Tag Archives: incentives

The Hidden Cost of Credit Ratings

Posted on June 24, 2014 | 1 comment

justice

The NY Times’ “The Hidden Cost of Trading Stocks” paints a concise and damning picture of yet another malpractice in financial services.  This has been a recurring theme.   

Another storm may be brewing – this time for the credit ratings industry.  

It is standard practice for issuers to hire ratings agencies to rate their securities.  This practice has lead to incentives to give higher ratings when trying to get business from securities issuers, putting the ratings agencies in the position of representing the issuers when they are given special status to serve and protect investors.  They are not even required to disclose the conflict of interest.  The closest we get to protection is a lawsuit when they explicitly advertise objectivity.

It now looks like 16 states will each get their chance to sue individually.  This may be the beginning of a big and positive change.  If conflicts of interest did influence credit ratings, it would shift capital and damage economic efficiency even when it is not misdirecting pension money into a mortgage bubble.  I wonder if we will see a social media movement to influence reform like we are seeing with network neutrality and “common carrier” status.  I hope so.

 

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Posted in Bonds, Economics, Investment, Law, Personal, Public Policy, Stocks, The Future

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The Independent Globalist: an instruction manual

Posted on September 9, 2011 | Leave a comment
I drink your milkshake

You drank my milkshake!

Independent globalists optimize after-tax returns, labor, and supply chains into the tax and regulatory regimes that are most favorable.

It’s an optimization exercise and a chess game.  This seems to be the dominant strategy:

1) After-Tax Returns

The equation: taxes + regulation.   Taxes are simple; they reduce your profits by their rate.  Regulation is more complicated because it costs money to comply, but there are also opportunity costs from business activities that are no longer available.

The game: reduce and eliminate taxes and regulation.  Express the stresses of international competition to pressure national politics using one issue at a time in the countries where you do business.

2) Labor

The equation: salary + benefits, including long term commitments.  Retirement, health care, and other benefits have costs, but also may reduce employee turnover.

The game: reduce and eliminate costs within each role.  Divide operational units and move them to locations with optimal rules and costs.  Use the placement of these units to pressure politics to reduce labor’s collective bargaining rights.

3) Supply Chains

The equation: price.  Commodities and other non-labor costs are priced on global markets, and are mostly fungible.

The game: reduce and eliminate regulations that internalize costs of production for your suppliers.

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Posted in Freakonomics, Law, Public Policy, Rights, Taxes

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Mad at Pakistan?

Posted on May 20, 2011 | Leave a comment

Americans are mad at Pakistan.  Last night, Jon Stewart showed a clip of Fareed Zakaria asking if Pakistan is complicit in hiding Osama Bin Laden – or just incompetent.

Do you blame Pakistan for bin Laden living there?  Do you think our relationship with their government should be strained by this?   Should we reduce support?  Sanction trade?

No.  That’s wrong.  Here’s why:

Pakistan is not one thing and their government is not monolithic.  There are many power structures in Pakistan.  You shouldn’t blame “the government” for sectarian separatists, terrorists, or others who secretly hide within their borders.  Thinking that way is like blaming a person when their body grows a cancer.

Did we blame the American Government when Timmothy Mcveigh was a terrorist in Oklahoma City?  No.  America was a victim.  And Pakistan is the victim now.  Pakistan has been in a complex civil war with multiple armies of radical extremists for many years.  Some of them are politicians trying to consolidate power with secret affiliations, others attack India trying to incite a broader war, others hide like rats.  Pakistan is suffering from these cancers.

We should be offering tax incentives to increase trade with Pakistan, increase aid, and increase support for democratic stability, secular and academic institutions, and human rights.   Economic sanctions and saber-rattling are counterproductive because they attack the commercial economy.  It would be better to empower the population through the commercial economy – enable them to overtake and stamp out radical separatists and would-be religious fascists.  Help them get on a path to become a productive and educated economy that has the power and will to suppress it’s own cancers.  Use economic levers to achieve better outcomes.

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Posted in Economics, Freakonomics, Public Policy

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Improving Google’s “20% time” policy

Posted on April 22, 2011 | 2 comments

Google’s “20% time” program is not working as well as it should.  I love the idea of giving passionate engineers the opportunity to invent and build, but the policy needs tweaking.  Here is my recommendation:

  1. Engineers can submit projects to the Google management team.
  2. Managers can approve projects.
  3. Approved projects get resources, including engineering time, to achieve their vision.
  4. Google invests 20% of its engineers’ time to these projects.
  5. Managers’ approvals are tracked, plus bonuses for good records.

Why?  Lots of reasons.  Not every engineer should spend 20% of their time on side projects.   Some engineers should be spending 100% of their time on their side projects, others 0%.   Managers who demonstrate years of good decisions form the teams who lead Google into the future.

For Google to maximize the potential of its great teams and ideas, it needs to embrace a more flexible and competitive policy.  This plan turns Google managers into a sort of investment committee, the result will exploit competition and align incentives to optimize performance.

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Posted in Investment, Media, Stocks, Tech

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Reconsider the Stimulus

Posted on January 27, 2009 | Leave a comment

I am fed up with the structure of the stimulus plan.  Bailing out failed banks is foolish when tax credits for mortgage payments would cut the foreclosure rate and fix the toxic debt.  Why ignore this easy and super-efficient tactic?

If I could recommend a specific plan, it would be to provide tax credits for up to $30k/year in mortgage payments for primary residences for the next 2 years. This relatively cheap solution maintains free market capitalism with all the good incentives, and would dramatically reduce the foreclosure rate — particularly for those paying less than $30k/year for their mortgages. The plan could be extended or expanded if necessary, of course.

The result would be a reduction in mortgage defaults, an increase in the value of mortgage backed securities (MBSs), and a recovery of the financial strength of the lending institutions and pensions that hold MBSs. Essentially, this would repair the cause of the credit crisis rather than throwing money away at the symptoms and rewarding failure.

As soon as it is announced, assumptions about foreclosure rates would fall, raising the value of MBSs the same day.

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Posted in Economics, Public Policy, Taxes, The FED

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