female business leaders have made headlines in recent years — a Mary T. Berra, Virginia M. Romelty, and Indra K. Nooyi all come to mind — just 5.2 percent of CEOs of companies in the S&P 500 are women.

To reduce this imbalance we need a modern incarnation of the Dragon Lady, a protagonist who is surely among the great characters in American literature. Unfortunately, her real significance has become obscured by the passage of time since she starred in Milton Caniff’s comic strip “Terry and The Pirates,” which he set in turbulent China during the 1930s and 1940s and is now regarded as something of a masterpiece.

It began as a standard newspaper comic strip that followed the adventure story traditions of its time. Terry Lee was a plucky adolescent who ran around China under the watchful eyes of his adult mentor, Pat Ryan. Pat was a two-fisted Black Irish soldier of fortune who was assumed to be an appropriate guardian for Terry because he smoked a pipe, talked in terse ambiguities, played football in college and never displayed any discernable sense of humor.

But all these conventions went out the window when the Dragon Lady appeared.

These days, people think of her as the quintessential Asian temptress, luring men to perdition with her irresistible female wiles. Embodying in full-blooded glory all the primal male fears of women, which they have woven into elaborate horror stories to tell each other in locker rooms, sports bars or their equivalent ever since Old Testament times.

Many contemporary women find this stereotype offensive, and rightly so. But it has nothing to do with the remarkable character Caniff created. Unfortunately, newsprint is highly perishable, so few people today can see for themselves what the Dragon Lady was really all about.

Yes, she was awesomely beautiful. But she never let this genetic accident define her character. She paid no attention to the standard male view that a woman’s physical appearance is the most important thing about her.

Yes, she spent most of her life engaged in various illegal activities. But this was more an expression of her clear-eyed pragmatism than evidence of any moral depravity inherent in her female nature. From her perspective, living outside the law gave her more freedom to be herself than she could ever have enjoyed in any of the conventional roles assigned to women. The Dragon Lady had no patience with this.

It is worth mentioning that Terry and Pat were not above reproach either, since they were seeking a lost gold mine that was obviously not their lost gold mine.

She was a brilliant and sophisticated woman, whose Chinese-English ancestry had made her an outcast to both societies. Highly educated in Eastern and Western cultures, she was wise in the ways of the world and the frailties of its people. Most of all, she choose to live entirely by her own existential set of moral principles that gave no quarter to anyone. All of which made her more than a match for Caniff’s irredeemably wicked multiethnic villains.

He introduced her in 1934 as the strong-willed leader of a pirate gang preying up and down the South China coast. This kind of dominating role in command of an all-male crew was scarcely common among female characters in the American literature of the time. But Caniff made it seem like the most natural thing in the world by emphasizing her cool intelligence, emotional toughness, and Wall Street trader’s ability to balance risks and rewards.

The behavior of many members of the masters of the universe club would suggest that they have limited talent. Many organizations are directed by the can-do-no-wrong man of the extended moment who leaves no indelible trace and will be forgotten long before he will be remembered.

You will know women have finally arrived when there are as many incompetent women in the C-Suite as incompetent men. Ain’t it de troot?

 

Imagining ‘It’s a Wonderful Life, 2017’

Posted on by j.giglio

 The holidays would not be the same without watching “It’s a Wonderful Life” and feeling every moment of struggle as George Bailey discovers that riches are not measured in dollars and cents. The film highlights the importance of family and love and celebrates civic and familial virtues.

Those of you who have seen the classic 1946 movie will remember one of its most famous scenes. George Bailey runs a small community bank with a mortgage business. One day, as he is headed out on his honeymoon, George is confronted by a group of depositors wanting to withdraw their savings because they are nervous about the bank’s solvency.

He explains that he doesn’t keep their savings lying in the bank safe. Instead, he has invested most of the money in affordable mortgages on the homes they own.

Sam’s money is in Chuck’s house. And Chuck’s money is in Dick’s house. And Dick’s money is in Sam’s house…

So it goes, with customers able to own their homes instead of having to pay rent to Old Man Potter, the predatory capitalist villain who owns the leading commercial bank in Bedford Falls – and most everything else in town.

In George Bailey’s day, a lending institution would keep a home mortgage on its books until it was fully paid off. The default risk was held by the bank, which sought to protect itself by granting mortgages only to clearly creditworthy borrowers with stable incomes sufficient to meet monthly mortgage payments and the ability to invest a significant portion of their own money in a down payment.

In a modern “It’s a Wonderful Life”, director Frank Capra could have contributed to an understanding of the financial crisis by turning George Bailey into a rapacious mortgage broker willing to do almost anything to maximize his mortgage origination volume.

A modern-day Capra would present a series of fast-paced sequences showing how George converted low-income homebuyers with non-existent credit into qualified sub-prime mortgage applicants.

No money for a down payment? “Not a problem,” George reassures the applicant. “You can take out a small first mortgage to cover the down payment, then a larger second mortgage to cover the rest of the purchase price.”

“But won’t that mean high monthly payments?”

“Not with adjustable rate mortgages that charge interest only for the first two years.”

“But after two years, when the much higher monthly payments kick in …?”

“Nothing to worry about. The way house prices are skyrocketing, you’ll be able to refinance with a single bigger mortgage to pay off both original mortgages, and give yourself enough extra cash to cover the monthly payments for several years.”

“And after that?”

“As long as home prices keep going up, you’ll be building equity in your house, which you can tap for ready cash by refinancing yet again.”

“So the house keeps paying for itself?”

“That’s what it amounts to.”

“Sounds great. What’s next?”

“Let’s fill out the mortgage applications together right here on my PC. I know how to word the answers to give banks what they’re looking for.”

“Do I need documentation for my income?”

“Nah. It’s all streamlined these days. The banks run your applications against their crazy computer models to see if you qualify for the mortgage. And you will. It’s just a formality.”

“A formality?”

“Banks are mainly interested in generating new mortgages to sell to Wall Street. Each mortgage they sell increases their servicing fee volume, so they approve as many applicants as possible.”

Just then, George gets a phone call from Old Man Potter, George’s hungriest lender for the sub-prime mortgages he sells to his Wall Street buddies.

“Hi Mr. Potter,” George says, leaning back in his desk chair with a big smile. “Just going to call you … No, a first and second mortgage this time … Yeah, I thought you’d like that … Great. I’ll see you at the club around six.

A wonderful life indeed.

Originally Published: Dec 9, 2017

Ugly as it is, pay attention to tax bill

Posted on by j.giglio

Otto Von Bismarck, the Prussian statesman and architect of German unification, was reputed to have said, “Laws are like sausage, it is better not to see them being made.”

This cliché is relevant today as Congress plays politics with tax legislation. The House has passed a $1.4 trillion tax cut package, while the Senate will consider its version after Thanksgiving.

Comparing sausage making to how lawmakers do their work may be insulting to sausage makers, whose process is transparent and predictable. In contrast, when the intricacies of the tax legislation get too sensitive, politicians demure by claiming “it’s all part of the sausage making.” The implication is that the public would be better off not knowing the details of the legislative process.

As tax reform negotiations enter the final stage, the so-called carried interest loophole that provides preferential tax treatment for hedge funds and private equity firms remains largely untouched. When legislators are asked about closing this loophole they change the subject and recount the other loopholes they are ending.

Carried interest represents the share of profits that hedge funds, private equity, and other investment managers collect from clients. At issue is how much investors should be taxed on these profits. The managers typically take a 2 percent fee from investors and claim a share – generally 20 percent – of whatever profits they generate.

The 20 percent in profits these managers pocket, known as carried interest, is currently treated as a long-term capital gain and taxed at 23.8 percent: the capital gains rate of 20 percent plus the Obama health care surcharge of 3.8 percent on their income. That is well below the 39.6 percent rate plus the 3.8 percent surcharge they would pay if the money were treated as ordinary income.

As a candidate, President Trump repeatedly promised to close this loophole. He said, “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky.”

The carried interest provision is worth billions to super-rich Wall Street folks. Congress’s Joint Committee on Taxation has estimated that changing the treatment of carried interest could raise about $16 billion over the next decade. Academics claim the figure is more like $180 billion. Regardless of who is right, this is not chopped liver, so these wealthy financiers have pushed back with an army of lobbyists and sprinkled enough dollars around Washington to preserve their beloved tax break.

They argue that the lower long-term capital gains rate affords them an incentive to take investment risks that benefit the economy. This defies logic, since many of these managers are managing a pool of assets, not putting their own funds at risk.

Regardless of the merits, their efforts have yielded a handsome return. The House bill extends the period over which firms must hold an asset before it is eligible for the long-term capital gains rate from one year to three years. While that might bite some hedge fund managers, it will not touch the vast majority of private equity, venture capital, real estate investment managers.

They would still pay 23.8 percent on their income, roughly the same as someone making between $37,450.00 and $90,750.00 annually. The financiers pay taxes at a rate that is well below those that apply to much of the middle class, once again validating the influence Wall Street and wealthy investors exert in the Congressional sandbox. The strong take what they want and the weak suffer.

Meanwhile, the struggling middle and working-classes could really use the help. After adjusting for inflation, household incomes have not risen since the 1970s.

Instead the discrepancy between rich and poor has widened. Forty years ago, the richest Americans had more than 8 percent of the nation income, today it is about 20 percent. Which is why it’s so important for citizens to pay attention to the details of the legislative process.

Originally Published: Nov 25, 2017