You Call That Compromise?

Imagine a couple sitting at the kitchen table and discussing their finances:

Husband: “Our savings account will run dry by Thanksgiving, and we’ve maxed out all our credit cards. I haven’t done a budget in two years, but I’m going to try and get a few more credit cards so we can keep spending more than we earn.”

Wife: “Another credit card might help us in the short term, but can we afford it? Won’t it ultimately create a bigger problem in the future?”

Husband: “Oh, no. Not at all. You see, I’ve projected out our future earnings and expenditures, and assuming we get a 10% raise every year, interest rates stay at these historically low levels forever, and our house value reverts back to it’s 2007 levels, we should have no problem paying off our debt in 27.4 years.”

Wife: “Really? Shouldn’t we just adjust our spending to make ends meet today?”

Husband: “Why would we do that? Don’t you like our weekly hot rock massages and Friday night dinners at Nobu? ”

Wife: “I do, but shouldn’t we actually pay down our debt and save some of our income so that we don’t have to rely upon our kids to fund our retirements.”

Husband: “OK, fine. I’ll be the adult in the room and suggest a compromise. How about you let me get the new credit cards, but in return, starting in 2018, we’ll only get one massage a month, and we’ll go to Ruth Chris Steakhouse instead of Nobu on Friday’s because it’s about 10% cheaper. With those changes, my calculations show that we’ll save $100,000 over the next 12 years, and it will only take us 21.6 years to pay off our debt. How’s THAT for compromise!”

Wife: “How about we avoid the new credit cards, cut the massages and go to Chipotle on Fridays. That will save us $300,000 over the next 10 years.”

Husband: “I couldn't possibly do that to our poor masseuse.  In the name of compromise, here is my final offer - you let me get the new credit cards, we’ll only get one massage per quarter, and you go get a better job and make more money. After all, our debt is not just a spending problem, it’s also a revenue problem.”

Wife: “You're a moron...”

Doesn’t this sound like the buffoonery in Washington over the last few months regarding the budget and debt ceiling debates? President Obama and the Democrats (i.e. the husband) are claiming to be the responsible adults in the conversation, despite having failed to pass a budget in over 2 years, even when they controlled Congress and the White House.  Their preferred solution is to go out and get another credit card and figure out the rest later. And by later, I mean after the 2012 elections, because they know we’re in a pile of trouble and without a major rebound in the economy, some seriously hard and unpopular decisions will be required to avoid fiscal disaster.  Despite their strong rhetoric, they know they can't just "tax-the-rich" their way out of the problem as there's just not enough revenue there to grab to make a significant impact.

The Republicans have used the debt ceiling talks to take a stand and demand serious and immediate budget cuts (not as serious nor as immediate as we would like) in exchange for allowing a new credit card.  The Democrats feigned compromise and produced illusory cuts over the next 10 years. For example, the Harry Reid plan would reduce the deficit by $1.8 trillion over 10 years (per CBO, and mainly by pulling out of Iraq and Afghanistan, which is optimistic at best).  Both parties are guilty of scoring budget cuts off of projected spending over a 10 year period to make them look more impressive.  The 2010 single year deficit was $1.3 trillion, and 2011’s is expected to be even higher, so we're not sure how any number below $5 trillion over 10 years realistically addresses the problem.

When the Republicans called their bluff by refusing to raise the debt ceiling without more robust budget cuts (still not enough for us) and gimmicky future votes (e.g. a balanced budget amendment that has 0% chance of passing either the House or the Senate), Obama went on national television to again try and place the blame for the current deficit on Republicans while lecturing them from his ivory tower on the value of compromise.  As if that wasn't enough, he threw a grenade into the negotiations by adding tax increases into the “compromise” at the last minute (no plan in Congress included tax increases). 

To his credit, President Obama has come out and proposed reasonable cuts to the budget, even putting previously untouchable entitlement programs on the table, but his good deeds are often overshadowed by his tendency to blame others for our problems (both Bush and his policies, or the "rich" and their tax cuts) - a trait that seems to be getting worse as his problems get bigger.  Americans want a fix, they don’t want election year politicking to result in kicking the can down the road...again. Unfortunately, our leaders (on both sides of the aisle) are more concerned about their own jobs than America’s fiscal soundness.

Since we loathe those who only complain about problems without suggesting a solution, here’s the antipopulist.com’s "compromise" that we're sure would equally anger both parties and would immediately disqualify us from public office, so we must be on the right track. 

The US currently collects 15% of GDP in taxes, but spends 24% of GDP - why not meet half way and gradually move taxes up to 18% of GDP and spending down to 20% of GDP?  Here's how we'd do it:

• Any debt limit increase must be offset by at least twice that amount in real and irrevocable spending cuts. We'd accept one for one cuts if it was required to avert a default, but when measuring these cuts, they must be compared to 2010 spending levels, not future budgeted levels of spending. No budget gimmicks, no soft cuts that will supposedly happen in 8 years time - real savings. 
• Tax increases, while not preferred, would be acceptable if they are felt by everyone.  These increases can be progressive (i.e. larger % increases for higher incomes), but it's important that all American’s feel the effects of government spending. We'd prefer a major simplification of the tax code – three income levels (starting at $0), three rates (starting at 5%), and a tax return that fits on a postcard.  All current deductions/credits/allowances that only certain people can take advantage of would be gradually phased out of the tax code. We can’t have 50% of the country paying zero or negative income taxes and then voting for bigger government, while 2% of the country funds this unlimited expansion. If you want big government, you have to help pay for it, and feel the impact of higher taxes on your paycheck and on the economy (see Europe). Additionally, any tax increases must be offset by at least two times the amount raised with real and irrevocable spending cuts.
• Any actual cash surpluses (we can dream right?) generated by the above policies would be split evenly between tax refunds to all taxpayers and a trust fund for future fiscal emergencies.  Any release of those funds would require a 3/4 majority vote from Congress and Presidential approval. 
• All government programs are eligible for cuts, especially Social Security, Medicaid/Medicare, Obamacare and defense spending.
• The government must produce a balance sheet and income statement that is compliant with the same accounting standards as listed corporations, and audited as such. This does not need to replace the current government accounting rules, but it should be made available as supplemental information for taxpayers to see a more realistic view of government’s finances, it’s liabilities in particular. 

We have many more ideas, but the above would be a great start to the process of digging ourselves out of our financial hole.

Why Crazy Might Be Best in 2012

It’s embarrassing that we have a President who’s every word and action is intended to help him win an election that is 16 months away rather than addressing today’s problems head on. It’s also embarrassing that the various Republican candidates, when not making stupid mistakes, are only capable of running around and contradicting everything the President says like my 4-year-old might do to my 2-year-old.

However, the fact remains that the 2012 campaign is in full swing, so it’s time for theantipopulist.com to put down its hope for the 2012 campaign. We’ll preface the piece by saying that there is approximately 0.03% chance that events will unfold as predicted below, but our hope remains audacious.

This much we know for sure – President Obama will be uncontested for the Democratic nomination and will run a very efficient campaign filled with shots at the Republicans (current and past), and Progressivism 101 lectures on ideals that will supposedly “put the country back on track.” Ideals such as higher taxes on “the rich”, increased government spending, and heavy interference, I mean, regulation on all things evil (like banks, doctors, derivatives, cars, toys, speech - basically everything except government itself, lawyers and unions).

The Republican side of the campaign is a circus of clowns driving around the country complaining about President Obama, shaking hands and kissing babies. Theantipopulist.com has no interest in debating the merits of Mitt Romney vs. Michelle Bachmann vs. Herman Cain, or any of the other candidates because they are all falling into the same trap that is sure to lead to defeat in 2012. It’s the trap of pandering to the far-right Republican base in order to secure the primary vote. We’ve discussed our hatred for the current primary system before, but in summary, candidates need to race as far to the right as possible in order to win the Republican primary. One starts with “I support the right to bear arms” the next adds “so do I, but I have two rifles” and the last says “oh yea, I hunt quail with my four semi-automatic rifles, three Glocks and an uzi!” This turns off moderate and independent voters - the same voters who decide general elections.

General elections have always been a choice between lesser evils – a vote for who you hate the least.

Our hope for 2012 is that this phenomenon is taken to the extreme. Sometimes the only way to get the pendulum back to the center is to push it as far out as possible. Think of the political parties of today as the subprime mortgages of 2006 – they are powerful, arrogant and everywhere, but their ever inflating bubble of influence is getting a bit too big, sure to pop at any second.

To get that bubble of influence to pop in 2012, we hope the most batshit-crazy Republican wins the nomination.  There’s no shortage of candidates to fill this role, but when the primary election only allows die-hard Republicans to vote, you’re destined to see a winner emerge who hates government, hates taxes, hates regulation, hates abortion, hates gay marriage, hates “elites”, hates foreigners, loves guns, loves religion, loves gas-guzzling pick-up trucks and loves to eat extra large value meals at McDonald’s three times a day as an expression of their American freedom. We’re being extreme with the stereotypes for effect – but the more polarizing the candidate, the better.

Why would a totally batshit-crazy Republican nominee be a good thing?

The combination of an ineffective incumbent President and a terrible Republican candidate would provide the perfect window of opportunity for a rational, reasonable and most importantly, moderate independent candidate to step into the race and have a very real chance of winning.

Who is that candidate?

We have no idea.

Perhaps it’s Jon Huntsman once he realizes his social views and his respect for President Obama effectively disqualifies him from the Republican nomination. Perhaps it’s someone who has long distanced him/herself from Presidential politics, but is intrigued by this historic opportunity to take down the two major parties. Michael Bloomberg? Rudi Giuliani? Ross Perot? (is he still alive?)

If it’s going to happen, this person will be fiscally conservative with deep executive experience to combat the ineffective liberal tax and spend policies favored by Obama and the Democrats, but socially liberal - perhaps even to the left of President Obama public views (although almost certainly not his personal views). Throw in some foreign policy experience, or at least a reasonable world view, and you have the perfect candidate to single-handedly dismantle the two party political machine that has grown far too big and is no longer fit for purpose.

Moderate Republicans, embarrassed by their nominated candidate and impressed with executive experience and fiscal conservatism, will vote for the independent. Moderate Democrats, unhappy with the economy and the advancement of social issues under Obama’s watch will vote for the independent. The final push will be provided by the crown jewel of the electorate, the independents, who will vote in droves for their dream candidate.

Now, if we could just find that candidate…

The Bad Journalist

In a recent New York Times op-ed with the headline “The Good Banker”, Joe Nocera, a career journalist with no actual banking experience leverages a conversation with the 77 year-old CEO of M&T Bank, Robert G. Wilmers, to regurgitate the three populist pillars of the Banks are Evil argument, which also happen to be the weakest:

1. Banks are “virtual casinos” and they “make most of their money” from trading, not lending. 
2. “Derivatives helped bring about the crisis and need to be regulated.”
3. “Bank executives are wildly overpaid.”

I can’t really blame Mr. Nocera for reporting the opinions of a CEO of a S&P 500 bank, who, in theory, should understand how Banks operate. However, I can blame him for not researching his argument and not asking the same questions of a more relevant bank CEO. Using the opinions of the M&T Bank CEO to prove your thesis about the largest Banks is the equivalent of theantipopulist.com making the Newspapers are Evil argument based on a single conversation with the editor-in-chief of The Sacramento Bee or The Roanoke Times.

Actually, it’s worse.

The average total assets of the top six bank holding companies referenced in the piece is $1.572 trillion. M&T Bank ranks 29th on this list with $68 billion, or roughly 4% of the average reported by the top six bank holding companies. The average daily circulation of the top six newspapers (which includes the New York Times) is just over 1 million. The Sacramento Bee ranks 29th on the list with circulation of 205,000 (20%) and the Roanoke Times ranks 99th with a daily circulation of 75,000 (7%). I didn’t have time to find a newspaper with a circulation that is 96% smaller than the average of the top six newspapers.

The ignorance of the op-ed doesn’t stop there. Let’s look at each pillar of the Banks are Evil argument in turn:

Banks are “virtual casinos”

Both Mr. Nocera and Mr. Wilmers make incredibly misinformed statements in attempt to show that Banks are gambling with our deposits. Mr. Nocera makes the statement that “the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues.” Mr. Nocera clearly has never taken an accounting course, and must not be much of an investor if he confuses net profits with revenues. The $75 billion is net profits (i.e. revenues less expenses), the $56 billion is only the revenue – anyone who writes about business for a living should know that trying to compare a net profit figure to a revenue figure is a fool’s game.

Let’s take the largest bank holding company, Bank of America, as an example of this foolishness. In 2010, Bank of America reported $10 billion in “trading account profit (losses).” That’s a lot of trading profit for one year. However, the relevance of these trading activities is quickly diminished when you look at the “Total Revenue, net of interest expense” which was $111 billion. Therefore, trading activities contributed less than 10% to the total revenues.

This argument hinges on the statement by Mr. Wilmers that “if you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how [Banks] make most of their money.” If I was an M&T Bank board member, I’d have serious concerns about Mr. Wilmers competence after a statement like this. Trading revenues do not go straight to the bottom line. Do trading revenues just appear from nowhere without any related expenses? Do all the traders generating these revenues work for free? Do they all work from home, without a phone, computer, network access, trading software, front office systems, back office systems, collateral management, financial controllers, risk officers, legal teams and others who support their efforts? Do the traders have access to free cash? What about taxes? Seriously, how could a CEO of a “large” bank make such a ridiculous statement?

Strike one.

“Derivatives helped bring about the crisis and need to be regulated.”

According to Mr. Nocera, Mr. Wilmers believes that “trading derivatives and other securities really had nothing to do with the underlying purpose of banking” and that derivatives “need to be brought under government control” and put into “a subsidiary and [taxed] at a higher rate.”

Strike two.

I could go on and on with concrete arguments proving why this would amount to throwing the baby out with the bath water, but instead I’ll just share another fact from the M&T Bank financial statements that proves my point.

At the end of 2010, M&T Bank held derivatives worth $472 million, with notional amounts in excess of $15 billion. Additionally, almost 80% of these derivatives were classified as trading assets.

If Mr. Wilmers really believes that derivatives have nothing to do with banking, I’d be curious why his company, which is “one of the most highly regarded regional bank holding companies,” holds $472 million worth of derivative assets (and $336 million in derivative liabilities).

“Bank executives are wildly overpaid.”

Bank executives do not set their own compensation; the markets do. You’re worth what someone is willing to pay you. The $20 million of compensation for JPMorgan’s CEO, Jamie Dimon, might sound excessive, but let’s compare his “value” to Mr. Wilmer’s using hard facts. It’s clear that Mr. Dimon received $18 million more in compensation, but when you look at the numbers relative to their banks performance, one could argue that Mr. Wilmer got paid twice that of Mr. Dimon. For every million of JPMorgan net income, Mr. Dimon got paid $1,352. For every million of M&T Bank net income, Mr. Wilmer got paid $2,717. Mr. Dimon’s compensation soaked up 0.08% of JPMorgan’s total compensation pool, while Mr. Wilmer share of M&T Bank’s total compensation was 0.2%, or almost two and a half times more than Mr. Dimon’s share.

As a shareholder, which CEO is giving you the bigger bang for the buck?

Strike three, you’re out.

Based on the comments to Mr. Nocera’s op-ed, you would have thought he was the ultimate purveyor of truth and wisdom. However, his entire piece is built around the opinion of a single CEO whose chest thumping (at least through Mr. Nocera’s eyes and ears) isn't backed up by his actions as CEO or economic reality.

Mr. Nocera is just another example of talking heads in the media - who for some reason people actually listen to and rely upon for information - developing a conclusion first, then searching for evidence to support that conclusion, with a reckless disregard for research and actual facts.

It took 10 minutes to find the facts presented above, shouldn’t we expect a bit more effort from a New York Times columnist?