Marginal Utility

by Ken Houghton

It had been a while since I looked at U.S. Food Policy, but the largest beef recall in U.S. history reminded me I might be missing something. Indeed, Parke Wilde first discussed animal abuse captured on video which, at its best, would be cruel, only a week ago.

Slaughtering cows that cannot otherwise stand increases the risk of BSE ("mad cow disease") in the food supply. Which is just one reason that bad treatment is also Bad Business Practice.

Another bad business practice is quoted at USFP:

The most ridiculous sentence in today's article comes from the Hallmark official who had the unpleasant job of reconciling the company's earlier untrue claims with the facts:

"We certainly wouldn't have failed to disclose that if we knew it was in the public record," he said.

I feel much better about domestic, let alone international, food processing standards now. In the nine months since Paul Krugman wrote "Yesterday I did something risky: I ate a salad," the stakes have only gotten higher.

Labels: governance, Health Care, principal/agent problems

by Ken Houghton

Biggest lie of the day, as printed by CNBC "Breaking News":

PAULSON: Congress deserves raise for passing the stimulus package.

UPDATE: My Loyal Reader suggests that the caption should have read "praise" not "raise." Certainly that makes intuitive sense give the opening statement, which uses neither word but does declare, the evidence notwithstanding:

Four weeks ago, recognizing the downside risks to our economy and that the short-term cost of doing nothing was too high, President Bush called for an economic growth package to provide a temporary boost to our economy as we weather the housing correction.

The Congress responded with bipartisanship, cooperation and speed to pass an economic growth package that is temporary, broad-based and will assist our economy quickly. We have demonstrated to the nation and the world that we can come together to address the needs of the American people as we weather the housing downturn.

Yesterday, the President signed the economic package into law and Treasury is already working to send payments out to more than 130 million American households.

The IRS will manage the current tax filing season and simultaneously prepare to issue these additional payments starting in early May. Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth. Together, the payments to individuals and the investment incentives for businesses will help create more than half a million jobs by the end of this year. [emphasis mine]

There are a lot of words there, so the chance of there being more lies than words is near zero. But it is likely that the caption should have read "praise."

Anyone have a screen shot?

Labels: Economics, governance, principal/agent problems

by Ken Houghton

Even with the family away for the week, I'm buried. But these two are too good not to highlight:

1. Quote of the day, via Dr. Black: "In fact, the most homes in foreclosure [in the Orlando, FL, area] are in ZIP codes that didn't exist five years ago." If that is true, then (1) it is clearly the speculators who are suffering the most right now and (2) those are precisely the contracts (second homes, rental properties) that current bankruptcy law allows a judge to revise. No wonder:
   

   Some mortgage companies and lenders don't want you to know how bankruptcy lawyers can help, telling you bankruptcy is for deadbeats.
   
   In bankruptcy, retirement savings and 401(k)s are protected. You can be freed from second and third mortgage obligations. Some lawyers are even negotiating directly with lenders, which has never been done.
   
   "It just absolutely breaks my heart when I have a couple who wiped out a humongous retirement account nest egg before they came to see me," bankruptcy lawyer Lori Patton said.

   
   If you want a textbook definition of a principal-agent problem, look no further.
   
   
2. The Derivatives world has turned upside down in the past twenty years. Proof: this quote from Tanta at CR from about a week ago:
   

   One of the ways LIBOR was "sold" to consumers who were used to old-fashioned indices like Constant Maturity Treasury (CMT)or Cost of Funds (COFI)...

   
   I spent about an hour in early 1994, during my first round at The Old Firm, on a conference call with an economist and one of our salesmen, discussing with one of his clients why COFI was underperforming the market. And CMT Swaps were not anywhere near so prevalent as LIBOR-based ones.
   
   Time marches on.

Labels: Calculated Risk, mortgage, principal/agent problems, The Old Firm

by Tom Bozzo

(An occasional look at search terms that bring people to this blog.)

Q: A Googler from Swaziland asks:

Is the CEO labor market neoclassical and frictionless [?]

A: No.

This has been another MU version of "Simple Answers to Simple Questions."

Labels: Economics, principal/agent problems, question hour, The New Gilded Age

by Ken Houghton

There has been much discussion (often heated enough to cover Tom's household energy needs) about "marking to model." (Tanta at CR has been especially good on this issue.)

I have no conceptual problem with marking to model so long as (1) actual trading prices are not significantly different from the model and (2) the model used is consistent.

Apparently, the SEC is starting to share that last concern:

U.S. regulators are scrutinizing the books of Wall Street's largest investment banks amid questions they are hiding losses from subprime mortgages, people familiar with the inquiry said.

The Securities and Exchange Commission wants to see whether firms are calculating the value of subprime-mortgage assets on their books the same way they calculate those values for their brokerage clients, such as hedge funds.

Note that the same method doesn't require the same price. But especially assets that are Held for Sale (HFS) are supposed to be marked with the best information available. This may not have been happening:

Wall Street banks are in a sensitive period as turmoil in U.S. mortgage markets generate losses for investors and push some lenders into bankruptcy. Yet few investment banks have disclosed significant subprime losses in recent periods.

The scrutiny may also help pinpoint whether hedge funds accurately report their results to investors, the Journal reported, citing an unnamed source. Regulatory checks into how firms calculate values of certain assets could boost the accuracy of performance reports to investors. [emphasis mine]

The first rule of reporting losses is that you can survive if you detail the entire problem upfront. If you report an $8 million loss the first day and $4 million more the next, you'll run into more problems than if you report $12 million on Day 1.

Liquidity and Transparency: they're not just for text books any more.

Labels: hedge funds, High Finance, Moral Hazard, Personal Finance Advice of Alan Greenspan, principal/agent problems, subprime

by Ken Houghton

Working on a longer rant, but why not leverage Mark Cuban at Blog Maverick?

I'm far from a sophisticated investor, although I guess I am an accredited investor because of my networth. As I have written before, I'm a big believer that whenever you do a business deal with people you don't know, particularly buying and selling stocks, you always look for the sucker. If you don't see the sucker, then you are the sucker.

Good basic rule. And more detail about why there is a severe principal/agent problem in the making:

Appeasing hedge fund investors is a very, very different business than making shareholders happy.

If a shareholder sells their share of stock, the hedge fund wont really care. Sure, they want the stock price to go up. They own shares of stock in the fund, and as the stock price goes, so goes some percentage of their networth. That should be enough for them to do whatever it takes to increase the stock price, right ? Maybe

Increasing the price of a share of stock is as much marketing to create demand for the stock as it is earnings of the fund.We also call this increasing the P/E of a stock. There are dozens of ways to increase the PE of a stock that is showing a profit. Hedge fund investors care about 1 thing. Cash. Money that is returned to them. Shareholders care about the price of the stock. One is capital returns, the other is capital appreciation.

That difference is just common sense, but its significant....

They can't be responsive to shareholders and investors with the same story

Read the whole thing, and think carefully about what it means when a Mutual Fund invests in a Hedge Fund.

Labels: Economics, hedge funds, investment strategies, Moral Hazard, principal/agent problems