Opinion

Ben Walsh

from Counterparties:

Suisse Crime and Punishment

Ben Walsh
May 20, 2014 21:34 UTC

Credit Suisse is the first bank in decades to admit to criminal charges. It has pleaded guilty to helping Americans evade taxes and agreed to pay a $2.5 billion fine.

Credit Suisse’s reaction has been relatively relaxed – at least in public. Chairman Urs Rohner remarked that “personally, our hands are clean”. The bank says the settlement will have no material impact on its business. CEO Brady Dougan says clients haven’t seemed to mind: “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all”. Investors seem to be mellow as well: the bank’s shares were up 1% today.

The key question is why the admission of criminal guilt, and why now. In 2009, UBS copped to similar accusations but got away with a $780 million fine and handing over 4,450 client names. UBS got off so much lighter than Credit Suisse, Reuters’ Aruna Viswanatha and Karen Freifeld report, because UBS had a bargaining chip to play, and a less motivated prosecutor across the table. The Swiss government allowed UBS to divulge client data, ordinarily a crime punishable by three years in prison under Swiss bank secrecy laws. No similar exception was made for Credit Suisse, forcing it to withhold the bank’s client names, and depriving it of the only negotiating leverage it had. That lack of leverage, along with the Justice Department’s desire to display that large banks are not “too big to jail”, appears to have ruled out a milder deal.

The WSJ’s Paul Davies thinks the episode shows banks’ guilty secret: criminal charges are not, in fact, a threat to the existence of an institution or the stability of the financial system. Floyd Norris wonders what the point of the whole exercise actually is: “The Justice Department has gone to great lengths to guarantee that convicted banks will not be treated as criminals”. Walter Russell Mead disagrees, calling the guilty plea an “exemplary punishment” that “sends signals to others in the industry”.

Fortune’s Stephen Gandel thinks the case shows that “justice for Wall Street is different than it is for the rest of us... Eventually, prosecutors are going to have to take the plunge and truly punish a bank". Or as Kevin Roose puts it, the “guilty plea is actually pretty low stakes” and is more about “prosecutorial desperation” than atypical or particularly malicious wrongdoing. That may be part of prosecutors' reasoning,according to Matt Levine. If you haven’t been assiduously following the story for months, seeing the words “bank” and “guilty” in the same headline is news, no matter the details. — Ben Walsh

from Counterparties:

Job insecurity

Ben Walsh
May 19, 2014 21:39 UTC

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Even positive news about long-term unemployment is depressing. 3.4 millionAmericans have been out of work for more than 27 weeks, a million less than last year. (27 weeks is the widely used definition of long-term joblessness.) Despite its recent decline, there’s still more long-term unemployment in the U.S now than in any pre-recession period since data-keeping began in 1948.

Matt O’Brien finds that your chances becoming a member of the long-term unemployed are almost twice as bad today as after the dot com bust. “Long-term unemployment isn't a story about lazy people choosing to live on the dole instead of getting a job”, says O’Brien. “It's a story about people who want a job not being able to find one... It’s a story about  macroeconomic bad luck”. The long-term unemployed are, on average, about as well educated as the shorter-term unemployed. (And the often-talked-about skills gap issomething of an urban myth across the board, according to Inc.’s Cait Murphy).

Paul Krugman thinks O’Brien refutes the idea “the long-term unemployed are workers with a problem”. In Krugman’s view, it’s not personal:

from Counterparties:

Testing Stress Test

Ben Walsh
May 12, 2014 22:16 UTC

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The Tim Geithner legacy project – which began in January 2013 – is entering its third phase: memoir release. Stress Test: Reflections on Financial Crises is out today. Phase one, receiving a glowing review from the president, and two, establishingfavorable consensus opinion, were completed before Geithner even left his role as secretary of the Treasury.

The third phase, according to Geithner himself, was supposed to be something different: he told Charlie Rose that he had no plans to write a book. But he did, and he talked to Andrew Sorkin about it at great length. The NYT’s Neil Irwin crystallizes what he learned from the book’s 580 pages, none of which is particularly revelatory.

The WSJ’s James Freeman says “one of the themes in Stress Test is Mr. Geithner's difficulty in understanding the health of large financial firms”. Freeman thinks that this failing is personal, not institutional. William Black likewise thinks that Geithner’s biggest missteps were as a regulator, which is the hard part. Bailouts are comparatively easy: “Bailing out banks”, writes Black, “is not hard when a nation has a sovereign currency and the banks’ debts are denominated in that currency”.

from Counterparties:

Buying a tax break

Ben Walsh
May 8, 2014 21:50 UTC

The UK tax rate on profits made from UK patents is just 10%. The nominal US corporate tax rate is 35%. Because of that, US pharmaceutical company Pfizer has spent the last four months trying to acquire London-based AstraZeneca, the maker of heartburn drug Nexium and cholesterol-lowering Crestor. The problem, of course, is that neither AstraZeneca’s board nor the British government seems particularly fond of the tax-avoidance play.

AstraZeneca seems to have the upper hand in negotiations. Pfizer’s drug pipeline is weak and has been for sometime: its two latest cancer drugs debuted to lackluster sales, and it hasn’t had a significant new drug released in a decade. To make matters worse, the patents on some of its biggest drugs are about to expire. The company also just reported a 15% drop in quarterly profits, which is never good, but is particularly bad in the middle of a partially stock-based acquisition attempt. Breakingviews’ Neil Unmackthinks that Pfizer will have to “further loosen the purse strings” in order for its offer to be accepted by AstraZeneca.

Indeed, this deal has been in the hopper for months, with Pfizer slowly increasing its offer. The first whiff of the plan was in January, when Pfizer says it submitted a “preliminary, non-binding indication of interest”, but AstraZeneca broke off talks. At the end of April, Pfizer tried again, and AstraZeneca rejected a new $98.9 billion offer. On Friday, AstraZeneca rejected an improved $106 billion bid. Now Pfizer is rumored to be preparing a new offer worth $113 billion, Reuters’ Sudip Kar-Gupta and Ben Hirschler report.

from Counterparties:

Winning BID

Ben Walsh
May 6, 2014 21:21 UTC

Seven months ago, Dan Loeb sent an acerbic letter to Sotheby’s, disclosing he owned 9.3% of the auction house’s shares. The Third Point hedge-fund founder demanded several board seats, cost cutting, and the CEO’s resignation.

Now, after a bitter and expensive legal battle, Sotheby’s is giving Loeb pretty much what he asked for: the company is expanding its board from 12 to 15. The three new seats will be filled by Loeb, Harry Wilson (a restructuring expert), and Olivier Reza (a former investment banker and jewelry expert). The company is dropping its poison pill, which limited Loeb to less than 10% ownership. In return, Loeb is dropping his lawsuitchallenging Sotheby’s plan. He also agreed to cap his ownership at 15% and let Sotheby’s CEO William Ruprecht stay in his job — at least for now.

The outcome makes law professor Steven Davidoff wonder why the company put up a fight against Loeb’s demands at all: “Did Sotheby’s really have to spend well over $10 million to fight off Daniel Loeb’s Third Point only to cave at the last minute to give Mr Loeb almost everything he demanded?” Davidoff cites FactSet data showing that activists win 60% of proxy contests that are voted on by shareholders. As a result, Davidoff says the best way for companies to deal with their demands is negotiate quickly, before things escalate.

from Counterparties:

Mr Markets: Remembering Gary Becker

Ben Walsh
May 5, 2014 21:44 UTC

Economist Gary Becker, the Nobel Laureate who embodied and helped define what it means to be a Chicago school economist, died on Sunday at age 83. He “was the most important social scientist in the past 50 years”, writes Justin Wolfers. No economist since Marx, Wolfers says, has been as influential in changing the way we think about the social sciences. Becker “had the audacity to suggest that virtually every aspect of human behavior was amenable to economic analysis”.

In his 1992 Nobel acceptance speech, Becker said he “tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences”. Becker’s early work tackled the economics of discrimination during the civil rights movement, proving that discrimination can economically hurt both those discriminated against and those doing the discriminating. He later dug into the economics of family life, restaurant pricing, education, immigration, and organ donation. In other words, Becker was doing freakonomics before Steven Levitt was out of high school.

Tim Carmody said that “people sometimes talk about ‘neoliberalism’ as a kind of intellectual bogeyman. Gary Becker was the actual guy”. What that means, says Crooked Timber’s Keiran Healy, is that economics is not just a topic, “but rather an ‘approach to human behavior’”. Healy says the significance of that leap was recognized by none other than French theorist Michel Foucault. Becker changed economics from the study of exchange, Foucault said, into the study of the individual as an “entrepreneur of himself”. Healy says Foucault viewed Becker as following in the footsteps of Emile Durkheim, the founder of modern sociology. Becker’s work was something of a “general science of society”, according to fellow Chicago economist George Stigler.

from Counterparties:

Letting the sun shine in

Ben Walsh
May 1, 2014 21:26 UTC

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The market is finally doing clean energy a favor. Kyle Chayka writes in Pacific Standard that the price of solar energy has been “falling like a meteor over the past several years, even dipping below” some fossil fuels. Last year, solar energy was already as cheap as conventional sources in Germany, Italy, and Spain, achieving what the energy industry calls grid parity. This scares traditional utilities, the Washington Post’s Matt McFarlandwrites:

Advances in solar panels and battery storage will make it more realistic for consumers to dump their electric utility, and power their homes through solar energy that is stored in batteries for cloudy days.

Falling costs are the best hope for solar and wind energy. Electricity is a commodity – price points beat moral arguments. Fossil fuels receive huge government subsidiesthat aren’t like to go anywhere soon, and while significantly increasing the comparatively miniscule subsidies for renewable energy would help a lot, that’s unlikely in the near term.

from Counterparties:

BofA: Too big to fail a math test

Ben Walsh
Apr 29, 2014 21:45 UTC

Bank of America has joined Citi in the dubious group of banks who have failed the Fed’s stress test twice. The Federal Reserve announced yesterday that the bank would have to resubmit its capital plan due to incorrectly reported data.

While BofA made an accounting mistake, and a rather egregious one, the Fed also failed to spot the error the first time around. Ben White quotes an unnamed senior bank executive performing blame jujitsu: “Easy to blame BofA here but seems like some of the blame goes to the opaque design and implementation of stress testing by the Fed”.

Last month, the Fed approved Bank of America’s plan for a $4 billion share buyback and a $1.5 billion dividend increase. Now, after BofA found problems in its capital calculations, it is halting those plans and will submit a new plan to the Fed. The bank’s error was in calculating the value of a set of structured notes issued by Merrill Lynch in 2009. The WSJ’s Michael Rapoport explains the rule that tripped up BofA, called the “fair value option”:

from Counterparties:

Square’s dance

Ben Walsh
Apr 21, 2014 22:11 UTC

Five months ago, Square was talking to Goldman Sachs and Morgan Stanley about a 2014 IPO. Now the payments company is trying to sell itself before it runs out of cash. The WSJ reports that Google discussed purchasing the company, whose card reader plugs directly into mobile phones. Google’s interest in buying Square was reported earlier this month by Jessica Lessin. Apple and PayPal are also potential acquirers, according the WSJ and confirmed by Forbes.

Square issued a narrowly-worded denial, telling Mashable, “we are not, nor have we ever been in acquisition talks with Google... we have never seriously considered selling to anyone or been in any talks to do so”. TechCrunch gives a sense for the hairsplitting going on here, confirming that while Square met with Google, “none of the meetings the payments company had with Google amounted to actual acquisition talks, we’re told, just ‘a two minute meet and greet’”.

Jason Del Rey summarizes the amusing state of affairs: “The most-asked question, of course, is whether Square is for sale or not. And that answer depends on what you mean by for sale”. Del Rey says the answer is yes, if the price is $8 billion or more. (It was most recently valued at $5 billion.)

from Counterparties:

Ex-ecutive pay

Ben Walsh
Apr 17, 2014 21:43 UTC

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In January, fifteen months after he joined Yahoo, chief operating officer Henrique de Castro was firedSEC filings show that the company paid him $58 million to walk out the door, or around $130,000 per day of service, weekends included.

In a move unlikely to mollify critics, Yahoo’s filing showed that had the company’s stock not risen since de Castro joined the company, he would have exited with a mere $17 million. Bloomberg Businessweek’s Joshua Brustein says that de Castro “got fired at the perfect time”. The company’s shares rose more than two and a half times while he was there. All of that rise is attributable to the rise in the value of Yahoo’s stake in Alibaba.

Golden parachutes offend even Vladimir Putin’s corporate governance sensibilities. The good news is that, despite de Castro’s payout and former Time Warner Cable CEO Robert Marcus’ $80 million parachute, severance packages are on the decline, at least by one measure. Fortune’s Claire Zillman reports that a Thomson Reuters Journal of Compensation and Benefits study found that from 2007 to 2011, the number of randomly selected S&P 500 companies that paid three times salary in severance dropped from 58% to 38%. The number of companies paying two times salary as severance rose from 9% to 20% over the same time period.

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