The Great Debate Tue, 25 Oct 2016 20:07:05 +0000 en-US hourly 1 Cox: AT&T opens itself up to activist attack Tue, 25 Oct 2016 20:07:05 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

AT&T’s $85 billion takeover of Time Warner looks like a deal from another era. Back around the turn of the millennium, corporate chieftains roamed the global capital markets freely, buying rivals at random and running roughshod over shareholders, unencumbered by vigilant boards or uppity investors.

In this profligate epoch, the Hollywood studio was a popular plaything. Think Edgar Bronfman, who skunked his family’s Canadian booze kingdom by acquiring MCA, owner of Universal Studios, before handing it over to Jean-Marie Messier, who set out to use it to transform a boring French utility into a cutting-edge media conglomerate.

In 2000, Vivendi acquired Universal from the Bronfmans for $34 billion to, in his words, “make the internet swing.” And swing it did, just not the way Messier – or J6M, for “Jean-Marie Messier, Moi-Même Maître du Monde” (master of the world) – had anticipated. Crushed by losses two years later, Messier was out and Vivendi’s Tinseltown dreams diminished with the disposal of Universal to General Electric.

It’s a sordid tale AT&T Chief Executive Randall Stephenson might reflect upon as he illogically deploys shareholder booty to acquire the creative minds behind HBO’s “Game of Thrones,” Looney Tunes cartoons and Harry Potter films. The deal he intends to ram down the gullets of AT&T owners is financially wasteful, industrially nebulous, politically inadvisable and, quite possibly, legally unfeasible. There is, however, a blueprint to try and stop him.

The consensus on Wall Street is that Stephenson had to do “something.” After all, Ma Bell is running out of steam, what with every American man, woman and child already staring into the glow of a connected device of some kind. Estimates compiled by Eikon forecast AT&T’s top line will grow by less than 5 percent, to $172 billion, from this year to the end of 2019.

What AT&T’s dividend-loving shareholders did not anticipate, however, was that Stephenson – arguably corporate America’s most compulsive shopper – would splurge on a refreshed convergence theory. Since word of the Time Warner deal first leaked about a week ago, AT&T has shed $17 billion of market value. That covers most of the premium it is handing over for control of the company.

In most sensible acquisitions, a buyer promises to reduce expenses in the combination, diluting the financial impact to its owners. AT&T does say it will target $1 billion in savings, but given the absence of overlap, it’s a dubious pledge. “Most of these,” posits Cowen analyst Colby Synesael of the synergies, “will come from what will likely be meaningful headcount cuts within AT&T that were likely to occur regardless of whether AT&T was acquiring Time Warner.”

Then there is the strategic rationale. It flies in the face of the enterprise sagely deconstructed by Time Warner boss Jeff Bewkes. He jettisoned the company’s cable, publishing and ancillary internet operations to focus on producing television shows and movies. That strategy, as it happens, also is the one adopted by rivals Twenty-First Century Fox and Walt Disney, both of which traditionally garner higher valuation marks from investors.

Meantime, politicians have railed at AT&T’s plan, presaging a more difficult trip through the antitrust and telecom authorities. Add it all up, and it’s easy to sympathize with the market’s judgment. Time Warner shares today trade at a 20 percent discount to the value of the offer, half of which comes in AT&T shares.

None of this is entirely surprising given Stephenson’s proclivity for acquisitions. Four years ago, AT&T’s board merely slapped him on the wrist for a botched $39 billion bid to buy T-Mobile, which was skewered by antitrust regulators and cost AT&T’s owners $4 billion in break fees. Those helped its would-be quarry engage in a damaging mobile-telephony price war.

Stephenson then gazed across the ocean at British titan Vodafone. After running the numbers, AT&T demurred, but only briefly. AT&T saw something shinier at home: satellite operator DirecTV, which it acquired for $67 billion last year. At the very least, these purchases were adjacent bets on AT&T’s core of connectivity and distribution.

What can embittered AT&T shareholders do? They don’t get to vote on the Time Warner deal, thanks to the crafty workings of Stephenson and the board. Beyond a rival bid that rescues them or regulators squashing the plan, investors determined to put a stop to the madness could enlist the services of a modern-day white knight of sorts: an activist.

There is precedent. Carl Icahn was shaving one morning when he heard that drugmaker Mylan Laboratories was pursuing a value-crushing takeover of King Pharmaceuticals back in 2004. The buyer’s shares dropped 16 percent. “I wondered: ‘What did this management just do?'” the voluble billionaire told Fortune magazine at the time. He piled into the stock, grabbing nearly 10 percent of it, and mounted a successful campaign to torpedo the deal.

That was back when activists targeted smaller companies. A decade on, they have rattled the cages at Microsoft, Apple, Procter & Gamble, PepsiCo and General Electric. Why not AT&T? Stephenson’s empire-expanding ways make the $220 billion company an easy target. There’s already ample lost value to reclaim. If AT&T can slash $1 billion of costs as a smokescreen for a lousy deal, a more competent operator probably could find even more. AT&T’s annualized total shareholder return has lagged Verizon’s over the last decade. Its rival is also better at squeezing more from each dollar of revenue, with a 20 percent operating margin so far this year that exceeds AT&T’s by 4 percentage points.

Frustrated fund managers these days send out the proverbial Bat-Signal in what is colloquially referred to as an “RFA”, or request for activist. Before these AT&T investors wind up overpaying for the company behind Batman himself, they should send out the distress call.


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Cox: Amsterdam has first-world financial dilemma Thu, 13 Oct 2016 13:14:50 +0000 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Amsterdam has a history of enticing foreign entrepreneurs with financial incentives. At the start of its golden age in the 17th century, the city used public funds to bring glassblowers from Venice, artisans making gilded leather wall hangings from Antwerp and hatters from France.

And when the Dutch Republic captured two Portuguese silk ships, the city offered Lisbon merchant Manuel Rodrigues de Vega 120,000 guilders to set up shop because “it was anxious not to miss out on yet another lucrative trade,” according to Geert Mak’s “Amsterdam: A Brief Life of the City.”

Britain’s decision to leave the European Union will likely force scores of international companies and banks to move their European headquarters somewhere else inside the world’s largest trading bloc. The likes of Dublin and Paris are aggressively wooing firms like Goldman Sachs, Morgan Stanley and Mitsubishi to relocate. At last week’s International Monetary Fund meetings in Washington, Frankfurt displayed signs advertising the city as “A place for bankers, hipsters and for you.”

Much as Paris and Frankfurt have their attractions, however, the London-based European head of one of Wall Street’s top investment banks recently told me: “the best place of all would be Amsterdam. I just question whether the Dutch want us.”

It’s easy to see why modern masters of the financial universe have a soft spot for Amsterdam beyond its charming canals and the easy availability of cannabis sativa. “Finance is in the DNA of the people,” says Karl Guha, chairman of Van Lanschot, a Dutch wealth management and merchant banking group.

That’s not hyperbole. In 1602, five years after a fleet of Dutch sailors established a trade route to India, Amsterdam’s merchants established the Dutch East India Company (VOC), effectively the world’s first limited-liability multinational enterprise. To trade the VOC’s stocks and bonds and promote risk sharing, the city founded what was in essence the first stock exchange.

The joint-stock company, which was granted a monopoly on Asian trade, was financed by more than 1,800 investors, who chose 17 directors to oversee its affairs. The City Exchange Bank, basically the world’s first central bank, opened in 1609 to handle the foreign coinage flowing into Amsterdam. The VOC’s success led to the founding of a second enterprise – the West India Company, which established the Nieuw-Amsterdam colony, today known as New York. It was arguably the most successful startup in human history.

City leaders keenly recall Amsterdam’s heritage of financial innovation in their pitch to London’s banking exodus. “To live in Amsterdam is to dwell in living history, with all the comforts of a modern metropolis,” says Jan Paternotte, leader of the D66 party on the Amsterdam City Council. “Add to this the established reputation as a hotbed of liberal innovations like same-sex marriage and regulated recreational drugs and you know it is a special place.”

Paternotte also argues that Amsterdam is safer than other big European metropolises, loaded with culture and recreational opportunities, and nearly everyone speaks English. More practically, it has the transportation infrastructure bankers need: a world-class airport with connections throughout Europe and to Asia and the Americas that’s 20 minutes by train from the city center.

“When living in Amsterdam I often left my home one hour before departure and still made the flight without a sweat. Compare that to Heathrow or Charles de Gaulle,” notes Joris Luyendijk, a Dutch author who chronicled banking culture in the City of London in “Among the Bankers: A Journey into the Heart of Finance,” which was published last month in the United States, and sold 300,000 copies in the Netherlands.

Providing adequate housing to accommodate an influx of white-collar workers won’t be easy. And there are not enough positions in international schools. But as the city council’s Paternotte points out, the Dutch are good at finding creative solutions to problems – just look at land they have reclaimed from the sea over the centuries. “If we need to boost housing capacity, Amsterdam will find a way,” he says confidently.

What’s not to like? Top of the list is the “Dutch Act on the Remuneration Policies Financial Undertakings”, which came into effect in February 2015. The law sets a 20-percent cap on bonuses paid to financial industry staff. That’s even more draconian than the rules that apply in the rest of Europe, which limit bonuses to 100 percent of salary – or 200 percent if shareholders approve.

True, there are some nuances to the rule, which was adopted after the near failures of Dutch banks, principally ABN Amro, in the financial crisis. The cap, for instance, “does not apply on an individual basis, but to the average bonus of such staff collectively,” notes Floris van de Bult, a labor lawyer at Clifford Chance in Amsterdam. And some employees of foreign firms can avoid the restrictions altogether.

As in much of the West, there is little appetite to relax the rules restraining the pay of wealthy bankers. If anything, Dutch legislators are more likely to extend them to other arenas of finance, like insurance or asset management. “Realistically speaking, one could assume that no politician will get elected on a promise that they will eliminate the bonus cap,” says van de Bult.

That may be the biggest dealbreaker of all for Amsterdam’s pitch as a financial center. While it might mean U.S., Swiss and Japanese investment banks and trading firms can find ways to make Amsterdam their new European headquarters, they run the risk of creating second-class citizens of locals. It’s hard to envision a worse way to revive the public fortunes of the banking class.

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Cox: Stock picking for a “Trump Victory Portfolio” Wed, 28 Sep 2016 19:20:18 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

The U.S. presidential race is tight after the first debate between the two candidates and only six weeks until the election. That means it’s time to start thinking about a stock portfolio in the event Republican nominee Donald Trump defeats his Democratic opponent Hillary Clinton.

The Breakingviews “Trump Victory Portfolio” mimics a long-short equity hedge fund to position investors for such an event. The New York real-estate mogul’s positions have been hard to pin down and he has proven to be fickle on a variety of issues. As credit-rating agency Moody’s put it in June: “Quantifying Mr. Trump’s economic policies is complicated by their lack of specificity.”

Trump Victory Portfolio graphic: constituents view


Parsing speeches, unscripted remarks and the few papers he has produced on economic and financial matters nevertheless hints at how to trade a President Trump. The basic contours of his growth plan are: reducing regulations, or halting new ones, for industries ranging from energy to financial services; lowering individual and corporate tax rates; boosting infrastructure spending; and renegotiating trade deals. He also has pledged to deport as many as 11 million undocumented immigrants and further restrict foreigners from moving to the United States.

Finally, Trump has put forward an “America First” policy on the nation’s security alliances that could fundamentally increase geopolitical risk. To wit, Trump on Monday underscored his position that Japan, South Korea and Saudi Arabia should shoulder more of their own defense burdens. He also has said the North Atlantic Treaty Organization ought to be reconsidered.

Trump’s plan to cut corporate taxes – if he could negotiate one of his self-proclaimed great deals with Congress – would boost the bottom line of many U.S. companies. That’s especially true of smaller ones with largely domestic businesses that do not have the resources of a General Electric or Microsoft to minimize tax liabilities. That favors an overweight position in the Russell 2000 Index over the S&P 500 Index. And his “America First” theme argues against owning most overseas stocks.

Trump Victory Portfolio graphic: index view


Indeed, many big exporters and companies with manufacturing in countries Trump has fingered for possible tariffs or sanctions, including Mexico and China, could get whacked. Trump name-checked two of them: Ford Motor, appliance-maker Whirlpool and Carrier, the air-conditioner manufacturer that is part of United Technologies. Those stocks may make for good Trump-victory losers.

The reality-TV star also has personally threatened other companies. – whose founder Jeff Bezos owns the Washington Post, which called Trump “a unique threat to American democracy” – has “got a huge antitrust problem” and is “getting away with murder tax-wise,” he has said. In a tweet, Trump said “Don’t shop at Macy’s. Very disloyal,” after the department-store chain moved to phase out Trump-branded merchandise following his derogatory comments about Mexicans. He consistently refers to New York Times Co as “failing.”

It’s not clear whether, or how, Trump would retaliate against these declared corporate nemeses, but he will do them no favors. They are underweight in the Trump Victory Portfolio.

Similarly, Trump has joined Clinton in saying he would abolish the carried-interest tax deduction, which could ding the profitability of investment partnerships in the private-equity and hedge-fund industries. Many of these firms are now publicly traded, such as Ares Management, Blackstone, Carlyle and KKR.

On the flip side, the businesses of some Trump supporters may get an easier ride. That club includes Continental Resources, the $17 billion energy group controlled by Harold Hamm, and Vornado Realty, whose boss Steven Roth serves as an economic adviser to the candidate. So does steelmaker Nucor’s former chief executive, Dan DiMicco.

Though he has not specified how he would cut red tape, Trump has criticized the Dodd-Frank Act and praised Jeb Hensarling, the leader of the House Financial Services Committee, who wants to make life easier for small banks at the expense of big ones. A logical Trump trade, then, would be to buy the PowerShares KBW Regional Banking Portfolio ETF, with its holdings of shares like Bank of the Ozarks and Community Bank System, and to short Citigroup. Trump also has said he would remove barriers to drilling and hydraulic fracturing for oil and gas. The VanEck Vectors Unconventional Oil & Gas ETF might be a way to play that pledge.

Trump’s immigration and trade policies would create winners and losers, too. Deporting 5 percent of the workforce would push up wages, putting more money in the pockets of shoppers at Wal-Mart Stores and other retailers. It also would increase their own labor costs, while slapping tariffs on imports from China would make goods more expensive. Wal-Mart’s heavy reliance on Chinese suppliers puts it at risk under a Trump regime.

Building detention centers to corral deportees and erecting a 2,000 mile wall on the Mexican border would require plenty of building materials, like the kind made by Vulcan Materials and Martin Marietta. It also should help equipment makers like Caterpillar and Manitowoc, as well as construction companies such as KBR and Fluor. They also might get a lift from Trump’s promise to double the $250 billion in infrastructure spending Clinton advocates.

The forced exodus of immigrants would be bad news for Western Union, the biggest sender of financial remittances. On the bright side, shipping millions of people back to their native lands will require 50,000 flights and bus rides, the American Action Forum reckons. That’d be good for American Airlines and United Continental, with their extensive Latin American routes, and FirstGroup, the UK-listed company that owns Greyhound bus lines.

Similarly, Trump has cast himself as the rightful heir to Richard Nixon’s campaign for law and order. That presumably would benefit Corrections Corp of America, which owns, operates and manages prisons. Trump’s endorsement by the National Rifle Association also should be good for gunmakers like Smith & Wesson if he is elected.

Clinton has thus far garnered more support than Trump from the investment community, which has showered her campaign with donations. They know well enough, however, to hedge their bets.

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Cox: Apple and Tesla really need each other now Tue, 20 Sep 2016 15:26:24 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Great partnerships are often forged when each party enjoys a surplus of something the other needs and there’s little conflict in their ambitions. By that logic, two of Silicon Valley’s best known firms, Apple and Tesla Motors, really need each other right now. An investment in Tesla by Apple in return for some of the carmaker’s innovation dust might be just the ticket.

Apple Chief Executive Tim Cook is revamping the company’s approach to self-driving cars and the gadget maker’s broader role in the future of transportation. He just fired some of the company’s autonomous car team, according to the New York Times.

Along the highway at Tesla, founder Elon Musk needs billions of dollars of capital as he ramps the company up toward making a targeted 500,000 vehicles a year by 2018. He could also use an injection of corporate credibility as his proposed deal to buy his solar-panel venture SolarCity, also publicly traded, appears to be running into unanticipated headwinds.

The idea of Apple acquiring Tesla in its entirety isn’t new. It surfaced even before Cook poached some of Musk’s engineers a year ago. That move prompted Musk to tell a German newspaper: “If you don’t make it at Tesla, you go work at Apple.” But it might not require a full purchase to address the two companies’ strategic challenges – which, arguably, are each becoming most prominent in areas where the other could fairly easily help.

Musk’s hurdles are the most obvious. The entrepreneur who runs the $30 billion-odd Tesla is struggling to persuade investors of the merits of his plan for Tesla to acquire SolarCity. The deal, worth $2.6 billion when announced in early August, is supposed to create a “vertically integrated sustainable energy company.” Last week the deal was publicly panned by Jim Chanos, a prominent hedge-fund manager. By the math of the all-share deal, its market-implied chances of success have been falling, too. Shares of the solar-panel installer closed on Monday nearly 25 percent below Tesla’s offer price.

The acquisition and the potential ownership and family conflicts it throws up are a distraction for Musk from Tesla’s carmaking ambitions, not to mention the task of proving the safety of the company’s Autopilot feature after a fatal crash in May. Even if investors decide to back him in buying SolarCity, any slippage in either company’s plan could hurt their ability to hit up investors for additional funding. Both need regular cash injections – over $2 billion each last year – to fund operating and capital investment outflows.

Apple could easily address Tesla’s capital problem by buying, say, a 20 percent stake. While dilutive to existing owners – including Musk, who owns around 21 percent – that would bring in nearly $8 billion at $215 a share, just under a 5 percent premium to Monday’s market closing price.

That would take the question of capital off the table at Tesla for years to come. It would more than cover the negative free-cash flow estimated at $4 billion through 2020 by researchers at Auburn University, in a report entitled “Driving off a cliff: The case against Tesla,” plus any extra needed for the accelerated production targets the company has since announced.

For Apple, with more than $230 billion of idle cash, the investment would be close to a rounding error. Its shareholders would probably rejoice at converting a sliver of money in the bank for a placeholder in an emerging leader in self-driving cars. Unlike a full purchase, buying a minority stake won’t dilute Apple’s profitability either. The company has projected gross margins of around 38 percent in its next fiscal quarter.

Meanwhile, what could Tesla do for Apple? With a market capitalization north of $600 billion, Cook’s business is doing fine at the moment. Shares of the company have gained some 5 percent since unveiling the iPhone 7 earlier this month. Pre-orders for the new handset have been robust despite reviews that largely called it an incremental advance on its predecessor. Features like wireless ear buds are novel, but hardly game-changing.

But many analysts, investors and observers want Apple to develop more new products. Its last big launch, of watches, was a relative dud. Since they went on sale in April 2015, shares of Google parent Alphabet have rallied by nearly 50 percent and Apple’s are down 8 percent, in part because investors fret the company is running short of new ideas.

One obvious potential area, where Alphabet appears to be further ahead, is in self-driving vehicles. Apple doesn’t talk publicly about its plans in the car business. But earlier this month it fired dozens of staffers and closed down parts of its so-called Titan project, focused on autonomous cars.

Ideas are something Musk has in abundance. In addition to running Tesla and creating SolarCity, he’s trying to make a going concern of intergalactic travel and freight through Space Exploration Technologies, or SpaceX. In his spare time, he also hatched the Hyperloop, an idea to use air pressure to speed human beings through tubes at extraordinary speeds.

In that respect, he resembles Steve Jobs. Even when Apple was in its relative infancy in 1986, its co-founder bankrolled the creation of Pixar, the animation studio. For two decades, that side project put him in conflict with some of the media companies whose content would become a key attraction for iPhone users. In 2006, a year before launching the handset that changed the world, Jobs sold Pixar to Disney for $7.4 billion in stock. Disney put him on its board.

With competition no longer an issue, Jobs became a consigliere to Disney boss Bob Iger, who told Fortune after the Apple founder died that “we would stand in front of a white board and talk about ideas. And every once in a while he’d come to me thinking the sky’s falling apart and that our business was screwed. And I’d say, ‘tell me how.'”

That sort of relationship would probably be hard to develop between a chief executive and a subordinate – one argument against Apple swallowing Tesla whole. But as a collaboration, with shared goals and running businesses that work together rather than competing for talent and customers, a functional Cook-Musk partnership might serve both companies’ shareholders.

As part of the deal, Apple could fold its wobbly car operations into a joint venture with Tesla, add a couple of directors to Tesla’s board – helping to handle deals with the likes of SolarCity – and bring Musk onto its own. Of course, the two executives would have to be capable of playing nice. Musk might have to walk back his crack last year that Apple is the “Tesla graveyard.”

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Cox: Banking ghosts haunt Clinton in Philadelphia Thu, 28 Jul 2016 18:06:39 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Just a few blocks from where Democrats have been celebrating Hillary Clinton’s nomination for the presidency this week stands a handsome Greek-Revival building that once housed the central bank of the new American nation. The Second Bank of the United States derived its charter in 1816 from the antecedent founded by Alexander Hamilton.

Today, the Second Bank houses a portrait gallery of famous locals, such as Benjamin Franklin, American revolutionaries and various French mercenaries who helped the 13 colonies defeat the British crown. In one small anteroom at the back is a small exhibit on the bank itself, with a large portrait of the man who ensured the institution’s demise. The painting is, fittingly, “the ugliest” depiction committed to oil of Andrew Jackson, the seventh U.S. president, in the opinion of a park ranger at the museum.

Andrew Jackson


This former pillar of the American establishment not far from where Democratic rallying cries to break up the country’s largest financial institutions are taking place – in an arena branded by one of them, Wells Fargo – haunts the election of 2016 in ways worthy of reflection. Long before Donald Trump disrupted American politics with his populist excoriation of Washington and Wall Street, Jackson did something similar in Philadelphia – and won.

The charismatic frontier lawyer from Tennessee, who became a military hero by defeating the British at the Battle of New Orleans in 1815, waged the so-called “Bank War” that ultimately took down Hamilton’s fiscal creation. The affair also guaranteed Jackson, the first Democratic Party president, re-election in 1832. That campaign against the moneyed classes mirrors today’s race for the presidency, yet in an odd form of political reverse.

“Whether in the courtroom, the battlefield, or the White House, Andrew Jackson took opposition to his authority personally,” says a plaque next to Jackson’s unflattering portrait in the bank today. “As president, he refused to consider the Bank of the United States as anything but a ‘monster’ that threatened the nation and by extension, Jackson himself.”

Jackson’s philosophical tussle with Hamilton’s version of a central bank extends back before his election to the presidency in 1828. Convinced he had been denied the office in a close race four years earlier by elites like then-Speaker of the House Henry Clay – who instead anointed the privileged son of a previous president, John Quincy Adams – Jackson ran on a radical reform platform that derived wide support from agrarian interests, particularly in the slavery strongholds of the South. When he won, Jackson held the first inaugural ball open to the public.

Early in his first term, Jackson sowed the seeds for taking on the powers of the Second Bank, whose charter would need to be renewed in 1836. According to Michael Barone, a resident fellow at the American Enterprise Institute, “Jackson argued that government interference in the economy would inevitably favor the well-entrenched and well-connected. It would take money away from the little people and give it to the elites.”

The president asked Congress to reconsider whether the bank deserved its station given that it had “failed in the great end of establishing a uniform and sound currency,” a reference to several financial panics that had occurred in the preceding decade.

As Jackson built on his opposition to the institution’s purpose, the bank, led by the Princetonian financier and editor of a literary magazine, Nicholas Biddle, sought support from the president’s political rivals. Chief among them was Clay, who would unsuccessfully challenge Jackson for the presidency in 1832 as a National Republican. In defeat, Clay would go on to help found the Whig Party.

Jackson, who told Secretary of State Martin Van Buren “the bank is trying to kill me, but I will kill it,” turned the future of the institution into a referendum against the urban American elite. As Trump supporter Newt Gingrich co-wrote a year ago, in an essay comparing the real-estate mogul’s appeal to Jackson’s, “millions supported Andrew Jackson because they deeply distrusted the Bank of the United States and other instruments of elite power over the average citizen.”

Biddle fought against Jackson’s attempts to dismantle the bank, even after he won a second term by promising to do so. “This worthy president thinks that because he has scalped Indians and imprisoned judges, he is to have his way with the Bank,” proclaimed Biddle. “He is mistaken.” In the end, it was Biddle who miscalculated, retaliating by withdrawing credit and provoking economic crisis. That only lent greater legitimacy to critics who feared its unaccountable powers.

The Second Bank, without a renewal of its charter, became a private company in 1836 and was eventually liquidated. It was not for another 70-odd years – and after numerous financial panics – that Congress sought to replace its duties, among them acting as the chief watchdog of private banks, with the creation of the Federal Reserve in 1913.

Today, Hamilton – the founder of the bank that Jackson tormented – is considered a national treasure. And both political parties are actively bashing banks. It is, however, the Republicans and their disruptive leader Trump who most embody Jackson’s populist ideals. Indeed, their party platform lays out a plan to turn the financial system into a de facto network of community banks.

Democrats, too, want to curtail the power of giant financial institutions, by enforcing the existing Dodd-Frank Act and brandishing the breakup stick should they fail to follow the rules. That is, however, a less radical vision – more Biddle than Jackson. And look at how that turned out.

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Cox: Iron Man Musk wages war on too many fronts Tue, 19 Jul 2016 21:18:15 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Last October, Consumer Reports published the most glowing appraisal of an automobile in its 80-year history. The hard-to-please non-profit magazine, whose independence from advertisers has made its reviews of consumer products a Bible for American shoppers, gushed over a vehicle not from Detroit, Tokyo or Stuttgart, but rather Palo Alto.

“The all-wheel-drive Tesla Model S P85D sedan performed better in our tests than any other car ever has, breaking the Consumer Reports Ratings system,” the review began. The electric car’s “significance as a breakthrough model that is pushing the boundaries of both performance and fuel-efficiency is dramatic.”

It is therefore telling that this most ardent and objective supporter is now scolding Tesla Motors for aggressively marketing a key feature of the Model S, its Autopilot self-driving technology. For Elon Musk, the engineering entrepreneur who founded Tesla, along with renewable-energy company SolarCity and the unlisted extraterrestrial freight-hauler Space Exploration Technology, it’s just another front in what is increasingly becoming a struggle against, well, the world.

Like the Marvel movie character Tony Stark, also known as Iron Man – which actor Robert Downey Jr. says he modeled on the Tesla founder – Musk is a multitasking fighter. Consumer Reports is a distraction compared to adversaries like government regulators, billionaire Warren Buffett, the combustion-engine industrial complex and even the press. In a jokey tweet over the weekend, Musk himself acknowledged how stretched he is, crediting his energy despite little sleep to “large amounts of crack.”

These are mere mortal threats, however, compared to the technological heights Musk’s three companies promise to scale. SpaceX, which on Sunday successfully launched and landed a Falcon 9 spacecraft for the second time, is seeking two more landing sites. SolarCity raised $345 million on Monday to fund further projects focused on harnessing the energy of the sun to power the world. And last but not least, Tesla is intent on building the first commercially viable fleet of electric cars.

Musk lacks neither for self-confidence nor smarts. Like Iron Man, he may prove capable of fighting off multiple enemies at once in the service of what he believes is right for mankind. To do so, however, Musk unquestionably will need shareholders on his side to prove the viability of his vision. And though he has let them down recently, Musk can still repair his relations with the investors whose cash he needs to fuel Tesla, SolarCity and other ventures. He is planning to release as soon as Wednesday “Part 2” of the “Tesla Secret Master Plan.” To make it credible, he needs to better explain his proposal – visionary though he may think it – for Tesla to buy SolarCity for $2.8 billion, or withdraw it entirely for another day.

Musk’s more immediate travails began on May 7, when a Model S collided with an 18-wheel truck on a Florida highway, the top of the car sheared off and the driver died. Tesla says it alerted the NHTSA, America’s top traffic cop, nine days later and sent an agent to investigate the circumstances of the wreck on May 18. That also happened to be the same day Tesla was selling $2 billion of stock.

On June 30, after Tesla stock had closed at $212.28 the company revealed that NHTSA had opened a preliminary evaluation into the Florida crash, the first documented fatality in which Autopilot may have been involved. Tesla stock rose to $216.50 the next day as investors weighed the materiality of the disclosure.

Days later, Musk engaged in a spat with Carol Loomis, the editor of Buffett’s annual letters to Berkshire Hathaway shareholders. The Oracle of Omaha’s electric utility, NV Energy, got involved in a high-profile bust-up with Musk’s SolarCity earlier in the year, which ended in SolarCity withdrawing from NV’s home state of Nevada. Loomis was so moved by the question of whether Tesla should have disclosed details of the crash during its fundraising that she roused herself out of retirement from Fortune to immerse herself in the matter over the July 4 holiday.

It’s worthwhile to ask when Tesla should have let the market know what happened in Florida. Autopilot’s success will be important for Tesla’s ambition of becoming the car of the self-driving future. Any road bumps will matter to investors. That’s why the Securities and Exchange Commission is investigating. If Tesla’s timeline is correct, however, it should have little to fear. Tesla’s shares following the news also indicate that investors were equally sanguine.

It is clearly a distraction, though, and one that needs to be handled deftly, not tetchily. (Said Musk to Loomis: “Please, take 5 mins and do the bloody math before you write an article that misleads the public.”) Tesla is traveling uncharted ground with Autopilot, as with electric cars broadly. Bringing customers, regulators and investors on board requires focus.

It also requires money. To reach Musk’s goal of producing 500,000 cars a year by 2018, Tesla will need to spend heavily on people and technology, according to Breakingviews estimates. The company is investing $2 billion a year on capital expenditures and burning through cash.

If there’s any lesson to draw from the Florida Autopilot affair, it is that while Musk can win his battles, he needs to pick them more judiciously. Of all his creations, $33 billion Tesla is the closest to achieving his grand ambitions. Forcing it to assume responsibility for SolarCity’s different set of challenges, by shoving an unpalatable deal down the throats of shareholders, will at a minimum raise Tesla’s cost of capital. At worst, it could turn away investors completely.

Iron Man came to recognize his limits, though it nearly cost him his life. The only things at risk by Musk’s corporate finance shenanigans are his companies and his own personal wealth. It would be a shame for a piddling deal like this one to spoil such extraordinary aspirations.

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Cox: Dismantling Dodd-Frank is a Trump distraction Tue, 12 Jul 2016 18:29:23 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

For professed lovers of free markets, there’s something philosophically attractive about a grand plan to remake American banking. That may explain why Donald Trump has taken a shine to the Texas Republican who chairs the House Financial Services Committee, and whose views on the matter are heavily shaping the Grand Ole Party’s policy platform, which will come to full light at next week’s convention in Cleveland.

A month ago Jeb Hensarling unveiled a blueprint for trashing the financial-reform act passed into law six years ago this month bearing the names of its two Democratic legislator-sponsors, Chris Dodd and Barney Frank, whose chair Hensarling now occupies. Hokey title aside (he calls it the Financial CHOICE Act, an acronym derived from Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) there is an appealing simplicity to the proposal.

The basic thrust of Hensarling’s proposal is to replace America’s current massive financial regulatory complex. The Financial Stability Oversight Council, a star chamber by Hensarling’s account, conspires with myriad agencies like the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to keep banks from lending. Instead, he offers banks a straightforward promise that if they reserve $1 of capital for every $10 extended to borrowers he will take a machete to red tape.

In addition, the new plan calls for greater penalties for fraud, of the kind his committee highlighted in a critical report released this week about HSBC’s 2012 settlement over money-laundering violations, and allows the Securities and Exchange Commission to seek higher monetary fines. The bill also offers regulatory relief for community banks; reins in the Consumer Financial Protection Bureau and renames it the Consumer Financial Opportunity Commission; and enhances oversight of regulators, among other changes.

The trouble is that Hensarling and Trump, who promises “close to a dismantling” of Dodd-Frank if elected president in November, may be embarking on a quixotic battle. The law isn’t perfect, but to argue as Trump does that it’s “a very negative force,” is a more difficult assertion to make against the realities of the business today.

Consider the results of the Federal Reserve’s latest comprehensive capital analysis and review of the 33 largest U.S. bank holding companies. The central bank evaluated whether the banks would have sufficient capital to keep operating even under severe distress. The Fed’s worst-case scenario assumed a global recession, negative yields on short-term U.S. Treasury securities, 10 percent unemployment, halving of stock prices and a 25 percent drop in house values would lead to $526 billion of losses over nine quarters.

That’s nastier than what followed the failure of Lehman Brothers. Yet by the Fed’s reckoning, the banks still would have aggregate common equity tier 1 capital ratios of around 8.4 percent, well above the 5.5 percent reported in the first quarter of 2009. This is a testament to the way the new regulatory apparatus, working to the spirit and letter of Dodd-Frank, has made banks safer. They have boosted their capital buffers by $700 billion, to some $1.2 trillion.

Much of this is coherent with Hensarling’s pitch. “If you put a whole lot more of private capital into the system, you will get a whole lot less federal control,” he told Breakingviews. The idea, as he sees it, would be to give banks a choice to substantially pump up the amount of capital they reserve for a rainy day in exchange for avoiding micromanagement. Hensarling blames Dodd-Frank for “the single weakest recovery in our public’s history.” Moreover, by heaping so many fiddly new strictures, Dodd-Frank “codified” that some banks are too big to be allowed to fail.

An acolyte of Phil Gramm, a senator who in the late 1990s spearheaded banking deregulation that many critics blame for the financial crisis a few years later, Hensarling may be right that when the next crisis strikes, politicians will give in and bail out faltering banks. It’s a counterfactual argument, of course. By at least one important and visible metric, however – the difference in the costs big and small banks pay for deposits – progress has been made on removing the too-big-to-fail advantage.

In its last quarterly banking profile, the FDIC calculated the effective cost of paying for deposits by banks with assets over $50 billion was about 23 percent lower than it was for all other banks. That gap is one way to quantify the benefits big banks receive – by dint of the perception they will never be allowed to go belly up – over smaller rivals. But it compares with a 38 percent advantage big banks enjoyed before Dodd-Frank passed. So something is working.

None of this is to say the law is perfect. Even so, banks are better capitalized, have avoided some of the bad practices that got them into trouble and are enjoying fewer benefits from being big. That’s why General Electric, for one, embarked on the biggest-ever fire-sale of financial assets.

Perhaps the biggest flaw of the CHOICE Act is its call to repeal the way Dodd-Frank would allow failing institutions to wind down, known as resolution authority, with a “new chapter of the bankruptcy code.” While theoretically attractive, most non-ideologically focused bankers and regulators struggle to see how swapping the judgment on thousands of experienced financial experts for the untested powers of bankruptcy judges would work in practice, especially given the need to act swiftly to stem a global crisis.

Then again, Trump has been through bankruptcy courts on four occasions. It’s a milieu he knows all too well. In that sense, Hensarling’s pitch may not be perfect, but perhaps it is perfectly suited for a role in the presumptive nominee’s inner circle.

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Cox: How about a referendum on ending referendums? Thu, 23 Jun 2016 21:06:47 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

A few years ago, it took the voters in my Connecticut hometown five tries over three months to approve the annual municipal budget. By the end of the process, townsfolk were so fed up that 71 percent of them didn’t even vote on the fifth iteration. That meant that 156 people, or less than 1 percent of the electorate, ultimately decided whether to pass the $106 million spending bill.

While of consequence to just 27,000 New Englanders, the episode illustrates one of the key problems with direct democracy – it allows for tyranny at the hands of the minority. That is one reason why the men who drafted America’s Constitution went the other way, opting instead for a representative form of government: think Rome over Athens. And it’s why referendums like the one the British people are engaging in right now are a terrible idea.

How democracy works best is an ancient debate, but there’s no doubt that plebiscites undermine the representative version of it. Indeed, Alexander Hamilton, currently the hippest founding father, told the New York ratifying convention of 1788 that “it has been observed by an honorable gentleman, that a pure democracy, if it were practicable, would be the most perfect government. Experience has proved that no position in politics is more false than this.”

In the parallel world of corporations, there are also arguments about how much so-called shareholder democracy makes sense. A company’s owners elect representatives who occupy the boardroom. Votes on big mergers generally come all the way back to them, but it’s easy to see why companies resist efforts to dictate smaller strategic choices, like how many breadsticks to serve customers.

The basic idea is that shareholders elect directors, they choose managers, and they make the decisions. Bring too much back to all investors and business soon becomes cumbersome and bosses lose accountability. It’s one of the perils of shareholder activism that focuses too narrowly.

So it is, more or less, in a nation’s affairs. Nonetheless, rule by referendum is in vogue around the world, as the Initiative & Referendum Institute Europe, a think tank that favors them, observes. The British vote on EU membership may inspire copycats in the Netherlands, and even France. Italy is planning one in October that could collapse its government. And the treaty signed on Thursday in Havana to end 50 years of war between the Colombian state and FARC guerrillas needs to go to referendum.

Sadly, all of this gives politicians another way to avoid accountability for their actions. Some governments have avoided making difficult fiscal decisions, instead shifting responsibilities for economic policy to unelected bodies like central banks. Throwing nuanced matters like Brexit and other live examples to the people also shows elected representatives abrogating their responsibilities.

It’s also bad for business. Debates about policy – whether economic, trade, fiscal or defense – are fractious affairs at the best of times. Conducted in parliament or Congress, they can create volatility in financial markets, hold back investment, delay hiring and stall purchases of plant and equipment by businesses.

Putting the entire weight of a one-off decision down to a single day’s popular vote massively amplifies the risk. It means fickle sentiment can easily sway the outcome, and it divorces one issue from others when they might best be considered together. Moreover, under direct democracy, thoughtless populism and special interests are more likely to carry weight. That’s especially true when voter turnout is low.

California’s experience with people’s initiatives illustrates the problem. Ever since Proposition 13, which capped property taxes, was passed by 63 percent of voters in 1978, the Golden State’s finances have been a mess to balance – initiatives to raise taxes elsewhere or cut spending aren’t so popular. That vote has become so firm a fixture in the legislative firmament in California that no politician dares revisit it today.

British Prime Minister David Cameron didn’t have to bring his country’s EU membership to the ballot box. It was a political decision that has arguably slowed investment into the UK and damaged British financial assets, even if it has also brought the pros and cons of the union to the fore.

That may be what happens in Italy, too. Prime Minister Matteo Renzi has pledged to put constitutional reforms to an up-or-down vote in October. If voters reject them, Renzi – who has brought relative stability to Italy and boosted market confidence in the country – has promised to resign. That in turn risks another European crisis.

Colombia’s President Juan Manuel Santos, speaking last week at a World Economic Forum meeting in Medellin, said his country is expecting a surge in foreign direct investment once it ends hostilities with the leftist rebels of the FARC. But investors attending the forum said big infrastructure projects will only happen once the deal is blessed at the ballot box. And many Colombians may find the détente emotionally difficult to support, even if their heads say otherwise.

The UK’s Brexit vote isn’t strictly binding on the government. But ignoring the outcome would be dangerous for the political classes – just as so-called “say on pay” votes at U.S. companies generally sway boards even though they are merely advisory.

Those votes offer another argument for the risks of direct democracy, too. They tend to provoke changes in corporate pay policies even when fewer than half of shareholders demand it, if the minority is large enough. That’s also the case with referendums. Even if the UK’s Cameron gets the “remain” vote he has campaigned for, the views of the large losing camp will have to be taken into account in future dealings with Europe – and vice versa if there’s a “leave” vote. Whichever way Britain votes, everyone concerned may come to wish it hadn’t.

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Dixon: Why I’m voting to remain in Europe Thu, 16 Jun 2016 21:40:23 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Until about five years ago, I didn’t give much thought to whether Britain should stay in the European Union - because quitting didn’t seem like a realistic prospect. Insofar as I did consider the matter, I had a vague feeling that we were better off in than out - but knew I would need to delve into the topic to understand why that was so.

In the early part of the century, I was too busy setting up Breakingviews to do this. Our initial focus was on the dotcom bubble and corporate finance. We didn’t do much macroeconomics, let alone politics. For example, we sat out of the debate over whether Britain should join the euro.

But during the credit bubble, our focus changed. We worried that the financial system was getting over-leveraged. When the crunch actually came, the story became banks, macro and crisis - and the political response to all that.

The credit crunch mutated into the euro crisis - during the early days of which we sold Breakingviews to Thomson Reuters. I immersed myself in the Greek crisis. I now saw myself as a political economist rather than a financial journalist.

Freed of a day job, I also wrote a book about whether we should stay in the EU. After David Cameron declared himself in favour of a referendum during a speech in January 2013, it was clear that this was going to be the big political issue of the coming years.

My initial focus was on the economic arguments - in particular, the line that we could stay in the single market while quitting the EU. But the more I examined it, the more I realised that none of the alternatives for trading with the EU - such as the Norwegian and Swiss options - were any good. They involved less access to the single market, while moving from being a rule-maker to a rule-taker.

I also became aware of the ghastly phrase, “non-tariff barriers” - the panoply of regulations that gum up trade, especially in services. The EU’s original common market was about removing tariffs. The move to create a single market since 1992 has been about dismantling non-tariff barriers. Trade liberalisation in the 21st Century will be almost entirely about further getting rid of rules that stop commerce because most tariffs have already gone.

The more I thought about this, the more I realised how Britain, whose economy is 80 percent services, has a huge amount to gain from EU projects like capital markets union and the digital single market. These will extend the single market to the liveliest industries of the future, where Britain excels.

We’d also be hurt if we lose full access to the single market. For example, the City would no longer have a passport to operate freely across the EU. It would suddenly face a massive “non-tariff” barrier.

I still think the economic case for staying in the EU is powerful. But over the past year or so, geopolitical considerations have played an even bigger role in my thinking. Consider the boiling cauldron of the Middle East and North Africa. Unless we find a way of stabilising this region, Europe will be troubled too. We can’t just pull up an imaginary drawbridge.

The idea that Britain can do anything useful about this if we quit the EU is pie in the sky. Surely we have learnt - from our wars in Iraq and Libya, and from Angela Merkel’s unilateral offer to Syrians to come to Germany - that when Europe is divided, our interventions will cause more trouble than good.

There’s even a risk that Brexit will lead to the breakup of both the UK, with Scotland going its own way, and the EU. How can that make us safer and stronger? The possibility that Donald Trump, an anti-NATO bully, may be the next U.S. president makes me all the more keen to stay in the EU.

By contrast, if we remain, we can be one of the EU’s leaders. We can help devise a joined up economic and political plan to settle the Middle East and North Africa. There are no quick fixes. But surely we must try.

As the referendum campaign has progressed, another consideration has weighed on me. The Leave camp has been running a campaign of misinformation - telling the voters that we send £350 million a week to Brussels - when we don’t - and that Turkey is scheduled to join the EU in 2020 - when it isn’t.

If Britain votes to leave, post-truth politics will have triumphed - polluting our democracy. We must fight that with every sinew.

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Cox: Slicing global trade with a GE carving knife Thu, 09 Jun 2016 20:58:35 +0000 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Emptying out the basement of my grandparents’ home in New Canaan, Connecticut a few years ago, I found an electric carving knife. From the still-unopened box, I learned that my grandfather had bought the General Electric appliance, which features two alternating serrated edges that slice through an overcooked turkey like butter, for around $19.99 in 1970.

The knife still cuts beautifully. But the chain store where it was purchased, Caldor, liquidated in the 1990s, trampled in Wal-Mart Stores’ march toward retail domination. The GE factory in Bridgeport where it was manufactured, along with toasters and coffee percolators, was torn down brick by brick a few years ago. It once employed 20,000 workers and housed a bowling alley and pool hall for employees.

Nostalgia for such places, and the era in which they thrived, is one factor behind the popularity of both Republican Donald Trump and Democrat Bernie Sanders in the U.S. presidential race. Both rail against free trade and globalization. Similar rhetoric plays into Britain’s upcoming vote on whether to remain in the European Union or leave. Homegrown workers, the narrative goes, have been displaced. Good jobs have vanished. Ordinary people’s wages have been stagnant, or nearly so, for years. So blame cheap foreign labor or, in the Brexit debate, immigrants.

Even the latest chapter in the carving-knife story doesn’t obviously change that picture. Just this week, GE completed the $5.6 billion sale of its white-goods business, which began producing heating and cooking devices in 1907, to Haier, a company based in Qingdao, China. Haier would have been the Red Star Electric Appliance Factory back when my grandpa, the son of an Italian immigrant who made hats in Danbury, Connecticut, went shopping at Caldor.

What’s lost in the telling of this and countless other wistful anecdotes in the United States and elsewhere, however, is the other side of the story. Developed economies have gained hugely from freer trade, something which – as economists think about such things – expands the available pool of labor beyond national borders.

The trouble in making the case for globalization is that it simply doesn’t tug at anyone’s heartstrings. As Johan Van Overtveldt, the finance minister of Belgium, which has seen its fair share of industrial hollowing-out, said this week in an interview: “The advantages of trade are divided and shared among the entire population, so the per-capita impact seems relatively small. But the disadvantages can be huge, highly concentrated and visible. That’s why it is essential for policymakers to explain the benefits clearly.”

With so few political leaders speaking up for the free movement of goods and people, my humble electric knife may perhaps do its part. GE Appliances, which on Monday became a division of Haier, no longer makes carving knives. But Stanley Black & Decker offers a comparable device, made overseas, for $15.99. That’s $4 cheaper than its 46-year-old antecedent. But adjust the $19.99 my grandfather spent in 1970 for inflation, and in today’s terms he paid around $120, enough to buy seven Black & Decker models. That, in a nutshell, is a quantified benefit of globalization.

For further evidence, trawl through the spring-through-summer 1971 edition of the Sears, Roebuck catalogue, which back then would have landed in the mailbox for free but cost me $21.99 on eBay. Nearly everything in its pages was made in the United States. There’s a 5,000 Btu, three-speed air conditioner advertised for $139.95, which would come to more than $820 adjusted for inflation. Frigidaire offers a model with the same features today for $139.99.

But wait, there’s more. A Ted Williams two-man tent available in 1971 from Sears would have cost $350 in current terms, while a new Poco Divo two-person backpacking tent goes for $19.99. The comparisons go on, from appliances to clothing, from toolkits to babies’ toys. While there are other reasons some consumer goods have become so much cheaper relative to purchasing power, it’s clear that a big driver has been reduced friction in the flow of manufactured goods, services, raw materials and, ultimately, labor across borders.

Nobody would argue that saving a theoretical $100 here or there is an acceptable tradeoff for the loss of thousands of decent jobs. But in the context of what U.S. consumers spend every year – some $11 trillion, or around two-thirds of GDP – the benefits are massive and widely shared. Telling Americans that the quid pro quo for bringing jobs back home, as Trump likes to put it, would be a sevenfold increase in the price of lots of goods makes the sound bite a lot less appealing.

Displaced workers, though, have voices. They have families to feed and experience genuine suffering. “Open trade creates dislocation and that has to be dealt with,” Lance Fritz, chief executive of railroad operator Union Pacific, told me last week. “But equally clearly, the many benefits of trade need to be articulated, and that’s not happening in the current political climate. As a result, global trade is not getting its fair shake in the dialogue, and that can have serious consequences.”

That certainly was the case with the Tariff Act of 1930, sponsored by Congressman Willis Hawley and Senator Reed Smoot. In the five years following the passage of the Smoot-Hawley legislation, world trade fell by two-thirds. The act, which raised import duties on 890 products, is touted by economists as a catalyst for the Great Depression and the associated catastrophic loss of employment.

Closing borders to “protect” good jobs isn’t, therefore, the answer. Explaining how free trade benefits everyone requires a nuanced approach, and the losers deserve a fair hearing, too – and potentially some help. Such precision is missing in the arguments on both sides of the Atlantic. Maybe my venerable GE electric slicing knife can help provide some.

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