Thursday, August 27, 2009
Monday, August 24, 2009
Private Equity and the Banks
A review article in WSJ claims FDIC is right to demand protection for taxpayers.I agree.
Federal regulators are meeting Wednesday to decide on rules for investing in failed U.S. banks, and they're under heavy pressure to ease up on the draft terms that the Federal Deposit Insurance Corp. laid out earlier this summer. While some flexibility may be in order, the FDIC is right to drive a hard bargain for taxpayers.
The private-equity community has in particular been lobbying hard against the draft rules, which set tough capital and cross-ownership standards. Wilbur Ross, who has made a fortune buying failed assets with the help of Uncle Sam, has hit the media circuit saying he'll never invest in a failed bank again if the FDIC's terms aren't watered down.
That's best understood as negotiating melodrama. Mr. Ross is entitled to wrangle for the best terms he can get, but he isn't entitled to an easy profit as if he's waiting to invest as a great favor for taxpayers. He and other private-equity players aren't amassing $40 billion or more to buy bad banks as philanthropy. Mr. Ross was already part of a private-equity group that bought BankUnited, a Florida thrift, on bargain terms from the FDIC.
For their part, the feds have to balance the need for private capital with the interests of taxpayers. Last Friday, the FDIC closed the 81st failed bank this year, and its deposit insurance fund had already fallen to $13 billion in March, with many more failures to come. The FDIC does have access to a $500 billion Treasury line of credit to pay off insured depositors, but FDIC Chairman Sheila Bair and the Obama Administration are reluctant to tap it for obvious political reasons. (We advised long before TARP that the FDIC was going to have to be recapitalized, and we wish that is where most of the TARP money had gone.)
By attracting private capital to buy these failed banks, the FDIC can reduce the number of liquidations and thus reduce the potential losses to taxpayers. And there seems to be no shortage of bidders. Last Friday, the FDIC rolled up Guaranty Bank of Texas—the ninth largest bank failure in U.S. history—and sold most of its operations to the U.S. division of a Spanish bank. A week earlier, it sold $20 billion in deposits and some assets of failed Colonial BancGroup to BB&T Corp. These buyers are experienced banking operations that are relatively healthy and already meet the capital and ownership standards of any bank holding company.
The big fight is over private-equity investors who want to pool together and bid on failed banks without meeting the 24.9% ownership limit that triggers bank-holding company regulation. PE investors like Carlyle and BlackRock claim, with good reason, that their far-flung holdings in commercial companies mean they can't operate as a bank-holding company. So if the FDIC wants them to bid on banks, it will have to allow them to control banks despite the 24.9% rule. And as long as they claim to be "passive" investors, the PE firms won't technically violate current banking law—the degree of passivity being a subject of some debate.
The FDIC is willing to go along with this, but it understandably wants to build in protections for taxpayers. The FDIC absorbs a big chunk of these failed bank losses, after all, while the new investors benefit from deposits that are taxpayer insured. One proposal would require a 15% Tier I capital standard, which is higher than the 8% required for a new bank. The FDIC seems prepared to budge on that 15%, and we can see the need for some flexibility depending on the investors and the condition of the failed bank. But the impulse to demand a high capital cushion as proof of ownership commitment and staying power is exactly right.
The same goes for the proposal to require a holding period of three years from the purchase of a failed bank before it can be re-sold. The still weak U.S. banking system doesn't need investors looking mainly for a quick spinoff that could leave a bank in poorer hands within a year or two—and eventually back in the arms of the FDIC for more taxpayer losses.
We keep hearing from Treasury and Congress that the U.S. needs more and tougher bank regulation, even though regulators failed miserably to detect problems at Citigroup and many others in their charge. Yet the FDIC is being roughed up—even by some in the Obama Treasury—for demanding capital and other standards from nonbank investors who won't have to meet current bank holding company rules. This is not the way to restore confidence in the banking system.
Why AT&T Killed Google Voice
Andy Kessler believes that Telecom operators are yesterday's business. It's time for a national data policy that encourages innovation.This article appeared in WSJ.
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%.
Wireless data service is AT&T's only bright spot, up a whopping 26% per customer. How so? As any parent of teenagers knows, text messages are 20 cents each, or $5,000 per megabyte. After the first month and a $320 bill, we all pony up $10 a month for unlimited texting plans. Same for Internet access. With my iPhone, I pay $30 a month for unlimited data service (actually, one gigabyte per month). Is it worth that? The à la carte price for other not-so-smart phones is $5 per megabyte (one-thousandth of a gigabyte) per month. So we buy monthly plans. Margins in AT&T's Wireless segment are an embarrassingly high 25%.
The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don't have wired pipes, but by owning spectrum they do have a pipe and pricing power.
Aren't there phone competitors to knock down the price? Hardly. Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. That all gets passed along to you and me in the form of higher fees and friendly oligopolies that don't much compete on price. Google Voice is the new competition.
By the way, Apple also has a pipe—call it a virtual pipe—to customers. Its iTunes music service (now up to one-quarter of all music sales, according to NPD Market Research) works exclusively with iPods and iPhones. The new Palm Pre, another exclusive deal, this time by Verizon Wireless, tricked iTunes into thinking it was an iPod. Apple quickly changed its software to lock the Pre out, and one would expect Apple locking out any Google phone from using iTunes.
It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that—see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So now the FCC and its new Chairman Julius Genachowski are getting involved. Usually this means a set of convoluted rules to make up for past errors in allocating scarce resources that—in the name of "fairness"—end up creating a new mess.
Some might say it is time to rethink our national communications policy. But even that's obsolete. I'd start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data. We need a national data policy, and here are four suggestions:
• End phone exclusivity. Any device should work on any network. Data flows freely.
• Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.
• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.
Technology doesn't wait around, so it's all going to happen anyway, but it will take longer under today's rules. A weak economy is not the time to stifle change.
Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don't need to file with the FCC.
And new features for apps like Google Voice are only limited by the imagination. Mother-in-law location alerts? Video messaging? Whatever. The FCC better not treat AT&T and Verizon like Citigroup, GM and the Post Office. Cellphone operators aren't too big to fail. Rather, the telecom sector is too important to be allowed to hold back the rest of us.
Tuesday, August 11, 2009
Cap & Trade Debate
Greg Mankiw, one of my favorite economists, writes in the New York Times that the cap-and-trade bill making its way through Congress represents a ``missed opportunity'' to collect nearly a trillion dollars in government revenue. How so? Because the bill will create permits to emit greenhouse gases and then, instead of selling them at auction, give them away to ``powerful special interests''.
But who are those so-called powerful special interests? They are firms in carbon-based industries---firms whose existing factories and machinery stand to lose a lot of value if they can't be operated without an expensive permit. In that light, it doesn't seem so unreasonable to ameliorate their losses by letting them have the permits at a deep discount.
There are good arguments in both directions here, but Professor Mankiw has failed to engage with any of them. Let me try to point out the issues that he and so many other economists have overlooked.
The primary goal of cap-and-trade is to make firms behave better in the future, and as Professor Mankiw points out, that goal is served equally well whether we give the permits out for free or require firms to buy them. But the latter option not only creates an incentive for good future behavior; it simultaneously punishes badpast behavior. The firm that recently invested in a million-dollar machine that now can't be operated without a half-million dollar permit is effectively paying a half-million dollar fine for behavior that was perfectly legal a year ago.
The larger question, then, is this: When people do things that are socially destructive but nevertheless perfectly legal (like, say, owning slaves in the 19th century or leaving an excessive carbon footprint in the 21st), ought they be punished ex post facto? The answer is far from obvious.
There are two competing principles here. The first principle is: Nor shall private property be taken for public use without just compensation, a principle enshrined in the Bill of Rights. Arguably, in the case of the million-dollar machine, the government has effectively taken half your machine from you for the public purpose of cleaning the air; therefore you should be entitled to just compensation. One form of compensation would be to give you your permit for free.
(Actually, a free permit amounts to overcompensation, because cap-and-trade will lead to higher prices for carbon-based products, which already partly compensates the affected firms. So maybe our principle dictates that permits should be cheap but not free.)
This is the principle that justifies job retraining programs for displaced workers. Like slaveholding and overpolluting, working in a tariff protected industry is socially undesirable even when it's perfectly legal: You really oughtn't be overcharging your neighbors for goods they could get cheaper from overseas. When we put an end to your bad behavior with a free trade agreement, we simultaneously punish you by devaluing your job skills. A lot of people think we should ameliorate that punishment by giving you some training. That's a lot like ameliorating the effects of cap-and-trade by giving out free (or cheap) permits.
But here's the countervailing principle: Bad behavior ---even legal bad behavior---should be punished eventually, because that precedent deters future bad behavior. If that principle were applied consistently and predictably, firms might not have overinvested in the wrong technologies to begin with. That's partly why we didn't compensate the slaveholders when we freed the slaves; we wanted to send the message that you really shouldn't have been holding slaves in the first place.
One problem with applying this principle is that a government with the power to punish bad behavior ex post facto is also a government with the power to punish good behavior ex post facto. If today they can retroactively punish overinvestment in bad technologies by making people buy cap-and-trade permits, then perhaps tomorrow they can retroactively punish saving by taxing our 401Ks. The fact that a principle is capable of being abused does not invalidate the principle, but it does suggest we might want to be cautious about invoking it.
In this case, I'm not sure which principle should prevail. I am, however, sure that these are the principles at stake, and any useful debate will have to address them.
That's why I'm so disappointed to see am economist as smart as Professor Mankiw arguing in essence that we should sell cap-and-trade permits just because it's a good way for the government to get its hands on a big pile of money. The fact is that the government does not lack for opportunities to get ahold of big piles of money. It could go ahead and tax those 401Ks, or confiscate them altogether. For that matter, it could confiscate all our houses and make us buy them back. That would raise plenty of revenue, but it's still a bad policy.
The real question on the table is: Do we want to empower our government to punish bad behavior that was perfectly legal when it occurred? If you answer one way, you'll favor compensation for slaveholders, retraining programs for displaced workers and free (or at least inexpensive) cap-and-trade permits for polluting firms. If you answer the other way, you'll reverse those judgments.
Let the debate begin.
But who are those so-called powerful special interests? They are firms in carbon-based industries---firms whose existing factories and machinery stand to lose a lot of value if they can't be operated without an expensive permit. In that light, it doesn't seem so unreasonable to ameliorate their losses by letting them have the permits at a deep discount.
There are good arguments in both directions here, but Professor Mankiw has failed to engage with any of them. Let me try to point out the issues that he and so many other economists have overlooked.
The primary goal of cap-and-trade is to make firms behave better in the future, and as Professor Mankiw points out, that goal is served equally well whether we give the permits out for free or require firms to buy them. But the latter option not only creates an incentive for good future behavior; it simultaneously punishes badpast behavior. The firm that recently invested in a million-dollar machine that now can't be operated without a half-million dollar permit is effectively paying a half-million dollar fine for behavior that was perfectly legal a year ago.
The larger question, then, is this: When people do things that are socially destructive but nevertheless perfectly legal (like, say, owning slaves in the 19th century or leaving an excessive carbon footprint in the 21st), ought they be punished ex post facto? The answer is far from obvious.
There are two competing principles here. The first principle is: Nor shall private property be taken for public use without just compensation, a principle enshrined in the Bill of Rights. Arguably, in the case of the million-dollar machine, the government has effectively taken half your machine from you for the public purpose of cleaning the air; therefore you should be entitled to just compensation. One form of compensation would be to give you your permit for free.
(Actually, a free permit amounts to overcompensation, because cap-and-trade will lead to higher prices for carbon-based products, which already partly compensates the affected firms. So maybe our principle dictates that permits should be cheap but not free.)
This is the principle that justifies job retraining programs for displaced workers. Like slaveholding and overpolluting, working in a tariff protected industry is socially undesirable even when it's perfectly legal: You really oughtn't be overcharging your neighbors for goods they could get cheaper from overseas. When we put an end to your bad behavior with a free trade agreement, we simultaneously punish you by devaluing your job skills. A lot of people think we should ameliorate that punishment by giving you some training. That's a lot like ameliorating the effects of cap-and-trade by giving out free (or cheap) permits.
But here's the countervailing principle: Bad behavior ---even legal bad behavior---should be punished eventually, because that precedent deters future bad behavior. If that principle were applied consistently and predictably, firms might not have overinvested in the wrong technologies to begin with. That's partly why we didn't compensate the slaveholders when we freed the slaves; we wanted to send the message that you really shouldn't have been holding slaves in the first place.
One problem with applying this principle is that a government with the power to punish bad behavior ex post facto is also a government with the power to punish good behavior ex post facto. If today they can retroactively punish overinvestment in bad technologies by making people buy cap-and-trade permits, then perhaps tomorrow they can retroactively punish saving by taxing our 401Ks. The fact that a principle is capable of being abused does not invalidate the principle, but it does suggest we might want to be cautious about invoking it.
In this case, I'm not sure which principle should prevail. I am, however, sure that these are the principles at stake, and any useful debate will have to address them.
That's why I'm so disappointed to see am economist as smart as Professor Mankiw arguing in essence that we should sell cap-and-trade permits just because it's a good way for the government to get its hands on a big pile of money. The fact is that the government does not lack for opportunities to get ahold of big piles of money. It could go ahead and tax those 401Ks, or confiscate them altogether. For that matter, it could confiscate all our houses and make us buy them back. That would raise plenty of revenue, but it's still a bad policy.
The real question on the table is: Do we want to empower our government to punish bad behavior that was perfectly legal when it occurred? If you answer one way, you'll favor compensation for slaveholders, retraining programs for displaced workers and free (or at least inexpensive) cap-and-trade permits for polluting firms. If you answer the other way, you'll reverse those judgments.
Let the debate begin.
From the Undercover Economist
Economists might not be an obvious source of advice on parenting, the intricacies of etiquette or the dark arts of seduction. Even seen in the most flattering light, the economist can appear a remote figure: resolutely rational, untroubled by indecision or weakness of the will, a Spock-like creature too wedded to theory to be able to relate to mere human concerns. At worst he can look like a social naif, if not an outright sociopath; a man (or occasionally a woman) who knows the price of everything and the value of nothing.
At least such is the traditional image of the economist; and who is Dear Economist to demur?
He is not, it would be fair to say, as sympathetic as more traditional agony aunts. He is blunt. He is rude. He loves jargon. When confronted with a woman who enjoys the dating game but worries that she might leave it too late to settle down, Dear Economist offers not a shoulder to cry on but a frank explanation of optimal experimentation theory. When a dinner party guest wonders how much to spend on a bottle of wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.
But – and this is the crucial question – is the advice any good?
Letter from STATA Sales Division
LAN,our eternal source of useful but pirated software.Long Live Piracy!!
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